Vol. 25, No.14 Week of April 05, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

AOGCC reduces AIX bonding from $1.6 million to $200,000

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Kristen Nelson

Petroleum News

The Alaska Oil and Gas Conservation Commission has issued its first ruling on a bond reconsideration request, reducing the bonding required for four AIX Energy wells at the Kenai Loop field from $1.6 million to $200,000.

The commission had increased AIX’s bonding from $200,000 (the old requirement for more than one well) to $1.6 million based on its new regulations, which went into effect in May, and set bonding at $400,000 per well for one to 10 wells.

In July, AIX requested a reduction to $1,037,166, based on a third-party engineering cost estimate to plug and abandon its four gas wells.

In August, AIX requested reconsideration based on other bonds in place with state agencies.

The commission held a hearing on the reconsideration request in February.

AIX has a bond in place for dismantlement, removal and restoration with the Department of Natural Resources and the company said that bond included an unspecified amount intended to cover P&A costs of its wells.

AIX also said it should get an offset for the $950,000 certificate of deposit it has in place with the Mental Health Trust Land Office, the landowner. That certificate is dedicated to P&A of AIX’s four wells and does not secure any other DR&R obligations.

AIX requested a reduction of its AOGCC bonding to the $200,000 already in place.

The commission said it found the third-party engineering cost estimate to P&A the wells to be reasonable. It also found the MHTLO certificate of deposit is exclusively for P&A costs and said it “will be accounted for in AIX’s bonding obligation to the AOGCC.”

But the commission said the $500,000 bond with DNR “is for the DR&R of the surface of DNR’s leases to a condition acceptable to DNR. No evidence was offered that any of that bond is irrevocably restricted to the costs to properly P&A AIX’s wells,” and said AIX’s bonding requirements would not be reduced by the amount of the DR&R bond.

The commission ruled that AIX’s bonding requirement “stands at $200,000 and no increase is required at this time.”

Bonding increase

The AOGCC bonding requirement, formerly $100,000 for a single well and $200,000 for multiple wells, was raised last May after a lengthy series of hearings, with the new amounts reflecting 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 has been working with the Bureau of Land Management for a number of years to get wells drilled decades ago by the federal government in the National Petroleum Reserve-Alaska plugged and abandoned.

The commission notified companies with permitted wellheads last 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.

The commission received requests for reconsideration from a number of companies: AIX Energy, Alaskan Crude, Amaroq Resources, Cook Inlet Energy, Malamute Energy and Savant Alaska.

Original proposal different

In 2017, before the new bonding regulations were finalized, the commission considered a requirement for companies to provide estimates of costs to plug and abandon all of their wells, receive the commission’s concurrence on the amount and then bond to cover that cost, with an update every five years - or whenever the operator made significant changes.

For exploration wells, an operator applying for a permit to drill would have had to submit an estimate of costs to properly P&A.

In 2018 the commission dropped that approach and adopted a multitiered bonding approach, eventually settling on what was adopted last year.

Former operator issue

The commission was able to increase bonding amounts on its own authority because the $100,000 and $200,000 were set in law as minimums, not maximums.

Something the commission can’t do on its own and has asked legislators to consider is going after a previous operator if the current operator fails to P&A.

California and Kansas both have the ability to go after previous operators, as California has done after Exxon sold an offshore platform to another operator and that operator went bankrupt. The state was then able to go back to Exxon under the state’s “prior operator” law, because Exxon was operating the platform when the law went into effect.

The Legislature has another option: it could set up an idle well fund and charge companies for idle wells, with increasing amounts over time. As the amount to keep a well idle rose over time, companies would have to take a hard look at whether idle wells have utility. And the fund would accumulate and could be used to P&A wells.

Sometimes idle wells do have future utility, as when coiled tubing technology became available on the North Slope and many wells which had been idle were brought back into production with coiled tubing drilling, providing a lot of oil which otherwise wouldn’t have been produced.


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