A bonding challengeAurora Exploration appeals AOGCC’s $6 million order for Nicolai Creek Alan Bailey Petroleum News
Aurora Exploration has filed petitions with the Alaska Oil and Gas Commission and with the U.S. Bankruptcy Court for the District of Alaska, challenging an AOGCC order requiring a $6 million bond if Aurora Exploration purchases the Nicolai Creek gas field from Aurora Gas. And AOGCC has agreed to reconsider its order.
As reported in the Sept. 10 issue of Petroleum News, Aurora Exploration had proposed to AOGCC a $200,000 bond for the eventual plugging and abandonment of the six wells in the gas field onshore the west side of the Cook Inlet. However, AOGCC demanded a $6 million bond, on the basis that each well might cost $1 million to plug and abandon. As an alternative, Aurora Exploration can establish a $200,000 bond if the company also undertakes to plug and abandon three wells in Aurora Gas’s Three Mile Creek gas field, AOGCC has said. Aurora Exploration has no plans to acquire the Three Mile Creek field.
Under current regulations, AOGCC requires bonding of not less than $200,000 for blanket coverage of all of an operator’s wells in Alaska. Although that $200,000 has become the norm for bonding requirements in the state, the commission does have the right to set a higher bonding level if it sees fit. The commission is currently reviewing its bonding requirements for the plugging and abandonment of wells and has expressed concern about small-scale operators having the financial wherewithal to deal adequately with defunct wells.
Aurora Gas bankruptcy The issue relating to the Nicolai Creek field has arisen from the bankruptcy of Aurora Gas, the field’s current operator - Aurora Exploration has offered to purchase and operate the field as part of the bankruptcy settlement. The bankruptcy court has approved the purchase. But completion of the purchase requires approval by the Alaska Department of Natural Resources of the transfer of the Nicolai Creek leases to Aurora Exploration, and the acceptance by AOGCC of a well plug and abandonment bond.
According to court filings, DNR has accepted in principle the lease transfer but the AOGCC bonding order has placed a major question mark over the Nicolai Creek sale. In a Sept. 15 AOGCC filing from Aurora Exploration, the company said that if it needs to post a $6 million bond “the Nicolai Creek unit becomes non-commercial and the Aurora Exploration transaction will not close.” In that case, the gas field would likely shut down and, given Aurora Gas’s insolvency, the state would presumably have to take on the plugging and abandonment of the Nicolai Creek wells.
But “AOGCC is charged with preventing waste of Alaska’s resources,” Aurora Exploration’s filing says, referencing the loss of gas production if the gas field shuts down.
According to an affidavit filed with the bankruptcy court by Ed Jones, president of Aurora Gas, Aurora Gas recently received bids for the plugging and abandonment of the company’s gas wells on Cook Inlet Region Inc. land on the west side of the Cook Inlet. Those bids indicated estimated costs ranging from $100,000 to $250,000 per well, Jones said.
Aurora Exploration has requested AOGCC reconsider its order. And on Sept. 19 the commission announced that it will reconsider and that it has scheduled a public hearing at 10 am on Oct. 9.
Two related issues There are actually two related issues in play in the bonding dispute: the eventual dismantlement, removal and restoration, or DR&R, of the field’s surface facilities; and the plugging and abandonment, or P&A, of the field’s wells. DNR has jurisdiction over DR&R, while AOGCC has jurisdiction over P&A. P&A is important in ensuring that hydrocarbons do not escape to the environment from defunct wells.
According to Aurora Exploration’s AOGCC filing, the company has executed a DR&R agreement with the state under which the company would establish a trust account and a $500,000 bond for the DR&R liability at Nicolai Creek. The combination of this with a $200,000 P&A bond with AOGCC would make $700,000 available to the state, should Aurora Exploration fail. That would come in addition to $700,000 already under bond to the state from Aurora Gas for all of that company’s gas fields. However, should Aurora Exploration’s purchase of Nicolai Creek fall through, the state would not be entitled to the benefit of the $700,000 in bonding from Aurora Exploration, the filing says. In other words, in this eventuality the state would have just Aurora Gas’s $700,000 to cover some of the total cost of DR&R and P&A for all of Aurora Gas’s fields, including Nicolai Creek.
Court order requested In the event that AOGCC does not relent on its $6 million bonding requirement, Aurora Exploration has requested the bankruptcy court to order the commission to accept a $200,000 P&A bond - Aurora Exploration argues that the court can issue such an order because the AOGCC order violates U.S. bankruptcy law. In particular, U.S. bankruptcy code prohibits governments from discriminating against debtors in order to coerce the payment of dischargeable debts, Aurora Exploration told the court.
In this case, AOGCC’s requirement that, for approval of a $200,000 bond, Aurora Exploration must P&A the Three Mile Creek wells, wells that have not been assigned to the company and that the company has no interest in, is an impermissible demand that is unenforceable and void, Aurora Exploration argues. Moreover, a bond of more than $200,000 as a consequence of a transfer of field operating rights has no precedent in Alaska and, in a bankruptcy, it is not permissible to use a bonding rule that is not consistent with rules used in other situations Aurora Exploration says.
In addition, the bankruptcy code requires a stay or freeze on the business arrangements of the debtor in a bankruptcy case. As a consequence, the contract between AOGCC and Aurora Gas for Nicolai Creek must transfer intact to Aurora Exploration upon transfer of the operatorship of the field. And so, if AOGCC is unwilling to agree to a $200,000 bond as a result of the sale of the field to Aurora Exploration, the court should order that the purchase of Aurora Gas’s $200,000 bond must be included in the transfer of field operatorship, Aurora Exploration says.
Comparisons By way of comparison for the potential cost of P&A for onshore wells in the Cook Inlet basin, there was a case earlier this year involving AOGCC levying fines against NordAq Energy for that company’s failure to permanently abandon the Shadura well on the Kenai Peninsula and the Tiger Eye Central No. 1 on the west side of the basin. Both of these wells were exploration wells and not wells associated with existing gas fields.
NordAq told the commission that the estimated P&A cost for the Shadura well was about $400,000, although the cost would more likely be about $500,000 in the winter because of issues including the need for an ice road. In the event, the commission imposed a $1.2 million bonding requirement for the Shadura well. The commission reduced an initial bonding requirement of $1.3 million for the Tiger Eye well to $800,000 in recognition of available road access to the well site.
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