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Vol. 22, No. 13 Week of March 26, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

State reconsiders CRU

Mack agrees to hear ConocoPhillips’ arguments in favor of expanding unit

ERIC LIDJI

For Petroleum News

The state has agreed to reconsider its decision to deny ConocoPhillips Alaska Inc.’s request to expand the Colville River unit to include the former Tofkat unit.

As part of the reconsideration decision, Alaska Department of Natural Resources Commissioner Andrew T. Mack also agreed to stay his earlier Feb. 17 decision, which had included an option to approve the expansion if ConocoPhillips agreed to drill this winter and provide $14 million in bonds and other payments to guarantee development.

Those work commitments had been an acknowledgement that ConocoPhillips is likely the fastest option for exploring and developing the acreage, but is not the only option.

In his earlier decision, Mack raised numerous concerns about ConocoPhillips, from its earlier failure to explore the expansion acreage, to the status of its surface use agreement in the area, to its preference for “sequential” development. In its March 15 request for reconsideration, ConocoPhillips criticized the state for issuing the decision without first discussing those concerns with the company and its partners in the expansion acreage.

ConocoPhillips is now asking the state to approve the expansion with a clause requiring the company to drill an exploration well into the Nanushuk formation by May 31, 2018, or immediately relinquish the acreage, which would allow the state to make the leases available in the next North Slope areawide lease sale toward the end of 2018. The relinquishment clause would make the bonds and bonus bid payments unnecessary.

Four points

ConocoPhillips challenged the denial on four points.

In the first, the company said that the state denied the company due process by failing to discuss its concerns. One of these involved a commitment ConocoPhillips had made to drill a well in the exploration acreage this winter if the state approved the expansion request by August 2016. The state became confused when ConocoPhillips continued to discuss the potential well after that deadline had passed. The company has now explained that it continued to plan for the well but could not guarantee activity, as it had before.

The company eventually cancelled its plans in December 2016, citing a desire to address concerns from villagers in nearby Nuiqsut before advancing any exploration plans.

In the second point, ConocoPhillips questioned the bond requirements. Although the February ruling denied the expansion, Mack included a provision that would have allowed the expansion if ConocoPhillips provided a $2.5 million performance bond for the exploration well, a $10 million performance bond to guarantee oil production from the area within the next five years and a $1.5 million “bonus bid replacement payment.”

ConocoPhillips called the $10 million development bond “inappropriate” given the lack of successful exploration activity in the expansion leases, not to mention delineation and appraisal. The company also challenged a request from the state to provide a development plan for the leases, which “has not been standard practice” before a successful exploration program has been completed, according to the company.

Although previous exploration wells drilled in the expansion area over the past decade have encountered hydrocarbons, they were never certified for paying in commercial quantities, and the state acknowledged the potential for a dry hole in its initial decision.

Even if ConocoPhillips drills in 2018, the company noted, it could not guarantee production by 2022. The well might be a dry hole, and even if the well was successful, an environmental impact statement could take years, especially given the rush of activity in the region over the past two years with several major discoveries and developments.

The third point involves a major point of contention in the earlier decision: a surface use agreement between ConocoPhillips and the Kuukpik Corp. ConocoPhillips cancelled plans to drill on the leases this winter after meeting with the village of Nuiqsut. The state saw that delay as a potential admission that its surface use agreement was not valid. But ConocoPhillips argued that the surface use agreement merely provides access to the leases, and not does offset the need for acquiring other endorsements. The company also noted that the Kuukpik Corp. and the Native Village of Nuiqsut are separate entities.

The fourth point concerned the “protection of all parties” clause, which is one of the ways the state determines whether or not to approve requested oil and gas activity on its lands.

Mack had argued that allowing the expansion would prevent the state from making the acreage available in an upcoming lease sale, which would provide a competitive advantage to the state. But ConocoPhillips believes that competition would have arisen under previous operators or during public comment periods, if it were truly an issue.

Additionally, ConocoPhillips believes that the question of competition ignores the role of Arctic Slope Regional Corp., which is also a landowner and endorses the expansion. If the state and ASRC truly disagreed, it would be a first under the terms of the Colville River unit agreement, according to ConocoPhillips, which could create complications.



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