Vol. 25, No.08 Week of February 23, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

Bond increases argued

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Commission continues hearings on reconsideration requests from field operators

Kristen Nelson

Petroleum News

The Alaska Oil and Gas Conservation Commission is continuing hearings on bonding reconsideration requests received from oil and gas field operators after the commission substantially increased its bonding requirements last year with the goal of covering plugging and abandonment costs should operators fail to meet their obligations.

The commission heard the first two appeals in January - from Malamute Energy on Jan. 16 and from Alaskan Crude on Jan. 23.

The commission heard the remaining four appeals in February: Cook Inlet Energy and Savant Alaska, both Glacier Oil and Gas companies, on Feb. 12, AIX Energy on Feb. 13 and Amaroq Resources on Feb. 18.

Savant Alaska

In August Glacier requested a consolidated bonding requirement covering both CIE and Savant, since Glacier owns both.

Phillip Elliott, president and chief financial officer of the companies, told the commission at the Feb. 12 hearing that the companies were no longer requesting consolidation.

The company had different requests for the two companies - Savant operates the Badami field on the North Slope and CIE operates three Cook Inlet area fields.

In its July notice to Savant on the increased bonding requirement, the commission cited 12 wells at Badami.

Elliott said Glacier was very supporting of the commission’s goals with bonding - the state shouldn’t have to bear the P&A burden, he said.

But bonding is difficult for small companies because of the exceptionally high cost of bonds, which basically require, for small companies, that cash be deposited into dedicated bank accounts. That, Elliott said, is cash the company doesn’t have to invest.

With 12 wells at Badami the total bond requirement would be $6 million, the amount required for 11 to 40 wells.

But Elliott said that not only did BP drill most of the wells at Badami, it retained the plug and abandon obligation for seven of those wells, an obligation spelled out in the 2011 sales agreement. Elliott said he would provide the commission with a redacted copy of that portion of the agreement.

Savant is responsible for just five wells, which brings the $6 million bonding requirement specified by the commission down to $2 million, which, Elliott said, is reasonably close to the estimate the company has to P&A, which is just under $3 million for all obligations for DR&R, dismantling, removal and restoration, at the field.

Commission production data for December, the most recent posted, shows 11 wells in production at Badami; the twelfth is an injector.

Elliott said it only assumed responsibility for wells it drilled or reentered: Savant had reentered two wells originally drilled by BP, and drilled three, so is responsible for five wells.

The commission wanted to know what would happen after the sale of BP’s Alaska assets to Hilcorp. Elliott said the Badami obligation would not be extinguished and said he would ask BP to confirm that.

Elliott requested that the commission consider other bonding obligations it has in place for Badami, $2.345 million with the Department of Natural Resources for the Badami wells and $615,000 with DNR for facilities, for a total of $2.96 million for DR&R at the field.

He said Savant Alaska has cash deposits of $1.498 million toward the DNR obligation, in addition to a $500,000 DNR bond, in addition to its existing $200,000 AOGCC bond (the former bonding amount covering all an operator’s wells in the state), and asked the commission to consider the bonds already in place for Badami.

The amount of the DNR bonding has recently been increased and the commission wanted confirmation from DNR on the amount in place, as well as information on what would happen to the BP obligation at Badami after the sale to Hilcorp. The hearing record was left open until March 25 to allow Savant to submit that information.

Cook Inlet Energy

Elliott said Cook Inlet Energy, also a Glacier company, operates three units in Cook Inlet: North Fork, Redoubt and West McArthur River, and has 25 permitted wells. He said the commission cited 26 wells but said one of those was plugged and abandoned when a sidetrack was drilled, reducing the number of wells to 25.

The commission’s new bonding requirement would be $6 million, $5.8 million in additional bonding on top of the $200,000 statewide bond CIE already holds.

He said CIE’s view is that the amount is reasonable, but said CIE is asking for credit for DNR and U.S. Environmental Protection Agency bonds already in place and which are available for well abandonment work.

CIE has a $500,000 statewide bond in place with DNR for plugging and abandonment of wells and a $324,000 bond in place with EPA for plugging and abandoning the WMRU 4D and Redoubt-D1 disposal wells.

Elliott said CIE does not request that the commission reduce the amount of bonding required, but requests that it recognize the $824,000 in bonds CIE already has in place, which together with its existing $200,000 AOGCC bond, would reduce the outstanding bonding obligation under the commission’s new regulations to $4.976 million.

Savant has a separate bond with DNR for abandonment of the Osprey platform and pipelines, but Elliott said that bond excludes wells.

AIX Energy

Wendy Sheasby, chief financial officer of AIX Energy, operator of the Kenai Loop field, told the commission by phone in a Feb. 13 hearing that AIX bought Kenai Loop out of bankruptcy from Buccaneer in 2014. There are two producing gas wells in the field and 5 years of remaining economic life at the field, she said.

AIX has an existing $200,000 statewide bond from AOGCC, a $500,000 statewide DNR bond and a $950,000 of financial security in place to the benefit of the Alaska Mental Health Trust Land Office to satisfy its DR&R bonding obligations for the four wells, a total of $1.65 million.

At $400,000 each for four wells, the commission’s new bonding requirement would be $1.6 million.

Sheasby said the cost estimate to P&A the field’s four wells is $1,037,166 based on engineering data submitted to the commission and noted that the since the gas field is in the Kenai Industrial Park there are good logistics for P&A work.

She also noted the commission’s 2019 decision on the Northern Dancer well, which held the Mental Health Trust Land Office, the landowner, liable for P&A of that well, and said the state would look to the landowner if AIX failed.

AIX believes it has sufficient bonding in place, Sheasby told the commission, and is looking to eliminate any redundancy.

The commission asked Sheasby to secure from the Mental Health Land Office in writing the specific uses to which that $950,000 bond could be put and kept the hearing record open until March 5 for that purpose.

Amaroq: round two

Amaroq Resources and the commission already had issues over bonding.

In 2017 Amaroq, then Aurora Exploration, acquired the Nicolai Creek gas field from Aurora Gas for $100,000 in a bankruptcy. The commission, concerned about wells Aurora Gas had on other acreage, said that before it would approve a handover to AE as operator, AE would have to plug and abandon wells at Three Mile Creek, wells AE was not acquiring, or provide a $6 million bond. At that time, the commission’s bonding was $100,000 for a single well and $200,000 for multiple wells.

AE fought the commission in bankruptcy court, which sided with AE. The company also filed an administrative agency appeal against the commission in state court. A December 2017 settlement agreement resolved both the bankruptcy issue and state administrative appeal between AE and the commission, Amaroq said in an extensive prehearing brief, filed prior to its Feb. 18 reconsideration hearing. But, it said, the appeal raised 17 issues, “many of which overlap with the present motion for reconsideration.”

Amaroq said that in addition to the AOGCC bond, it was required to have a DR&R, dismantlement, removal and restoration, agreement with the Alaska Department of Natural Resources.

In early July 2019 Amaroq received a letter from DNR about the new AOGCC bonding requirements, notifying it that its DR&R agreement with DNR “might not be sufficient satisfaction or substitute for AOGCC’s new bonding requirements. The DNR also indicated that there may be some relief available from double bonding requirements for plugging and abandonment requirements,” the company said in its prehearing brief.

AOGCC notified Amaroq in early July that its new bonding requirement was $2.4 million (six wells at $400,000 each, per the new bonding regulations). Since Amaroq already had a $200,000 bond, an additional $2.2 million was required, which could be paid in four annual installments.

Amaroq’s DR&R agreement with DNR requires a trust account at a bank for the benefit of DNR, with funds under exclusive control of DNR and funding required over a five-year period in an amount determined by an independent third party to be sufficient to cover DR&R costs at Nicolai Creek after production ceases.

This trust account is in addition to the $500,000 bond held by DNR; those funds would be released to Amaroq once AOGCC certifies that Amaroq has plugged and abandoned the Nicolai Creek wells to the commission’s satisfaction.

Amaroq said Solsten XP was hired to determine total DR&R costs at Nicolai Creek, and estimated $819,600.

Issues cited by Amaroq

The company said it had five legal issues and a number of factual ones relating to the bonding increase.

Since AOGCC previously settled bonding requirements for Nicolai Creek with Amaroq, applying the new bonding requirements “violates an existing settlement agreement,” the company said, arguing that since the issue had been “resolved by a court of competent jurisdiction” the parties are bound by that decision in similar circumstances.

Amaroq said the “additional bonding requirement is not reasonable or based upon any articulable facts”; said the Solsten XP DR&R estimate included plugging and abandonment of the wells; and said the commission “has not solicited, opined, or challenged any of Amaroq’s factual contentions or estimates.” The company said the new regulations place the onus on the operator to challenge the increased bonding requirement, “rather than placing the burden on the agency to first prove the necessity of the bond.”

The company argued that the additional bonding requirements “impermissibly retroactively applies a new bond requirement that was not in effect when Amaroq acquired the leases,” and said in Alaska law “no statue is retroactive unless expressly declared therein.”

“By settling its earlier claims, Amaroq and the AOGCC resolved their issues on the necessity of the bond regardless of subsequent regulatory enactments,” the company said.

The company said the new AOGCC requirement is a 12-fold increase in the bonding requirement, drastically exceeds the DNR requirement, “is not supported in fact” and is a regulatory taking, which “could easily render Amaroq illiquid, torpedo its attempts to develop the Nicolai Creek Unit, and put Amaroq out of business.”

The company said AOGCC’s jurisdiction “is not exclusive,” since “DNR has standing before the commission to raise all issues related to state-owned land.” DNR has overlapping bonding authority, Amaroq said, noting that DNR has said the agencies should work together on the overlap in requirements.

“The DNR has already warned that ‘this Regulation goes too far, by orders of magnitude,’” Amaroq said, citing DNR’s concerns that the new regulatory requirements are “unduly burdensome” on existing producers and detracts from new regulation in the state.

Amaroq also argued that the new regulation “places a disproportionate bond requirement on small scale producers.”

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