Providing coverage of Alaska and northern Canada's oil and gas industry
January 2020

Vol. 25, No.04 Week of January 26, 2020

AOGCC hears first appeal to new bonding

Malamute Energy tells commission BLM already requires $1.25M in bonding for the two wells, which are on federal acreage at Umiat

Kristen Nelson

Petroleum News

Malamute Energy Inc., owner of 97.5% of Renaissance Umiat, and the field’s designated operator, has two suspended wells on U.S. Bureau of Land Management leases at Umiat.

At a Jan. 16 Alaska Oil and Gas Conservation Commission hearing, asking for reconsideration of AOGCC’s new bonding requirements for the wells, issues included the bond amount and who would be responsible for plugging and abandoning the wells, should Malamute fail to do the P&A work.

Malamute has a $200,000 bond on file with AOGCC for the wells, but under the commission’s new bonding regulations, which went into effect last May, Malamute would be required to post bonds totaling $800,000, $400,000 per well for one to 10 wells, an increase of $600,000 in their bonding with AOGCC.

After the commission notified operators of increased bonding requirements, a number of smaller operators, including Malamute, applied for reconsideration.

The Jan. 16 hearing was the such the commission has held on the reconsideration requests.

Malamute holds no state acreage and its only wells are the two on the federal leases at Umiat in the National Petroleum Reserve-Alaska.

BLM primary regulator

Malamute Energy President Leonard Sojka told the commission in testimony at the hearing and in a Jan. 16 letter that BLM is the primary regulator of the two leases in the Umiat unit, which was formed last fall. Malamute’s bonds with BLM had been $100,000 each for the two wells, a total of $200,000, and in a July 9 letter requesting reconsideration Malamute said since it had $200,000 in bonds with BLM, it was requesting that amount should be considered and it should only be required to post an additional $400,000 - with the existing AOGCC bond and the existing BLM bonds making up the remainder of the $800,000.

But the BLM bonding changed, Sojka said, with a BLM bond adequacy review in late 2019 resulting in an increase in required bonding for Umiat from $200,000 to $1.25 million, with half of the increase, $525,000, required to be posted by early March.

With that increase from BLM, Sojka said Malamute is now requesting that AOGCC not increase its bonding beyond the existing $200,000. The increase, he said, would be duplicate bonding for the two wells.

Feds responsible

Rob Brumbaugh, section chief for oil and gas for BLM’s Alaska office, said at the hearing that BLM’s “position is that if an operator were to default on their obligation on federal leases in the NPR-A, the federal government would be responsible and hold the liability.”

Commissioner Dan Seamount asked Brumbaugh if BLM would go after AOGCC bonding if it had to P&A the Umiat wells and the $1.25 million wasn’t enough.

Brumbaugh said there is no way for BLM to get the AOGCC bond.

In response to questions about how BLM came up with the $1.25 million, Brumbaugh said specifics are run through a worksheet and the result is the bonding amount required.

Sojka told the commission there was no environmental risk from the wells, as “neither well will flow to surface without incremental pressure.” He also said the wells “may provide significant benefit to a new partner, who may find the wells useful for further exploration or production activities.”

Commissioners questioned the ability of BLM to cover plugging and abandonment with $1.25 million.

Commissioner Jessie Chmielowski said in 2018 the cost of P&A for the two wells was projected at $2.9 million.

Sojka said he thought a round number of $3 million was still reasonable, but he said about two-thirds of that cost was the logistics of getting to Umiat. While he said Malamute was not ready to P&A the wells, there have been discussions of cheaper approaches with modular equipment flown in and the work done in summer without a snow road.

Plans for Umiat

Commission Chair Jeremy Price asked Sojka for the history of the Umiat leases and what is planned there.

Malamute Energy was formed in 2016 by Linc’s creditors to acquire Renaissance Umiat (owned 97.5% by Linc), Sojka said. He told the commission his background is in finance and said he has been the company’s sole employee since late 2016.

In the Jan. 16 letter Sojka said, “Malamute shareholders are former Linc Energy creditors who inherited the Umiat wells and the plug and abandonment obligation on which Linc had effectively defaulted.”

Linc Energy drilled the two modern wells at Umiat in 2013 and 2014 but defaulted on its debt in 2016 and filed for bankruptcy protection.

In the Jan. 16 letter Sojka said the company’s focus since acquiring Umiat has been to de-risk technical challenges at the field, “in hopes of attracting an oil industry partner.” Malamute conducted a multidisciplinary reservoir workshop and conducted extensive tests on Umiat oil and those tests, he said, “confirmed that both the gasoline and the diesel fractions are low in total sulfur and have less than detectable readings for dibenzyl disulfide. That makes the Umiat oil a good candidate for producing Ultra Low Sulfur Fuels for sale into the Alaska North Slope market.”

He said Malamute wants to find deeper oil at Umiat, because while reserves in the permafrost at the field conceivably could be produced, nobody in Alaska is doing that.

Sojka said Malamute has three technical studies underway the University of Alaska Anchorage, the first two of which are complete and the third expected to be complete soon. In response to a question from Seamount, Sojka said the studies were being done by Prof. Shuvajit Bhattacharya. Bhattacharya is an assistant professor in UAA’s Department of Geological Sciences.

Sojka said there was now a unit with BLM, formed last year, with obligations over the next five years.

Asked by Chmielowski about the obligations of the unit, Sojka said it commits the company to drill another well within two to three years. According to AOGCC’s new bonding regulations which require $400,000 per well for operators with one to 10 wells, adding a third well would raise the commission’s bonding requirement to $1.2 million, close to the BLM bond requirement.

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