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Commission hears final arguments in case to force Phillips to include Danco’s leases in inlet unit AOGCC will issue a decision within 30 days in a case that began in 1996 over source of expanded gas reserves in North Cook Inlet field Kristen Nelson PNA Editor-in-Chief
Briefs and oral arguments are complete in an application to the Alaska Oil and Gas Conservation Commission that would force Phillips Alaska Inc. to include two leases in its Cook Inlet unit. The commission will make a decision within 30 days, chair Cammy Taylor said Nov. 2.
The case was remanded to the commission for a hearing by the Alaska Supreme Court in May 2000. The case reached the court on appeal after the commission ruled in 1997 that since the leases expired just after Danco Inc. and Monte Allen applied to the commission, any decision it made would be moot.
Not so, the court ruled: “We hold that the commission has discretion to order unitization effective upon the date of filing of a proper petition and that its exercise of this discretion is a matter for case-specific determination rather than a matter of jurisdiction. Because the commission does not dispute that Allen's petition was proper when filed or that a retroactive unitization order would operate to extend Allen's leases, we reverse its order dismissing his petition as moot.”
Overriding royalty interests at stake Danco and Allen, who have overriding royalty interests in leases adjoining the unit to the north, have faced off in the commission hearing against unit operator Phillips Petroleum Co. and Phillips Alaska.
C.R. Kennelly represented the petitioners at the Nov. 2 final oral arguments; William Rozell represented Phillips.
Kennelly told the commission that the petition was the result of an estimated increase in gas reserves in the 1990s — information from Phillips, he said, caused gas reserve estimates to be more than doubled. But, he said, Phillips has refused to bring forward evidence it used to estimate reserves and, he said, has not even shared that information with its own expert witnesses.
He told the commission that it has the same power as a bankruptcy court to require parties to settle ownership — if that doesn't happen, he said, the commission has the authority to force agreement.
He also said that since this was only part one of a bifurcated hearing, all the petitioners had to prove was that gas may be being drained from the northern leases. That was shown, he said, by testimony from David Lappi based on Phillips' three-dimensional seismic over the northern leases.
Kennelly asked the commission to issue an interim rule forcing the parties to sit down and agree. If an agreement is not reached, he said, then the commission should force Phillips to produce data it hasn't even shared with its experts witnesses in this case, data which the commission could look at in closed session.
Burden on petitioners Attorney William Rozell, representing Phillips, told the commission Nov. 2 that the case is about reviewing evidence put on by the petitioners and the petitioners, he said, have not shown the presence of any gas under the Danco leases.
The petitioners have not shown, he said, that unitization would increase production or reduce waste, and haven't addressed the issue of cost at all. The statutes require, Rozell said, that additional production from unitization exceed any additional cost.
Rozell said the evidence — both well control and seismic — shows that the reservoir is within the unit boundaries. Evidence from the petitioners, he said, came down to “it could be” and their expert witnesses presented conflicting testimony.
Unitization first decision Post-hearing memorandums have been filed by both sides. (See story in Oct. 14 issue of PNA on petitioner's post-hearing memorandum, filed Oct. 1.)
In Phillips' post-hearing memorandum, filed with the commission Oct. 29, Rozell said that the petitioners, as overriding royalty interest holders, do not hold correlative rights in the leases and do not have standing to petition for involuntary unitization. The Supreme Court acknowledged the commission's argument that Danco and Allen, as overriding royalty holders, do not have correlative rights, he said.
Overriding royalty holders do have rights, Rozell said, but those rights come into play only after the commission determines that there are grounds for compulsory unitization. Because of the unique history of this proceeding, he said, “we find ourselves in the odd position of having a hearing on the merits first, while a decision on standing has been deferred.”
AOGCC has no obligation to prepare Danco's case Rozell said the commission “has gone to extraordinary lengths” to ensure the petitioners have had full opportunity to prepare and present their case, even drawing protests from Phillips that it “was going too far and unfairly prejudicing Phillips.”
Rozell said the commission allowed Danco to change its case from pre-filed testimony and later, “identified public files that Danco's experts had overlooked or ignored and gave them a chance in the middle of the March hearing to review those records and again change their case.” Then the commission extended and postponed the hearing, gave Danco opportunities to incorporate more information into their evidence, “and to completely re-present their case, even though the records and documents had always been available to Danco and their failure to use them in preparing its original case was inexcusable.”
The petitioners have argued, Rozell said, that the commission has the duty to investigate their claims. But, he said, the commission “was set up as a separate, quasi-judicial agency primarily to ensure that conservation interests involving oil and gas resources are protected… It has no right or duty to pursue the strictly commercial interests of one party against another party, as Petitioners contend.”
Not little old lady with limited funds Rozell said the petitioners have compared “themselves to the proverbial little old lady with limited funds, no sophistication and only a tiny royalty interest.”
But, Rozell said, Monte Allen “describes himself as very experienced and the seventeenth largest leaseholder in Alaska” and Dan Donkel is an experienced player in the oil patch.
“The fact of the matter is,” Rozell said, “Petitioners are sophisticated speculators who make no effort to explore, develop or produce on their own, but rather hope to attach themselves to the work, investment and expertise of others and extract a share of their profits. Danco contends that its claims in this proceeding should be valued at over $200 million… If there were any legitimate evidence supporting that claim, Petitioners would almost certainly have generated additional interest and financial backing for their case.”
Phillips is asking the commission to find that the Danco petition is unsupported by the evidence and to dismiss it.
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