Alaskan Crude wants reconsideration

Small independent says it wasn’t given fair shake at Arctic Fortitude, claims state isn’t interested in helping the little guys

Eric Lidji

For Petroleum News

In its request for the state to overturn a recent ruling terminating the Arctic Fortitude unit, operator Alaskan Crude Corp. is making a technical case as well as a philosophical case.

Technically, the San Antonio-based independent continues to argue that its plans to re-enter a well south of the Prudhoe Bay unit shouldn’t require an oil spill contingency plan.

Philosophically, Alaskan Crude believes the policies of the Palin and Parnell administrations have kept small, homegrown oil companies from producing in Alaska.

The Alaska Department of Natural Resources terminated the Arctic Fortitude unit in May, following nearly four years of legal actions between the state and Alaskan Crude.

But the company continues to argue its case.

The original unit agreement called for Alaskan Crude to workover and test the Burglin 33-1 well drilled in the 1980s, among other activities. Throughout the permitting process, the company sought a reduction in its planning standard for oil spill response efforts.

The Alaska Oil and Gas Conservation Commission denied the request, though, and Alaskan Crude appealed the ruling. That appeal continues to play out in state court.

The Alaska Department of Natural Resources — and the Alaska Supreme Court in an October 2011 ruling — believe Alaskan Crude changed its plans for the project. They said Alaskan Crude originally signaled plans to explore for oil and gas at Burglin, but later requested a reduction in the planning standard more in line with a “gas only” well.

Alaskan Crude describes policy revisions.

According to the company, the Murkowski administration saw “no reasonable chance that an uncontrollable oil spill could occur when the Burglin 33-1 well’s casing would be reentered and flow retested at the same Ugnu formation level that was first originally tested in 1985,” because of earlier test rates. But when the Palin administration came into office in late 2006, “Both the new DNR commissioner and staff, and the AOGCC, without any new data, declared that there now could be uncontrolled oil spill during the reentry of the well’s casing and during the testing of the Ugnu heavy crude interval.”

By requiring the company to draft a contingency plan, hire a contractor and build storage facilities, the decision added about $18 million to the project, according to Alaskan Crude, “to prepare for an oil spill that that had no reasonably chance of happening.”

With the issued unsettled, Alaskan Crude said it could not meet original deadlines for mobilizing a rig at the unit. The state disagreed and put the unit in default. Alaskan Crude appealed, saying its AOGCC appeal prevented it from moving ahead on the project.

The Alaska Supreme Court ruled the appeal did not constitute a force majeure event.

The default “severely clouded and slandered” the leases, making it difficult to maintain the investment dollars independent companies depend upon to bring exploration plans to fruition, according to Alaskan Crude. “The state is well aware that leases with titles clouded by default will not be developed because nobody will invest in them,” Alaskan Crude President James W. White wrote in his June 22 request for reconsideration.

It is uncommon but not unheard for an operator to default on a unit agreement, especially among smaller companies. Furie Operating Alaska is currently drilling at the Kitchen Lights unit after numerous defaults by its precedent companies and former partners.

Additionally, Alaskan Crude doesn’t feel it should have been required to make annual lease rental payments throughout the process and during the current AOGCC appeal.

When the Murkowski administration approved the unit in June 2006, it said Alaskan Crude, if successful, “would serve as an example for other similarly sized firms to follow, thereby promoting interest in further development of North Slope oil and gas reserves by companies of a similar size, of which there are many hundreds in North America.”

Using the decades-long delay at Point Thomson as an example, Alaskan Crude believes the state is no longer supporting small companies as much as it supports larger companies. The Murkowski administration put the Point Thomson unit in default and the Palin administration maintained that hard line stance. The Parnell administration recently settled with operator ExxonMobil in an attempt to end a long-running legal battle.

Although Alaskan Crude is based in San Antonio, White traces his history in Alaska back to the 1970s, including early oil exploration efforts and raising a family in the state.

“Alaskans are being warned the pipeline is in dire jeopardy of shutting down because too few wells were being drilled on the North Slope,” White wrote. “Still … not one homegrown Alaskan firm is producing oil and gas in the state of Alaska.” Noting that the history of the Alaska oil industry includes no local operators, he added, “There is now nothing on the horizon that indicates this will change unless the perspective of the state and its agencies change with regard to the requirements for such companies change.”