December 18, 2008 --- Vol. 14, No. 116December 2008

State proposing to combine three Cook Inlet prospects

State oil and gas officials are proposing to consolidate the Cook Inlet lease holdings of three small companies in the hopes of speeding development of the offshore leases.

The move would combine the leases of Pacific Energy Resources, Escopeta Oil and Renaissance Alaska into one unit with the goal of getting a well drilled by next summer.

The proposed unit would include the Kitchen unit, the Corsair unit and the proposed Northern Lights unit, as well as surrounding leases currently outside of unit boundaries.

Currently, those units and most of the surrounding leases are either in default or facing expiration because the operators have not met drilling commitments required by the state.

The three prospects sit along one geologic trend in the waters south of the village of Tyonek. All three prospects also require use of a special drilling rig called a jack-up.

The proposed unit would require the companies to start moving that rig to Alaska by March 15, 2009, to drill one well by June 30, 2009, and another by May 1, 2010.

“We hope they, as a group, will be able to accomplish the development objectives that none of them individually seem able to achieve,” Kevin Banks, acting director of the Division of Oil and Gas, said in a statement. “We are willing to give them a reasonable time to work out the deal amongst themselves. If they are unable to cooperate, the state will enforce the terms of their existing contracts with the state.”

The companies have until March 1, 2009, to agree to the proposal from the state.

Editor’s note: See full story in the Dec. 28 issue of Petroleum News, which will be available online Dec. 26.

DNR inspects Point Thomson pad, says Exxon not in compliance

In a Dec.1 legislative hearing in Anchorage, top Alaska Department of Natural Resources officials learned that ExxonMobil completed two well cellars this past summer at the No. 3 pad in the former Point Thomson unit on Vol. 14, No. 116Alaska’s eastern North Slope. (See story in the Dec. 7 issue of Petroleum News.) And, more importantly, that ExxonMobil believes that drilling the 120-foot well cellars, and setting conductor pipe in each, legally holds several of the unit’s leases, which DNR says have expired.

ExxonMobil’s Alaska production manager Craig Haymes told legislators that leases don’t automatically expire 90 days after expiration of a unit, but can be held through different means such as by drilling.

“If you have a drilling operation under way on those leases then you can retain those leases in accordance with regulations and in accordance with the lease conditions,” he said, which state DNR officials did not dispute.

But DNR officials at the hearing said the surface land use permit issued by DNR’s Division of Land, Mining and Water to ExxonMobil does not include the right to drill and that setting conductors is not drilling.

“ExxonMobil does not have a drilling permit from the AOGCC for this work, so they must not consider it a drilling operation either,” acting director of DNR’s Division of Oil and Gas, Kevin Banks, told Petroleum News after the hearing. (The Alaska Oil and Gas Conservation Commission has a February hearing scheduled on this issue and others surrounding Point Thomson.)

Three days after the Dec. 1 legislative hearing, Division of Land, Mining and Water official Gary Schultz inspected the work done by Exxon at Point Thomson Pad No. 3 this past summer under its land use permit 26895. In a Dec. 15 letter to ExxonMobil, Schultz said that the company was “for the most part” in compliance with the environmental stipulations of the permit, but there were some issues of non-compliance with the development plan of the permit,” including the installation of the two conductors.

Schultz said the land surface permit authorizes surface uses only, such as the staging of equipment, but not the installation of conductors, which “is the first step in the drilling of oil wells” and “must be approved by the Division of Oil and Gas.

“This activity was not clearly stated in your application and was not approved,” Schultz told ExxonMobil.

He said the company might be asked to remove the conductors next summer.

At this point ExxonMobil is not waiting on permits to advance its 2009 winter drilling program at Point Thomson, Haymes told legislators. Of the 22 permits needed, he said 16 have been issued, two have been denied and the status of the other four is unclear.

Editor’s note: See full story in the Dec. 28 issue of Petroleum News, which will be available online Dec. 26.

Shell cancels drilling program in wake of court ruling

Shell is canceling its 2009 exploration program in the wake of a recent court ruling.

The company announced today that it would forego drilling and seismic plans for the coming year because its “current level of investment in Alaska is not sustainable given our inability to drill,” Shell spokesman Curtis Smith wrote in a prepared statement.

The decision comes after the 9th U.S. Circuit Court of Appeals ruled on Nov. 20 that the U.S. Minerals Management Service did not adequately evaluate Shell’s drilling plans in the Beaufort Sea. Shell is now planning to appeal the ruling, arguing the appellate court “exceeded its field of expertise” and “ignored the expertise of federal regulators.”

Smith wrote that Shell’s decision to cancel its 2009 exploration program would mean the loss of hundreds of jobs and “tens of millions of dollars” in overall operating investment.

Editor’s note: See story in the Dec. 21 issue of Petroleum News, which will be available online Dec. 19.

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