Conoco appeals Tofkat ruling

Alongside its proposed exploration activities for the coming year, ConocoPhillips wants to expand the Colville River unit to include portions of the former Tofkat unit.

In late March, the company asked the Alaska Department of Natural Resources to add approximately 9,131.22 acres of state and Arctic Slope Regional Corp. leases to the unit.

The request is complicated by a larger dispute over the leases in question. The state has only agreed to allow ConocoPhillips to acquire a portion of the proposed expansion area while the company insists it should be allowed to acquire the entire expansion area.

The delays are apparent in the title of the request: “Application for the Fifth Expansion of the Colville River unit.” The fourth expansion occurred in 2010 and the state approved the sixth expansion in August 2016, leapfrogging over the stalled fifth expansion request.

In a proposed plan included with the request, ConocoPhillips said it would drill at least one exploration well in the expansion area this year. The company recently submitted a permitting application for the Putu No. 1 well and Putu No. 1A sidetrack, although the future of the exploration program depends in part of a resolution of the lease issue.

According to the plan, ConocoPhillips might drill an appraisal well as early as 2020.

Oil by 2024?

A development in the area would likely also require an Environmental Impact Statement, according to ConocoPhillips, because of its proximity to Nuiqsut. The company said it would honor setbacks and location preferences from the village. The EIS process and associated permitting would likely take at least three years, according to the company, which would push construction and development drilling into the 2022-24 timeframe.

In its plan, ConocoPhillips touted the benefits of bringing the project into the sequential development of the Colville River unit. In addition to obvious benefits such as making the most of existing infrastructure, the company believes a sequential development “avoids large activity surges and downturns.” The question matters because if the state ultimately decides against ConocoPhillips, another company could acquire the acreage and develop the project independently of the existing Colville River unit acreage.

Through sequential development, ConocoPhillips has tried to time the startup of new satellites at the unit to match the capacity of transportation and processing infrastructure.

Leases in limbo

In a June 15, decision, the state allowed the transfer of seven leases still within their primary terms but rejected the transfer of the remaining 15 leases that had passed into their 90-day secondary term when the Tofkat unit expired at the end of March 2016.

In justifying the rejection, then-Division of Oil and Gas Director Corri Feige offered two reasons: that the failure of ConocoPhillips to develop the acreage when it held previous leases suggested that the state might have a better chance of development if the acreage was made available in a future sale, and that transferring the leases would increase their royalties to a point that would jeopardize the economics of any future development.

ConocoPhillips appealed the decision to then-Department of Natural Resources Commissioner Marty Rutherford at the end of June, saying it violated existing policy.

“The idea that (ConocoPhillips) is disqualified from owning the leases because it once held these lands under other oil and gas leases is an unprecedented and baseless reason for denying the lease assignments. There is nothing in state law, regulation or past practice which states that a lessee only gets one chance at owning a state lease,” ConocoPhillips Alaska Inc. Land Manager David W. Brown wrote in the June 28 appeal.

Brown also pointed to recent transfers involving similar royalty burdens and questioned why the state would oppose the transfer of a lease within its secondary 90-day term.

Rutherford and Feige both resigned in the weeks after ConocoPhillips filed its appeal.

- ERIC LIDJI