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AOGCC hears call for Kenai Loop escrow CIRI, Buccaneer, Mental Health Trust, Division of Oil and Gas set to testify on who should share in profits from gas production Kristen Nelson Petroleum News
As this issue of Petroleum News went to press Jan. 30, the Alaska Oil and Gas Conservation Commission was hearing a dispute between Cook Inlet Region Inc. and Buccaneer over natural gas production from the Kenai Loop field. The Trust Land Office of the Alaska Mental Health Trust Authority and the Alaska Department of Natural Resources Division of Oil and Gas were also expected to testify.
This story is drawn from briefs submitted in advance of the Jan. 30 hearing.
CIRI and Buccaneer are also disputing Kenai Loop issues in Alaska Superior Court.
CIRI petitioned the commission for relief based on a claim that Buccaneer’s production from the Kenai Loop 1-1 and 1-3 wells is illegal. The division and the Trust Land Office intervened.
Buccaneer is producing from a Mental Health Trust Authority lease; CIRI and DNR have adjacent leases.
CIRI and the division are both asserting that Buccaneer is draining natural gas from their adjacent acreage.
Escrow requested CIRI, asserting that Buccaneer is draining its acreage, is asking the commission to require Buccaneer to put money into an escrow account to cover “past, present and future production from CIRI acreage.”
CIRI said the specific amount Buccaneer owes it will be determined in Superior Court, but argued “the fact that Buccaneer is taking CIRI’s gas without payment is not disputed.”
DNR also argued drainage, telling the commission in its brief: “It is undisputed that both the KL #1-1 and KL #1-3 wells are draining CIRI and DNR lands and that Buccaneer has not paid CIRI or DNR a share of production or any royalties on production,” and asked that, in addition to escrowing funds for CIRI, the commission “also escrow funds to secure DNR royalty on its claimed share of production” from the Kenai Loop wells.
DNR said that while escrow was the issue pending, it intends to petition AOGCC “proposing modifications to the Conservation Orders under which the KL #1-1 and KL #1-3 wells are producing, and proposing an allocation of production, a pooling agreement, pool rules, and resolution of any other outstanding issues arising from the production of the KL #1-1 and KL #1-3 wells.”
Buccaneer: Pooling not required Buccaneer argued that a pooling agreement is not required because the commission, in a 1987 conservation order for the Cannery Loop field, established 40-acre drilling units for the governmental section from which Buccaneer is producing its Kenai Loop wells. The Kenai Loop area is no longer part of the Cannery Loop field, but the conservation order was never modified to reflect the change in the Cannery Loop field.
Buccaneer said it is the only party with an interest in the 40 acres from which it is producing, and “is under no obligation to enter into a pooling agreement.”
CIRI argued that more than 30 percent of Kenai Loop production is coming from its acreage, but Buccaneer said CIRI “has offered no compelling explanation why it believes it is legally entitled to this percentage of production.”
Buccaneer took out a lease on CIRI acreage in the Kenai Loop area in 2011, but in January 2013 CIRI terminated the lease. Termination of that lease is one of the things CIRI and Buccaneer are litigating in Alaska Superior Court.
In its brief the Mental Health Trust told the commission that “CIRI’s petition potentially throws into question a significant portion of the royalty revenues received to date by the Trust from production from the Kenai Loop 1-1 and 1-3 wells, and to be received by the Trust in the future.”
It argued that AOGCC has established a 40-acre drilling unit and that CIRI did not object when the commission spacing exceptions for the KL 1-1 and KL 1-3 wells.
While Buccaneer and the Mental Health Trust argued that the 40-acre drilling unit from the Cannery Loop unit conservation order is determining at Kenai Loop, CIRI argued that the commission’s regulations require pooling over a 640-acrea area, a governmental section, before production can begin. CIRI, DNR and the Mental Health Trust all hold acreage within the 640-acrea governmental section.
On the 40-acre drilling unit, CIRI said it found no evidence in the 1987 hearing on the Cannery Loop unit conservation order that any of the Cannery Loop gas pools extended into section 33 where Kenai Loop is located and also said none of the participating areas established for Cannery Loop by DNR’s Division of Oil and Gas extend into section 33.
Section 33 was contracted out of the Cannery Loop unit in 1991, CIRI said, but the former Cannery Loop unit operator never asked that the Cannery Loop conservation order, CO 231, be updated.
“In the past, the AOGCC has removed lands from existing COs if and when appropriate. CIRI raised the issue of CO 231 simply to encourage the AOGCC to take this ‘housekeeping action,’” CIRI said.
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