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Alaska Oil and Gas Conservation Commission denies Danco petition for forced unitization of leases into North Cook Inlet unit Commission hears case remanded from Alaska Supreme Court on the merits; issue of standing not addressed, but commission says that issue is open to consideration in any future petition brought by a person other than a working interest owner Kristen Nelson PNA Editor-in-Chief
After months of written and oral presentations, examination and cross examination, the Alaska Oil and Gas Conservation Commission has found no merit in a petition from Danco Inc. and Monte Allen to forcibly unitize two leases into the North Cook Inlet unit and has denied the petition.
The commission first denied the petition in 1997, saying then that because the leases in question expired shortly after petitioners filed for forced unitization in August 1996, any decision it rendered would be moot.
That decision was appealed. The superior court affirmed the commission’s decision, but the Alaska Supreme Court ruled in May 2000 that the commission could order unitization retroactive to the date of the petition and remanded the case for a hearing on the merits.
In a Dec. 3 decision, the commission itemized evidence by experts for the petitioners that the unit should be expanded and said it found that evidence neither credible nor persuasive.
The commission said it found evidence by witnesses for North Cook Inlet unit operator Phillips (Phillips Petroleum Co. and Phillips Alaska Inc.) that the existing unit encompasses the productive reservoir to be both credible and persuasive.
Issue of standing not addressed Jurisdiction over the case was returned to the commission effective August 2000 and in September 2000 the commission issued a procedural order stating it would first determine if the leases should be ordered unitized, and then decide the details of a plan of unitization, noting that that it would determine at that time whether it might be appropriate to defer to the Department of Natural Resources on some or all of the details of a plan of unitization.
DNR approved the existing voluntary North Cook Inlet unit.
In 1997 the commission said it had decided not to reject the petition on the ground that petitioners owned no working interest in the leases (Danco and Allen were overriding royalty interest owners, not working interest owners), but noted that decision “was made without notice to other interested parties and is subject to being revisited at the request of an interested party.”
Phillips argued in the present hearing that petitioners do not have standing to petition for involuntary unitization because they do not own any working interest in the leases.
The commission said in this decision that because the Supreme Court directed it to hold a hearing on the merits, it did not revisit the earlier decision. The commission also said Phillips had urged it to “decide the case on the facts so that the matter is finally resolved on the merits.”
The commission said it “decides this petition on its merits and does not address the standing issue. We observe, however, that the issue is open to further Commission consideration in any future petition for involuntary unitization brought by a person other than a working interest owner.”
Theory that unit “may” be draining leases The commission said it agrees with Phillips that petitioners have the burden proof “and believes that the involuntary unitization statute contemplates that a petitioner must show that the conditions for exercise of the involuntary unitization power have been met in order for that power to be exercised.”
The commission said that petitioners argued that because the hearing was bifurcated — with details of a unit to be determined after an expansion decision — that it was sufficient to show at this stage that the North Cook Inlet unit “may” be draining the adjacent leases.
“There is no merit to this notion, which would render futile and superfluous the considerable expenditure of time, effort and money in connection with the hearing that commenced last March and with several interruptions, ended in June. It is completely clear,” the commission said, “that it is was the purpose of that hearing, and not some future hearing, to present whatever evidence the parties wished to be considered on the question of whether the statutory conditions for involuntary unit expansion were met in this case.”
The commission said that even if the petitioners “may” be draining argument had merit, the evidence fails to show any reasonable possibility that the North Cook Inlet unit is draining gas from the Danco leases.
Petitioners’ evidence “not credible or persuasive” Petitioners’ presented three primary witnesses: Dr. James Givens, a petroleum engineer; David Lappi, a geologist and geophysicist; and Monte Allen, one of the petitioners.
Givens’ “various, and conflicting, proposed reservoir limits extending into the Danco leases are inconsistent with well control. Notably, at least one dry hole is present within each of the proposed reservoir limits,” the commission said, and further said that it found Givens’ testimony “inconsistent and self-contradictory and that his analysis as described in his testimony does not conform to generally accepted professional methods for petroleum engineering and is not credible or persuasive.”
The commission noted that it did not qualify Monte Allen as an expert, and said “his testimony on technical issues is not based on and does not reflect the application of generally accepted geological, geophysical, or engineering principles or techniques, and it is not credible or persuasive.”
“Mr. Allen also made a number of assertions concerning the alleged misconduct of unit or lease operators or state officials,” the commission said, and it said that it found “those assertions to be erroneous or irrelevant to the issues in this case or both.”
Lappi’s testimony focused on interpreting Phillips’ seismic data and the commission said that seismic and well control data show that areas Lappi “characterized as consistent with gas are likely to represent coal deposits and that, in any event, those areas are not continuous with the gas reservoirs in the NCIU.
“Hence,” the commission said, “if any gas exists under the Danco leases, it is not in reservoirs that extend from the NCIU.”
Of Lappi’s testimony on a gas-water contact, the commission said Lappi “misread and misinterpreted or selectively ignored the relevant well data.”
The commission said it “also finds that Mr. Lappi’s analysis as described in his testimony does not conform to generally accepted professional methods for petroleum geology or geophysics and is not credible or persuasive.”
Phillips’ witnesses “credible and persuasive” The commission also reviewed testimony of the five witnesses presented by Phillips and found testimony from each to be “credible and persuasive.”
John Horn, a retired Phillips manager, provided written testimony on the history of the North Cook Inlet unit. The commission said Horn “stated that it was the intention of Phillips to include within the NCIU all of the commercially productive gas regions in the area and that Phillips had no reason to exclude from the unit productive lands already leased by Phillips, including the lands within what later became the Danco leases.”
Area first leased in 1961, 1962 The area was first leased in 1961 and 1962. DNR approved the North Cook Inlet unit in 1967 — including leases that subsequently became the Danco leases at issue here. In 1972, the commission said, DNR required contraction of the unit “to conform to the presence of productive gas reservoir.” Acreage excluded from the unit eventually lapsed; subsequent leases composed of portions of the land excluded were allowed by their owners to expire without drilling.
Danco acquired its leases (ADL 369100 and ADL 369101) north of the unit in 1986. In 1988, Danco assigned all working interest ownership in the leases to Amoco Production Co., reserving an overriding royalty interest, fractions of which were assigned to others including Monte Allen.
ARCO acquired 100 percent of the working interest in the Danco leases in 1992 through drilling an exploratory well on an adjacent lease. In 1992, ARCO and Phillips cross-assigned interest in a number of leases, including the Danco leases. The primary terms of the Danco leases expired Aug. 31, 1996.
In April 1999 and August 2000, portions of lands comprising the former Danco leases were re-offered by DNR but received no bids.
Estimated recoverable gas an issue The commission said Givens said “estimates of recoverable gas in the NCIU have essentially doubled since the pool was discovered in 1965 and that this doubling indicates that the pool extends under the Danco leases.”
Givens compared “an early deliverability projection that was based on very little data to later material balance analyses” to show doubled reserves, the commission said, but the deliverability projection was done in 1967 based on only the Sterling formation and at a time when seven wells had been drilled and there was no significant production.
“To derive material balance reserves from a deliverability estimate, as Dr. Givens did, is a fundamental misapplication of this data,” the commission said, noting that neither Phillips nor its partners made any claims of gas in place at the 1967 hearing.
The commission said Givens referred to material balance analyses from a 1996 report by Geoquest on Cook Inlet proven reserves.
“Contrary to the suggestion that reserves estimates were recently doubled,” the commission said, “the Geoquest Report indicates that data from as early as 1975 … established a material balance trend that projects recoverable reserves of 2.36 TSCF, with GIP of 2.72 TSCF. The report found that 1.049 TSCF of gas remained in the Sterling and Beluga Formations in communication with the wells based on material balance calculations. …
“Utilizing the same Geoquest data and extrapolating back to day one of production,” the commission said, “a reservoir pressure very close to that actually measured can be demonstrated. This technique indicates that NCIU reserves have not changed significantly since the beginning of production. Any statement referring to a doubling of reserves is incorrect and ignores actual data.”
Area not l The commission also said that Givens “mistakenly assumes that more gas reserves means a greater areal extent of the reservoir.” Volume of gas contained in a reservoir depends on several factors, the commission said, including: length and width; thickness; gas saturation; net to gross sand ratio; porosity.
“Evidence submitted at the hearing shows that the thickness of the productive intervals in both the Sterling and Beluga formations is now known to be substantially thicker than was apparent or counted at the time of initial field development,” the commission said, and intervals counted as productive have produced more gas than expected.
The commission said that 3-D seismic surveys acquired by Phillips and ARCO over the North Cook Inlet unit provide much better quality and precision that the 2-D seismic available when the unit was formed and “subsurface interpretations presented by Phillips included rigorous calibration of 3-D seismic with all relevant well data, including NCIU development wells and Tyonek Deep exploratory wells drilled in the unit.”
This data demonstrates, the commission said, “that the areal extent of the Cook Inlet No. 1 Sand gas accumulation is marginally less extensive than estimated at the time of the 1967 Conservation Order No. 40 hearing. …
“The seismic data, as calibrated by well and production data, demonstrate persuasively that the Danco leases are structurally lower than 4260 feet subsea, the depth of the gas water contact in the most areally extensive NCIU gas reservoir. The Danco leases do not contain any portion of any productive gas reservoir within the NCIU.”
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