Providing coverage of Alaska and northern Canada's oil and gas industry
March 2018

Vol. 23, No.10 Week of March 11, 2018

AOGCC working bonding, wants ability to go after prior owners

Kristen Nelson

Petroleum News

Itís kind of like musical chairs, with the state left standing if a company goes bankrupt leaving oil or gas wells that need to be plugged and abandoned, something which companies normally do in the course of managing a field.

The Alaska Oil and Gas Conservation Commission has been fighting the federal government over the issue for years - because the commission has authority over wells drilled decades ago in what is now the National Petroleum Reserve-Alaska, where wells were left unplugged and unabandoned. The Bureau of Land Management, the NPR-A landlord, has done some work, but some of that was unsatisfactory and there still remain two to three dozen wells in NPR-A needing to be plugged and abandoned.

AOGCC Commissioner Cathy Foerster has been battling with BLM over the issue for years and hasnít been shy about sharing the problem with the Alaska Legislature, which has also put pressure on the federal government to clean up in NPR-A. Lisa Murkowski, the stateís senior U.S. senator, got some money for cleanup work, but it isnít enough to cover all that needs to be done.

The commission requires bonding for companies wanting to drill in the state, to ensure that wells are properly plugged and abandoned, but to date, Foerster and Commission Chair Hollis French told the House and Senate Resources committees March 5 in separate hearings, the commission has only required minimum bonding of $100,000 for a single well or $200,000 for all a companyís wells in the state.

Last year the commission began working on its bonding requirements and brought the issue to the Legislatureís attention. AOGCC held a workshop with operators on bonding and has required all companies in the state to provide estimates of their costs to plug and abandon.

Costs vary widely

The cost varies widely, French told House Resources, based on whether it is a North Slope or Cook Inlet well, whether the well is reachable by the road system, is onshore or offshore. He said the commissionís best estimate to plug and abandon on the west side of Cook Inlet, off the road system, is about $600,000 per well.

Foerster told Senate Resources that the commission has started to require operators to come in, once a year, and report on the number of wells they have which are idle, identify wells with no future utility and those with issues - and agree to which wells the company will plug and abandon. That, she said, will be a slow process because every rig devoted to P&A isnít doing something that generates revenue - for the operator and for the state.

So, how big a problem is it and what is the solution?

When Aurora Gas went bankrupt, with 19 west side Cook Inlet wells, only six wells were purchased out of bankruptcy. Of those not purchased, 10 were on Cook Inlet Region Inc. land. If the operator doesnít P&A the wells, then that becomes the responsibility of the landowner. In CIRIís case, however, when the original operator sold its CIRI leases to Aurora Gas, CIRI insisted that the original operator retain the responsibility to P&A the wells, should Aurora Gas fail to do so. CIRI has pursued that obligation and the work will be done.

As for the other three wells, those are on state land, making the Alaska Department of Natural Resources, as the landowner, responsible to P&A. Eventually, Foerster told legislators, DNR will be coming to you for the money to do that.

The numbers problem

The state is now potentially on the hook to P&A three wells.

But the real problem, French and Foerster told legislators, is that more than 5,000 wells have been drilled in the state, and as large companies tend to sell out of mature provinces to smaller companies, the state faces the problem of that P&A requirement falling on the shoulders of companies which donít have the deep pockets of the major North Slope producers.

AOGCC is working on raising its bonding amounts, and French and Foerster told legislators the commission has the statutory authority to do that - the $100,000 and $200,000 it now imposes in bonding are set in law as minimums, not maximums.

Foerster said the commission can set the bonding higher but noted that bonding isnít free. The more financially secure a company is, she said, the cheaper it is for them to get a bond - and the less worried the commission is about the company. BP can get a bond for pennies on the dollar, she said; for an independent, the cost would be high and might be prohibitive.

Prior operator laws

There is something the commission canít do on its own, and is asking legislators to consider: Two states, California and Kansas, have written into statute the ability of the state to go back to a previous operator if the current operator fails to P&A. California used this recently, Forester said, with an offshore platform Exxon had sold to another operator. When that operator went bankrupt, the state was able to go back to Exxon under the stateís ďprior operatorĒ law, because Exxon was operating the platform when the law went into effect.

That would require a statutory change, and House Resources Co-Chair Geran Tarr, D-Anchorage, said the committee was interested in working on that.

Foerster told Senate Resources the Legislature has another option - set up an idle well fund, charge companies $100 per idle well in year one, $500 per well in year two, $1,000 in year three, etc. Eventually, she said, companies would start to look pretty hard at whether idle wells have utility. A fund would accumulate which could be used to P&A wells, and operators would be encouraged to identify wells without future utility and do the P&A work.

Sometimes wells do have future utility.

Foerster said many wells which had been idle on the North Slope were brought back into production when coiled tubing technology became available. Had all those well been P&Aíd when production stopped initially, she said, both the companies and the state would have been out a lot of oil.


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