Small independent companies planning offshore exploration in Cook Inlet are screaming in protest at a bonding requirement that the State of Alaska is proposing as part of new regulations governing the dismantling, removal and restoration arrangements for offshore oil and gas platforms.
The proposed new Department of Natural Resources regulations would apply to platforms on leases in state waters including upper Cook Inlet. Upper Cook Inlet contains the operational Middle Ground Shoal, Trading Bay, McArthur River, Redoubt Shoal and North Cook Inlet fields, as well as the Kitchen and Sunfish oil and gas prospects.
The Alaska Division of Oil and Gas has posted the proposed regulations on its web site at http://www.dog.dnr.state.ak.us/oil/.
“It will kill what investment is coming in,” Mark Landt, a partner with Renaissance Resources LLC, told Petroleum News in reaction to the bonding proposal. Renaissance owns state leases in the inlet and hopes to explore several prospects using the jack-up rig that Escopeta Oil and Gas and partner Centurion Gold are bringing into the inlet in 2007. Renaissance is currently seeking investors to help fund its exploration program, Landt said.
Pat Galvin, land manager for the Division of Oil and Gas, told Petroleum News the proposed regulations are a response to concerns about what will happen when an offshore platform reaches the end of its useful life. There have been a number of enquiries about the situation regarding the dismantling of platforms, he said.
“There’s concern that a decision is going to be made without public involvement,” Galvin said.
He said industry has also requested more clarity about state requirements for dismantling, removal and restoration. Currently the platform DR&R requirements are specified as part of the site cleanup plan in the plan of operations for a lease or unit, Galvin said.
But in 2005 the state Legislature passed a resolution requiring DNR to review the situation regarding Cook Inlet oil and gas platform abandonment.
Three new sections
DNR proposes adding three new sections, 11 AAC 83.159, 11 AAC 83.199, 11 AAC 83.347 and 11 AAC 83.161, to the Alaska administrative code for natural resources
Section 11 AAC 83.159 requires the submission of a plan for approval to the department “before undertaking any operations to remove dismantle, or abandon an offshore platform from a leased or licensed area.” The regulation spells out what that plan must contain. The commissioner will approve or reject the plan within 21 days following the issuance of the final Alaska Coastal Management Program consistency determination for what is proposed, the proposed regulation says. 11 AAC 83.347 specifies the equivalent DR&R plan requirement for a state unit. And 11 AAC 83.199 contains the appropriate definitions for the new regulations.
Section 11 AAC 83.161 specifies the proposed DR&R bond that is causing such angst among the independents. This regulation says that “A responsible party shall submit an unusual risk bond under 11 AAC 83.160(b) in an amount sufficient to secure payment of the responsible party’s estimated financial obligations associated with the removal, dismantlement, and abandonment of its offshore platforms, unless the responsible party demonstrates to the satisfaction of the commissioner that it has the financial strength and operational reliability to fully meet its financial obligations.” Demonstration of financial strength and operational ability includes requirements such as a net worth or stockholder equity of at least $100 million and at least five years experience in offshore exploration or development.
11 AAC 83.160(b) has for some time given the commissioner the ability to require a larger than normal oil and gas bond if there is some additional and unusual risk involved in an operation on a state oil and gas lease. But the proposed new regulation, in effect, mandates the commissioner to require an unusual, additional risk bond (or demonstration of financial strength or operational reliability) in the specific case of offshore platform DR&R. Galvin said that the new bonding requirement would come into play whenever anyone applies to construct or operate an offshore platform. He also said that the DNR commissioner would periodically review the need for DR&R bonding for platforms, including platforms that are already operational.
Shut out independents
“That would shut down any activity of independents coming into the Cook Inlet,” said Landt.
Landt doubts that it would be possible to raise the required bonds for DR&R and, besides, the cost of the bonding would kill the economics of offshore exploration, he said. In effect, a DR&R bond would close Cook Inlet to everyone except the very large independent companies and the major oil companies, Landt said. He said that nowhere in the United States is there a similar bonding requirement and he compared the low level of oil and gas activity in the Cook Inlet region with the Gulf of Mexico shelf where, he said, the oil majors have moved out and there are now “hundreds and thousands of platforms” operated by independents.
“Alaska needs to do everything in its power to encourage independents,” he said.
Landt said that he can’t understand why, rather than imposing bonding, the state doesn’t require a DR&R sinking fund tied to remaining reserves, as currently happens for the Middle Ground Shoal field. A sinking fund defers the DR&R funding to a point some way into the field life.
In response to Landt’s comments, Galvin pointed out that DNR welcomes comments on the proposed regulations.
“We encourage them to provide any comments that they have,” Galvin said.
However, Galvin said that the purpose of the proposed bonding is to ensure adequate funding for offshore platform removal; companies building offshore platforms need to have the capability to eventually remove those platforms. He said that a particular issue would arise in the case of a fixed platform used for exploration — a sinking fund arrangement uses proven reserves as collateral for deferred DR&R funding, but there would be no proven reserves associated with exploration from a platform, he said.
The department is also proposing some changes to 11 AAC 83.160, the regulation that relates to state oil and gas bonds. The state is increasing the basic bond level from $10,000 to $100,000, to account for increasing cost factors since the regulation originally came into force. The regulation now states that the bonding applies to operations done under an exploration license or geophysical permit, rather than just under a state oil and gas lease. The department has also tidied up some of the wording of the regulation.
Comments on the proposed regulations must be submitted to the division by 5 p.m. on Oct. 2.
There will be public hearings on the proposals in Kenai on Sept. 18 and in Anchorage on Sept. 19.
