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Escrow ordered for Kenai Loop revenues AOGCC agrees with CIRI, DNR; sets hearing on pooling; Alaska Superior Court agrees with CIRI that lease to Buccaneer was terminated Kristen Nelson Petroleum News
Some steps have been taken by the Alaska Oil and Gas Conservation Commission and Alaska Superior Court to resolve issues at the Buccaneer-operated Kenai Loop gas field.
The commission, which has been hearing issues around natural gas production at the field since August, ordered establishment of an escrow account in response to requests from Cook Inlet Region Inc. and the Alaska Department of Natural Resources.
Buccaneer has been producing natural gas from the Kenai Loop field since January 2012, when production began from the KL-1 well; a second well, KL 1-3, went into production in February 2013; a third well, KL 1-4, is completed and has been tested. All the wells are on MHT-9300082, a lease Buccaneer holds from the Alaska Mental Health Trust Authority. CIRI, DNR and the MHT have adjacent leases, one of which, owned by CIRI, was formerly leased to Buccaneer.
The commission said in an order issued May 23 that there is agreement that the two producing wells are draining gas from adjacent leases. Buccaneer has been making royalty payments only to the Trust Land Office; DNR and CIRI have received no money for production from their adjacent leases, the commission said.
The commission ordered that effective June 1 all future revenues from Kenai Loop, less operating expenses, be deposited in an escrow account “until a production allocation agreement can be reached.” The escrow account will fund retroactive payments and protect parties from future loss.
Separately, the commission said it will “compel pooling and/or unitization” of the Kenai Loop field “in order to protect the correlative rights of the operator and landowners” and scheduled a hearing on the matter for July 7, “unless the operator and the landowners come to voluntary agreement on pooling and or unitization prior to the scheduled hearing.”
Agreement on drainage The commission said all parties - CIRI, DNR, the Trust Land Office and Buccaneer - agree that the two producing wells at the field, KL Nos. 1-1 and 1-3, are draining not only the MHT lease from which the wells were drilled but also adjacent CIRI, DNR and MHT acreage.
Buccaneer has made royalty payments exclusively to the Trust Land Office for gas produced at the field.
“The parties were given until the date of this order to reach a consensus production allocation agreement but have not done so,” the commission said.
Until an allocation determination is made, amounts CIRI owes as a working interest owner in the development and “the amount MHT and Buccaneer owe for retroactive royalty/production payment corrections cannot be ascertained.”
“Depositing all future revenues, less operating expenses into an escrow account until a production allocation agreement can be reached will fund retroactive payments and protect the parties from future harm,” the commission said.
Buccaneer is ordered to establish an interest-bearing escrow account and to pay all fees and costs associated with the escrow account, with no funds to be “disbursed from the account except by written order of the AOGCC.”
The commission said if prior to the allocation hearing set for July 7 it is provided with an agreement signed by Buccaneer, the Trust Land Office, DNR and CIRI specifying how production from the four leases is to be allocated, it will order funds in the escrow account dispersed in accordance with that agreement.
CIRI lease terminated In a separate action, CIRI sued Buccaneer in Alaska Superior Court last year over the return of a lease which CIRI issued to Buccaneer in 2011.
CIRI said Buccaneer had not met the terms of the lease; Buccaneer said it had more than met the lease terms.
In December CIRI filed a motion for summary judgment on its quiet title claim; Superior Court Judge Frank A. Pfiffner ruled on that motion April 22, granting CIRI’s motion for summary judgment in part.
“Because the language in the lease is clear and unequivocal, there is no disputed material fact as to whether it has terminated,” Pfiffner said. “However CIRI’s conduct may have provided Buccaneer with an equitable defense that the lease was extended until as late as January 9, 2013. The lease was no longer in force after January 9, 2013, and may have terminated before that date. ... CIRI has present title to the gas estate, and Buccaneer does not presently have a valid lease.”
A trial setting conference/status hearing is set for June 13.
Work commitments not met The judge said CIRI claimed the lease terminated when Buccaneer failed to meet work commitments by deadlines. In response, Buccaneer argued that the lease did not terminate and that it met all of the requirements under the lease by completing a well.
When Buccaneer did not meet deadlines, Pfiffner said, “CIRI informed Buccaneer that it was in ‘breach’ of the agreement and demanded compliance with the work commitments by a new deadline.”
“The language in the term section (of the lease) is unmistakable,” Pfiffner said.
“The lease is automatically terminated by failing to comply with ‘any’ of the work commitments in Exhibit A.”
The language of the lease provides that it “automatically terminates on the deadline for any uncompleted work commitment. The only way to keep the lease in force is for CIRI to grant an extension. The language allows no other interpretation.”
The judge said “sophisticated parties have a right to determine what will be material in the agreements they enter. The language in this lease is absolutely unequivocal: failure to meet a work commitment terminated the lease automatically. ... Buccaneer should either have refused to agree to such harsh terms or, knowing the lease contained such harsh terms, complied with the terms rigorously and absolutely.”
Actions may have been unclear “CIRI pursued a confused position regarding the lease termination itself,” Pfiffner said. “It seemed to suggest that the lease would terminate unless Buccaneer cured, but the express terms of the lease automatically terminated it as soon as Buccaneer failed to perform the first work commitment on June 1, 2011.”
Even if CIRI granted an extension, “that extension lapsed at least after January 9, 2013, when CIRI unequivocally communicated its position that the lease had terminated,” Pfiffner said.
He said Buccaneer has shown two defenses “that may have extended the lease until as late as January 9, 2013,” and said the court would not rule on whether the lease terminated before that date.
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