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Vol. 22, No. 33 Week of August 13, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

State offers terms

DNR will approve CRU expansion if ConocoPhillips agrees to stipulations

Alan Bailey

Petroleum News

The Alaska Department of Natural Resources has issued a decision setting stipulations whereby ConocoPhillips can expand the Colville River unit to include leases that were in the former Tofkat unit. The leases in question are adjacent to the southeast corner of the CRU. In February DNR denied the unit expansion but in March DNR Commissioner Andrew T. Mack agreed to reconsider that decision. In this latest decision, dated Aug. 1, DNR said that it will reverse that February denial and approve the expansion if ConocoPhillips agrees to certain stipulations from DNR by Aug. 14.

Those stipulations consist of drilling commitments and payments to the state in lieu of lease sale bonus bid payments.

“We really think this in the interests of Alaska,” Mack told Petroleum News. “It’s the right thing to do.”

Nanushuk potential

The drilling of the Tofkat No. 1 well in the expansion area leases in 2008 by Brooks Range Petroleum confirmed the existence of hydrocarbons in the leases. Hydrocarbons are believed to lie in the Nanushuk formation, a rock unit of particular interest in the region because of its relationship to recent major oil discoveries in the nearby Armstrong Energy Inc. Pikka unit and in the ConocoPhillips Willow prospect in the Colville River Delta region. The Tofkat well also encountered hydrocarbons in the deeper Torok and Kuparuk formations.

The February denial of the unit expansion resulted from ConocoPhillips’ failure to meet a commitment to drill a well in the expansion leases during this year’s winter drilling season. ConocoPhillips said that it had postponed the drilling as a consequence of concerns expressed by community leaders in the nearby village of Nuiqsut. The company said that the concerns related to the need for adequate time to engage the community in local permitting requirements.

In coming to its new unit expansion decision DNR has had to balance the benefit of giving ConocoPhillips, a highly experienced operator in the region, continued access to drilling in the acreage, versus the possibility of having some other company acquire the leases in a lease sale and then perhaps moving ahead with drilling. The decision also relates to a need to coordinate leasing arrangements with Arctic Slope Regional Corp., the Native regional corporation for the North Slope. ASRC and the state both have undivided interests in the leases involved.

In the stipulations for the unit expansion, the payments in lieu of bonus bids are designed to compensate the state for money that DNR anticipates would have been paid for the leases in a lease sale. Other stipulations require ConocoPhillips to move ahead with exploration, appraisal and development, if there is a viable resource in the leases.

Failure to meet any of the stipulations would cause the Tofkat leases to be withdrawn from the Colville River unit.

Stipulations

Specifically, the stipulations require ConocoPhillips to drill a well in the expansion area by May 31, 2018, if the company is to continue to hold the expansion acreage. After drilling that well, the company must notify DNR by Aug. 15, 2018, whether it intends to hold the leases and drill a second well. The drilling of the second well requires a bonus bid replacement payment of $3 million. The second well must penetrate the Nanushuk formation, with the well and well testing completed by May 31, 2020. Based on the results of that second well, ConocoPhillips must inform DNR by Aug. 14, 2020, if it intends to bring a hydrocarbon resource into production in the leases. If the company does move towards development, the company must make an additional bonus bid replacement payment of $4 million and incorporate development plans in a Colville River unit plan of development. However, that $4 million payment would be reduced to $3.5 million if ConocoPhillips can demonstrate that it has met certain minimum requirements for local and state hire in its exploration and appraisal efforts in the leases.

“We think this places the state in a strong position to understand what’s there and puts a company in a position to naturally get to production in this area,” Mack said.

He said that DNR had determined the bonus bid replacement amounts using the results of recent North Slope lease sales.

“The area is very interesting, not only for the state but also to a lot of companies that are looking to develop oil,” Mack said. “There’s infrastructure nearby. There’s pipeline systems. There’s processing facilities. It’s an area where people know that, if they’ve got a good prospect, they can bring that prospect on line and produce it from the region.”

“It’s important for the state of Alaska to find common ground with our oil industry partners and local stakeholders as we work to bring much-needed oil to the trans-Alaska pipeline,” commented Gov. Bill Walker in response to DNR’s decision. “To get the full benefit of the decision, at least 80 percent of the hires must be Alaskan. ConocoPhillips has a strong record of training and hiring Alaskans. Because jobs in Alaska should go to Alaskans, my team and I will continue to ensure strong local hire provisions on this and other projects.”

Complex history

And the leases have a complex history. They had been added to the Colville River unit in an earlier unit expansion in 2002. That expansion had been contingent on a drilling commitment in the expansion acreage. And after ConocoPhillips subsequently defaulted on that commitment the state contracted the acreage back out of the unit in 2004. ConocoPhillips had been anticipating drilling into what was termed the Titania prospect.

The baton for the leases then passed to a consortium led by Brooks Range Petroleum Corp., which acquired the leases through a lease sale. Brooks Range referred to the target prospect in the leases as the Tofkat prospect.

Brooks Range drilled the Tofkat No. 1 well and two sidetracks in 2008, later reporting a hydrocarbon discovery. In October 2011 the company formed the Tofkat unit. However, after various proposed drilling programs over the years failed to materialize, in late March 2016 the state terminated the unit.

Expansion request

On March 31, 2016, ConocoPhillips asked the state to expand the Colville River unit to include the leases that had formed the Tofkat unit. However, the company’s request could not proceed until ConocoPhillips acquired interests in the leases in mid-May of that year. At that point 15 of the 22 leases involved had expired and had passed into their 90-day secondary terms. In mid-June the state approved the addition of just the seven active leases to the unit. An appeal by ConocoPhillips, requesting all of the leases to be added to the unit, was turned down in late July by the then Division of Oil and Gas Director Corri Feige.

However, in early November Mack, who by then was DNR commissioner, reversed Feige’s decision and allowed all of the Tofkat leases to be added to the Colville River unit. As a condition for allowing the unit expansion, Mack required ConocoPhillips to drill into the Nanushuk formation in the unit expansion area, with a single well to be drilled by June 1, 2017.

ConocoPhillips proposed drilling the Putu No. 1 well in the leases during the winter 2016-17 drilling season. But after the company subsequently postponed that drilling plan, the state denied the unit expansion.

Agreement with ASRC

Because the state and ASRC both have interests in the leases, there is an agreement that was signed between the state and ASRC a number of years ago. Under this agreement the state has the executive right to conduct lease sales for the acreage and to take certain other actions. But there is also a specified process for resolving disputes relating to the agreement, Mack said.

In the case of the Tofkat leases, there was a disagreement between the state and ASRC over how the leasing should be handled, after Brooks Range eventually defaulted in its drilling commitments for the Tofkat unit. An upshot of this disagreement was that in June 2016 ASRC assigned its interests in the acreage to ConocoPhillips, independently from the state.

“They had very good reasons that they felt in this particular case that Conoco, with its long history in the region, was the best entity to … attempt to drill these wells,” Mack said.

Given the continuing situation over the Colville River unit expansion application, ASRC indicated its concerns and has reminded the state about the regional corporation’s right to challenge the state’s executive rights in relation to the leasing, Mack said.

The new DNR decision for the leases in part represents a reconciliation of DNR’s and ASRC’s views of how the leases should be dealt with. The decision gives ConocoPhillips another shot at the drilling, provided the company is willing to compensate the state for the loss of potential lease sale bonus bid payments in the event that drilling continues beyond a single well.



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