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Court upholds Arctic Fortitude default Supreme Court finds that DNR acted properly by placing the unit into default in 2009, despite ongoing dispute over spill plan Eric Lidji For Petroleum News
Affirming a lower court ruling, the Alaska Supreme Court has upheld a 2008 decision by the Alaska Department of Natural Resources to place the Arctic Fortitude into default.
The ruling opens the door for the state to terminate the North Slope unit.
Arctic Fortitude-operator Alaskan Crude Corp. had claimed that a dispute with the Alaska Oil and Gas Conservation Commission constituted a force majeure event that made it impossible for the Texas-based independent to meet the work commitments in its unit agreement. The company also claimed that DNR unilaterally amended that unit agreement when it proposed new work obligations to bring the unit out of default.
After previously proposing to drill a well for both oil and natural gas, Alaskan Crude changed its plans and claimed it shouldn’t be required to get an oil spill contingency plan for its exploration work at Arctic Fortitude because it planned to drill a gas-only well.
The AOGCC denied that request, but Alaskan Crude appealed and said the length of the process constituted a force majeure, or an unexpected delay outside of its control.
The court said the dispute did not constitute a force majeure event because Alaskan Crude agreed to an amended plan of exploration after the AOGCC made its final ruling.
The court also noted that if an operator could call the appeal process a force majeure event, then “development could be stalled indefinitely over routine disagreements,” and added that Alaskan Crude had other options available to it, such as requesting a stay.
The court also found that DNR did not unilaterally amend the unit agreement by proposing a default cure because the agreement set out the process for curing a default.
The Arctic Fortitude unit is adjacent to the southern edge of the Prudhoe Bay unit.
Debate stems from c-plan The case stemmed from a dispute over oil spill response planning.
When DNR approved the three-lease Arctic Fortitude unit in June 2006, the unit agreement called for Alaskan Crude to workover and test the 1980’s Burglin 33-1 well, drill two additional wells and shoot a 3-D seismic campaign over the entire unit.
Although it originally intended to explore for oil and natural gas, a plan that would have required an oil spill contingency plan, Alaskan Crude first asked the state for a large reduction in its response planning standard and then asked that the well be classified as “gas only,” a designation that would have exempted it from needing a spill plan.
The AOGCC denied that classification and Alaskan Crude appealed the ruling.
Meanwhile, Alaskan Crude asked DNR for a one-year extension to the deadlines requiring it to get a rig to the Burglin pad and re-drill the well by Oct. 1, 2007, saying “winter tundra travel equipment shortages and summer tundra travel restrictions” made it impossible to meet the deadline. The state denied that request and kept the deadline.
Alaskan Crude appealed that ruling and requested a hearing. The state held a hearing in late September 2007, but Alaskan Crude did not attend. The two sides settled the appeal in early November by agreeing to an amended plan of exploration that required Alaskan Crude to move its equipment to the pad by May 15, 2008, and re-drill by Oct. 1, 2008.
Force majeure claim rejected In January 2008, Alaskan Crude claimed that its difficulties surrounding the oil spill contingency plan issue created a force majeure situation. The state disagreed.
Although the response did not constitute a formal ruling, Alaskan Crude appealed the decision. The state subsequently said that an appeal wasn’t relevant, but offered to consider the force majeure situation if Alaska Crude explained its case within seven days.
Alaskan Crude responded 11 days later by reiterating its right to invoke force majeure. In March, the state denied that request and in April Alaskan Crude appealed that decision.
The state told Alaskan Crude that the work commitments remained in place while the appeal process played out, but the company requested another extension, asking to have until March 31, 2009, to move a rig to the pad and until Oct. 1, 2009, to re-drill the well. Because the state didn’t act on those requests, Alaskan Crude defaulted on May 15.
That July, the state ruled that Alaskan Crude did not have the right to invoke force majeure over the AOGCC dispute and placed the unit in default. To cure the default, the state made Alaskan Crude pay a $60,000 security payment, move a rig to the pad by March 31, 2009, and re-drill by Oct. 1, 2009. Alaskan Crude made the $60,000 payment, but appealed the ruling to the Alaska Superior Court, saying that the state was wrong about the force majeure and that the default cure unilaterally amended the unit agreement.
The superior court affirmed the ruling in late October 2009 and Alaskan Crude appealed.
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