Oil patch insider: Amaroq to appeal AOGCC decision; RDC’s virtual conf a newsmaker

Kay Cashman

Petroleum News

Amaroq Resources will “almost certainly appeal” the Alaska Oil and Gas Conservation Commission’s Nov. 9 decision revising the company’s bonding requirements, Amaroq President Scott Pfoff told Petroleum News in a Nov.17 email.

Under its new bonding regulation AOGCC originally assessed Amaroq $2.4 million on six wells at $400,000 each for plugging and abandoning. Amaroq has an existing $200,000 statewide bond with the commission based on the previous regulation, so its additional bonding requirement would have been $2.2 million.

Under AOGCC’s new Nov. 9 ruling, Amaroq’s total bonding requirement is $900,000 ($150,000 per well), less the existing $200,000 bond, so an additional $700,000 is required.

Still a lot of money for the tiny independent oil and gas company.

“AOGCC has proposed changes to … the Alaska Administrative Code that increase the number of annual installments an operator has to pay on increased bonding levels from 4 years to 7,” Pfoff said. “However, Amaroq would be required to pay 71% ($500,000) of the increased bonding requirement in the first installment. This is very problematic for a company our size.”

Amaroq is on record as being supportive of AOGCC’s efforts to embrace bonding requirements that give consideration to unique factors facing each operator when it comes to plugging and abandoning wells, Pfoff said: “However, the bonding requirements for Amaroq’s wells should be approximately 50% less than AOGCC’s decision of $150,000 per well.”

Additionally, “AOGCC and the Department of Natural Resources need to work together to eliminate duplicative financial coverage for the same P&A costs,” he said.

When Amaroq acquired the Nicolai Creek gas producing unit “we entered into a Dismantlement, Removal & Restoration Agreement (DR&R) with DNR, which obligates Amaroq to escrow funds sufficient to restore the lands including P&A of the wells.”

In its decision, AOGCC stated that no evidence had been offered as to the amount of the DR&R funding that was dedicated to the costs to properly P&A Amaroq’s wells.

“Amaroq,” Pfoff said in his email to PN, “intends to provide the evidence and work with both agencies in an effort to resolve this issue.”

“Lastly, Amaroq continues to consider legal remedies available to us should we be unable to achieve an acceptable bonding solution,” he said.

Dr. Paul Craig, a board-certified neuropsychologist who practices in Anchorage and a veteran oil and gas investor in Alaska, was also approached by PN for a comment on AOGCC’s Nov. 9 decision, as his independent oil and gas company, Trading Bay, owns one-third of Amaroq.

“Bottomline from my perspective is that if Amaroq is, in fact, required to post an additional $500,000 of bonding immediately, the net result is that the AOGCC may thereby push the Nicolai Creek unit from its current status as a going concern into the category of being a non-commercial enterprise by way of regulation,” Craig wrote in a Nov. 17 email to PN.

“Obviously, we have to run the numbers to make a final determination about whether it is or is not a going concern. But shooting from the hip, the numbers currently imposed by the AOGCC do not look good from a purely commercial perspective,” Craig said.

Turning the Nicolai Creek unit into a non-commercial enterprise through the regulatory process would result in the following, per Craig:

* Several Alaskan’s jobs being lost in the middle of a pandemic.

* Loss of royalties paid to the State of Alaska.

* Loss of tax revenue - some of which is paid to the Kenai Peninsula Borough.

* Loss of proved producing reserves on the heels of the Nicolai Creek unit wells being plugged and abandoned.

AOGCC said in its Nov. 9 decision that Amaroq had filed a September 2017 affidavit from Ed Jones that estimated the cost to properly P&A the Amaroq wells at between $100,000 and $200,000 per well.

In 2019 Jones, operating as Plugging Inlet LLC, successfully plugged and abandoned 10 wells on Cook Inlet Region Inc. land near the Nicolai Creek field. The estimate Jones made in 2017 was based on the plan AOGCC approved for P&A of the CIRI wells, the commission said.

At a 2020 hearing on bonding reconsideration requests (see story in Feb. 23, 2020, issue of Petroleum News), Amaroq said it had hired Solsten XP to determine total P&A costs for Nicolai Creek, which Solsten estimated at $819,00 for all the wells. (Solsten is a well-known project management and contracting service company for the oil and gas industry in Alaska.)

The commission said Amaroq provided a second third-party P&A cost estimate totaling $470,000 or $78,333 per well for the six wells. AOGCC requested estimates for each well, and in March, Amaroq provided a revised third-party cost estimate of $491,675 to P&A the six wells.

The commission said Plugging Inlet LLC successfully completed the P&A of the CIRI wells in 2019.

“Because of the similarity of the CIRI wells to the Amaroq wells, on May 1, 2020, the AOGCC requested documentation of the actual costs incurred to P&A those 10 wells. On May 13, 2020, Jones provided the information which showed an average cost to P&A the CIRI wells of $151,000 per well,” the commission said.

AOGCC said its Nov. 9 decision was based on the actual costs incurred in 2018 and 2019 to P&A the CIRI wells, as well as evidence provided by Jones. Consequently, it found an average cost of $150,000 per well, $900,000 for the six wells, to be a reasonable estimate for the Amaroq’s wells.

On the issue of the DNR bond and trust account, the commission said that as of the date of its order “no evidence has been offered as to the amount of the DR&R funding that is dedicated to the costs to properly P&A Amaroq’s wells.”

That’s because DNR does not break out those costs, so AOGCC does not recognize the bond that operators are required to have with DNR.

While the relationship between the two state offices might be unclear, one thing is very clear: Pfoff is not going to be regulated out of business without putting up a fight.

Stay tuned….

- KAY CASHMAN

RDC pulls off first virtual annual conference

Some of the speakers from Alaska’s oil and gas industry included Joe Marushack, president, ConocoPhillips Alaska; Jill Fisk, asset team leader, Prudhoe Bay West, Hilcorp Alaska; and Darlene Gates, president, ExxonMobil Alaska.

Marushack made the top of page 1 last week in Petroleum News with especially good news: ConocoPhillips Alaska is going from zero to four rigs on the North Slope in 2021, mainly thanks to the defeat of Ballot Measure 1, which would have significantly raised state oil taxes on the North Slope.

Fisk also made page 1. Hilcorp took over as operator at Prudhoe Bay on July 1, bringing a corporate culture of entrepreneurship and ownership to the state’s largest field where it acquired a 26% interest from BP. Although Marushack said Prudhoe Bay unit activity going forward “is dependent on reaching a consensus with the major working interest owners, a discussion that’s still under way,” Fisk provided some perspective on what has changed since July 1.

Among other things, she mentioned:

* On the maintenance side, more fin fans were repaired at Gathering Center 1 in July than in the previous four years, leading to improved plant efficiency in the summer months.

* Hilcorp has been able to increase production by about 10,000 barrels per day, and as temperatures dropped in November, she said, there have been several days of more than 280,000 barrels of oil per day.

* In under a month, a contractor came up with an idea that saved more than $250,000 - evidence of Hilcorp’s “taking ownership” strategy.

What was RDC’s secret to pulling off this successful virtual conference?

“I think timing played a key part in our conference. If we hadn’t had the election behind us (as well as Ballot Measure 1), I’m not sure the news from the producing companies would be positive. It was really about all of the Alaskans that voted no on 1. For the other industries, there is a lot of opportunity, and we are optimistic 2021 will be better, particularly for tourism and fishing,” Hall said in a Nov. 19 mail to PN.

She also reminded us and our readers to “mark your calendars for an update from Oil Search on 12/3 for our breakfast program.”

Done.

- KAY CASHMAN