Court rules bonding order illegal

Judge Gary Spraker of the U.S. Bankruptcy Court for the District of Alaska has issued a ruling nullifying an Alaska Oil and Gas Conservation Commission order regarding required bonding for the plugging and abandonment of wells, if Aurora Exploration is to buy the Nicolai Creek gas field from Aurora Gas.

In a Sept. 26 memorandum, Spraker explained that he was ruling the AOGCC decision void because it contravenes U.S. bankruptcy law. The AOGCC and the Alaska Department of Natural Resources had opposed a motion by Aurora Exploration to strike down the AOGCC order.

Aurora Gas, the operator of five onshore gas fields on the west side of Cook Inlet, is bankrupt and is trying to sell its assets to help reimburse its creditors. Aurora Exploration, a separate company, has offered to buy Nicolai Creek, one of Aurora Gas’s fields. Nicolai Creek has six active gas wells: The AOGCC has said that it needs $1 million in bonding for each of those wells, if Aurora Exploration is to take over as field operator. In the alternative, the AOGCC has said that Aurora Exploration can use a $200,000 bond if the company plugs and abandons three wells in the Three Mile Creek field, an Aurora Gas field that Aurora Exploration does not plan to buy.

Judge Spraker said that AOGCC’s conditioning of a $200,000 bond on the plugging of the Three Mile Creek wells violates bankruptcy law because it conditions the sale of the Nicolai Creek wells on the payment of an Aurora Gas liability that predates the company’s bankruptcy. Moreover, the imposition of a very high bond, without supporting evidence for its scale, evidences an effort by the state to force Aurora Exploration to accept that Three Mile Creek liability, Spraker said.

The AOGCC has concerns about the financial capability of small companies to plug and abandon wells that the companies operate. However, Aurora Exploration has argued that plugging and abandoning a Nicolai Creek well would cost much less than $1 million and that the imposition of a $6 million bond would render the purchase of the field non-commercial. If the sale of the field falls through, the field would shut down and, given Aurora Gas’s bankruptcy, the state would have to pay a substantial portion of the cost of dealing with the field’s wells, Aurora Exploration has argued.

- ALAN BAILEY