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Vol. 24, No.50 Week of December 15, 2019
Providing coverage of Alaska and northern Canada's oil and gas industry

Guitar unit tracts back in play, fate of Hemi Springs lease unclear

Click here to go to the full PDF version of this issue, with any maps, photos or other artwork that appears in some of the articles.

Kay Cashman

Petroleum News

On Oct. 18, Alliance Exploration told the Alaska Department of Natural Resources’ Division of Oil and Gas in an email that it was relinquishing the North Slope Guitar unit and surrendering its three leases, ADL 391544, 391545 and 392104. Four days later, the division sent the company a letter confirming the unit has been terminated and the leases surrendered. The agency also told Alliance it would contact US Specialty Insurance by Nov. 1 about releasing the $500,000 statewide bond that Alliance wants refunded.

The company’s unit termination and lease surrender email came in after the Sept. 16 cutoff date for the three Guitar leases to make it into the state’s Dec. 11 North Slope lease sale, but they will be offered in the next North Slope lease sale, currently scheduled for about a year from now.

In Alliance’s plan of exploration, approved by the division in 2017 in conjunction with the formation of the Guitar unit, the company promised to drill a well in the winter of 2018 or 2019, which was why the statewide bond was required.

Alliance did not meet its work commitment and so the unit was put into default by the state.

Although it did not cure the default, the division approved a new plan of operation filed by Alliance for drilling the well this winter.

The vertical well was to be spud from an ice pad prior to March 31, 2020, and like the previous plan of operation, it was to penetrate the Ivishak, the formation that hosts the adjacent Prudhoe Bay reservoir, with a lateral well targeting a seismic anomaly in the Kuparuk C.

Oil potential indicates an upside of 200-300 million barrels, an Alliance executive previously told Petroleum News.

Deal with ConocoPhillips

In June, Alliance said it had finalized a lease transfer document and production sharing agreement with ConocoPhillips on the Hemi Springs lease, ADL 28249, which sat at the northwest quadrant of what, with the three Guitar unit tracts, had formed a square shape.

The fourth lease was of intertest to Alliance because the well head of the Hemi Springs State No. 1 discovery well, drilled by ConocoPhillips predecessor ARCO Alaska in the mid-1980s on the tract, was certified as capable of producing hydrocarbons in payable quantities from the Kuparuk C formation. The bottom hole of the well was on one of Alliance’s three Guitar unit leases.

Those three leases and the fourth ConocoPhillips tract had previously been part of the Hemi Springs unit, formed in 1983 by ARCO Alaska and terminated in 1992.

Fate of ConocoPhillips lease uncertain

Alliance terminating the Guitar unit and surrendering its three leases to the state revived a situation between ConocoPhillips and the division on ADL 28249. The agency had ordered ConocoPhillips to put the lease into production or lose it.

The most recent public document was a response from DNR’s commissioner at the time, Andy Mack, to an appeal by ConocoPhillips on the production order, confirming the division’s initial decision.

In his July 25, 2018, decision letter, Mack said ConocoPhillips “has submitted an application to assign this lease to Alliance Exploration, LLC, received August 31, 2017. To allow the Division’s assignment process to proceed, this decision is hereby stayed pending the outcome of the assignment application.”

If the lease assignment had gone through ConocoPhillips would no longer have had any working interest in the lease.

With the Guitar unit gone and its leases surrendered to the state, the production order is back in play and will have to be worked out between ConocoPhillips and the state.

Background on ADL 28249

DNR initially issued ADL 28249 to Richfield Oil Corp., predecessor to ARCO Alaska, and Humble Oil and Refining, predecessor to ExxonMobil, on Oct. 1, 1965, with an effective date of March 27, 1974, once the State perfected title.

Paragraph 7 of the lease says, “If, upon the expiration of the primary term or at any time or times thereafter, there is on said land a well capable of producing oil or gas in paying quantities, this lease shall not expire because Lessee fails to produce the same unless Lessor gives notice to Lessee allowing a reasonable time, which shall not be less than sixty days, after such notice to place the well on a producing status, and Lessee fails to do so; provided, that after such status is established such production shall continue on the said land unless and until suspension of production is allowed by Lessor.”

Near the end of the lease’s 10 year term it was included in the Hemi Springs unit, formed Jan. 17, 1984. Unitization extends a lease for the life of the unit.

ARCO Alaska drilled the Hemi Springs State No. 1 on ADL 28249 and on June 5, 1984, the division certified the well’s results as capable of production in paying quantities.

When the working interest owners voluntarily terminated the Hemi Springs unit Oct. 1, 1992, the unit agreement extended all the leases for one year, and then on April 30, 1993, the division notified the lessees that the lease would remain in force under Paragraph 7 because of the well certification finding.

The well was never brought into production.

Well plugged and abandoned

The well is currently plugged and abandoned and therefore not physically capable of commercial production without being redrilled. As of 2012, after several name changes and assignments, ConocoPhillips was the sole lessee for ADL 28249.

In 2014, the company contacted the division regarding surrender of the lease. They “discussed an opportunity for the Division to re-lease the land with certain improvements intact,” Mack wrote.

When those discussions did not work out, the division gave ConocoPhillips notice on Aug. 25, 2014, to place the Hemi Springs State No. 1 on producing status by Feb. 25, 2017, in accordance with Paragraph 7

ConocoPhillips appealed the division’s decision on Sept. 15, 2014, challenging the reasonableness of the 2.5 year period that the division provided for it to place the well on production. The company also requested a stay of the decision.

DNR initially did not issue a stay, but on Feb. 24, 2017 - one day before ConocoPhillips’ deadline to place the well into production - the commissioner stayed the decision.

In the intervening 2.5 years while there was no stay in place, the division did not receive a plan of operations from ConocoPhillips to do the work needed for production. Nor, Mack wrote, was DNR aware of the company submitting permits to other state agencies for the approvals it would need to comply with the division’s decision.

How long does it take?

ConocoPhillips disputed only one issue on appeal: whether 2.5 years was a reasonable amount of time to put the well into production. According to the company, the lease was not connected to infrastructure and the nearest production and transportation facilities were distant and not owned by ConocoPhillips.

Instead ConocoPhillips said five years was a reasonable amount of time to bring a new field into production.

The division did not agree because the agency’s order did not require a full field development.

Thus, Mack’s decision said the issue was what was a reasonable amount of time for production from a single capable well, not production from an entire field.

Mack said, ConocoPhillips’ “appeal offers no evidence that it was physically and logistically incapable of bringing the lease on production in the 2.5 years that the Division provided. As a lessor of oil and gas resources and regulator that approves the plans and permits lessees need to explore, develop, and produce resources, DNR has broad and deep expertise in how oil and gas leases can and are developed in Alaska, the length of time operators need to develop these resources, and the lengths of time operators prefer to take to develop resources. In DNR’s experience, it was entirely possible for CPAI (ConocoPhillips) to place the Hemi Springs State No.1 on producing status in 2.5 years,” noting ConocoPhillips and its predecessors have held this lease for more than four decades knowing it holds producible resources.

“DNR need look no further than CPAI itself for examples of comparable situations where CPAI brought acreage into production in far less than five years,” Mack said, saying the ConocoPhillips-operated Kuparuk River unit includes two leases that are not contiguous with the rest of the unit, separated by miles of acreage that is not part of the unit.

The leases he wrote about are in the Meltwater Participating Area, which is more than eight miles from the nearest pad in the Kuparuk River unit, whereas the Hemi Springs State No.1 is less than seven miles from a unit pad (see map in pdf and print versions of this article).

The company “progressed from a newly issued lease to first production in three years” at Meltwater, Mack said, and this included drilling three explorations wells and one development well, as well as building a road and pipelines to connect Meltwater to Kuparuk infrastructure.

Another example used by Mack was ConocoPhillips Tarn Participating Area within the Kuparuk River unit. When the Tarn project began, it was seven miles from existing Kuparuk River infrastructure.

ConocoPhillips “confirmed a commercial oil accumulation through exploration drilling in early 1997, built a road, pipelines, and a powerline to connect the area in early 1998, began development drilling in April 1998, and started first production by July 1998. If CPAI could accomplish this in a year and a half, certainly it should have been able to place the Hemi Springs State No. 1 on producing status in 2.5 years,” Mack wrote.

Sixty-one days to production?

In his findings, Mack said his appeal decision “is hereby stayed for as long as the assignment application is pending before the Division,” which it is no longer.

Mack stayed the division’s decision on Feb. 24, 2017, leaving ConocoPhillips “with one day remaining in its period to place the well on producing status. If the division denies the assignment application and this decision becomes final, the commissioner will extend that period by 60 days. Under Paragraph 7 of the lease, CPAI would then need to place the Hemi Springs State No. 1 on producing status and continue producing from this well within that 60 days or ADL 28249 will expire.”

A Petroleum News source said it is likely the division and the company will be able to come to terms that are acceptable to both.

Stay tuned …

- KAY CASHMAN

Editor’s note: Petroleum News subscribers see the May 5, 2013, article in Petroleum News online archive titled “Polar releases Hemi Springs reserves: Study estimates 558.2 million barrels of recoverable oil reserves from Ivishak, Kuparuk and Schrader Bluff/West Sak formations.”



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