Vol. 24, No.45 Week of November 10, 2019
Providing coverage of Alaska and northern Canada's oil and gas industry

More AOGCC hearings

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Savant, Cook Inlet Energy, AIX Energy say other bonds should be considered

Kristen Nelson

Petroleum News

The Alaska Oil and Gas Conservation Commission began scheduling hearings on reconsideration requests for its increased bonding requirements in October, setting hearing dates for three companies, Alaskan Crude, Amaroq Resources and Malamute Energy (see story in Nov. 3 issue of Petroleum News).

The commission had received three more appeals and has now scheduled hearings for those companies - AIX Energy LLC, Cook Inlet Energy LLC and Savant Alaska LLC. (Cook Inlet Energy and Savant Alaska are Glacier Oil & Gas subsidiaries.)

In requests for reconsideration various of the companies dispute the number of permitted wells they have, ask for consolidation of bonding for companies which share the same parent, argue that other DR&R bonds in place should reduce the AOGCC required amount and say amounts required for DR&R are less that what the commission is requiring in bonding.

The AOGCC bonding requirement, formerly $100,000 for a single well and $200,000 for multiple wells, was raised in May after a series of hearings. The new amounts reflect the commission’s concern that companies would abandon wells, leaving the landowner, typically the state of Alaska, to pick up the cost for plugging and abandonment.

The commission notified companies with permitted wellheads in July, laying out the additional amounts required to bring bonding up to the new requirements which are based on the number of permitted wellheads: $400,000 per well for one to 10 wells; $6 million for 11-40 wells; $10 million for 41-100 wells; $20 million for 101-1,000 wells; and $30 million for more than 1,000 wells.

Formal appeals of the commission’s new bonding, with requests for reconsideration, have come from smaller companies, two of which, Alaskan Crude and Malamute Energy, have permitted wellheads but no production.

Consolidation request

Glacier Oil and Gas, which has two subsidiaries operating in the state, is requesting consolidation of the bonds for those subsidiaries, Savant and Cook Inlet Energy.

The company’s attorney, Elena M. Romerdahl of Perkins Coie LLP, said in an Aug. 2 request, that in addition to the July 25 separate requests for reconsideration of the bonding amounts the companies are requesting that the commission “allow Glacier to provide a single consolidated bond to satisfy the bonding obligations” of its two subsidiaries.

After a company exceeds 10 wellheads, Romerdahl noted, the per well bond “generally decreases as the number of permitted wellheads increases,” with 1,000 permitted wellheads costing an operator $20,000 in bonding per well, “while an operator with 11 permitted wellheads is required to provide $545,454 in bonding per well”, the maximum amount per well under the new regulations.

Collectively Savant and Cook Inlet Energy are responsible for 31 permitted wellheads (Savant five and CIE 26).

Individually, Savant would be required to provide bonding of $2 million (five wells at $400,000 each) and CIE $6 million. If a single bond could cover both subsidiaries the bonding required would be $6 million.

“The disparity in the amount of bonding required per wellhead under the Commission’s amended regulation benefits large operators and penalizes small operators like Savant and CIE,” Romerdahl said.

Savant Alaska

The first of this group of hearings is for Savant Alaska LLC and will be held at 10 a.m. Feb. 12 (all hearings are in the commission’s Anchorage offices), with written comments accepted through the end of the hearing.

Attorney Elena M. Romerdahl of Perkins Coie LLC, representing Savant, said in a July 25 request for reconsideration that while the commission’s letter on bonding identifies 12 permitted wells at the Badami unit, BP Exploration (Alaska) Inc.’s purchase and sale agreement for Badami states that BP as former Badami unit owner and owner of overriding royalty interests in Badami leases “agreed to retain DR&R obligations for all existing wells at the Badami Unit except wells B1-18A, B1-21, B1-36, and B1-38 and any wells that Savant or AEX (ASRC Exploration LLC) later modified or re-entered.”

There were 11 Badami wells when the purchase and sale agreement was executed in 2011, Romerdahl told the commission, and Savant has re-entered two wells, B1-18A and B1-38. “Savant has not and does not plan to re-enter any of the other original Badami Unit wells,” and pursuant to the PSA, “is therefore only responsible for the DR&R obligations, including plugging and abandonment, of 4 of the original Badami Unit wells: B1-18A, B1-21, B1-36, and B1-38.”

Savant drilled B1-07 and is responsible for DR&R obligations for that wells, making it responsible for a total of five Badami wells.

Savant has a Badami DR&R agreement with the Alaska Department of Natural Resources “under which DNR obtained $1,375,000 to cover the DR&R obligations of Savant and its working interest partners at the Badami Unit, including plugging and abandonment of the 5 Badami Unit wells for which Savant is responsible.” Romerdahl said on July 2 then-acting Director Jim Beckham of DNR’s Division of Oil and Gas confirmed in a letter to Savant “that from DNR’s perspective the DR&R Agreement covers all of Savant’s DR&R obligations at the Badami Unit, including plugging and abandonment of the Badami wells for which Savant is responsible.”

On July 22 Savant requested that DNR agree to terminate the Badami DR&R agreement and release funds held by DNR under that agreement. If DNR agrees, “Savant will immediately notify the AOGCC and transfer the amount currently held by DNR under the Badami DR&R Agreement to the AOGCC in satisfaction of the bonding requirements” under the commission’s revised regulations.

Savant argues that with the $200,000 existing bond and the $1.375 million in bonds and pledged security with DNR, and five wells at Badami, Savant should only be required to post an additional $425,000 in bonds with AOGCC.

Cook Inlet Energy

The Cook Inlet Energy hearing is set for 11 a.m. Feb. 12, with written comments acceptable through the end of the hearing. The company’s counsel, Elena M. Romerdahl of Perkins Coie, in an Aug. 2 letter requested consolidation of bonding for CIE and Savant, both of which are Glacier Oil and Gas subsidiaries.

In a July 25 letter addressing the CIE bonding amount, she said the commission’s letter on CIE’s bonding confirmed that the company has 26 permitted wellheads and would be required to establish a $6 million bond. The commission’s letter sets out a schedule of payments by CIE to bring its current $200,000 bond with the commission up to the $6 million letter.

Romerdahl said the commission’s letter does not acknowledge that in addition to the $200,000 bond with AOGCC, CIE also has a $500,000 bond with the Alaska Department of Natural Resources “that covers plugging and abandonment of CIE’s 26 permitted wellheads” and a $324,000 bond with the U.S. Environmental Protection Agency “for plugging and abandonment of the WMRU 4D and Redoubt-D1 disposal wells.”

She said CIE is not requesting a reduction in the amount of the bond but is requesting that the commission “acknowledge the additional $824,000 in bonds CIE currently has in place with DNR and the EPA” and reduce the AOGCC bonding by that amount, to $4,976,000.

AIX Energy

AOGCC has set a hearing for a request for reconsideration of bonding amounts by AIX Energy for Feb. 13 at 10 a.m. at the commission’s Anchorage offices. Written comments will be accepted through the end of the hearing.

AIX LLC has four permitted wellheads and the commission is requiring the company to establish a $1.6 million bond. AIX currently has a $200,000 bond with the commission.

Elena M. Romerdahl of Perkins Coie, attorney for AIX, said in an Aug. 7 letter requesting recalculation of the company’s bonding obligations that in addition to the $200,000 bond with AOGCC, AIX also has a $500,000 statewide bond with the Alaska Department of Natural Resources and $950,000 in financial security for the benefit of the Alaska Mental Health Trust Office to satisfy DR&R obligations on its four permitted wells, a total of $1,650,000.

In addition to the bonding and financial security in place with state entities, Romerdahl said that the Mental Health Trust “as landowner would be required to satisfy any DR&R obligations that AIX failed to complete.”

She noted that based on actions the commission took related to the Northern Dancer 1 well in 2018, “the Commission can and would look to MHT as landowner for AIX’s leases to complete plugging and abandonment of AIX’s 4 wells if AIX failed to satisfy its DR&R obligations under those leases.”

The bonding and financial security AIX has in place with the state exceed the estimated cost to remediate the four wells, Romerdahl said, and MHT’s landowner status provides further assurance that DR&R obligations for the wells would be fully satisfied.

AIX also wrote the commission July 18, requesting reconsideration of the bonding amounts based on an independent engineering estimate which concluded that plugging and abandoning the permitted wells would cost $1,037,166, $562,834 less than the amount required under the commission’s revised bonding regulations.

Romerdahl said the commission had granted reconsideration based on the July 18 letter, but said whether the commission grants the July 18 request to reduce the amount, “AIX requests that the Commission acknowledge the bonding and financial security currently in place” with the state for the four wells and additional assurance provided by MHT’s landowner status.

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