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Sullivan confirms unitization policy Says DNR will only approve an exploration unit if applicant has demonstrated the existence of a potential hydrocarbon accumulation Alan Bailey Petroleum News
Rumblings of discontent over the Alaska Division of Oil and Gas’ apparent reluctance to approve exploration units surfaced in June, when executives from several companies engaged in Alaska oil exploration sent a letter to Dan Sullivan, commissioner of the Alaska Department of Natural Resources, complaining about what the companies claimed to be the division’s infringement of state laws relating to oil and gas unitization. The Division of Oil and Gas is a division within the Department of Natural Resources.
The companies involved consist of ASRC Exploration, Brooks Range Petroleum Corp., Buccaneer Alaska, Great Bear Petroleum Operating LLC, Linc Energy, Royale Energy, Savant Alaska and UltraStar Exploration.
But in a letter dated Sept. 24 Sullivan responded by affirming his department’s unitization policies and saying that the Division of Oil and Gas approves exploration units in situations where the unit applicant has sufficiently established the presence of a “potential hydrocarbon accumulation” in the proposed unit.
Purpose of a unit A unit, a lease-management tool normally applied during the development of a proven oil or gas field, is a vehicle whereby several oil and gas leases with disparate leaseholders can be tied together as a single entity with a single ownership structure, to avoid ownership complications and conflicts when developing the field. However, Alaska laws also allow the formation of a unit over an exploration prospect, in a situation where the prospect spans multiple leases — the idea is to encourage an efficient exploration and delineation drilling program in a situation where different leases are owned by different people.
But the formation of a unit also has the effect of extending the terms of leases beyond their original expiry dates. So questions can arise over whether an application to form a unit is intended to aggregate lease ownership or whether it is a tactic to defer lease termination.
And the state regulations for unit formation give the commissioner of the Department of Natural Resources, or DNR, wiggle room to use discretion over unitization decisions: The commissioner must evaluate whether unitization will “promote conservation of all natural resources” and “promote the prevention of economic and physical waste,” while considering factors such as the geologic characteristics of a potential hydrocarbon accumulation and the unit applicant’s exploration and development plans, the regulations say.
In conflict with law? The companies objecting to current exploration unit policies said that DNR has been in conflict with state laws by only allowing unitization in situations where there is a proven hydrocarbon reservoir, rather than an unproven potential hydrocarbon accumulation.
“Companies are not going to invest in acquiring and exploring state acreage if DNR refuses to unitize leases where geologic data demonstrates resource potential,” the companies wrote in their letter to Sullivan. “Further, the division’s new policy has prevented multiple companies from conducting exploration activity, including drilling wells.”
Current policies, only allowing unitization of acreage where development is imminent, result in development delays, wastage and unnecessary environmental impacts, the companies wrote. Furthermore, the Division of Oil and Gas has changed its unitization policies without consulting with industry, the companies argued.
10 units approved In his response Sullivan said that every unitization application is unique and that the Division of Oil and Gas continues to approve applications “on the basis of a sufficient showing of a potential hydrocarbon accumulation.” Since January 2011 the division has received 15 applications of which 10 were approved, with five of those approvals being based on the existence of potential hydrocarbon accumulations, Sullivan wrote. The other five approved applications demonstrated both potential accumulations and the existence of hydrocarbon reservoirs, he wrote.
“DNR will continue to ensure that unitization promotes conservation, prevents waste and maximizes the ultimate recovery of oil and gas resources,” Sullivan wrote. “DNR will also continue to comply with its unitization regulations and state law and follow the established practice of forming units over a reservoir or potential hydrocarbon accumulation to develop the unitized area.”
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