Development of Cosmopolitan Field in Alaska’s Cook Inlet has been 50 years in the making. Pennzoil first discovered oil here in 1967 with two exploratory wells that clipped the outer edge of an oil zone. However, the find did not appear large enough to warrant further development, and Pennzoil subsequently pulled up stakes. The rest of the industry left the inlet in the early ’70s to cast for bigger fish at Prudhoe Bay on the North Slope, and the play was forgotten.

ConocoPhillips Co. tried to rejuvenate activity in the early 2000s, drilling two long-reach wells from onshore, as no vertical offshore rigs were available in Alaska at the time. These wells confirmed the resource but, being horizontal, only revealed the individual zones targeted. Pioneer Natural Resources Co. followed in 2007 with a sidetrack, drilling into and proving another section of the reservoir, but a fuzzy 3-D seismic shoot taken earlier left the center of the structure undefined.

In 2012, newly formed BlueCrest Energy Inc., headquartered in Fort Worth, Texas, learned that Pioneer wanted to exit the field to focus on opportunities in Texas. Coincidentally, Cosmo Field is near Anchor Point, just a few miles north of where BlueCrest CEO Benjamin Johnson’s parents lived in a cabin before he was born, and nearby his hometown of Kenai. And although BlueCrest is Texas-based, “I appreciate the land and I appreciate the people of Alaska,” Johnson said.

BlueCrest geophysicists studied the seismic data, determining that the clouding effect at the center of the anticline was a gas cloud, “indicative of some or a lot of gas,” Johnson said. BlueCrest partnered with Australian E&P Buccaneer Energy Ltd., which had the only offshore drilling rig available in Alaska at the time, to acquire the leases. The partner¬ship drilled an offshore, vertical delineation well straight through the heart of the struc¬ture. It was one of the first offshore wells drilled in Alaska in decades and the first vertical into the Cosmopolitan geological structure.

The well revealed 5,000 feet of sands and shale filled with dry, clean gas, and 1,200 feet of sands and shale below, saturated with oil. “We concluded there was a lot of oil and gas that hadn’t been seen before, and we proceeded with plans to develop the field,” Johnson said.

Johnson left Alaska following high school to pursue petroleum engi¬neering at the University of Kansas, working his way through college on oil platforms in Cook Inlet and the North Slope. He returned to his home state to work for Atlantic Richfield Co. (ARCO), concur¬rently completing his master’s degree at the University of Alaska, Anchorage. Ultimately, he became familiar with most of the major basins in Alaska and in the Lower 48 through ARCO and the past 15 years he spent as co-founder of Summit Resource Management, a Dallas-based oil and gas management and consulting firm.

The Cosmopolitan structure covers approximately 15,000 acres and lies three miles offshore, below 80 feet of water. At the time of acquisition and before completion of the new Cosmopolitan #1 well in 2013, an independent reserve report commissioned by Buccaneer estimated 2P reserves of 55.2 million barrels of oil equivalent. BlueCrest has since acquired Buccaneer’s interest and now owns Cosmo Field outright. BlueCrest has not made public any updated independent reserve forecasts since that time.

In the meantime, the company has been preparing a single, 38-acre onshore multiwell drill pad with which to access the oil reserves using four-mile-measured-depth wells. To do so, BlueCrest also built a 3,000 horsepower, fit-for-purpose rig.

Johnson recently spoke with Oil and Gas Investor on his motivation in pursuing the Cosmo prospect.

Alaska native and BlueCrest Energy Inc. CEO Benjamin Johnson believes that “while most of the large, traditional structures in Cook Inlet have been located through seismic work, there is a great opportunity for stratigraphic plays in these conventional reservoirs.”


Investor Do you see an opportunity in the Cook Inlet as underexplored?

Johnson Yes, we do. There has been a rela¬tively small amount of exploration since the late ’60s. Alaska has enormous undeveloped resources. The productivity of these wells is very good. It’s been relatively unexplored over time, and we see tremendous potential in Alaska for continuing development and exploration. I do believe that most of the large, traditional structures in Cook Inlet have been located through seismic work, but there is a great opportunity for stratigraphic plays in these conventional reservoirs.

Investor What do you think that you can achieve at Cosmo that others before you couldn’t?

Johnson First, we know what’s there, and the others did not. We took a fresh look at some old data. The five older wells had only penetrated portions of this large structure. Without having the new vertical well, they couldn’t even know where to drill their wells.

Second, technology has improved dramat¬ically over the past couple of decades, particularly in the last 10 years for horizontal drilling. Our plan is to drill extended-reach wells from an onshore location three miles out to the start of the reservoir and then another mile through the reservoir. The addi¬tional factor is that we will be completing and stimulating these wells with modern, state-of-the-art hydraulic fracturing.

BlueCrest Energy Inc. believes the 15,000-acre Cosmopolitan Field contains 7,200 feet of oil- and gas-bearing zones.

Investor Why not an offshore platform that would be closer to the target?

Johnson Our No. 1 focus is protecting the environment. By putting these wells onshore, we ensure that there cannot possibly be an oil spill into the ocean. Second, the permitting for onshore is much more straightforward. Construction and positioning of a new offshore oil platform in Cook Inlet would likely take a very long time to get approved and be operational.

Investor Why did you need to build a custom rig?

Johnson There weren’t any rigs available that met all the requirements we needed: a very high hook load of 1.5 million pounds, and a 7,500 psi mud-pump system. I believe it’s the only rig in Alaska that can do that. The entire system is fully winterized and meets the state of Alaska’s stringent standards.

Last year was a good time to build a drilling rig, as costs were much lower. The rig itself was around $30 million. We have designed and built the most powerful drilling rig operating in Alaska and will spud the first of our new oil wells around the beginning of this month.

Investor How far out can it go?

Johnson The longest well in Cosmo that we anticipate drilling would be 24,000 feet measured depth and 7,200 feet vertical depth. The rig itself is capable of much more.

Investor What prospective zones are you targeting?

Johnson The oil zones are the Hemlock, which is the most prolific producing zone in Cook Inlet, and another large oil zone right above that called the Starichkof. It is actually part of the Lower Tyonek system that is prevalent throughout the inlet. Above that are the Upper Tyonek gas zones.

Investor How much resource potential does Cosmopolitan hold?

Johnson We’re not quoting reserves at this time. We know there are hundreds of millions of barrels of oil and hundreds of billion cubic feet of gas in place. Our work over the next year or two should provide a much clearer answer on final expected ultimate recoveries.

Investor How many wells is this pad designed for?

Johnson If we drill all of the locations that we know should be good locations, and we go lateral into all of the zones, we could have as many as 15 or 20 or more producing wells. They’re all in a line where we can move the drilling rig on hydraulic rails from well to well literally within minutes.

We’re also planning to waterflood the field within two to three years, so that would add roughly the same number of injection wells.

Investor Why waterflood so soon after initial development?

Johnson Waterflooding is very common in Cook Inlet, and the earlier we can prevent pressure depletion, the better the reservoir should perform over time. We’ll likely produce each injector to begin with, for up to a year, then convert it to injection.

Investor Are these wells economic in the current environment, or do you need higher prices or state credits to make them work?

Johnson The first wells that we’re drilling now should be economic even at current prices. Of course, that depends on the total produc¬tivity of the wells. We’ll confirm that after the first new well is on production next year.

We believe prices will somewhat improve over the long term. Higher prices—or if we were to receive some tax credits or incentives from the state of Alaska—would allow us to go after smaller zones and recover more oil. We have several hundred feet of oil above the Starichkof that may be marginally economic at this point.

Investor What production rates are you modeling?

Johnson We believe we’re going to be able to produce a lot of oil at a good rate, but at this point, we’re not making any announce¬ments as to what our expectations are. Our facilities are designed for 10,000 barrels a day to start with. We have stated that we expect this field should produce in excess of 20,000 a day at its peak. We should be able to reach that point within a few years after starting up. We have the ability to expand our production facilities to any level we may need.

Investor How much do the wells cost?

Johnson Depending on whether they’re single or dual lateral, the wells are somewhere between $30 million and $35 million each, including the frack. Costs to drill wells in Alaska are typically two to three times what a similar well costs in the Lower 48. Costs are higher, and it takes longer to get projects permitted, but there is a lot of production potential that can justify the costs. We have to be very careful; there can be no tolerance for any types of spills or emissions.

Investor How are you funding the project?

Johnson We’ve put together a group of share¬holders, particularly One Stone Energy Partners out of New York. One Stone has also helped us secure financing, an additional loan program, so this is not a typical private equity deal. We have the stock that we used at first, and we have a line of credit that we’re using to pay for the drilling operations that we’re doing now.

Investor How much do you have into the project so far?

Johnson We have roughly $200 million in equity that has been added to the company, and by the time we’re done with the drill¬ing program, we’ll have an additional $150 million approximately in one loan. That $150 million helps us finish the development of the facilities, and pay for additional costs such as purchasing pipe and tools and building the man camp.

We’ve also borrowed $30 million from the state of Alaska to build the drilling rig. Like a car loan, they gave us a loan secured by the rig.

Investor You mentioned this is a gas oppor¬tunity as well.

Johnson We know for a fact that we have highly productive gas zones. We tested some individual zones at 20 million cubic feet per day, and we’ve got a significant number of additional gas zones throughout the 5,000-foot vertical gas interval. These gas reservoirs are too shallow to reach from onshore, so that gas would be developed with one or two small offshore gas platforms that have no liquids production on them; then we would run a gas pipeline on the seafloor back to our oil produc¬tion facility. The offshore gas is very dry, and poses no risk of liquid hydrocarbon spills.

Investor Is there a market for gas here?

Johnson Currently, Cook Inlet gas is selling for more than $7 per Mcf. This is a high-cost area relative to other portions of the world, so it certainly has to be higher than what we’re seeing with Henry Hub prices.

But Cook Inlet is a unique spot in the world. A large portion of Alaska’s population lives in the south-central area around Anchor¬age and the inlet, and there is no way to bring gas into the inlet area. So it’s an interesting supply and demand economic concept; they have to have gas when they need it to heat their homes and fuel their industry. On the other hand, if you’ve got surplus gas, you must have something to do with it or you have to shut in the wells.

A few years back, Cook Inlet became short on gas, so Alaska created incentives—tax credits and reduced production taxes—to bring new companies into Alaska. That worked tremendously, and now the gas short¬age has turned into a gas surplus in the inlet, at least for the short term.

Investor Are you pursuing gas at this time?

Johnson We have no imminent plans. We’re holding off until we can confirm there is an economic demand for our gas. We are able to sell the associated gas that we produce with the oil, relatively small volumes, but large volumes of gas, 60- to 80 million cubic feet per day of additional production, there is no market for that at the time.

The state of Alaska has basically termi¬nated the tax credit program it had in place. Not only has it terminated the ability to earn the credits, but it has declined to pay what it owes in a timely manner for credits that have already been earned, which has created a severe problem for some independent Alaskan companies.

BlueCrest, however, was careful in our plan¬ning, so that hasn’t created an undue hardship for us, although we have pulled back from our plans on development, particularly for the gas. We’ve completed a lot of engineering design and permitting as well, but until we have confirmation of a good market and pricing for our gas, it will stay in the ground.

Investor Is the gas decision to drill or not drill based on getting state tax credits?

Johnson If we had had the tax credits for this year and knew we would have been paid for them, we would have been drilling the gas this year, at least some confirmation delinea¬tion wells.

Investor If the tax credit doesn’t come back, will the gas get drilled?

Johnson The gas can be drilled at some point in the future as long as there is suffi¬cient demand—and price—that will justify its development. It could be 2017; it could be 2025.

Investor What is the plan going forward?

Johnson The well we are spudding this month will penetrate the Hemlock Formation in a long, horizontal lateral. It will begin producing in April or May of 2017. Then we will drill an additional well—an offset to that—that will be a dual lateral. The bottom lateral will be in the Hemlock; the top lateral in the Starichkof zone. Its production will begin in the third or fourth quarter of 2017.

Depending on oil prices and the state of Alaska’s oil and gas tax law changes, we will then determine what our plan will be going forward. We expect we will continue our drilling program and pay for it out of producing revenues, probably two to three wells per year.

Investor What is your long-term vision for BlueCrest?

Johnson We’re focused on Cosmopolitan to begin with, but that isn’t necessarily the end. Once we have success proven at Cosmopolitan, we will look to carefully expand beyond that.

Investor Focused on Alaska, or elsewhere?

Johnson We’re exclusively focused on getting done what we need to do in Alaska. We have a big investment and unique exper¬tise in regard to Alaska, and we’re going to take advantage of that.