Providing coverage of Alaska and northern Canada's oil and gas industry
January 2005

Vol. 10, No. 1 Week of January 02, 2005

Alaska denies Alliance Energy’s application to include its lease in Unocal’s Deep Creek unit

Kristen Nelson

The Division of Oil and Gas of the Alaska Department of Natural Resources has denied an application by Alliance Energy LLC to expand the Unocal-operated Deep Creek unit to include state oil and gas lease ADL 390511 on the unit’s eastern edge. The working interest in ADL 390511 is held 99.275 percent by Alliance and 0.725 percent Northstar Energy Group.

The division said the proposed unit expansion “is not supported by the available geological, geophysical or engineering data” and Alliance did not commit “to acquire additional technical data that would justify approval” of its application.

Unocal holds 100 percent of the working interest in the 22,657-acre Deep Creek unit, which includes three state leases and five Cook Inlet Region Inc. leases, and is jointly administered by the state and CIRI. The unit was formed in 2001.

ADL 390511 was originally part of ADL 388199, a noncontiguous lease issued in 1997 with some two miles between the segments. In 2001, when Unocal applied to form the Deep Creek unit, Alliance owned ADL 388199, but did not request inclusion of the lease in the unit when it was formed in 2001. In 2003 Sam Nappi, president of Alliance and Northstar, contacted the division contending that segment 2 of ADL 388199 should be included in the Deep Creek unit. Alliance provided the division with a map of seismic interpretations of the Deep Creek unit as it related to segment 2 of ADL 388199, three seismic dip sections and a two-way time map of the Upper Tyonek Sandstone in the lease area.

Segment 1 in Nikolaevsk unit

Alliance included segment 1 of ADL 388199 in a 2003 application to form the Nikolaevsk unit southeast of Deep Creek. On the last day of the public comment period for the Nikolaevsk application, Alliance informed the division that it was assigning its interest in the acreage proposed for inclusion in the Nikolaevsk unit to Unocal. Unocal submitted an amended application to form the Nikolaevsk unit with a slightly modified unit area, and informed the division it had acquired 100 percent working interest ownership in Nikolaevsk from Alliance and all other lessees in the proposed Nikolaevsk unit, including segment 1 of ADL 388199. The division approved the Nikolaevsk unit in 2004 and severed ADL 388199, assigning lease number ADL 390511 to non-unitized acreage in segment 2, due to expire Jan. 31, 2004.

Six-month extension granted

Alliance was granted a six-month extension of the term of leased ADL 390511 to present its geologic interpretation and file an application to expand the Deep Creek unit to include ADL 390511, an application which Alliance filed in July. The division found the application incomplete and Alliance was given until Sept. 1 to file a complete application, which the company did. Technical data in support of the application included a report prepared by Sproule International Ltd. and a time structure map on the Upper Tyonek.

In response to a request for public comments, Unocal told the division the Alliance application should be rejected.

Unocal said: “No extension of the lease was appropriate in the absence of either new geological or geophysical information or the commitment by Alliance to obtain such additional information or, better yet, drill a well to support the application.” Unocal further told the division it believed its “extension of the primary term of the lease in the absence of either new data or a work commitment is unprecedented and inappropriate.”

Unocal also submitted confidential information and said that if the division continued to process the application, it should deny the Alliance request due to lack of technical merit.

The division noted in its decision that “Alliance has not acquired any new geologic, geophysical, or well data over the lease area, while Unocal drilled 10 wells since forming the Deep Creek unit and acquired 105 miles of proprietary seismic.” With well results and new data, “Unocal’s interpretation of the Deep Creek unit boundary remains unchanged,” the division said.

Middle Happy Valley prospect south of Happy Valley

The division said that it had access to three times more seismic data over the proposed expansion area than Alliance and “agrees with Unocal’s assessment that the Deep Creek unit may contain multiple accumulations but the only confirmed commercial production is from the Happy Valley reservoir, which does not extend onto” the Alliance lease.

The division said “Unocal’s interpretation of the data also indicates a potential accumulation south of the Happy Valley reservoir” that Unocal calls the Middle Happy Valley prospect, and where Unocal plans to drill the Middle No. 1 and the Saddle No. 1 wells from a new pad. Unocal submitted a plan of operations for this prospect, which was approved in May, but did not go ahead with the project, which includes a road and a pad. The division approvals for the Middle Happy Valley prospect are good for three years.

The division said that an exploration well will be needed to confirm whether the Middle Happy Valley prospect is commercially viable, but said well and geophysical data in the Middle Happy Valley application, and other data available to the division, suggest that lease ADL 390511 “may lie within the structural saddle that separates the Deep Creek anticline from the Happy Valley anticline, in which case it would not contribute to production. The data is currently insufficient to conclude if the land within ADL 390511 is underlain by hydrocarbons.”

No exploration well planned for ADL 390511

Alliance told the division it ratified Unocal’s plan of development for the unit, but the division said that Unocal’s first plan of development “does not contemplate any exploration wells that would evaluate whether hydrocarbons are present in the proposed expansion area,” and Alliance in its application “did not propose any additions or amendments to the approved unit plan...”

Since there are no plans to confirm hydrocarbons in the proposed expansion area, approval of Alliance’s application “would provide no economic benefits from exploration, delineation, or production from ADL 390511,” the division said. And if ADL 390511 were added to the unit, its term would be expanded for as long as it was in the unit, “even if exploration confirmed that the expansion area was not underlain by hydrocarbons.” The term would be extended for at least 10 years because the Deep Creek unit agreement calls for contraction of areas not in a participating area after 10 years of sustained production from the unit. If the division denies the application, however, “the lease will expire and the acreage will be available for bid in the next Cook Inlet Areawide lease sale.”

“Even Alliance’s interpretation suggests that only a small portion of the lease, if any, could be underlain by hydrocarbons. However, a prudent operator would not drill a well on ADL 390511 to confirm the prospect, because, even in the most optimistic case, it lies on the lower edge of the structure. An exploration well drilled within the unit area to the southwest of the lease could confirm if a reservoir exists, but additional well tests would be necessary to determine if it was a commercial discovery and if the lease could contribute to production.”

The division concluded data indicates “the Happy Valley reservoir does not extend southeast of the current Happy Valley (participating area) boundary,” and so inclusion of ADL 390511 in the unit is not necessary to protect Alliance’s rights to any of that production.

Essentially a request for involuntary unitization

The division said it was “unfortunate” that Alliance and Unocal “could not agree on a plan to evaluate the expansion acreage and submit a joint expansion application.”

Because Alliance and Unocal did not agree, the application essentially requested the division to “approve involuntary unitization of the lease.” If Alliance had committed to drill a well to evaluate its acreage, it might have been in the state’s interest to approve Alliance’s application. But since Alliance did not commit to drill a well, the division’s approval of its application “would have put Unocal in an unreasonable position as the unit operator who is required to fulfill a commitment that it did not make.

“Alliance took no action during the seven-year primary term of the lease to evaluate its hydrocarbon potential. Further, Unocal claims the division acted inconsistently by granting Alliance lease extensions to prepare, submit, and evaluate the application.”

Unocal told the division that it was unable to find an instance in which the division granted Unocal a lease extension “wherein a work commitment, nonperformance payment or well commitment was not a condition of extension. The favorable treatment of Alliance in this matter is inconsistent with the treatment Unocal has experienced under similar yet different circumstances.”

Division Director Mark Myers said in the decision that he does “not agree with Unocal’s assessment in this case,” but is “concerned about any perceptions that the division’s actions were unfair or unreasonable.” Myers said Alliance approached the division four months before lease expiration, and said it was in the state’s interest “to grant the extension, if Alliance could provide technical data and an appropriate plan of exploration supporting commitment of the lease” to the Unocal-operated Deep Creek unit.

The division said that it is possible, as Unocal continues to explore, that it may find a reservoir that extends onto ADL 390511, but concluded “there is insufficient data at this time to justify expanding” the unit to include the lease.

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