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Producers Preview: Cosmo financing pinned on HB 50 funding Unit operator BlueCrest and Division of Oil and Gas traded correspondence this summer over the future of the Cook Inlet unit
Eric Lidji for Petroleum News
Editor's note: This story comes from the 2024 edition of The Producers magazine, which will be published in early January 2025.
The Cosmopolitan project neatly captures the challenges of the Cook Inlet basin.
The offshore field is the largest proven and undeveloped oil and gas reserve in the Cook Inlet basin and is therefore crucial for maintaining supplies in the region. It is also a technically challenging project, requiring offshore drilling or extended reach drilling to access. And it exists in an unusual marketplace, where most supplies stay local.
To make the project work, operator BlueCrest Operating Alaska LLC wants some assurances, specifically upfront supply contracts and state backing to spur investment.
Under its 10th plan of development for the unit, covering calendar year 2024, the Texas-based independent company made two commitments for 2025: drilling the H-10 Trident Fishbone well and providing a plan for bringing the Tyonek Gas Project online in 2027.
The H10 Trident Fishbone is an innovative well that is designed to maximize subsurface recovery while minimizing surface drilling. A single wellbore branches into three subsurface "fishbone" wells with eight laterals each -- 24 individual wells altogether.
BlueCrest would drill the well directionally from an onshore pad. The custom-built BlueCrest Rig No. 1 can drill 3 miles out and then a mile-and-a-half down to the reservoir and an additional mile-and-a-half horizontally through the sands, according to the company. Even with the rig, the desire to minimize surface drilling led to the complex well design. In addition to the technical challenge, it poses new permitting challenges.
The Tyonek Gas Project sits even farther out, beyond the reach of the rig. The project would require a new offshore platform and a new pipeline system back to shore.
According to the company, the field contains 235 billion cubic feet of proven gas reserves, enough to support as much as a quarter of Cook Inlet demand. The company estimated in February 2024 that the project required some $400 million in financing.
Summer update In approving the plan of development, the state required an update by June 30, 2024.
With a few weeks remaining toward that deadline, Division of Oil and Gas Director Derek Nottingham took the uncommon step of publicly telling the company about the pending due date. In a letter dated June 17, 2024, Nottingham reminded BlueCrest's John Martinek of the need to file a letter by the end of the month addressing four questions:
Did the company have enough money to drill an oil well at Cosmopolitan in 2025? Did it have enough money to advance its Tyonek gas development? Did the company have a "fully defined plan and schedule for Tyonek Gas development?" And were the existing financing and development plans enough to bring sustained gas production by 2027?
"The current Cook Inlet market environment demands operators marshal all available resources and ensure enough natural gas is available for citizens of Alaska. The Division (of Oil and Gas) accordingly expects BlueCrest to develop its proven oil and gas resources in time to meet this critical need, consistent with its (10th plan of development) commitments. Delay is not an option and the Division must fulfill all of its constitutional, statutory, and contractual duties in this context," Nottingham wrote in the letter.
In its official update, dated June 28, BlueCrest listed some of the challenges of Cook Inlet. It described the basin as "a closed gas market" with 70 billion cubic feet of annual demand and declining supplies, presaging an energy shortage in the Alaska Railbelt.
The company said that it needed upfront sales contracts to justify the hundreds of millions of dollars of investment required to bring additional natural gas supplies online.
AIDEA partnership In arranging financing, BlueCrest has depended heavily on the Alaska Industrial Development and Export Authority, a public corporation created in the late 1960s to spur economic activity in the state. The recent passage of House Bill 50 gave AIDEA the authority to loan funds to a company based on its proven undeveloped or developed oil and gas reserves. "It will be important for the legislators now to appropriate the funds necessary to fund this loan program to the producers," Martinek wrote to Nottingham.
AIDEA's involvement in the project dates to 2015, when it provided a loan to bring an onshore drilling rig to the Cosmopolitan unit for an extended-reach drilling program.
A series of internal and external issues -- construction delays on the rig, the state suspending its tax credit program, and the drop in oil prices during the early months of the coronavirus pandemic -- led to various modifications, most recently in August 2023.
In his letter, Martinek said BlueCrest was working with AIDEA on a loan to fund drilling of the H10 well and to finish preparatory work on the Tyonek Gas Project. "There is also a possibility that other lenders will join in on the loans given to BlueCrest now that the State has taken an interest in the development of these oil and gas projects. We continue to work with two other groups outside of AIDEA to jointly fund this project," he wrote.
Plans of development The Division of Oil and Gas was unsatisfied with the response. In a letter dated Aug. 26, Nottingham asked BlueCrest for more details about its financing and supply contracts.
"January 2027 is now 29 months, or a little less than two and a half years away -- a very short timeframe for the execution of significant development activity. Based on the information above, please also share how the contingencies or uncertainties in the current funding opportunities affect this delivery date," Nottingham wrote in the August letter.
In its 11th plan of development, for calendar year 2025, BlueCrest said it was "working with a large investment firm" to secure funding for Cosmopolitan. Combined with AIDEA funding, these third party funds would "totally fund" drilling of the H10 Trident Fishbone Well in 2025 and bringing the Tyonek Gas Project online by mid-2027.
According to the plan of development, BlueCrest had already completed long lead-time permitting for 2025 operations and was working on permits for the 2027 program. The company said it still needed to complete final permitting for the 2025 program. The state had yet to approve the plan by the time The Producers went to print in November 2024.
History BlueCrest came to Alaska in the early 2010s as a partner of Buccaneer Energy Ltd., which operated Cosmopolitan. As part of bankruptcy proceedings, BlueCrest took over as sole owner and operator and brought the unit online in early 2016 from an existing well.
The company commissioned a mechanical refrigeration unit at Cosmopolitan in 2020 capable of processing as much as 35 million cubic feet of natural gas per day. The two current Cosmopolitan projects have been on the docket for years, delayed by a global pandemic, oil price fluctuations, and uncertain financial markets and tax regimes.
The Cosmopolitan unit produced nearly 260,000 barrels of oil and 465 million cubic feet of natural gas in 2023, according to the Alaska Oil and Gas Conservation Commission, down from 281,000 barrels of oil and 587 million cubic feet of natural gas in 2022. The unit has produced 2.3 million barrels of oil and 9.2 billion cubic feet of gas cumulatively.
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