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Donkel challenging Cohoe ruling Donkel appealing Cohoe unit denial; state believes Donkel’s overriding royalty doesn’t give him standing before the court Eric Lidji For Petroleum News
A case before the Alaska Superior Court could impact the relationship between the State of Alaska and ancillary investors in the oil and gas sector, particularly smaller players.
The court is considering whether to hear an appeal from the small independent Donkel Oil & Gas and its managing partner Dan Donkel over a proposed Cook Inlet unit.
After more than a year of deliberations, the Alaska Department of Natural Resources denied the formation of the Cohoe unit last September and upheld the decision in May.
While it’s not uncommon for companies to appeal unfavorable unit rulings, appeals typically come from leaseholders. But Donkel Oil & Gas holds no interest in the leases proposed for unitization and Donkel holds only an overriding royalty interest on them.
An overriding royalty interest entitles the holder to a cut of the production from a lease, but does not require the holder to fund operations or allow it to guide development, according to the state. For that reason, the state wants the court to dismiss the appeal.
Regardless of his rights to the lease, though, Donkel stands to gain or lose based on the outcome of the case. Without unitization, the leases expire retroactively to late 2010.
State denied unit twice The saga over those leases goes back nearly a decade.
Donkel and fellow independent investor Kenneth Mehaffey picked up the two leases — ADL 390364 and ADL 390365 — for a seven-year term in an October 2003 lease sale.
The onshore leases are near Kasilof, between Soldotna and Clam Gulch.
Donkel and Mehaffey eventually transferred their working and royalty interests in the leases to Aurora Gas LLC, while each retaining a 1.5 percent overriding royalty interest.
With the two state leases only a little more than two months from expiring, Aurora applied in July 2010 to form the Cohoe unit over the two state leases and an adjoining lease owned by Cook Inlet Region Inc. (The CIRI lease expired on Aug. 17, 2011.)
The leases include the Cohoe Unit No. 1 well Unocal drilled in 1973.
The unit request took more than a year to process, because state officials wanted Aurora to submit a unit agreement that included both the state and Cook Inlet Region Inc.
Two-year exploration plan The eventual unit agreement included a two-year exploration plan where Aurora proposed re-entering the old Cohoe well and gathering new 3-D seismic data. Aurora wanted to look for natural gas Unocal might have missed in the search for oil.
The state ultimately denied the application. “The Cohoe unit plan of exploration does not demonstrate that unitization will encourage earlier delineation drilling activities upon the subject leases than if these activities were conducted on a lease-by-lease basis, other than to provide Aurora an extension to the leases’ primary terms,” Division of Oil and Gas Director William Barron wrote in a September 2011 ruling. “(Earlier) drilling operations on any one of these leases would have extended the drilled lease’s primary term.”
Aurora appealed, but in May DNR Commissioner Dan Sullivan said it was “not in the state’s interest to allow Aurora to retain the leases and benefit from the lease term extensions provided by unitization without having demonstrated the need for unitization.”
Donkel appealed the case to the Alaska Superior Court in June.
On its points of appeal, Donkel said the state erred when it said Aurora failed to demonstrate the existence of a reservoir at Cohoe, and also erred by claiming the unit was not in the public interest and claiming Aurora hadn’t proven the need for unitization.
Could establish precedent The state made its argument against the Donkel appeal using existing statute and code, and referencing case law from other cases in Texas concerning overriding royalty interests, but also acknowledged the Alaska Supreme Court has never decided “whether ORRIs have standing to enforce the terms of a lease or appeal DNR decision related to a lease.”
In at least two cases from the past decade, though, the Alaska Supreme Court discussed the question as part of a larger matter, attorneys for the state wrote in court filings.
Donkel filed his response to the state after Petroleum News went to print.
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