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Dispute over Umiat funding rumbles on Arctic Falcon challenges Linc’s claim over funding for the Brooks Range foothills oil field, says being squeezed out of field Alan Bailey Petroleum News
While work has been moving forward on the appraisal of the Umiat oil field on the northern edge of Alaska’s Brooks Range foothills, a court case over how the appraisal work should be funded has been making its way through the Alaska Superior Court. Linc Alaska Resources, a subsidiary of Australian company Linc Energy, the majority owner of Renaissance Umiat LLC, the field operator, has sued Arctic Falcon Exploration, the minority owner of Renaissance Umiat, claiming that Arctic Falcon owes Linc a portion of the Umiat appraisal costs. In lieu of payment being received, Linc says it can take ownership of some of Arctic Falcon’s share of the Umiat operating company.
Arctic Falcon disputes Linc’s claim, saying that it does not owe Linc any money and claiming that Linc is trying to squeeze Arctic Falcon out of the field.
Lease purchased in 1999 According to court filings the dispute has its origins in May 1999, when Gary Nydegger, owner and managing member of Arctic Falcon, acquired leases in the Umiat field, a known oil field discovered in 1946 by the U.S. Navy on the east side of what is now the National Petroleum Reserve-Alaska. Despite being a known resource, the economics and practicalities of developing the field have been uncertain, given the field’s remote location and the fact that much of the field’s oil lies in relatively shallow, and therefore cold, reservoir sands.
In 2007 Arctic Falcon, Rutter and Wilbanks Corp. and Renaissance Alaska LLC formed a company called Renaissance Umiat LLC, to pursue an appraisal program in the Umiat field and potentially bring the field into production. Arctic Falcon contributed three Umiat leases to the new company, in return for which Arctic Falcon received a payment of $3.6 million and a 15 percent membership interest in Renaissance Umiat. Apparently, as part of the deal, Renaissance Alaska and Rutter and Wilbanks agreed to pursue an appraisal program in the field, carrying Arctic Falcon’s share of the appraisal costs as part of the compensation for the value of Arctic Falcon’s leases. The assumption appears to have been that, should the appraisal demonstrate field viability, Arctic Falcon would be able to attract investment funding for Umiat development and hence pay its share of the development costs.
According to a court filing by Arctic Falcon, the leases that the company contributed to Renaissance Umiat hold around 55 percent of the field’s oil, with an oil value of more than $15 billion at an oil price of $100 per barrel.
Field operating agreement Under an operating agreement for the company formed in 2007, Renaissance Umiat planned what is referred to as the “Umiat appraisal program,” a program originally involving the drilling of two horizontal wells and four vertical wells by Sept. 1, 2008, at an estimated cost of around $25 million. The wells would target the upper and lower Grandstand sands, the two shallow sand reservoirs at Umiat. But in 2008 Renaissance Alaska cancelled the drilling program, electing instead to shoot a 3-D seismic program, seeking deeper appraisal targets in the field as well as helping delineate the shallower sands.
According to testimony provided by Mark Landt, formerly executive vice president of land and administration for Renaissance Alaska, Renaissance Umiat had decided to defer the drilling program because of funding issues, opting instead to shoot seismic to better delineate the field.
By late 2007, under circumstances which apparently Rutter and Wilbanks has contested, Rutter and Wilbanks was forced to relinquish its share of Renaissance Umiat to Renaissance Alaska because of a failure by Rutter and Wilbanks to pay its share of the Umiat appraisal costs.
Purchase by Linc Energy In 2011 Linc Energy bought out Renaissance Alaska and in 2012 Linc renamed the company Linc Alaska Resources. In 2013 Linc drilled a single appraisal well in the Umiat field, targeting both the relatively shallow Grandstand sands and some deeper targets.
Meantime the costs of the Umiat appraisal work had been growing. According to testimony by Nydegger the Umiat 3-D seismic survey cost more than $12 million and the cancelled drilling program incurred costs of $14.6 million. At the end of 2010 Renaissance Alaska said that expenditures had reached $22.1 million, a sum which Nydegger has questioned. Nydegger also testified that the deep well drilled in 2013 had cost in excess of $60 million.
Cash calls On Aug. 17, 2012, Linc sent Arctic Falcon a cash call for $427,732 for what Linc claimed was Arctic Falcon’s share of the Umiat appraisal costs, later claiming that, if Arctic Falcon failed to pay the bill, a proportionate amount of Arctic Falcon’s ownership interest in Linc Alaska Resources would revert to Linc Energy.
On Oct. 3, 2012, after Arctic Falcon declined to pay the bill, Linc sued Arctic Falcon in Superior Court. And in November 2012 Linc sent Arctic Falcon an additional bill for $2.3 million.
Arctic Falcon says that, because Renaissance Umiat, later to-become Linc Alaska Resources, has never completed the multi-well appraisal program in the shallow Grandstand sands at Umiat, as agreed under the 2007 Umiat operating agreement, Arctic Falcon is not required, at this point, to pay any contribution to the appraisal costs.
No obligation? Arctic Falcon says that, as a part owner in Renaissance Umiat, it had not agreed to either the 3-D seismic survey or the later deep well that Linc had drilled. Under a non-consent agreement associated with the Umiat operating agreement, Arctic Falcon is not obliged to contribute to the costs of these operations, the company says. And, under the terms of the agreement for the formation of Renaissance Umiat, Arctic Falcon does not need to contribute to the funding of the Umiat project until after completion of the multi-well appraisal program.
Linc, for its part, says that a clause in the operating agreement requires Arctic Falcon to contribute to the Umiat costs if the Umiat appraisal program is completed or if the project costs exceed $20 million. With the costs now above that $20 million threshold, Arctic Falcon must pay up, Linc says.
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