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Continued questions over AOGCC bonding Briefings in Aurora Gas bankruptcy case question the $3.6 million in bonding the commission requires for Nikolai Creek wells Alan Bailey
Ahead of a bankruptcy court hearing on Nov. 17 there have been court filings, questioning an order by the Alaska Oil and Gas Conservation Commission, requiring Aurora Exploration to post a $3.6 million surety bond if the company is to purchase the Nicolai Creek gas field from Aurora Gas. Aurora Gas and Corri Feige, a previous director of Alaska’s Division of Oil and Gas, have filed briefs, supporting Aurora Exploration’s position, opposing the high bonding level.
The bonding requirement would cover the cost of plugging and abandoning all of the gas field’s six wells, assuming a cost per well of $600,000. In the past, the commission has imposed a bond of $100,000 for a single well, and a bond of $200,000 for all of an operator’s wells in Alaska. The commission’s regulations allow the imposition of a higher bond than $200,000, if the commission sees fit.
AOGCC originally imposed a $6 million bond for Nicolai Creek, but with an alternative possibility involving Aurora Exploration having a lower bonding level if the company plugged and abandoned some other Aurora Gas wells that Aurora Exploration had no interest in purchasing. Following a hearing, the commission reduced the bonding level in the order to $3.6 million and removed the alternative remedy - the judge in the bankruptcy court had already kicked out the order as contravening bankruptcy law because of the alternative remedy in the order.
Purchase arises from bankruptcy Aurora Exploration’s proposed purchase of Nikolai Creek arises from the bankruptcy of Aurora Gas. As part of bankruptcy proceedings, Aurora Gas is trying to dispose of its assets and has agreed to sell Nikolai Creek to Aurora Gas. To take over as operator of Nikolai Creek, Aurora Exploration needs approval from both the Alaska Department of Natural Resources and the AOGCC. The company has agreed terms with DNR for provisions for the eventual restoration of surface lands at Nikolai Creek but has hit an impasse over the AOGCC bonding requirement.
Aurora Exploration has said that the bonding requirement would render the field uneconomic. And if the purchase of the field falls through, Aurora Gas does not have the financial resources to plug and abandon the Nikolai Creek wells. Consequently, the state would presumably have to pick up much or all of the plugging and abandonment costs. And, since there is no other purchaser for the field, the field would close, precluding the possibility of achieving maximum gas recovery.
Aurora Gas: no precedent for increase In its new filing, dated Nov. 8, Aurora Gas told the bankruptcy court that for decades transfers of field operatorships in Alaska have taken place upon submission of an application and the posting of a $200,000 surety bond. The adequacy of this bonding has never been the subject of testimony, discussion or estimation in any past application for a change of field operatorship, Aurora Gas wrote. And, since the AOGCC had previously only required Aurora Gas to post a $200,000 bond for all of its wells, including the Nicolai Creek well, why was the commission now requiring a major increase in the bond amount, especially since the bonding statutes and regulations have not changed since those Aurora Gas bonds were originally imposed, Aurora Gas asked. There are no other bonds of this magnitude imposed on oil and gas operators in the state and, thus, there is no precedent for this new bonding requirement, the company said.
Moreover, by issuing a revised version of a bonding order that the bankruptcy court had already declared illegal, AOGCC is in contempt of court, Aurora Gas argued.
Feige: no order required Feige told the court that there has been no past occasion in which, for a transfer of well operatorship, the AOGCC has issued a bonding order of the type issued for the Nikolai Creek wells. A change of operator requires the new operator to file with the AOGCC a standard form, signed by both the old and the new operators, along with a $200,000 bond. The AOGCC handles the form administratively, without issuing an order, Feige wrote.
Moreover, the only well surety bonds that the AOGCC has required in excess of $200,000 have been well-specific bonds issued in conjunction with enforcement orders following regulation violations, she wrote.
In June the AOGCC held workshops to discuss potential changes to the commission’s bonding practices. But proposed changes have not been implemented and the oil industry has expressed concerns about the proposals. The AOGCC has not scheduled any follow up workshops or hearings, Feige said.
Feige also commented that the AOGCC has a statutory mandate to prevent hydrocarbon waste. A requirement for a bond that causes economic condemnation of the gas field creates a waste of known gas reserves, she said. Aurora Exploration is managed by respected and credible professionals who meet all of the state’s requirements to function as an operator, she wrote.
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