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Vol. 23, No.22 Week of June 03, 2018
Providing coverage of Alaska and northern Canada's oil and gas industry

Bonding requirement down

DNR cuts Great Bear performance bond for extension from $6M to $3M

Alan Bailey

Petroleum News

The Alaska Department of Natural Resources has agreed to reduce a performance bond requirement for the extension of the terms of some of Great Bear Petroleum’s North Slope leases. The agency has reduced the bonding amount from $6 million to $3 million.

Lease term extensions

As previously reported in Petroleum News, DNR had agreed to extend by three years the terms of four blocks of Great Bear leases that had been due to expire on April 30. The lease extensions involved exploration drilling commitments by Great Bear. DNR had required performance bonds for three of the blocks, with the bonds to be forfeited if Great Bear failed to comply with the drilling commitments within required timeframes.

Great Bear appealed the size and timing of the bonds, arguing that the bonds were too high in relation to the drilling commitments, and that the raising of the bonds would put the drilling program at risk by diverting funds from the drilling program.

Dropping some leases

The company subsequently decided to allow the leases in two of the blocks to expire and to focus its exploration efforts on the other two blocks, thus rendering the bonding decisions for two of the blocks moot. However, DNR had mandated a performance bond of $6 million for one of the blocks that Great Bear wishes to retain.

In a May 22 letter to Pat Galvin, Great Bear chief commercial officer, Andy Mack, commissioner of DNR, said that he had considered Great Bear’s request and had decided to reduce the bonding level to $3 million - Great Bear had requested a reduction to $1 million.

Mack wrote that DNR could have increased the annual rental rate for the lease block in question to a much as $5.6 million, although the department realized that that level of rent would impose a much higher burden on Great Bear than the proposed performance bond. However, DNR could justify a bond requirement as high as $17 million, based on the estimated cost of the drilling commitment, Mack wrote.

Nanushuk play

The lease block in question consists of four contiguous leases to the south of the Colville River unit and the village of Nuiqsut. The leases line up with the trend of recent oil discoveries to the north in the Nanushuk formation - the lease extension approval document says that the leases are underlain by Nanushuk sandstones. Great Bear has told Alaska’s Division of Oil and Gas that it has spent some $175,000 on an evaluation of seismic and other data relating to the leases. The exploration commitment associated with the lease term extension requires the drilling of a single exploration well by May 30, 2019, at an estimated cost of at least $17 million.

Mack said that, in making his bond reduction decision, he had reviewed the information that Great Bear provided to DNR. He wrote that relatively little work had been accomplished in the lease block to date and that the $1 million bond level that Great Bear had proposed, in conjunction with relatively low rental rates already set for the leases, would be too low to protect the state’s interests when extending the leases - by extending the leases the state is delaying the opportunity to offer the leases for competitive bid.

Previous drilling

The other lease block that Great Bear has decided to hold, where there is no bonding requirement, consists of 10 contiguous leases to the west of the Dalton Highway and five leases straddling the highway. The leases straddling the highway include the Alcor No. 1, Merak No. 1 and Alkaid No. 1 wells that Great Bear has already drilled. The company drilled the Alkaid well, to the west of the Dalton Highway, in 2015, but was unable to test the well at that time because of flooding on the highway. The work commitment associated with the term extension for leases in this block consists of re-entering and testing the Alkaid well, and drilling a new exploration well in the block. Flow testing must be conducted, if well logging suggests the possibility of significant oil production.

In addition to the leases that had been due to expire at the end of April, Great Bear holds a quite a few other North Slope leases that do not expire until 2021 or 2022.



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