www.AlaskaAlliance.com 33 planned for this year, but the AIDEA financing may not be enough. The company also needs a reduction of its gross royalty on gas production, its CEO John Hendrix has said. The royalty burden is a combined 25 percent, half of that being the normal state 12.5 percent royalty and the remainder an overriding royalty held by the Kitchen Lights’ original explorer, Danny Davis, and others. The state Legislature advanced a bill last spring that would have reduced the state’s royalty on new Cook Inlet gas including that from Kitchen Lights, but the measure failed at the end of the legislative session. HEX meanwhile has an application pending before the state Department of Natural Resources, or DNR, for relief of part or all of the state royalty. The status of this is confidential, the department says. HEX says it needs the royalty reduction for the expanded Kitchen Lights project to be economic. DNR can negotiate lower royalties in certain cases on producing oil and gas fields, but the procedure is complex, and the department must be able to demonstrate that the reduction is really needed. If HEX is successful with its nearterm exploration, the project could add two billion feet of new reserves to Cook Inlet’s gas supply. But while the prospects are good any exploration program carries risks, Hendrix said. Meanwhile, BlueCrest Energy, another independent, has a longer-term plan to develop a substantial proven gas deposit that overlies its Cosmopolitan oil field. Cosmopolitan is currently producing near Anchor Point, on Cook Inlet’s east side. BlueCrest will need a new offshore gas production platform and new pipelines to develop gas, which will require about a $400 million investment. The oil reservoir at Cosmopolitan is now being produced with extended-reach wells drilled from onshore, but the gas reservoir is too shallow to be produced by those wells. Conventional “vertical” wells and the new platform are needed to reach the gas, BlueCrest has said. BlueCrest is also hoping that investments by the state, through AIDEA, can help it attract other investment for the project. Cosmopolitan’s gas reserves, which are proven, can’t be developed in time to meet the short-term Cook Inlet gas supply deficit, but they could make a substantial contribution in the mid-tolonger term. The potential arrival of imported liquefied natural gas in Cook Inlet in 2029 could create additional uncertainties in securing investment for new gas development. The LNG price would be linked to world markets, which are now volatile. Investors may worry that a prolonged low period for LNG prices could undercut the development of expensive new Cook Inlet gas, which will be expensive. Meanwhile, Hilcorp Energy, the major gas producer in Cook Inlet, will drill 20 to 23 new gas production wells this year to meet its current contract commitments with regional utilities. Hilcorp has also said it cannot make guarantees that any new gas will be available. Hilcorp’s contracts with utilities will be expiring over the next few years and the company has said it does not have reserves sufficient to extend the contracts. — Tim Bradner BlueCrest Energy has a plan to develop a substantial proven gas deposit that overlies its Cosmopolitan oil field.
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