BlueCrest Energy expects to begin producing oil from Cook Inlet in the coming weeks, marking the first time in more than a decade that oil has flowed from a new field in the basin.
The project is also noteworthy because the Texas-based company plans to conduct the area's first large-scale fracking operation, using the same efforts that have helped turn the Lower 48 into an energy powerhouse.
Benjamin Johnson, chief executive of BlueCrest Energy, said the company will produce oil from its Cosmopolitan prospect by April 15 using an old exploration well. The old well, which won't be fracked, will produce a small amount of crude oil — perhaps a few hundred barrels daily.
But that's just a starting point.
More oil will flow after new wells are drilled starting this summer, he said. The wells will be fracked — injected with water, sand and chemicals to fracture the rock formation and enhance oil production — after the company imports a powerful new drilling rig that can drill long-distance horizontal wells from shore.
The $77 million rig was commissioned by the company with help from a $30 million loan from the Alaska Industrial Development and Export Authority.
BlueCrest Rig No. 1 is being shipped in pieces, taking 115 truckloads to move the rig and related equipment from Texas to the West Coast so it can be hauled on ships to Alaska. Fifteen stories tall, it won't be reassembled and ready to drill until the end of June, Johnson said.
Constructed by rig builder Oderco in Liberty, Texas, the rig will be the most powerful in the state because of its drilling and lifting strength, said Johnson, who graduated from Kenai High School in 1975 and now lives in Fort Worth.
The rig will drill wells more than 4 miles long from BlueCrest's site 6 miles north of Anchor Point, where the company has also built a processing facility.
"There's never been any wells like this (in the Inlet), the long horizontal well with the huge multistage frack," said Johnson, who decades ago helped develop the giant Kuparuk oil field for Arco Alaska Inc., the former big producer on the North Slope and the Kenai Peninsula.
Johnson said the work won't pollute the Inlet — a concern about fracking in the Lower 48.
"The fracks don't go more than a few hundred feet from the well, and we're 7,000 feet deep under the seafloor," he said.
Cathy Foerster, chair of the Alaska Oil and Gas Conservation Commission, said the state has "very stringent" regulations BlueCrest must follow before it can frack, with safeguards designed to prevent a release of fluids into the environment.
"If BlueCrest makes an application that doesn't comply, we won't grant it," said Foerster. "They'll either do it right, or they won't do it all."
Foerster said about 25 percent of Alaska oil and gas wells are hydraulically fractured, primarily on the North Slope. Companies have done small "fracture stimulations" in the Inlet, but this would be the first large effort with a horizontal well, she said.
Bob Shavelson, executive director of watchdog group Cook InletKeeper, said fracking has a negative connotation because of publicity surrounding shallow gas wells drilled in the Lower 48 that leak fluids and threaten groundwater. But the BlueCrest plans aren't a big concern.
"Well stimulations have been going on forever," Shavelson said. "It's not like you poke a straw in the earth and it just flows. They have perforated reservoirs for a long time, so this is nothing new and it doesn't raise huge concerns for us because of the depth of the fracking."
The group supports the company's effort to drill horizontally from shore. It's preferable to building an offshore platform in the Cosmopolitan field, one of the richest halibut nursing areas in the Inlet, he said.
But Cook InletKeeper opposes BlueCrest's plans to truck crude oil to the Tesoro gasoline refinery in Kenai, Shavelson said. The group would rather see that oil moved by pipeline.
"It's expensive, but it's the safest way to transport the oil," Shavelson said.
Very sweet crude
Oil was discovered at the site in 1967 when Pennzoil drilled a well that "clipped" the edge of an oil pool, Johnson said. The company didn't realize what it had at the time, and it wasn't long before wildcatters were turning their attention away from the Inlet and toward the huge prospects on the North Slope.
But decades later, other companies worked the field.
Bob Swenson, retired state geologist for Alaska, said he was a geologist working for Arco in the late 1990s when he discovered the Cosmopolitan's unit potential. He also named it.
Swenson said geologists knew that Pennzoil had found oil decades earlier, but it appeared to be so thick it couldn't be produced. But Swenson analyzed the oil, removing a sample from an old Pennzoil well core kept at the state's Geologic Materials Center.
Swenson proved the drilling fluid Pennzoil had used to help the drill-bit penetrate coal seams had reacted with the oil, thickening the extracted oil. Swenson tested the viscosity of his sample, and theorized it should have flowed easily in the high-quality rock.
Swenson said he named the field Cosmopolitan as something of a joke, after his superiors complained he wasn't "cosmopolitan" enough because he refused to leave Alaska and work elsewhere. "Is this Cosmopolitan enough for you?" he told one manager, sharing what he'd found and saying the oil could make the company a lot of money.
Phillips Petroleum, which in 2000 acquired Arco Alaska and Swenson, followed through on Swenson's discovery and drilled a test well in 2001, he said.
Swenson said the company discovered oil that "flowed nicely" and produced good amounts of crude oil. It was also "very sweet" crude, containing low amounts of sulfur that would make it relatively easy to process once it reaches the refinery — and potentially very valuable because such oil can draw a premium.
"It turned out to be much better oil than originally thought," Swenson said.
But being 3 miles from shore, the field is difficult to access, especially when oil prices turn low. That prevented companies from capitalizing on the prospect. Today's fracking technology makes it possible, said Swenson.
"It's a challenging reservoir, but these lateral wells with multistage fracks are how you work challenging reservoirs today," he said. "Now it's the industry standard, but it wasn't then."
The old exploration well BlueCrest plans to bring into production this month was drilled and redrilled by ConocoPhillips and Pioneer Natural Resources, said Johnson. To improve flow, tubing and new valves have been added.
"It's already tied into the production facility," Johnson said. "All we have to do is turn on the valve."
Once it flows, it will represent the first oil from a new Inlet field since 2002, when production began at the Redoubt Shoal prospect, Swenson said.
Zero production tax
BlueCrest, drilling an exploration well in 2013 using an offshore jack-up rig, also found four new oil-bearing zones at Cosmopolitan, in addition to the two oil zones that had already been discovered, Johnson said.
The processing plant that will remove gas and water from the crude oil can be expanded to handle more oil in the future, Johnson said. The company has hopes of drilling up to 20 wells from the onshore site, though only two would be completed by early next year, he said.
Ultimately, Johnson believes the field has the potential to more than double production levels in the Inlet, currently about 17,000 barrels of oil daily.
The Cosmopolitan field also contains natural gas above the oil, but the gas is so shallow it can't be reached with horizontal wells drilled from shore. Accessing the gas will require vertical drilling from offshore, and Johnson isn't sure when the company will pursue that gas.
Though oil prices have fallen to historically low levels, Johnson said the state's tax credit program makes the project more economic. The Republican-led Legislature is looking to scale back those credits, but under one proposal before the House, major changes won't take effect until 2017.
"That's a very important factor," Johnson said. "We've already spent money for the last half of this year. I've signed contracts and money is going out the door to drill the last two wells, and the funding for that is based on the existing tax-credit law."
Johnson said BlueCrest will have spent $525 million by year's end. He expects tax credits to pay for about $100 million to $200 million of that. The company has received $24 million in credits, he said.
State law prevents Alaska officials from disclosing the amount of tax credits the state pays to each company. The tax credit program covers the cost of some projects up to 65 percent.
Another factor making the project more affordable: Oil production is not taxed in the Inlet, and isn't scheduled to be taxed until 2022, he said.
Johnson asserted the state is getting its money's worth with BlueCrest.
Even if the state's tax credit program isn't scaled back, the state will at least double its investment over the field's life, which could last decades, Johnson said. The return to the state will come primarily through royalty oil, with one of every 8 barrels produced going to the state.
That's a conservative estimate, he said.
"In our case it's a very high certainty that the state will get its money back with a good return," he said.