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Vol. 18, No. 16 Week of April 21, 2013

Providing coverage of Alaska and northern Canada's oil and gas industry

First step for wetlands

Legislature authorizes administration to investigate state permitting primacy

Alan Bailey

Petroleum News

The State of Alaska has announced areawide oil and gas lease sales this fall for the North Slope, Beaufort Sea and Brooks Range Foothills, and the Alaska Mental Health Trust Authority is currently taking bids for an oil and gas lease sale in the Cook Inlet basin.

The Trust Land Office is offering 51,008 acres in 10 tracts in the Cook Inlet, including acreage where Storm Cat Energy drilled the Northern Dancer No. 1 well in 2006.

The tracts span the north end of the basin, with seven in the Matanuska-Susitna Borough, north of Anchorage, two east of Soldotna and one spread dis-contiguously in three blocks along the shoreline south of Soldotna and one block on the southern tip of Kalgin Island.

The Mat-Su acreage includes the Northern Dancer No. 1 well.

After picking up Alaska Mental Health Trust and State of Alaska leases around Big Lake, Storm Cat Energy drilled the well through coal formations to a conventional gas target.

Northern Dancer No. 1 found gas, but Storm Cat Energy never tested the well. After a shake-up of its top management, the company left the state. “Alaska is not in our core areas, and we had pipeline and service access issues there,” Storm Cat Energy spokesman told Petroleum News in 2007. “We certainly believe our prospect is very good. However, given limited capital, our decision was economically based in terms of risk-reward.”

Previous exploration in the region goes back decades, and includes ventures looking for oil, conventional natural gas and coal-bed methane. The only current leaseholders in the area are Apache Corp. to the east and west and Linc Energy Alaska Inc. to the south.

The terms of the sale require the higher bidder of the tract containing Northern Dancer No. 1 to test the well for commercial production during the primary term and post a $100,000 bond to guarantee it will properly abandoned the well, if it is noncommercial.

The minimum bid for all tracts is $25 per acre.

The primary term for Tract 29, the tract containing the Northern Dancer No. 1 well, is five years. The primarAmong a series of bills passed during the closing hours of the Alaska legislative session came an act authorizing the state administration to seek state primacy for wetlands permitting currently carried out by the U.S. Army Corps of Engineers.

The permitting in question, called “404 permitting” after the section of the Clean Water Act that mandates its use, applies to any activity that involves the dredge and fill of materials into the waters of the United States. Although the U.S. Environmental Protection Agency oversees the operation of this permitting program, the Corps of Engineers has been administering the program in Alaska.

The bill, introduced in February by Gov. Sean Parnell and now passed by the Legislature, authorizes the state administration to flesh out what would be involved in implementing 404 permitting primacy in Alaska, and what the cost would be of operating the permitting program — the practicalities and costs of the state taking over the program are as yet unclear.

Contentious program

The 404 permitting program has become very contentious in Alaska, in part because the question of what constitutes the “waters of the United States” has become an ill-defined concept, thus providing scope for federal authorities to claim permitting jurisdiction over broad areas of wetland, as well as over obvious navigable waterways that could potentially support interstate vessel traffic. And, with vast areas of wetlands within Alaska, it has become near impossible to execute any significant project in the state without first obtaining a 404 permit from the Corps of Engineers.

Alaska angst over the operation of the 404 permitting program has come to a head in recent years following lengthy delays in the wetlands permitting for ConocoPhillips’ CD-5 oilfield development program in the northeastern National Petroleum Reserve-Alaska.

The Clean Water Act does allow for the possibility of individual states taking over administration of the 404 permitting program for non-navigable waters, although the Cy term for the other tracts is 10 years. The rental rate for Tract 29 is $10 per acre. The rental rate for the other tracts is $10 per acre for the first seven years and $250 per acre for years eight through 10, returning to $10 after sustained production.

All tracts have a fixed royalty rate of 12.5 percent.

The Alaska Mental Health Trust is accepted bid through Sept. 18 at 4:30 p.m.

North Slope sales

The Alaska Department of Natural Resources has released details about its annual areawide lease sales in the northern half of the state, with bids accepted on Nov. 4.

The North Slope sale includes 1,225 tracts spread across three sub-regions — North, South and Adjacent to Federal Lands — each being offered with separate terms.

The tracts in the North and South sub-regions have a minimum bid of $25 per acre and rental rates of $10 per acre for the first seven years and rising to $250 per acre starting in the eighth year, except if the lease is hosting sustained production. The tracts in the Adjacent to Federal Lands sub-region have a minimum bid of $10 per acre and rental rates starting at $1 per acre and gradually rising to $3 per acre over the first five years.

The royalty rate on the tracts in the South and Adjacent to Federal Land sub-regions is 12.5 percent while the royalty rate on the tracts in the North sub-region in 16.67 percent.

The term for all tracts is 10 years.

The tracts range in size from 640 to 5,760 acres with some tracts divided into parcels.

Beaufort and Foothills

The Beaufort Sea sale includes 573 tracts.

The tracts adjacent to the Outer Continental Shelf, the National Petroleum Reserve-Alaska and the Arctic National Wildlife Refuge have a minimum bid of $10 per acre, a royalty rate of 12.5 percent and rental rates rising from $1 per acre to $3 per acre over the first five years. The remaining tracts have a minimum bid of $25 per acre, a royalty rate of 16.67 percent and rental rates rising from $10 per acre to $250 per acre at year eight.

The term for all tracts is 10 years.

The tracts range in size from 640 to 5,760 acres with some tracts divided into parcels.

The Foothills sale includes 1,347 tracts.

All tracts have a minimum bid of $10 per acre, a 12.5 percent royalty rate and rental rates rising from $1 to $3 per acre over the first five years. The term for all tracts is 10 years.

The tracts range in size from 1,280 to 5,760 acres with some tracts divided into parcels.

orps of Engineers would always retain administration of tidal waters, navigable waters and adjacent wetlands, according to testimony presented to the Legislature by the Corps of Engineers. And, regardless of who is administering the permits, the Environmental Protection Agency retains overall oversight of the program.

According to testimony presented to the Legislature by the Alaska Department of Environmental Conservation, several states are considering state primacy of the 404 permitting program but only two states — New Jersey and Michigan — have thus far obtained that primacy.

Parnell, in a Jan. 17 letter to Sen. Charlie Huggins, president of the Senate, explained the reasoning behind his proposed bill while expressing frustration at what he sees as unwarranted project delays resulting from the federal permitting process.

“The current federal process has resulted in a large number of projects in Alaska being subject to an expensive and bureaucratic federal permitting system and litigation, delaying and restricting opportunities for Alaskans,” Parnell wrote. “This change will limit federal overreach in Alaska by giving the state authority to make jurisdictional determinations, timely process permits and allow responsible development.”

Evaluate costs and benefits

The bill, as passed on April 14, allows the Alaska Department of Environmental Conservation in coordination with the Alaska Department of Natural Resources to evaluate the potential benefits, costs and consequences to the state of assuming primacy of 404 permitting. The bill also gives DEC the authority to file an application seeking federal approval for the primacy. And the bill allows the two departments to administer and enforce the permitting scheme, and to adopt any regulations necessary for achieving state primacy or operating the permitting program.

However, given the unknown cost of operating a state 404 program, as well as uncertainties regarding some aspects of taking the program over from the federal government, the Legislature will have opportunities to “weigh in” on whether the primacy move should proceed once the agencies have evaluated the overall costs of operating the program, according to written testimony from DEC. And, during a Senate hearing on the bill, DEC Commissioner Larry Hartig told lawmakers that the permitting program could take five years or more to implement.

Fewer EIS’s?

One possible indirect effect of state 404 permitting primacy could be a reduction in the number of environmental impact statements, or EISs, required for industrial projects in Alaska. The preparation of an EIS, done under the terms of the National Environmental Policy Act, or NEPA, and typically taking two or more years to complete, is often triggered by a 404 permit application to the Corps of Engineers. And, with 404 permits often being required in Alaska’s typically soggy lands, EIS preparation has become a rite of passage for any major project in the state.

But, with an environmental review and potential EIS under NEPA only required for an action involving the federal government, such as a federal permit application, might the takeover of the 404 permitting by state authorities eliminate the EIS from the permitting process for many projects?

That question raises a parallel issue of exactly which wetlands would ultimately become the responsibility of the state, and hence how much federal permitting would actually go away.

In written testimony to the Senate, Kara Moriarty, executive director of the Alaska Oil and Gas Association, an Alaska oil industry trade association, commended the administration’s intent to encourage resource development by simplifying the permitting process but also cautioned about possible permitting duplication and continuing federal involvement, given the complexities of transitioning the permitting program.

“And while a majority of the nation’s wetlands are in Alaska, many of these may be non-assumable by the state under the Clean Water Act’s geographic limitations and would remain subject to federal jurisdiction and duplicative Corps permitting,” Moriarty wrote, adding that her association would work with the state administration and other stakeholders to ensure an effective implementation of the permitting primacy.

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