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Corsair decision appealed Pacific Energy claims four expansion leases justify planned drilling program Eric Lidji Petroleum News
A small independent oil company claims the state didn’t expand an offshore Cook Inlet unit as a way to bolster the case against the owners of the Point Thomson unit on Alaska’s North Slope.
The claim arises from an effort by Pacific Energy Resources to more than double the size of the Corsair unit in the waters of upper Cook Inlet by expanding the boundary to include four surrounding leases.
The California-based company requested the expansion back in March, hoping to prevent three of the four leases from expiring at the end of April.
The state denied the request on the day the leases expired, calling the expansion tantamount to “warehousing” leases because neither Pacific Energy nor its predecessor Forest Oil had drilled exploration wells on any of the leases at or around Corsair.
Pacific Energy took over the leases and the Corsair unit in August 2007, and received state approval to take over as the operator of Corsair in late November. The company is proposing to drill three exploration wells at the unit by the end of 2009.
Vladimir Katic, executive chairman and chief operating officer of Pacific Energy, appealed the ruling on 11 points in a 34-page letter to Lt. Gov. Sean Parnell and Department of Natural Resources Commissioner Tom Irwin dated May 16.
Those points include a charge that the “prejudicial and predetermined nature” of the decision “appeared to have been written for the sole purpose of using the Decision to fortify its position taken in other pending litigation.”
That “other pending litigation” refers to the on-going battle between the state and ExxonMobil over the leases at the Point Thomson unit on the North Slope. The state recently terminated the unit and revoked the leases from Exxon Mobil, only to have the Irving-based mega major turn around and claim $800 million in damages from the state.
The Point Thomson case revolves around the question of whether ExxonMobil “warehoused” leases over the past 30 years, rather than developing them.
The state never explicitly made a connection between Point Thomson and Corsair, and did not mention Point Thomson in its decision not to expand Corsair. However, Pacific Energy believes the use of the word “warehousing” implies a connection.
The state made its decision about Corsair by interpreting the statutes governing leases, according to Kevin Banks, acting director of the state Division of Oil and Gas. Banks said the decision referred to a “lack of information” about the expansion area and “the lack of work commitment related to it.”
“Let’s put it this way: Anywhere else in the country, units are formed when a prospect is understood,” Banks said. “The state, in its effort to encourage exploration, has been often willing to unitize land before there’s a real good definition of a prospect, but in this case there wasn’t even that.”
Expansion acreage justifies drilling Pacific Energy based its request for expansion at Corsair on new information it said changed the outlook of the prospect. The company said it spent $500 million to acquire Forest’s assets, hold on to the Corsair leases, map the Corsair reservoir and secure a jack-up rig to the Cook Inlet.
Pacific Energy claims Forest didn’t drill exploration wells because the company “did not adequately interpret the Corsair structure,” a series of underground rocks bearing both oil and gas at different depths. According to Pacific Energy, Forest saw the data about those rocks and decided Corsair wasn’t economic.
But by using newly acquired 2-D seismic data of the area and a new evaluation by the technical advisors Gaffney, Cline & Associates, Pacific Energy determined that as much as two-thirds of the Corsair structure extended past the existing boundaries of the unit.
Pacific Energy describes a 2.5-mile wide and 9-mile long underground formation where gas reservoirs sit on top of deeper oil reservoirs. The extent and amount of those deeper oil reservoirs lead Pacific Energy to decide the prospect was economically viable to explore. Without the expansion acreage, the company says it can’t test out the theory.
Because the state quoted those dimensions in referring to the Corsair prospect, Pacific Energy claims the state agrees with this new geologic assessment, but not with the conclusion that the acreage should be included in the unit.
Banks said the state originally formed the unit based on the gas prospects.
“We’re only hearing about more resources now in this effort to expand the unit in weeks before the leases were to expire,” Banks said. “And frankly the discussion that they provided us on this new prospect was a discussion that was fairly inadequate.”
The seismic data and the technical evaluation are part of a confidential geological and geophysical package that Pacific Energy only shared with the state.
Deadlines and exemptions Forest Oil divested its Alaska assets several months before a series of expiration dates and deadlines, meaning Pacific Energy came into the leases at Corsair with only a few weeks to complete an expensive and difficult drilling campaign.
Pacific Energy failed to meet the first deadline requiring it to secure a drilling rig for the program by the end of 2007, just 34 days after it officially took over at Corsair. The state gave Pacific Energy 90 days to make things right or lose the unit.
Over those three months, Pacific Energy did enough to satisfy the state and earn several extensions, giving the company until April 30, 2008, to secure a rig and until June 30, 2009, to drill the first well at the unit.
On April 15, Pacific Energy announced a three-year, $156 million deal with Blake Offshore to bring a jack-up rig to Cook Inlet. The special rig would allow Pacific Energy to drill offshore wells without building a new platform.
Several companies have been trying for years to get a jack-up rig to Alaska, and with one set to arrive as early as late February, many companies with existing Cook Inlet acreage hope to get time on the rig.
Pacific Energy put down a non-refundable $100,000 deposit for the rig on April 24. Because the state rejection letter is both dated April 30 and references the April 30 deadline for securing a rig, Pacific Energy accused the state of writing the decision without taking into account recent developments.
“The use of this language clearly after the fact of the fulfilled obligation indicates that the Decision was written several days in advance of its execution and relied on the assumption that such obligation would not be met,” Katic wrote.
Getting a rig contract kept Pacific Energy from losing the Corsair unit, not the expansion area, Banks said.
“The leases were not part of the unit,” Banks said.
Future for jack-up rig uncertain The state believes the expansion acreage shouldn’t impact drilling operations at Corsair: Either the jack-up rig makes it to Alaska and Pacific Energy drills the required well, or the rig doesn’t make it and the arguments for expansion become moot.
Should the state uphold its ruling on Corsair, those three leases would become part of the 2009 Cook Inlet lease sale held next May, and Pacific Energy or any other company would have the chance to bid on the acreage.
Pacific Energy questions that logic.
“Without the expansion acreage, it is unlikely that (Pacific Energy) will be able to economically justify the delivery of a jack-up rig to the Cook Inlet,” Katic wrote.
That decision would ripple through the Inlet at a time of declining production. Escopeta Oil plans to use the rig to drill its Kitchen unit and Renaissance Alaska hopes to get time on the rig to explore its nearby leases.
Pacific Energy presents a dire scenario where the rig doesn’t make it to Alaska, known prospects in Cook Inlet aren’t developed and offshore exploration in Cook Inlet plummets, leading to gas shortages and higher consumer prices throughout the Railbelt.
“Frankly, we are worried,” Banks said about the possibility of the rig staying put.
He would like to see more cooperation among companies in the Cook Inlet.
“There seems to be an opportunity here for a lot of synergies if people could basically make the commercial arrangements to line themselves up for using that rig,” Banks said. “Once the rig is here, it seems to me it would be in play for quite a while.”
Rig currently drilling in Bahamas Should Pacific Energy cancel the drilling program at Corsair, it might be a while before a jack-up rig makes it to Cook Inlet.
The rig Pacific Energy plans to use is currently drilling wells in the Bahamas, which means it would need to travel to South America in order to make it north to Alaska.
Pacific Energy claims only foreign ships can support the weight of the rig and distance of the trip, meaning anyone looking to bring the rig north needs an exemption of the Jones Act requirement that tankers in U.S. waters be built, owned and manned by Americans.
Pacific Energy already has federal permission to bring the rig north.
“With the current war, upcoming change of Administration and lead time necessary, it is very unlikely another company could obtain such a waiver for several years to come,” Katic wrote.
Taking back the leases could delay any drilling for as much as two years, depending on how quickly the state can administer the leases. The land wouldn’t go back up for bid until May 2009. The state just approved bids from the 2007 Cook Inlet lease sale.
Pacific Energy believes it can explore the leases much sooner, but Banks said the state is “using all the tools in its toolbox to encourage development,” which means balancing incentives with a disciplined approach.
“Everyone seems to think about this the same way: Once you get somebody sitting on a lease you feel like you have to do everything in the world to make that one person deal with it. But the fact is that kind of approach only provides an opportunity for lessees to delay. At some point and at some level, the leases have to mean what they say they mean,” Banks said.
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