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Middle Ground Shoal leases signed over to Cross Timbers Company will escrow money for estimated $31 million removal cost, provide annually renewed $3 million suretyship bond Kristen Nelson PNA News Editor
In December, Cross Timbers Oil Co. got state approval for transfer of the two Cook Inlet leases it purchased from Shell Western E&P Inc. Sept. 30, 1998. The state approved the transfer after Cross Timbers agreed to provide the Department of Natural Resources with a suretyship bond and to establish and maintain a fund to pay for abandonment obligations for facilities on the leases, including two platforms (“A” and “C”), associated pipelines and onshore facilities.
These requirements are in addition to bonding and insurance obligations required by the leases and applicable state statutes and regulations.
Abandonment includes dismantlement and removal of materials, machinery, equipment, tools, appliance and structures from the leases and return of leased lands in good order and condition, as well as plugging and abandoning the wells.
Annual bond required Until Cross Timbers completes abandonment, it will provide DNR with an annually renewed $3 million suretyship bond. The company will also provide an annual proved reserves report.
Abandonment costs are assumed to be $31 million as of Jan. 1, 2009, and abandonment is assumed to occur in 2009 unless economic productive life of the leases extends beyond Jan. 1, 2009, as evidenced by proved reserves reports. Net present value of the abandonment costs will be a 5 percent annual rate prior to 2009 and the net present value of the abandonment costs will be compounded after 2009 at the average inflation rate used by the Department of Natural Resources.
Cross Timbers will begin paying into an abandonment fund — an escrow account to be maintained in an Alaska bank — when its portion of proved reserves is less than 150 percent of the net present value of abandonment costs. Monies in the fund will be used to purchase U.S. Government obligations maturing not later than Jan. 1, 2009.
The fund, the state said, secures Cross Timbers’ obligations to pay for abandonment of the assigned leases and the fund is collateral for the payment of those obligations.
Cross Timbers began operating properties in 1998 The sale, announced in August 1998, closed Sept. 30, 1998, and Cross Timbers has been operating the leases since. Properties include two production platforms in 70 feet of water about 6 miles offshore and a 50 percent interest in production pipelines and onshore processing facilities.
The properties were purchased from various Shell Oil Co. affiliates for approximately 2 million shares of Cross Timbers’ common stock, subject to certain price guarantees and other considerations and adjustments.
Cross Timbers said at the time of purchase that production was approximately 3,600 barrels of oil per day from 31 producing wells, primarily from multiple zones within the Tyonek formation between 7,300 feet and 10,000 feet subsea. Proved reserves were estimated at 12 million barrels of oil.
Shell has had a successful waterflood program at Middle Ground Shoal for many years, Cross Timbers said, primarily on the eastern flank. Cross Timbers said it planned to look at waterflood for the western flank where Shell has had some waterflood pilot projects.
Company looks at productive history Rick Seeds, executive vice president of Cross Timbers, told PNA in a 1998 interview that the company looks for properties with a long productive history so that production decline is more predictable; complex geology; waterflood and then looks for ways to increase reserves.
Since the company was first organized in 1986, he said, it has added in the range of 50-60 percent additional reserves on top of the reserves acquired.
“So that’s what we do,” Seeds said. “We will typically find these kind of assets that we’re interested in and then go in and figure out methods for increasing the producing rates.” Exploration is only about 10 percent of the company’s budget, he said, and that is confined to areas around existing production.
In response to a question about other acquisitions in Cook Inlet, Seeds said, “I can’t guarantee you that we’re going to acquire anything else. But our history would be that when we go in and establish a new core area, that we like to expand upon that core area.”
Cross Timbers grew out of the 1985 acquisition of Southland Royalty Co. in a hostile takeover by Burlington Northern. In 1986, three former Southland employees raised $20 million to purchase production. Other partnerships followed and in 1993 they were rolled into Cross Timbers and taken public.
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