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State to gas producer: Drill or potentially lose Cook Inlet field

The state is warning a Cook Inlet natural gas producer that it must drill as promised or risk losing its field, after the company blamed the state's scaled-back tax-credit payments for upsetting its plans.

Furie Operating Alaska in recent years has failed to meet its drilling commitments at the Kitchen Lights Unit, said Andy Mack, natural resources commissioner, in a Dec. 26 default notice.

The company's operation there "reflects a history of committing to drilling activities, but then delaying or changing those work commitments," Mack said.

Mack gives Furie until the end of 2018 to reverse the default notice by readying one well for production and drilling and testing a second well. If that doesn't happen, the state can take steps to terminate the unit.

Furie representatives could not be reached for comment Thursday. The company can appeal.

Furie has completed two producing wells at the unit. But it told state officials in October it was unable to pursue additional drilling as planned because the state had reduced tax-credit payments.

The state government, slammed with a giant deficit brought on by low oil prices, has in recent years paid oil and gas operators the bare annual minimum allowed under the tax credit program.

Furie said in October it has spent hundreds of millions of dollars developing Kitchen Lights. It said the state had not paid the industry $390 million in tax credits, hurting Furie and other small companies that expected "meaningful" payments to support operations.

Mark Wiggin, deputy commissioner of natural resources, said the state has no interest in defaulting units and will take many steps to avoid a unit termination.

But Furie needs to meet its obligations, he said.

Many companies in Alaska face challenges, including low oil prices, high operational costs and limited tax-credit payments, he said.

"We don't deny there are some wells producing (at Kitchen Lights), but they need to execute their plan of development," Wiggin said.

Furie produces natural gas at the Julius R platform, installed in 2015 in upper Cook Inlet. It has lined up gas supply contracts with utilities in the region, including Enstar, the largest natural gas utility in Alaska.

Furie's gas delivery to Enstar is set to begin in April under a three-year contract. Furie is expected to provide 20 percent of Enstar's gas supply. The gas utility serves about 140,000 customers in Southcentral Alaska.

Daniel Dieckgraeff, Enstar's rates and regulatory affairs director, said in a Sept. 25 letter to state regulators that Furie has missed deadlines for having three wells ready for production, as required in a gas-sales agreement.

But Dieckgraeff, noting Furie's two producing wells, said Enstar is "reasonably certain" a third well will be in production for the winter starting later this year.

Lindsay Hobson, Enstar's communications manager, said Thursday the utility has "every confidence Furie will perform under the contract."

If not, Enstar has a contingency plan in place and there will be no disruption in customer service, she said.

"There will be gas," Hobson said.

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