Supreme Court reverses ruling on Alaskan Crude Moose Point lease
The Alaska Supreme Court has upheld an order by the Alaska Department of Natural Resources terminating a lease held on the northwest coast of the Kenai Peninsula by Alaskan Crude Corp., owned by Jim White, a veteran wildcat driller. The court decision overturns an earlier Alaska Superior Court ruling that had determined that the lease termination had been invalid.
The lease in question, about 25 miles northeast of the city of Kenai, is the site of the Moose Point Unit No. 1 well, drilled in early 1978 by Amarex Inc. The well reached a total depth of 10,058 feet, was suspended in March 1978, and plugged and abandoned a year later.
Acquired in 2003In 2003 Alaskan Crude acquired the lease containing the well from lease owners, who had acquired the lease in a 2001state oil and gas lease sale. The term of the lease was seven years, so that the lease was scheduled to terminate at the end of 2008.
But, because the well lay within 1,500 feet of a property line, White had to apply to the Alaska Oil and Gas Conservation Commission for a spacing exception, to protect the rights of adjacent landowners. The AOGCC issued a conservation order in March 2005, allowing the well re-entry and testing, but prohibiting any production from the well until after a commission hearing regarding the ownership rights over the subsurface resources.
White has told Petroleum News that the Moose Point prospect has high potential for both oil and gas and that he started drilling operations at the well in the winter of 2005-06, with drilling recommencing in 2007. White funded the project entirely by himself, underwriting the project risks.
Unstable gas marketThe Moose Point well is situated not far from the Kenai Peninsula gas pipeline infrastructure.
And the market for gas from the Cook Inlet basin impacted Alaskan Crude’s project, with drilling halting in response to the mothballing of the fertilizer plant at Nikiski on the Kenai Peninsula in September 2007 - White had seen the fertilizer plant as a prospective buyer of gas from his lease. However, 2008 saw an agreement between the Palin administration and the owners of the Nikiski liquefied natural gas plant for state support for the plant’s export license extension in 2009, if the plant owners made at least 30 million cubic feet per day of plant capacity available for purchase from non-owner Cook Inlet gas producers. In response, White returned to drilling at Moose Point. But, with a mild early winter and with frozen ground being needed for access to the well site, drilling operations could not mobilize until Dec. 20, he told Petroleum News.
Lease terminationOn Dec. 31, 2008, the last day of the lease term, a DNR inspector observed drilling equipment, including a drilling rig, and evidence of well entry at the well site. But on Jan. 2, 2009, DNR notified White that the lease had been terminated.
White subsequently asserted that he had actually been drilling at the well site on the lease expiry day and that the rules for the lease require a lease extension to be granted, if drilling is in progress on the date on which the lease would otherwise expire. Following an appeal to DNR, the DNR commissioner withdrew the lease termination notice. However, as a condition for the lease extension, the commissioner required Alaskan Crude to continue drilling a well and to complete the well by April 27, 2009, with production from the well to start within 90 days of the end of drilling.
Appeal against DNR termsWhite protested, arguing that the April 27 deadline represented a modification to the original lease terms. White also said that it would not be prudent to immediately risk further capital on the drilling project, given the risk of not being able to complete the drilling before the end of the winter drilling season. In July 2009 DNR terminated the lease.
When an appeal to the DNR commissioner failed to reverse the July lease termination decision, White launched an administrative appeal in Superior Court. The Superior Court judge upheld Alaskan Crude’s position, saying that the lease did not require completion of the well by any specific date and did not require it to have sustained production within 90 days. The judge said that DNR had not allowed for the difficulty of continuing the drilling, given the need for winter conditions for site access. The court also observed that the AOGCC order for the well precluded Alaskan Crude from complying with DNR’s deadline for the commencement of production.
DNR appealed the Superior Court ruling to the state Supreme Court.
Supreme Court supports DNRThe Supreme Court agreed with the Superior Court that DNR’s January 2009 lease termination had been invalid and had breached the terms of the lease. But, while agreeing that DNR’s subsequent re-instatement of the lease cured that breach, the court took a view that the April drilling deadline that DNR had imposed was a justifiable expectation, if Alaskan Crude were to continue drilling the well with reasonable diligence. And the court agreed with DNR that, although the dispute over the lease termination had delayed the drilling program, Alaskan Crude would have been able to continue the drilling in 2009 within the period of winter conditions at the well site.
White told Petroleum News that, if the drilling had not been delayed as a result of the lease termination dispute, Alaskan Crude could have completed the well.
And despite the setback, White is determined to continue with his ventures, seeking wildcat drilling opportunities.
“I’m still here,” White said.
- ALAN BAILEY