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Vol. 22, No. 37 Week of September 10, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

Major bond needed

AOGCC orders $6 million bond if Aurora Exploration buys Nicolai Creek

Alan Bailey

Petroleum News

The Alaska Oil and Gas Conservation Commission has issued an order requiring Aurora Exploration LLC to post a $6 million bond for the plugging and abandonment of six wells in the Nicolai Creek gas field, if the company buys the field from Aurora Gas. The bond can be issued in three annual installments of $2 million each. As an alternative, Aurora Exploration can agree to plug and abandon three wells in Aurora Gas’s Three Mile Creek gas field and post a $200,000 bond for the Nicolai Creek wells, the AOGCC order says.

The gas fields in question are situated onshore, on the west side of Cook Inlet. Aurora Exploration has offered to buy the Nicolai Creek field as part of the fallout from the bankruptcy of Aurora Gas. Aurora Exploration had sought AOGCC approval of a $200,000 bond for the Nicolai Creek wells, but the commission has responded with the much higher $6 million figure. Aurora Exploration, a completely separate company from Aurora Gas, has not offered to buy the Three Mile Creek field.

Based on estimated cost

Under current regulations, AOGCC requires bonding of not less than $200,000 for blanket coverage of all of an operator’s wells in Alaska. Given that the Nicolai Creek case is still under adjudication, AOGCC has declined to comment on why it has mandated such a high level of bonding for the Nicolai Creek wells. However, the order says that the commission has estimated the cost of plugging each of the six wells to be $1 million - hence the $6 million total. In the absence of funding from the field operator or of adequate bonding, the cost of eventually plugging and abandoning the wells would fall to the landowner, the Alaska Department of Natural Resources.

A high bonding requirement presumably impacts the economics of operating the Nicolai Creek field. Scott Pfoff, president of Aurora Exploration, told Petroleum News in a Sept. 6 email that the AOGCC decision jeopardizes what would be a win-win deal for the parties in the Aurora Gas bankruptcy.

“We are evaluating options in response to the order and remain hopeful an acceptable resolution is possible,” Pfoff said. “Absent acceptable resolution, six Nicolai Creek unit wells will be permanently plugged and abandoned, resulting in resource waste, loss of royalties and taxes, immediate loss of several jobs and exposure to the State of Alaska for the cost of plugging wells and restoration of the surface lands.”

Regulatory change?

Separately from the Nicolai Creek decision, AOGCC has been proposing changes to the bonding requirements for the plugging and abandonment of wells in Alaska. The commission has expressed concern that, with smaller oil and gas companies coming to Alaska and two of these companies going bankrupt in 2016, the state does not have sufficient protection from being landed with the cost of dealing with defunct wells. The large, publicly traded companies that have in the past typified the Alaska oil and gas industry have large balance sheets and established track records when it comes to dealing with obsolete wells, the commission has said.

But the question of regulatory change has yet to be resolved. On June 6 the commission held a workshop to review its proposed changes, which would require an operator to demonstrate to the commission that the bonding of the wells is sufficient to ensure that the wells can be appropriately plugged and abandoned. The estimates for plugging and abandonment and the associated bonding levels would be periodically revised. Bonding would be based on individual wells, without the form of blanket coverage for all of an operator’s wells that is allowed at present.

Industry push back

The Alaska Oil and Gas Association has pushed back on AOGCC’s proposals, saying that Alaska operators have demonstrated financial responsibility and arguing that the dramatic increase in bonding costs resulting from the proposed regulations would chill investment and decrease the recovery of Alaska’s oil and gas resources. The current flexibility in bonding levels allows the commission to take account of the risks associated with individual operators, AOGA has said.

While sympathetic to the need to factor inflation into the minimum bonding requirements, ConocoPhillips has questioned the administrative burden for companies and for the commission, if a per-well bonding approach is adopted. Instead, standardized bonding amounts and the blanket bonding of wells, coupled with flexibility in AOGCC’s ability to make adjustments to bonding levels in particular circumstances, as is done at present, is an appropriate bonding mechanism, ConocoPhillips has said.

Bankruptcy court case

Aurora Gas, current operator of Nicolai Creek, was forced into a bankruptcy case in the U.S. Bankruptcy Court for the District of Alaska in 2016 following major problems with two of the company’s projects. In addition to Nicolai Creek the company operates Three Mile Creek and three other onshore gas fields on the west side of Cook Inlet. Nicolai Creek is the main source of the company’s gas, which it sells to several entities including the Andeavor (previously Tesoro) oil refinery at Nikiski on the Kenai Peninsula and Homer Electric Association.

Filings in the court case indicate that, with the company’s daily expenses expected to exceed the company’s daily income after the end of August, there is an urgent need to dispose of the company’s assets, to enable payments to the company’s creditors. One company made an unsuccessful bid for all of Aurora Gas’s gas fields and two companies, including Aurora Exploration, bid for just the Nicolai Creek field. Aurora Exploration’s bid of $100,000 for the field eventually prevailed.

Sale approved

On Aug. 22 Judge Gary Spraker of the bankruptcy court approved the Nicolai Creek sale but said that completion of the sale depended on the Alaska Department of Natural Resources’ approval of the transfer of the Nicolai Creek leases to Aurora Exploration. The AOGGC bonding order clearly adds another complication to the deal. The bankruptcy court has also yet to issue a decision on the proposed purchase by Aurora Exploration of Aurora Gas’s large commercial contracts - prior to the bankruptcy case those contracts were transferred to Helena Energy, a separate marketing company spun off from Aurora Gas.

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