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August 2008

Vol. 13, No. 32 Week of August 10, 2008

Alaskan Crude pays to stay in the game

Failure to move rig to Burglin pad results in $60,000 security payment; DNR commissioner says no acceptable basis for delay

Alan Bailey

Petroleum News

The failure of Alaskan Crude Corp. to move a drilling rig onto the Burglin well pad on Alaska’s North Slope by May 15, as required in the plan of exploration for the Arctic Fortitude unit, caused Tom Irwin, commissioner of the Alaska Department of Natural Resources, to place the unit in default in mid-July.

To “cure the default” and prevent unit termination, Alaskan Crude has had to make a $60,000 security payment to DNR. That payment having been made, the plan of exploration now requires Alaskan Crude to move a drilling rig to the Burglin pad by March 31, 2009.

On April 14 Alaskan Crude had appealed a March 24 decision by the director of Alaska’s Division of Oil and Gas not to approve a delay in the rig move.

“I find that ACC has provided no basis to change the director’s March 24, 2008, decision,” Irwin said in a decision document dated July 16 that placed the unit in default.

Alaskan Crude has been planning to re-enter the Burglin No. 33-1 well, originally drilled in the 1980s.

Formed 2006

The division approved formation of the Arctic Fortitude unit, on the south side of the Prudhoe Bay unit and one and a half miles southeast of the Deadhorse airport, in June 2006.

The original plan of exploration for the unit involved the workover and testing of the Burglin No. 33-1 well by Oct. 1, 2007; drilling two new wells within the unit; and shooting 3-D seismic over the entire unit by July 1, 2010. One of the new wells or the seismic program had to be completed by Nov. 1, 2009.

The working interest owners of the Arctic Fortitude leases are James W. White and James A. White. Unit operator Alaskan Crude is run by company president James “Jim” W. White of San Antonio, Texas.

At the time of unit formation Bruce Webb, Alaskan Crude’s then vice president of regulatory affairs, told Petroleum News that the company planned to re-enter the Burglin well to test several intervals including the West Sak-Ugnu, the middle Cretaceous Brookian and a portion of the Ivishak formation (the main reservoir formation in the Prudhoe Bay field).

And Alaskan Crude said that it planned to move a drilling rig and other equipment to the Burglin pad during the winter tundra travel season of 2006-07. However, on May 25, 2007, the company told the division that it had been unable to transport the equipment as planned, because of adverse weather conditions.

On June 28, 2007, the division denied a request by Alaskan Crude for a one-year delay in the work commitment to move the rig. Alaskan Crude made a $60,000 payment to prevent unit termination and appealed the division’s decision. And on Nov. 7, 2007, the division approved an amended plan of exploration that involved moving a rig to the drilling pad by May 15, 2008.

Oil spill response standard

Meantime Alaskan Crude had asked the Alaska Oil and Gas Conservation Commission to reduce the oil spill planning standard for the Burglin well, saying that test results from the well when it was originally drilled did not show any oil capable of flowing to the surface. The company also said that it only planned to remove the two shallowest plugs in the well, to perforate and test the Ugnu and West Sak formations.

On June 26, 2007, AOGCC reduced the spill response planning standard for the Burglin well from the customary 5,500 barrels of oil per day to 825 barrels of oil per day. However, the commission declined to classify the Burglin well as a gas-only well, saying that there were signs of oil in cores taken from the well in the Ugnu and West Sak formations and that those formations are known to contain movable oil elsewhere on the North Slope.

Following an appeal by Alaskan Crude, on Oct. 1, 2007, AOGCC confirmed its ruling that the Burglin well could not be classified as a gas-only well. The commission said that the well classification did not center on the question of whether Alaskan Crude was exploring for natural gas rather than oil. The question was whether the well might encounter oil capable of flowing to the surface.

However, based on a new interpretation by the Alaska Department of Environmental Conservation of DEC regulations, AOGCC reduced the oil spill planning standard for the Burglin well to 600 barrels per day.

Alaskan Crude subsequently asked the commission for a further ruling on the maximum flow rate, based on an amended drilling plan that involved only re-entering the Ugnu formation. And on Oct. 29 AOGCC reduced the unassisted oil flow potential for the well to 115 barrels per day for an Ugnu test.

2008 correspondence

According to the July 16 DNR decision document placing the Arctic Fortitude unit in default, there has been a chain of correspondence about the unit between Division of Oil and Gas officials and Alaskan Crude since early 2008.

In early January Alaskan Crude said that it was experiencing difficulty in communicating with AOGCC regarding an oil discharge prevention and contingency plan, DNR said. The division responded by stating that it saw “no cause for delays in ACC’s work obligations under the Arctic Fortitude unit amended initial plan of exploration.”

In early February Alaskan Crude asked that the plan of exploration work commitments be placed on hold because of alleged AOGCC delays. The division responded that it would consider the company’s request if Alaskan Crude provided more information about the reasons to delay the work. And on Feb. 27 Alaskan Crude requested a “declaration of force majeure for an extension of the Arctic Fortitude unit work commitment deadlines commensurate with the period of force majeure caused by AOGCC actions,” DNR said.

On March 24 the division denied Alaskan Crude’s request, saying that the division did not understand how AOGCC could have delayed the company consultant’s ability to prepare and submit an oil spill contingency plan for DEC approval.

“It appears … that ACC is requesting to delay its … work obligations solely because it is dissatisfied with the AOGCC’s determination that the Burglin no. 33-1 well is not a gas-only well,” the division said.

The dispute with AOGCC is not preventing Alaskan Crude from moving a rig into the lease, as required, by May 15 and that activity does not require an oil spill contingency plan, the division said.

April 14 appeal

On April 14 Alaskan Crude appealed the division’s March 24 decision.

“ACC indicated that its appeal and requests were based on its appeal of the AOGCC’s determination that the Burglin well is not a gas-only well,” DNR said.

And the DNR commissioner confirmed that Alaskan Crude needed to meet its May 15 work commitment. But on April 24 the company submitted a proposed new amendment to the plan of exploration, extending the plan of exploration to Nov. 1, 2011.

“ACC provided a number of reasons for this request that were mainly related to rig procurement,” DNR said.

Alaskan Crude submitted further material to substantiate its request for a plan of exploration amendment but did not move a drilling rig to the Burglin well site by May 15, as required under the approved plan of exploration. And on July 16 the DNR commissioner issued his decision denying Alaskan Crude’s April 14 appeal, saying that there was no basis for the existence of a force majeure under the terms of the Arctic Fortitude leases or the Arctic Fortitude unit agreement.

Jim White of Alaskan Crude told Petroleum News Aug. 6 that his company still plans to drill the Burglin well and develop the Alaska Fortitude unit.

“We don’t hold leases that we don’t intend to drill,” White said. “We still have outstanding issues. We’re hoping they can be timely resolved.”






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