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Fight over Moose Point lease continues Department of Natural Resources challenges Superior Court decision; Alaskan Crude disputes part of decision which it basically won KRISTEN NELSON Petroleum News
In early January 2009 the Alaska Department of Natural Resources’ Division of Oil and Gas terminated oil and gas lease ADL 389922, held by Jim White of Alaskan Crude Corp.
White appealed the decision in Alaska Superior Court.
After a March decision - in White’s favor - the case has been appealed to the Alaska Supreme Court by the state; White also has issues he wants the high court to address.
The 4,800-acre lease, some 25 miles northeast of Kenai, is the site of the Moose Point Unit No. 1, drilled in early 1978 by Amarex Inc. That well reached a total depth of 10,058 feet, was suspended in March 1978 and plugged and abandoned a year later.
Alaskan Crude applied to the Alaska Oil and Gas Conservation Commission in 2003 for a spacing exception to re-enter and test the well, a necessity because the well was within 1,500 feet of a property line.
In April 2003 AOGCC issued Conservation Order 488, allowing re-entry and testing of the well, but requiring further action prior to regular production to protect adjacent owners.
It said the well “may not be placed on regular production until the Commission takes additional action, upon petition, and after notice and hearing, to offset any advantage ACC may have over other owners by reason of re-entering Moose Point Unit #1 to the exception location and to allow affected owners to produce their just and equitable share of hydrocarbons.”
At the end of 2003 White submitted a plan of operations to the Division of Oil and Gas for re-entry of the Moose Point well. White had acquired the lease by assignment from Richard E. Wagner and others effective April 1, 2003. The primary term on the lease, which Wagner acquired in a 2001 state oil and gas lease sale, was 7 years.
Drilling activities In a March 31, 2016, decision Superior Court Judge Charles W. Ray Jr. ruled against DNR. He reversed the department’s Nov. 26, 2013, affirmation of termination of the lease and said the lease was reinstated in its original form. “ACC shall have a reasonable time to resume, and then diligently continue drilling in accordance with the Lease,” Ray said.
DNR issued a notice terminating the lease on Jan. 2, 2009, the judge said, “for the reason that ACC was not performing ongoing drilling operations that would have triggered automatic renewal.”
ACC appealed the lease termination Jan. 20, 2009, arguing that it was drilling under the terms of the lease.
On Jan. 27, 2009, “DNR conceded that the lease termination was erroneous and issued a letter retracting the lease termination,” explaining in its letter that the lease was extended “so long as drilling is continued with reasonable diligence and sustained production begins within 90 days after cessation of that drilling.”
DNR also required completion of the well by April 27, 2009; valid permits for all operations; and sustained production within 90 days of cessation of drilling.
The judge said that ACC asked DNR to reconsider its Jan. 27 decision arguing that it improperly imposed conditions inconsistent with the lease. DNR declined to reconsider and on Dec. 23, 2009, the agency again concluded that ACC did not continue to drill with reasonable diligence after the Jan. 27, 2009, letter of reinstatement.
White appeals White appealed the Dec. 23, 2009, decision to Superior Court in August 2012 and argued at an August 2013 hearing that there was an irreconcilable conflict between the Jan. 27, 2009, reinstatement and the original lease, statutes, regulations and AOGCC Conservation Order 488.
The AOGCC order made it impossible to comply with terms of the Jan. 27, 2009, letter because that order “prevented ACC from completing the well and entering sustained production within the 90 day deadline ordered by DNR,” the court said.
ACC also argued that DNR’s well completion deadline was contrary to terms of the lease.
The judge said DNR breached the lease on Jan. 2, 2009, when it sent the notice of expiration, and noted that DNR conceded that termination of the lease was in error.
Ray also said because DNR did not cure its breach, ACC was excused from its obligations under the lease because the lease required ACC to continue drilling with reasonable diligence and have valid permits for all operations, but the lease did not require completion of the well by any specific date nor to have sustained production within 90 days of the end of drilling.
And when DNR terminated the lease on Jan. 2, 2009, “ACC had no right to maintain or operate its equipment on the site so, quite correctly, began removing it,” the judge said.
“ACC was drilling diligently” before DNR breached the lease, was “diligent in challenging the lease termination and informing DNR of the consequences of the breach, including the difficulty of continuing drilling operations due to winter conditions,” the judge said in its order.
The order has been stayed pending appeal to the Alaska Supreme Court.
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