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Vol. 13, No. 52 Week of December 28, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Cook Inlet deal?

State offers to combine prospects to save leases; companies want more time

Eric Lidji

Petroleum News

State oil and gas officials are proposing to consolidate the lease holdings of three Cook Inlet operators in the hopes of speeding development of several offshore prospects.

But the operators are asking the state for more time to develop the prospects.

By combining leases held by Pacific Energy Resources, Escopeta Oil and Renaissance Alaska, the state hopes to get two exploration wells drilled over the next two years.

In return, the companies would keep dozens of leases set to expire at the end of the year.

The companies have until March 1 to agree to the proposal from the state.

As currently envisioned by the state, the agreement would require the three independent oil companies to start moving a drilling rig to Alaska by March 15 in order to drill one well at the proposed unit by June 30, 2009, and another by May 1, 2010.

The proposed unit would include the Kitchen unit, the Corsair unit and the proposed Northern Lights unit, as well as surrounding leases currently outside of unit boundaries.

Currently, those units and most of the surrounding leases are either in default or facing expiration because the operators have not met drilling commitments required by the state.

The three prospects sit along one geologic trend in the waters south of the village of Tyonek. All three prospects also require use of a special drilling rig called a jack-up.

Can it be done in time?

The state sees the move as a possible solution to a growing debate over whether or not to extend deadlines for companies that have missed work commitments in the past.

The companies say they are amenable to the idea, but can’t meet the March 15 deadline.

“There is nobody on the planet that could meet those deadlines. Even if you have the cash in your hands,” Pacific Energy President Darren Katic said Dec. 19. “It cannot be done.”

The companies would have to make sure current contracts for a jack-up rig and a ship to carry it to Alaska are valid, and need to get a waiver of the Jones Act, the federal law requiring ships docking at U.S. ports to be registered and built in the country.

“Can all that be done in 43 days?” Katic said.

Escopeta President Danny Davis is asking the state to give the companies until April 15, 2010, to start bringing a drilling rig to Alaska. If they miss that deadline, Davis said the state could terminate the units, cancel the development plans and take back all the leases.

Davis believes an extra year would give the companies time to combine their geological information, sign partnership agreements and seek new funding for drilling operations.

“It will give us the ability to approach the industry in a much stronger way,” Davis said.

Policy shift required

Extending the deadlines another year would require a shift in policy from the state, which hasn’t been willing to change lease terms when companies miss work commitments.

In fact, the idea to combine the prospects doesn’t technically extend any deadlines at all, because the state doesn’t officially take back leases until 90 days after they expire.

“As long as we’ve got this brief window, let’s see what we can do about it,” said Kevin Banks, acting director of the Division of Oil and Gas.

If the state doesn’t extend the deadlines further, and the companies can’t meet the current deadlines, it could easily set the stage for another debate like one in early December that set state legislators and industry representatives against state oil and gas officials.

During a public hearing, lawmakers like Rep. Jay Ramras, R-Fairbanks, and Rep. Craig Johnson, R-Anchorage, suggested the state should extend drilling deadlines, even to companies that haven’t met work commitments, in the hope of increasing production.

Top state oil and gas officials like Deputy Resources Commissioner Marty Rutherford said sometimes putting expired leases up for bidding is the quickest path to development.

The companies admit to missing deadlines, but believe the state is missing an opportunity to possibly see oil and gas production from prospects that have sat undrilled for decades.

In addition, Pacific Energy believes its deadlines, which it inherited in the acquisition of Forest Oil in August 2007, are next to impossible to meet. The state has argued that Pacific Energy knew the terms of the leases when it purchased them last year.

Together for good and bad

Combining the three prospects into one unit makes sense in many ways.

Unitization is designed as a way to bring a number of independent leases inside a single boundary in order to conserve resources and avoid overlapping facilities or expenses.

The three prospects sit along the same geologic trend under the waters of Cook Inlet, and none of the three prospects can be drilled without a jack-up rig, which would have to be brought to Alaska by ship for the work.

By making the prospects into one unit, the companies could avoid having to try separately to find investors for the project, secure a rig and ship it to Alaska.

But while the companies seem interested in partnering, they worry about having all their eggs in one basket. Combining the prospects would mean waiving on-going appeals and applications, giving the state the ability to deal with the companies in one fell swoop.

Even as it pursues the partnership, Pacific Energy is planning to appeal a recent state decision not to expand the boundaries of the Corsair unit to include soon-to-expire leases.

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