August 28, 2009 --- Vol. 15, No. 64August 2009

Pacific Energy abandonment plan risks pollution, huge costs to state, Alaska officials say

The State of Alaska has filed an objection to plans by financially strapped Pacific Energy Resources Ltd. to abandon some of its Cook Inlet oil and gas assets. State lawyers say they’re worried abandonment could lead to pollution from wells and cost the state tens of millions of dollars to safeguard or decommission.

The objection comes just ahead of what could be a pivotal court hearing set for 10 a.m. Sept. 1 in U.S. Bankruptcy Court in Delaware, where Pacific Energy is going through Chapter 11 bankruptcy proceedings.

In its 13-page objection filed Aug. 27, the state said many of the assets Pacific Energy is preparing to abandon “have reached the end of their useful lives,” are no longer producing and could cost $50 million to $80 million to decommission.

Other assets have years of producing life left and will need attention, the state’s objection says.

“Upon abandonment, the State estimates that it will need to expend at least $1.3 million monthly to temporarily shut in or otherwise preserve these properties in working condition in order to facilitate a sale and prevent damage to the State’s oil and gas resources. For example, the State will need to hire third party providers to ensure that the seals on the abandoned wells are intact and also hire third party providers to maintain the power for lights and equipment, including monitoring equipment, on the platforms and in the fields. Unless the properties are inspected, sealed as necessary and monitored, the environment will be at great risk.”

The state also is worried it might be on the hook to winterize wells to prevent freeze-up.

Money available from Pacific Energy to take care of decommissioning is seriously inadequate, the state objection adds. For example, Pacific Energy was required to put $12 million into an escrow account by March 2010 to cover decommissioning of its Osprey platform. But the company fell behind and paid only $6.6 million into the account.

The state’s lawyers are asking the judge to compel Pacific Energy to properly mothball the oil and gas properties, to provide more funding, and to sign over three insurance policies.

Pacific Energy previously said it had buyers for a collection of assets it operates in Cook Inlet, and had named New Alaska Energy LLC as the leading contender with a $7 million offer. But the state’s objection says New Alaska Energy was “unable to consummate the sale” and Pacific Energy is moving to abandon the assets.

State lawyers acknowledge Pacific Energy’s pledge that it will take care to leave the abandoned properties in safe condition. “The State is not convinced, however, that the efforts contemplated by the Debtors are sufficient to maintain the safety of the surrounding environment,” the state’s objection says.

Pacific Energy filed a reply today to objections from the state and other parties. The company remains hopeful it can sell some or all of the properties and avoid abandonment, but no “definitive sale agreement” is currently before the court, the reply says.

The Pacific Energy reply also says “skilled technical staff” have developed a nearly $800,000 “abandonment protocol,” and it will be fully implemented by Sept. 4 except for the Kustatan production facility, which will be completed on Sept. 30.

“The State of Alaska argues that the Debtors must ‘winterize’ their wells, pipelines and other facilities prior to abandonment, but that is precisely what the Debtors are doing (and quite a bit more) as part of the Abandonment Protocol,” the Pacific Energy reply says.

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