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AOGCC declines Ninilchik rules changes Hilcorp had asked for modifications to well spacing and escrow account provisions that the commission issued in September 2014 ALAN BAILEY Petroleum News
The Alaska Oil and Gas Conservation Commission has turned down a request from Hilcorp Alaska for changes to the pool rules for the Ninilchik gas field on the west side of the Kenai Peninsula. Hilcorp, the field operator and 100 percent working interest owner, had asked for changes to well spacing limitations and to provisions for maintaining escrow accounts for tracts within the boundary of the unit that are not committed to the unit.
However, in an Oct. 9 order the commission said that modifications to the pool rules are unnecessary.
Complex unit Ninilchik, with its combination of state, University of Alaska, Cook Inlet Region Inc. and patented fee land subsurface ownership, is one of the most complex oil and gas units in Alaska. And, just to add to the complications, the unit boundary encompasses some land tracts which have never been committed to the unit but which contribute gas to field production.
Under the latest pool rules for the unit, issued on Sept. 18, 2014, the only well spacing restrictions that apply within the unit require wells to be located at least 1,500 feet from a boundary where ownership changes, including the boundary of an uncommitted tract. And, to protect the correlative rights of owners of uncommitted tracts, Hilcorp must maintain an escrow account for each of these tracts: The company must deposit into each escrow account funds corresponding to the total value of gas production allocated to the tract.
On Oct. 20, 2014, Hilcorp asked the commission for permission to establish a Hilcorp-administered suspense account for each uncommitted tract, instead of using an escrow account. The company also asked that drilling should be allowed within 1,500 feet of an uncommitted tract, provided that a suspense account has been established for the tract. Hilcorp also requested that the amount of money deposited in each suspense account should be determined by the percentage used in calculating gas royalties paid to the state of Alaska - the company claimed that the term “total value of production” used in the pool rule as the basis for determining escrow account payments was unclear.
Protecting owner rights In turning down Hilcorp’s requests, the commission said that an escrow account would provide more equitable protection to owners of uncommitted tracts than would a Hilcorp-administered, non-interest bearing account. And when establishing an escrow account for a tract, Hilcorp must determine a factor for allocating gas production to the tract and, hence, calculating payments into the escrow account, the commission said. In the case of a tract that lies outside a defined participating area, the determination of an allocation factor will require the use of AOGCC’s spacing exception procedure, potentially including a public hearing, the commission said.
The use of a royalty percentage for payment calculations, as requested by Hilcorp, does not adequately protect tract owner interests, given that negotiations between individual owners and Hilcorp may result in royalty rates that differ from the state’s royalty rate, the commission said.
“To protect owners of uncommitted tracts, the most appropriate escrow amount for each month is the total value of production for each tract for that month,” the commission said.
And allowing the drilling of wells within 1,500 feet of an uncommitted tract, if Hilcorp has established a suspense account for that tract, will not adequately protect the tract owner’s correlative rights, the commission said.
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