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Cost and risk AOGCC hears evidence on the bonding requirements for Nicolai Creek wells Alan Bailey Petroleum News
In an Oct. 9 public hearing the Alaska Oil and Gas Conservation Commission gathered testimony for determining the appropriate level of bonding to cover the plugging and abandoning of six wells in the Nicolai Creek gas field, onshore the west side of Cook Inlet. The commission has issued an order requiring $6 million in bonding, $1 million for each well, a figure much higher than what has become a customary $200,000 in bonding for all of an operator’s wells. Aurora Exploration wants to buy the Nicolai Creek field but has said that AOGCC’s bonding requirement renders the field uneconomic.
From testimony presented during the hearing it became apparent that the bonding level argument revolves, not so much about the validity of various estimates of the potential cost of plugging and abandoning the Nicolai Creek wells, but about the choice of technique used to carry out the well remediation, and about the relative costs and risks associated with different techniques.
Outcome of bankruptcy The proposed field purchase comes as part of the fallout from the bankruptcy of Aurora Gas, a completely separate company from Aurora Exploration. Aurora Exploration has offered to purchase Nicolai Creek as part of the bankruptcy settlement. Aurora Gas operates five gas fields on the west side of the inlet and has said that it has funds to plug and abandon all of its wells except the Nicolai Creek wells and three wells in the Three Mile Creek field.
AOGCC’s bonding order gave Aurora Exploration the option of a $200,000 bond, as an alternative to the $6 million bond, if the company also undertakes to plug and abandon the Three Mile Creek wells. Aurora Exploration has no interest in purchasing Three Mile Creek. The bankruptcy court has ruled that the bonding order, with the Three Mile Creek provision, is illegal because it contravenes U.S. bankruptcy law.
Alternative suggestion The AOGCC had scheduled the Oct. 9 hearing in response to an appeal by Aurora Exploration against the Nicolai Creek bonding order and continued with the hearing despite the bankruptcy court ruling. In a filing with the commission Aurora Exploration had suggested that, given the ruling, the agency could, as an alternative to holding the hearing, discuss with Aurora Exploration how to resolve the bonding issue.
The company suggested a $200,000 bond in combination with a trust fund controlled by the AOGCC. Aurora Exploration, while it operates the gas field, would have to place money into the trust fund over a period of several years, enabling the accumulation of sufficient funding to cover the estimated cost of plugging and abandoning the field’s wells by the anticipated end of field life. The company has already agreed a similar arrangement with the Alaska Department of Natural Resources, to ensure funding for the eventual restoration of surface lands, once the field goes out of operation,
AOGCC has a duty to ensure that all oil and gas wells in Alaska are appropriately plugged and abandoned, to prevent environmental damage and safety issues. The objective of the bonding is to ensure that sufficient funds are available for the plugging and abandonment efforts, once a well becomes defunct. If the responsible company fails and bonding levels are inadequate, the state will likely have to pick up much of the tab for the well remediation work.
Aurora Gas’s estimates During the Oct. 9 hearing, Scott Pfoff, president of Aurora Exploration, commented to the commissioners that Aurora Gas had already presented documentation with estimated costs for the plugging and abandonment of a number of Aurora Gas’s wells. Ed Jones, president of Aurora Gas, said that, following a rigorous cost estimating exercise, Aurora Gas had estimated costs ranging from $100,000 to about $205,000 for plugging and abandoning each well. Those wells are similar to the shallow gas wells at Nicolai Creek he said. Moreover, the commission has already approved sundry notices filed by Aurora Gas for the plugging and abandonment, with those estimated costs included, Jones commented.A question of technique Michael Quick, senior petroleum engineer with AOGCC, commented that, whereas the commission must ensure that the results of a company’s planned plugging and abandonment work comply with the commission’s regulations, the commission does not regulate the methods that a company may use to achieve regulatory compliance. In the case of the Nicolai Creek wells, Aurora Gas had assumed a cheaper method of plugging the wells than the commission had envisaged when assessing the necessary bonding level. Hence the discrepancy in the anticipated costs, Quick said, commenting that there are several different techniques that can be used for plugging a well.
But the cheapest method involves a significantly higher risk of failure than does the more expensive technique, Quick said. And, in estimating the costs for determining the bonding level, it was necessary to assume that the state would be in charge of the scope of work, he said.
He said that the technique envisaged for state use would involve the use of a coiled tubing unit to inject cement downhole to successively form multiple downhole plugs, starting in the deeper sections of the well. This is known to be an industry best practice for P&A work, Quick said. After setting each plug, the work crew would wait for the cement to set and then conduct a pressure test to ensure that the plug was effective before installing the next plug farther up the well. If a plug does not work properly, the possibility remains to set another plug to contain the reservoir pressure.
Aurora Gas’s plan, on the other hand, involves installing a single cement plug in a well by injecting cement all the way down the well tube and allowing the cement to work up the annulus between the tube and the well casing. Executed properly this technique will work. But if pressure testing after the cementing is complete fails to meet the regulatory standard, the remedial work then involved in removing cement from the well bore and re-cement the well would cost multiple times the cost of AOGCC’s proposed remediation method, Quick said.
$960,000 estimate Including a 20 percent contingency, to allow for uncertainty in the timing of when the remediation would be carried out and in the condition of the wells at that time, the estimated cost of remediation by AOGCC’s preferred technique is $960,000 per well. Hence the $1 million per well bonding requirement.
The most rigorous and expensive way to plug a well is to remove the well completion and tubing and then use a well string to cement the well in several stages from the bottom up, Quick said. AOGCC’s assumed method is intermediate between that and Aurora Gas’s planned approach, he said.
Quick cited in support of his cost estimate the recent plugging and abandonment of NordAq’s Tiger Eye well on the west side of the Cook Inlet. He said that, for that well, NordAq had not used coiled tubing or removed the well tubing but had plugged the well in several increments, allowing the cement to set and conducting a pressure test after each increment. The total cost looks to be coming in close to the $800,000 estimate associated with the AOGCC bonding requirement for that well, Quick said.
North Slope projects Quick also said that there have been four projects on the North Slope that have used Aurora Gas’s planned technique to plug and abandon wells. In two of these projects the plugged wells had then failed pressure tests, with two subsequent attempts to remediate the situation also failing. According to AOGCC records, the two problem wells were drilled by the U.S. Navy in the National Petroleum Reserve-Alaska in 1950 and 1975 and are part of an NPR-A legacy well remediation program being conducted by the Bureau of Land Management - a failed attempt by a BLM contractor to plug and abandon these wells in 2016 was strongly criticized by the AOGCC.
In response to Quick’s comments, Jones said that the P&A work on the North Slope wells that Quick referred to involved severe circumstances, including winter weather, high pressures and questionable tubing and casing conditions, given the ages of the wells. Although the Nicolai Creek wells are old, they are in good condition, with relatively new well tubing and recent casing logs run, he said. Moreover, there are ways of mitigating the risks associated with the P&A technique that Aurora Gas plans to use, he said. The Nicolai Creek wells are also fairly shallow, ranging in depth from 900 to 2,400 feet, he said.
Field shutdown? Complicating the issues surrounding the Nicolai Creek wells is the fact that Aurora Exploration is the only company that has offered to buy the Nicolai Creek field. Thus, if the purchase of the field fails to complete because of the bonding issue, the field will presumably shut down, given Aurora Gas’s bankruptcy. As a consequence, the state would incur the cost of plugging and abandoning all of the wells at Three Mile Creek and Nicolai Creek, with just Aurora Gas’s $200,000 well surety bonding for its fields. And the state would not enjoy the economic benefits of continuing Nicolai Creek production.
If the purchase of the field does proceed, the state would still have to deal with the Three Mile Creek wells, but the closing down of the Nicolai Creek wells would be deferred. William Bankston, Aurora Exploration’s attorney, argued that Aurora Exploration’s proposed combination of a surety bond and a trust fund would ensure adequate funding for the future plugging and abandonment of the Nicolai Creek wells.
Pfoff overviewed his company’s ideas for future production and development at Nicolai Creek. With some new well work, there are 2 billion cubic feet of gas reserves yet to be produced, with the field having an economic life of at least five more years, he said. New drilling could unlock some of the 17 bcf of probable reserves in the field. There is also unconventional gas potential in the form of coalbed methane. Another possibility, as the gas field depletes, is to progressively convert the field to a gas storage facility, Pfoff said.
Aurora Exploration has also been in discussion with Apache Corp. - several years ago Apache farmed into deep oil rights in the Nicolai Creek leases, Pfoff said.
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