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October 2017

Vol. 22, No. 41 Week of October 08, 2017

DOG denies Nicolai Creek transfer but allows for sale completion

Alaska’s Division of Oil and Gas has denied an application for the transfer of the operatorship of the Nicolai Creek gas field from Aurora Gas to Aurora Exploration, because Aurora Exploration has not posted a required surety bond with the division. Consequently, the division has also denied Aurora Exploration’s proposed plan of development for the field.

In a Sept. 22 letter to the presidents of the two companies division Director Chantal Walsh said that she realized that the lack of a bond reflects a delay in completing the sale of the Nicolai Creek field. Once the bond is posted, the companies can resubmit the paperwork for the field operator change, Walsh wrote.

Having turned down the operatorship change, the division has also had to deny the new Nicolai Creek plan of development that Aurora Exploration had filed with the division. Aurora Gas’s current plan of development for the field expired on Oct. 1. Bearing in mind the reason for the delay in bonding for the field and the potential for the field transfer to go ahead, Walsh wrote in another Sept. 22 letter to the companies that she was extending the expiry date on Aurora Gas’s plan to Jan. 1, 2018. Presumably Aurora Exploration will be able to refile its plan by that date, if the sale of the gas field completes and Aurora Exploration becomes field operator.

Aurora Gas bankruptcy

The sale of the Nicolai Creek field is a consequence of the bankruptcy of Aurora Gas. The gas producer, operator of five onshore gas fields on the west side of Cook Inlet, including Nicolai Creek, has been trying to dispose of its assets and had agreed to sell Nicolai Creek to Aurora Exploration, a completely separate company.

However, the proposed sale ran into difficulties when the Alaska Oil and Gas Conservation Commission ordered Aurora Exploration to post a $6 million surety bond for the field’s six gas wells. As an alternative, AOGCC gave Aurora Exploration the option of posting a $200,000 bond, if the company plugged and abandoned Aurora Gas’s three wells in the Three Mile Creek gas field. Aurora Exploration has no plans to acquire Three Mile Creek. The company has said that a $6 million bond would render the purchase of the Nicolai Creek field uneconomic.

According to bankruptcy court filings, Aurora Gas has already plugged and abandoned its wells, except for the Three Mile Creek and Nicolai Creek wells.

The AOGCC bond, which accommodates liabilities for the plugging and abandoning of wells, is completely distinct from the division bond. The division bond relates to the dismantlement, removal and restoration, or DR&R, of the field’s surface facilities. According to court filings Aurora Exploration has executed an agreement with the state, under which the company would establish a trust account and a $500,000 bond for the DR&R liability at Nicolai Creek.

As previously reported in Petroleum News, on Sept. 26 the bankruptcy court ruled the AOGCC bonding order to be illegal under U.S. bankruptcy law because it appeared to be an attempt to condition the gas field sale on Aurora Exploration taking on an Aurora Gas liability that predates the company’s bankruptcy. It is not yet clear what the outcome of the court order will be. However, Aurora Exploration will need to post an acceptable bond with AOGCC before the company can become operator of the Nicolai Creek field.

Aurora Exploration’s plan

According to the plan of development which Aurora Exploration filed for Nicolai Creek, no development drilling, well workovers or significant field modifications were conducted during the previous 12 month plan period. Aurora Exploration said that, if it becomes field operator, it may drill a new well in the Nicolai Creek North unit following the drilling and testing of the deeper sands in the Nicolai Creek No. 10 well. A decision on drilling the new well, which would target Beluga and upper Tyonek sands, would depend on an evaluation of seismic and drilling data, the plan said. Aurora Exploration also plans remedial work on the Nicolai Creek No. 11 well.

The company said that it is also considering the possibility of using the Nicolai Creek Nos. 2 and 9 wells to establish a 2.5 billion to 3 billion cubic feet gas storage facility. This facility could also involve a new horizontal well. Aurora Gas had previously proposed the development of a gas storage facility at Nicolai Creek, but studies into the practicalities of moving ahead with this have yet to be conducted.

In the absence of further field development, for gas production or for gas storage, the field will likely become uneconomic in late 2020 or early 2021. In that case, field abandonment and surface equipment removal would likely be planned for the summer of 2021, Aurora Exploration’s plan said.

- ALAN BAILEY






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