The Producers 2017: Nicolai Creek future remains uncertain

Aurora Exploration is trying to resolve issues blocking its acquisition of the Nicolai Creek field

Eric Lidji

For Petroleum News

As The Producers was going to print, Aurora Exploration LLC was working through obstacles blocking its acquisition of the Nicolai Creek field from Aurora Gas LLC.

In a confusing twist, Aurora Gas and Aurora Exploration are completely separate companies, despite their similar names and a shared history in the Cook Inlet region.

The deal emerged as part of a bankruptcy case initiated last year.

Creditors filed an involuntary bankruptcy petition against Aurora Gas in early May 2016, after trouble at two projects left the company unable to meet financial commitments.

The utility Aurora Power Resources Inc. created Aurora Gas as an exploration and production arm in 1999, when major consolidations throughout the oil industry were creating opportunities for smaller companies to pursue overlooked fields in Alaska. The current troubles with the company began after Rieck Oil Inc. acquired Aurora Gas in August 2015 from a joint venture led by Kaiser-Francis Oil Co.-affiliate Aurora-KF LLC.

In early April 2017, Aurora Gas proposed a sale of its assets to pay off creditors. Trading Bay Oil & Gas LLC made an offer in late June 2017 to acquire the entire Aurora Gas portfolio. The offer included a commitment to conduct maintenance work and to use revenue from regular operations to return $2.4 million to Aurora Gas’ creditors. The deal fell apart after Cook Inlet Region Inc. and Tyonek Native Corp. rejected the offer. The two companies are landowners at Aurora Gas properties on the west side of Cook Inlet.

The investor Paul Craig owns Trading Bay Oil & Gas. The company is a 50 percent owner of Aurora Exploration, with Aurora Power Resources Inc. owing the remainder.

Escopeta Oil and Gas Corp. and Aurora Exploration made separate offers in late July 2017 to acquire only the Nicolai Creek field, which is on state-owned land. The field was the most productive Aurora Gas property, accounting for about half of its production.

Escopeta offered $125,000 for the Nicolai Creek field and associated seismic information and another $50,000 for related gas supply agreements. Aurora Exploration offered $100,000 in cash for the field, the seismic and the gas supply agreements. The court approved the sale to Aurora Exploration in late August, after Escopeta withdrew its offer. The decision did not include consideration of an associated $10,000 offer from Aurora Exploration to acquire a large commercial contract from Helena Energy LLC.

A bonding issue subsequently delayed the sale.

The Alaska Oil and Gas Conservation Commission ordered Aurora Exploration to either post a $6 million bond to guarantee plugging and abandonment of six Nicolai Creek wells or to commit to plugging and abandoning three wells at the Three Mile Creek field and post a $200,000 bond to guarantee the Nicolai Creek commitments. Aurora Exploration did not agree to buy the Three Mile Creek field from Aurora Gas as part of its offer.

A federal bankruptcy judge overturned the AOGCC decision in late September. Without a resolution to the bonding issue, though, the Alaska Department of Natural Resources is unwilling to approve the lease transfer, which is a requirement for the bankruptcy sale.

The matter remained unresolved as The Producers was going to print, making it difficult to determine what the coming year might hold for development work at Nicolai Creek.

In its last plan of development for the unit, Aurora Gas estimated that Nicolai Creek would become uneconomic in late 2020 or early 2021 without new investment.

The unit was producing from six wells as of August 2016, according to the plan of development. Although the new owner will have discretion over future work, Aurora Gas told state officials that it was considering plans to convert the Nicolai Creek Unit No. 2 and Nicolai Creek Unit No. 9 wells into storage operation with 2.5 billion to 3 billion cubic feet of capacity, was interested in remediating problems at the Nicolai Creek Unit No. 10 and Nicolai Creek Unit No. 11 wells, and believed that a proposed Nicolai Creek Unit No. 12 well could access a potential accumulation in the Nicolai Creek North area.

Without those activities, though, Aurora Gas estimated that the Nicolai Creek unit would become uneconomic within three years and would be abandoned by around mid-2021.

In early September 2017, Aurora Exploration submitted a revised plan of development referring to some long-delayed projects at Nicolai Creek. But the state rejected the plan, saying that the company needed to close on the acquisition before it could propose work.

Other fields

In a recent plan of development for the Three Mile Creek field, Aurora Gas estimated the field would become uneconomic in early 2018 without additional investment activities.

Three Mile Creek is currently producing from just one of its three wells - Three Mile Creek No. 1. The well was producing only 186,000 cubic feet per day as of August 2016, down 10 percent from the year prior, according to company figures included in the plan.

The company suspended production from the Three Mile Creek No. 2 well in 2011, after equipment became lodged in the wellbore during maintenance activities. Attempts to resolve the problem in November 2013 and again September 2014 both failed. Given that plugging the well would require a rig workover, Aurora is considering plans to clean out and test the well prior to officially abandoning it, to make the most of unavoidable costs.

The company drilled the Three Mile Creek No. 3 well in November 2011 but subsequent completion activities were “very disappointing” and the well was never brought into production. The company wants to continue testing the well before approving abandonment plans. In its plan, Aurora said it wants to proceed with the Three Mile Creek No. 2 and No. 3 plans this year, if it could secure a rig. If the work failed to resolve the issues with the two wells, the company would plug all three wells in mid-2018.

Aurora Gas also operates the Lone Creek, Moquawkie and Albert Kaloa fields.