The State of Alaska is concerned about abandonment plans and costs for dismantlement, removal and restoration, DR&R, for aging oil and gas platforms in Cook Inlet and held a workshop Sept. 10 to hear from the public on how the state might address the issue in regulations.
Bill Barron, director of the Division of Oil and Gas in the Department of Natural Resources, said the purpose of the workshop was “to assist DNR in creating potential regulations regarding offshore platforms.”
One of the state’s concerns, Barron said during the workshop, is what happens to a platform which stays in place once it is through producing and leases are returned to the state: “Who’s responsible for that disposal? Is it the state’s responsibility? Is that the previous leaseholder’s responsibility? At the end of the day, who’s responsible for that platform?”
The state has agreements in place for the Cook Inlet platforms and those agreements are different for different companies, he said.
What the state is looking at, Barron said, is having “a standard that everybody understands what they’re going to be expected to do and what the bonding associated with that activity should be. ... So everybody knows that the playing field is.”
The state has never really codified that should be done and what the bonding should be, he said.
In advance of the workshop the division put out a letter to the public and a discussion paper on possible financial strength measures that might be required of platform owners, as well as a map of Cook Inlet platforms. These materials are available on the division’s website at http://dog.dnr.alaska.gov.
Barron said the next step would be for DNR to consider input from the workshop and consult with other state agencies as it deliberates internally in preparing draft regulations. Once DNR has proposed regulations, there will be an opportunity for the public to review and comment, he said.
AOGA concernsKara Moriarty, executive director of the Alaska Oil & Gas Association, said association members are owners or operators of 14 of the 16 Cook Inlet oil and gas platforms.
The only Cook Inlet platform owners not listed as members of AOGA on the association’s website are ConocoPhillips Alaska (Tyonek platform) and Cook Inlet Energy (Osprey platform).
Moriarty said AOGA member companies operating Cook Inlet platforms (ExxonMobil subsidiary XTO and Hilcorp Alaska) “already have some type of assurance agreement with the state” and asked whether it is the state’s intent “to adopt a set formula that will apply to all operators even if the companies already have an existing agreement” or to establish regulations which would cover just new companies.
She said it would be AOGA’s preference that regulatory changes be crafted “to allow current agreements to remain in place and to allow the state the flexibility to determine assurances company by company.”
Companies have made investment decisions based on agreements in place, Moriarty said, and if those agreements were to change “it would affect their future investment decisions.”
New platform playerCook Inlet Energy is the newest platform operator in Cook Inlet. JR Wilcox, the company president, said the company has a DR&R agreement in place with the division, and said that like AOGA, his company would want to know “whether the proposed regulations would impact a current agreement in place or whether this idea ... is to shape future agreements.”
Wilcox said Cook Inlet Energy also wants to know whether the division is approaching regulations from a cost-benefit standpoint, “looking at the benefits of development in Cook Inlet and the barrier that an overly conservative bonding standard would impose” relative to the risk the division sees from having to pick up abandonment costs.
He also asked what studies have been done about the level of DR&R that would be required — whether full removal of platforms would be required — how the amount of DR&R bonding would be determined and whether different methods, such as insurance pools, would be considered.
Matt Snodgrass, with the division’s commercial section, said the division was trying to address the cost-benefit question by measuring risk and helping to offset risks “in an appropriate way” that doesn’t extract “undue amounts of capital” from projects, but helps protect the state’s best interests.
On the question of whether full platform removal would be required, David Hall, Cook Inlet Energy’s chief executive officer, noted the previous operator at Osprey had abandoned the platform, and had removal been required, it would have stranded a large volume of reserves which Cook Inlet Energy is now producing.
“I think there’s got to be a pretty good review of the impact if the platforms are going to be removed,” Hall said.
Prospective platform ownersFurie Operating is planning a new platform in Cook Inlet as early as next year and Bruce Webb, the company’s vice president, said Furie is “uniquely positioned to be very concerned about what these regulations mean ... for us, especially financially.”
Webb said Furie understands the “inherent disagreements” between the state and companies “because the state wants to ensure the platforms are abandoned to their standards and the cost of that is incurred whether the company remains in business or not.” But, he said, “the company needs the income and flexibility to use the funds to continue development.”
Barron acknowledged what he called “the healthy tension between capital today vs. liability tomorrow,” but asked “how does the state protect itself from being the last man standing?”
Another company with future platform plans is Buccaneer Alaska. Jim Watt, the company’s president, said asking for full bonding up front from smaller companies “certainly will curtail activities in the basin” and suggested a sinking fund approach — based on ongoing production rates — might be something for the state to look at.
Barron asked how the state would have access to those funds as a platform changed hands.
Watt said that normally lease abandonment costs are not funds transferred from one owner to the next, but rather a cost that is recognized in the value of the transaction.
Call for external accountsRichard Fineberg, who has studied and written extensively on trans-Alaska oil pipeline ownership issues, recommended that the state look at requirements he has suggested for pipeline DR&R, including requiring owners to set up external trust accounts for DR&R monies; developing regulations ensuring sufficient DR&R monies are collected; reviewing and updating such requirements periodically; distinguishing between independents and owner-operators in regulations; and providing for maximum transparency.
Mike Munger, executive director of the Cook Inlet Regional Citizens’ Advisory Council, said the council did a report on DR&R for Cook Inlet platforms in 2005 and will be updating that report.