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Vol. 11, No. 1 Week of January 01, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

BLM working on NPR-A

Focus on unit regulations, old wells; different leasing program elsewhere

Kristen Nelson

Petroleum News Editor-in-Chief

The Bureau of Land Management is working on revised regulations for lease extension and unitization in the National Petroleum Reserve-Alaska based on the 2005 Energy Policy Act and plans to have a draft out for public comment within a few months.

The agency put out NPR-A unitization regulations in 2002, Colleen McCarthy, deputy state director, Division of Energy and Solid Minerals, BLM Alaska, told Petroleum News.

The reaction was “pretty much universal disapproval from all the stakeholders,” the State of Alaska, the oil and gas industry and the Arctic Slope Regional Corp., McCarthy said.

The compromise reached was embodied in the 2005 Energy Policy Act, in Section 347, which also allows for lease extension for other than producing wells. The Naval Petroleum Reserves Production Act only allowed for the extension of a lease if there was a well in production. McCarthy said that is “different than the way BLM administers this responsibility anywhere else in the country under the Mineral Leasing Act,” which allows lease extension for a well “capable of producing,” rather than a well which is producing. That’s important, she said, because “the timeline ... from discovery to production is about nine years and the primary term of the leases is 10 years,” so the “in production” standard is not easy to reach.

In addition to allowing lease extension for wells capable of producing, the Energy Policy Act also provides that leases without discoveries can be renewed for an additional 10-year term at a cost of $100 per acre, commensurate with what might be bid in a lease sale, as long as there has been some exploration on the lease, “either unsuccessful wells or seismic,” she said.

Unitization: allocation issue

The unitization issue embodied in the Energy Policy Act involves how production is allocated.

In the Lower 48 BLM allocates production by surface acreage, but the “State of Alaska doesn’t do it that way.” The state, the oil industry and ASRC, the regional Native corporation on the North Slope, wanted allocation done based on “seismic information and reservoir modeling.” The compromise in the Energy Policy Act is that BLM decides how production will be allocated on leases with only federal acreage. A lot of the NPR-A is only federal acreage, McCarthy said, and on this undeveloped acreage “it’s easier and less costly” for BLM to allocate by surface acreage.

“But if we’re bordering ASRC and state land, we’re going to use a more sophisticated production allocation method ... because small percentage differences can amount to quite a bit of money and they want the most sophisticated information included in that decision,” she said.

Production allocation decisions where federal land borders non-federal land would include characteristics of a specific oil or gas pool or reservoir, which is “more expensive because it involves pretty sophisticated software reservoir modeling techniques.”

McCarthy said allocation issues were “one of the bigger problems” stakeholders had with the regulations proposed in 2002.

Draft regulations are scheduled to be out for public comment at the end of the first quarter or the beginning of the second quarter. McCarthy said the agency is “moving along pretty quickly on that process,” but she noted that this section of the Energy Policy Act did not mandate a timeframe, while others did, so there are workforce allocation issues that have to be managed at the Department of the Interior. She said the hope is to have final regulations out in the fall.

Orphan NPR-A wells

Orphan wells in NPR-A are also included in the energy bill, which “provides for the opportunity for the secretary to grant royalty relief and direct reimbursement of costs.”

McCarthy said BLM has talked to oil companies working in NPR-A about the option, but doesn’t expect any takers this winter because of the short drilling season and because the program is a “zero-balance exercise” for the companies, which “have a hard enough time drilling the number of wells that they need to in a season to make it all economic as it is...”

But, she said, “I think in the future there’s some potential for us to piggyback with staging areas and ice roads and there may be opportunities for us to remediate some of their costs — and costs could be lessened for a contract to do this work for us because we share some of that.” That, she said, is “probably the avenue that we’ll end up going.”

Umiat, Cape Simpson work this winter

Some 100 wells were drilled in NPR-A from the mid-1940s to the early 1980s, with “somewhere around 38 of those wells that require some level of remediation,” McCarthy said.

The Corps of Engineers plugged and abandoned two wells in Umiat in 2002 and BLM did four in Umiat in 2004, she said.

“We’re planning to complete the Umiat wells,” at least four more, this winter, and BLM will also be doing three wells in the Cape Simpson area, for a total of seven planned this winter, based on weather and contracting availability.

Of the 38 wells “in some state of disarray, these are the more serious,” she said, and BLM plans to deal with most of the wells that are leaking hydrocarbon within the next couple of years.

In addition to wells, there are reserve pits and landfills “scattered throughout the NPR-A which require hazmat remediation which is a separate issue from the actual well bores” and “quite a bit more costly” because contaminated soil has to be dug up and hauled away.

The J.W. Dalton well that BLM plugged last winter cost just under $5 million, she said, “mostly because of removing the contaminated soil...”

The Cape Simpson work this winter will involve getting rid of pipes left standing, but that area is a natural seep. McCarthy said BLM will spend about half a million dollars at Cape Simpson, but doesn’t believe any of the oil there is coming from the well bores, although “it’s kind of hard to tell when it’s in the middle of a natural oil seep.”

McCarthy said it’s hard to say how long it will take to work through the cleanup because money has to be allocated each year.

It also depends, she said, on “how dire” the situation is. The J.W. Dalton well didn’t appear to be critical “until we lost 300 feet of coastline” and then the need for cleanup became immediate. BLM is watching reserve pits along the coastline and “keeping track of those” and moving them up the priority list “because we don’t want to be responsible for contaminants into the marine environment.”

Leasing different outside of NPR-A

While NPR-A has been the focus of BLM oil and gas lease activity in Alaska, the bureau manages land throughout the state.

In areas of Alaska outside of NPR-A if there were oil and gas leasing on BLM-managed land, it would be handled differently than it is in NPR-A.

The “petroleum reserve authorizing legislation required that leasing be conducted in accordance with the OCS Lands Act, which is how MMS does their leasing program and that involves the fair market value evaluation and the sealed bidding process,” McCarthy said.

That process is different than how BLM does business elsewhere — in both the Lower 48 and in the rest of Alaska.

“This isn’t, in my opinion, going to be a huge significant thing in Alaska because most of the prospective lands were selected by the state or Native corporations and we’ll just have probably little isolated parcels scattered about,” she said.

This was the conclusion BLM reached in its draft resource management plan and environmental impact statement for the Ring of Fire planning area, BLM lands from the end of the Aleutians to just above the Dixon Entrance in southeast Alaska. While the agency considered oil and gas development activity in the plan, it said most BLM-managed lands in Alaska have been selected by the State of Alaska and Native corporations (see story in Dec. 11, 2005, issue of Petroleum News).

Leasing under Mineral Leasing Act

Under the Mineral Leasing Act of 1920, as modified by the 1987 Federal Onshore Oil and Gas Leasing Reform Act, lands are first offered for competitive, oral auction, and then may be offered for over-the-counter leasing.

There is a minimum $2 per acre bid for the oral auctions and lands can be selected for leasing by the bureau or as a result of public interest, but National Environmental Protection Act documentation — either a resource management plan or an EIS — must be completed first.

A competitive lease notice is posted in the state office at least 45 days before the auction with a listing of parcels to be offered and the stipulations for each parcel. Successful bidders pay $130 per lease (share of sale costs), $1.50 per acre for the first year’s rent (which increases to $2 per acre after the first five years) and the minimum bid bonus.

BLM said no bond is required at the sale, but a bond of at least $10,000 must be posted before any surface disturbing activities will be approved. Royalty is 12.5 percent and the initial lease term is 10 years. The maximum lease size is 2,560 acres in the Lower 48 and 5,760 acres in Alaska.

Tracts which do not receive qualified competitive bids are available the next business day for over-the-counter, non-competitive leasing on a first-come, first served basis for two years, after which the tracts must again go through the competitive process. For the first month following the sale offers can only be made using the sale tract descriptions but thereafter a tract may be described by survey or protracted survey descriptions with a minimum tract size of 640 acres in the Lower 48 and 2,560 acres in Alaska.

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