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Vol. 13, No. 49 Week of December 07, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

State won’t budge

Corsair, Kitchen pushed to edge; DNR denies concessions at inlet units

Eric Lidji

Petroleum News

The State is refusing to budge for two independent oil companies asking for concessions as they try to arrange the final pieces of difficult drilling programs in Cook Inlet.

In a pair of letters dated Dec. 1, Kevin Banks, the acting director of the state Division of Oil and Gas, placed the Corsair unit in default for failure to meet work commitments, and rejected a two-year extension to the work commitments for the neighboring Kitchen unit.

Both units sit in the waters of Cook Inlet some 10 to 20 miles south of Tyonek.

Banks sent the letters following a long, and at times tense joint hearing before the House Judiciary and Resources committees, where lawmakers pointedly questioned why the state wouldn’t compromise with oil companies claiming to be ready to drill, including Escopeta Oil, the Houston-based operator of Kitchen and its surrounding leases and California-based Pacific Energy Resources which operates Corsair and its surrounding leases. (See also Point Thomson story on page 1 of this issue.)

The timing of those letters, which came after the hearing that both covered the matters in question and included efforts to broker a meeting between state officials and company executives, only served to intensify the discontent of both lawmakers and the companies.

Companies asking for help

The hearing came after Pacific Energy and Escopeta spent the past year separately trying to fulfill several commitments required not only for technically exploring their prospects, but also for meeting the legal terms of the oil and gas leases issued by the state.

The most recent commitment required Pacific Energy to contract for a “heavy lift vessel,” a ship capable of bringing a jack-up rig to Alaska, by Oct. 31. A jack-up is a rig designed for drilling offshore prospects in relatively shallow waters, like Corsair and Kitchen.

The efforts of Pacific Energy and Escopeta converged in October when they agreed to share the jack-up rig and split the cost of bringing it to Alaska. The companies even signed a contract with Offshore Heavy Transport AS to bring the rig to Cook Inlet, but the terms of the contract required the state to extend the deadlines on 30 leases.

Escopeta asked the state to extend 16 of its 27 leases at and around the Kitchen unit for another two years. Most of those leases are currently set to expire at the end of the year.

Meanwhile, Pacific Energy asked the state to extend the deadlines on a slate of leases, including the eight leases at and around the Corsair unit, four independent leases to the west of Corsair, and two more onshore leases in the Susitna basin north of Anchorage.

The companies submitted the contract to the state on the Oct. 31 deadline. But Banks rejected the contract in his Dec. 1 letter, calling the conditions in it “unacceptable.”

The state also rejected a separate request from Escopeta to push back the deadlines in its plan of exploration at Kitchen. The plan outlines the work commitments required for keeping the unit and the leases within it, setting out dates when the company must drill.

The state previously moved those deadlines from the end of 2007 to the end of 2008.

With the two decisions, Pacific Energy now has until March 1 to cure the default at Corsair, while Escopeta has until the end of the year to avoiding losing its land position.

If the leases ultimately expire at the end of the year, the state would make them available in a future lease sale. The next Cook Inlet areawide lease sale is in May.

Differing views on policy

The Dec. 1 legislative hearing highlighted a debate on how Alaska manages its land.

Several lawmakers believe state bureaucracy is keeping oil companies from exploring and developing in Cook Inlet at a time of increasing public concern over dwindling Cook Inlet gas supplies and ongoing debate over how to price supplies that remain. (See Enstar contract story on page 1 of this issue).

During the hearing, House Judiciary Chair Jay Ramras, R-Fairbanks, accused state oil and gas officials of “wrecking my state” and said government “just doesn’t seem to have any answers.” He said he couldn’t reconcile Gov. Sarah Palin promoting “drill, baby, drill” with state officials turning away companies claiming to be ready to do just that.

“It’s like two locomotives going in different directions,” Ramras said.

State oil and gas officials say companies who meet commitments get to drill, and say the state can only guarantee its lands get developed by enforcing its statutes and regulations.

Banks said that by extending leases, rather than re-offering them in a competitive bidding process, the state is in essence awarding “a lottery ticket” allowing a company “to come to the state and negotiate a better deal” rather than uphold its “commitment to develop.”

Although Escopeta and Pacific Energy have asked for concessions and extensions, they’ve also come closer than most other companies to lining up all the pieces needed for developing their prospects. There hasn’t been a jack-up rig in the Cook Inlet since 1993.

House Resources Co-chair Craig Johnson, R-Anchorage, asked state officials, “Who do you have in the queue that has a better offer, that can get it done quicker?”

Deputy Resources Commissioner Marty Rutherford said, “There’s no certainty that we are actually delaying (drilling),” and noted that the leasing program, as created by the Legislature, depends on companies keeping commitments in exchange for access to land.

“When people don’t honor those commitments, we also have to be good land managers and recognize that sometimes it’s going to be the competition that provides for a greater opportunity for that exploration and development,” Rutherford said.

Caught in between are Escopeta and Pacific Energy, who face losing millions of dollars of investment because they could not meet deadlines for developing tricky prospects.

Escopeta President Danny Davis framed the debate in much larger terms, saying the decisions the state makes in Cook Inlet would “affect the future of the American oil and gas industry” and told lawmakers, “The future of this country’s in your hands.”

Davis believes the prospects around Corsair and Kitchen could hold a combined 1.1 billion barrels of oil and 6.5 trillion cubic feet of gas. Those estimates, which the state considers optimistic at best, are based on seismic acquisitions and a 2004 U.S. Department of Energy report suggesting the Cook Inlet contains several “missing giants.”

While Alaska consumers worry about natural gas supplies, Davis believes Escopeta and Pacific Energy can have gas “flowing into the system” in “less than 18 months.”

“We’ve got everything lined up,” he said. “All the contracts are signed to move that rig up here in the spring and drill these wells. With that extension, I truly believe that we can perform and we can make a difference in the overall production of natural gas and crude oil.”

Without the extension “we lose everything,” Davis said, suggesting he won’t fight the matter in court like ExxonMobil is doing with Point Thomson. “I won’t be back,” he said.

Issue not quite over yet

Even with the two Dec. 1 decisions, state oil and gas officials insist Pacific Energy and Escopeta haven’t run out of options as they work to save the Corsair and Kitchen units.

“We’ve got a few weeks to figure out something here,” Banks told Petroleum News on Dec. 2. “I’m not totally unreasonable.”

Asked why he and other officials didn’t mention their decisions about the companies during the hearing held earlier in the day, Banks said the letters weren’t official yet.

“I don’t want to be too cute with this, but frankly I probably would have signed those letters before I went on vacation, but just wanted to have more time to explore some of the problems,” Banks said, saying the state had questions about the ship and the rig.

The timing of the letters could have consequences, according to Ramras.

“I feel very mislead about the candor with which (the Department of Natural Resources) went about making its presentation. … I’m really appalled at what appears to have transpired,” Ramras told Petroleum News on Dec. 3.

Ramras said several committee members, including Johnson and House Judiciary Vice-Chair Nancy Dahlstrom, R-Eagle River, plan to write state officials about the matter.

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