Down to $3.6 millionAOGCC reduces the bonding requirement for six Nicolai Creek gas wells Alan Bailey Petroleum News
The Alaska Oil and Gas Conservation Commission has issued a revised order reducing its bonding requirement for six wells in the Nicolai Creek gas field from $6 million to $3.6 million. Aurora Exploration wants to purchase the field from Aurora Gas but needs to place a bond with the AOGCC for the plugging and abandonment of the field’s wells, in order to obtain state approval to become operator of the field. When the commission ordered a $6 million bond, a bonding level much higher than the $200,000 bond that the commission has typically required in the past, Aurora Exploration commented that the multimillion dollar bonding requirement would render the gas field uneconomic. The company requested a reconsideration of the bonding order. In response, AOGCC held a public hearing on Oct. 9 and, as a consequence, has now issued the revised order.
The revised order allows Aurora Exploration to post the bond in three stages: a bond of $2 million in the first year of the company’s field operatorship; $1 million in the second year; and $600,000 in the third year.
Results from bankruptcy The proposed purchase of the Nicolai Creek field by Aurora Exploration comes as part of the fallout from the bankruptcy of Aurora Gas. Aurora Gas, a completely separate company from Aurora Exploration, is trying to sell some of its assets, including the Nicolai Creek field, as part of the bankruptcy proceedings.
Recently the AOGCC has been expressing concern about bonding levels for the plugging and abandonment of wells in Alaska. In particular, the commission worries that, if operators do not have the financial wherewithal to remediate defunct wells, the state will be forced to pick up the tab for the remediation work.
Setting aside any precedent that may have been established from the $200,000 bonding level that has been typical in the past, it became clear during the Oct. 9 hearing that the issue of establishing an appropriate bonding level for the Nicolai Creek wells revolves around the estimated cost of plugging and abandoning the wells: The AOGCC had assumed a cost of $1 million per well for the P&A work, while Aurora Exploration had estimated a cost of $100,000 to $250,000 per well.
Different assumptions The differences in these estimates resulted from different assumptions over what would be the appropriate technique to use for the plugging and abandonment effort. AOGCC’s senior petroleum engineer Michael Quick explained that the AOGCC estimate assumes the use of a coiled tubing unit to plug each well with cement in stages, testing the effectiveness of the plugging after each stage. Aurora Exploration’s proposed method involves pumping cement into a well in a single stage. And, while either of these techniques could effectively plug the wells, Aurora Exploration’s proposed technique is more risky than AOGCC’s preferred method, Quick said. And, should Aurora Exploration’s approach fail, the ultimate cost of fixing the problem would end up much higher than the cost of using the AOGCC approach, he said.
As examples of where the single cement plug technique had failed, Quick cited abortive attempts to plug two old legacy wells in the National Petroleum Reserve-Alaska.
Ed Jones, president of Aurora Gas, had prepared the estimates that Aurora Exploration has cited for the potential cost of remediating the Nicolai Creek wells. During the hearing Jones told the commission that the Nicolai Creek wells are relatively shallow, with relatively new well tubing. By comparison, the NPR-A well remediation work involved operations in winter conditions on wells with questionable tubing condition, Jones said.
In its revised order AOGCC commented that it had reduced its estimates for the Nicolai Creek plugging and abandonment work to $600,000 per well, taking into account new information, including Jones’ testimony about the condition of the Nicolai Creek well tubing.
Other issues There are a couple of other issues relating to the Nicolai Creek bonding requirement. Firstly, because Aurora Gas is bankrupt, if the purchase of the Nicolai Creek field fails to close because of uneconomic bonding requirements, the state will presumably end up having to deal with the plugging and abandonment of the Nicolai Creek wells. Secondly, the bankruptcy court in Alaska has previously declared the order that the AOGCC has now modified to be illegal because of some stipulations involving the potential plugging and abandonment of Aurora Gas’s wells in its Three Mile Creek field - the AOGCC has removed those stipulations from its revised order.
During the Oct. 9 hearing William Bankston, attorney for Aurora Exploration, questioned the legal status of the hearing, given the bankruptcy court ruling. He testified that the findings from the hearing cannot legally be applied more broadly than to the Nicolai Creek field.
Aurora Exploration response Scott Pfoff, president of Aurora Exploration, told Petroleum News in an Oct. 25 email that his company is considering its response to the revised order but is disappointed that the AOGCC continues to put its bonding reform agenda above the reality of the situation in the Nicolai Creek field. Prior to the Oct. 9 hearing Aurora Gas had offered to establish a trust fund in conjunction with a $200,000 bond, to assure the company’s financial capability for eventual well remediation.
“Their latest order will most likely result in the transfer of the Nicolai Creek unit wells and the associated plugging and abandonment costs to the State of Alaska, rather than accepting Aurora Exploration’s offer to post the same bonding required of every other operator in the state,” Pfoff said, also commenting on his company’s trust fund offer.
Pfoff also expressed concern about the legal status of the AOGCC order, given the bankruptcy court ruling that the order contravened bankruptcy law. The order also violates equal treatment under state law, he said.
“Does every future acquisition of oil and gas properties in Alaska that involves a change in operatorship now require that the acquiring party post an AOGCC bond that approximates the total plugging costs of all the wells being acquired in the transaction?” he asked.
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