State seeks contractor to advise on risk of abandoned oil assets

The state of Alaska is doing some deep thinking about obsolete or abandoned oil and gas infrastructure — and who is ultimately responsible for it.

The Alaska Department of Natural Resources on April 24 put out a solicitation for a contractor to provide guidance.

DNR is “reviewing its policies and procedures for bonding associated with dismantlement, removal, and remediation (DR&R) of oil and gas infrastructure on state leases to address Alaska’s changing business and environmental climate,” the solicitation said.

State officials fear the state would be on the hook for potentially enormous costs to square away oil and gas properties should an operator abandon them due to bankruptcy or some other reason.

The officials add, however, that they don’t want to overdo it in terms of bonding or other requirements that operators warn could stifle investment.

The solicitation said the contractor “will provide to the DNR a comprehensive review of policies and procedures in other jurisdictions (domestic and foreign) regarding DR&R for oil and gas infrastructure (both onshore and offshore), as well as for other extractive industries (for example, mining). This review should encompass policies on state, federal, and private land. ... DNR needs an understanding of how other domestic and foreign jurisdictions address bonding levels and mechanisms to mitigate the risk posed with an operator not fulfilling its DR&R obligations.”

DNR expects to award the one-year contract in early June. The contract is worth an estimated $350,000 to $500,000, the solicitation said.

Alaska has two oil and gas provinces: the North Slope, where giant Prudhoe Bay and other major fields have been producing since 1977, and Cook Inlet, an older and far less productive area.

In recent years, the state got a scare when a Cook Inlet producer, Pacific Energy Resources Ltd., went bankrupt and abandoned a collection of properties including the Osprey offshore platform. The state faced potentially tens of millions of dollars in caretaking and DR&R costs before another operator eventually acquired the properties.

In September 2013, DNR held a public workshop to gather feedback on possible new regulations regarding rehabilitation plans or DR&R assurances for Cook Inlet offshore platforms.

The inlet currently has 16 platforms, most of which were installed in the 1960s. A few are no longer active.

DNR officials are looking at measures such as requiring larger bonds of small companies, or developing a “financial strength test to periodically assess a lessee’s capacity to carry its DR&R obligations.”

—Wesley Loy