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Bond hearings scheduled
AOGCC to hear appeals from operators on its increase in required well bonding Kristen Nelson Petroleum News
The Alaska Oil and Gas Conservation Commission raised bonding requirements for wells in Alaska earlier this year, intended to deal with the potential that operators would abandon wells, leaving the state to foot the cost for plugging and abandonment which could be many times the existing bond requirement of $100,000 for a single well and $200,000 for multiple wells.
The new regulations went into effect in May. In July, the commission notified companies with permitted wellheads of the amount of additional bonding required, which is based on the number of permitted wellheads: $400,000 per well for one to 10 wells; $6 million for 11-40 wells; $10 million for 41-100 wells; $20 million for 101-1,000 wells; and $30 million for more than 1,000 wells.
A number of companies have appealed the new amounts.
The commission has set dates for the first three hearings; it has other appeals, but dates for those hearings had not been set when this issue of Petroleum News went to press.
Malamute Energy A hearing on a reconsideration request from Malamute Energy has been set for Jan. 16 at 10 a.m. at the AOGCC’s Anchorage offices. The commission said it would also accept written comments through the end of the hearing.
Malamute Energy’s letter is from Leonard Sojka, the company president.
He said Malamute owns 97.5% of and is the designated operator for Renaissance Umiat LLC, which has two suspended wells on federal Bureau of Land Management leases at Umiat.
Sojka said Malamute currently has a $200,000 bond on file with AOGCC and has also posted bonds totaling $200,000 with BLM for the same two wells for what he said was the same regulatory purpose.
Because of the two sets of bonds, he told the commission, Malamute should only be required to post an additional $400,000. (That would bring the company’s bonding total to $800,000, AOGCC’s requirement for two wellheads.)
Sojka said the two wells at Umiat, drilled in 2013 and 2014, are good modern wells, neither of which will flow to surface without added pressure.
“The wells thus pose very little risk of rupture or environmental release,” he said.
In addition to the bonds already posted with the state and BLM, Malamute has $10 million in pollution liability insurance with the Alaska Department of Environmental Conservation.
“Therefore,” Sojka concluded, “the State of Alaska has very low economic exposure to costs from the Umiat wells.”
Alaskan Crude Corp. A hearing for reconsideration of the bonding amount for Alaskan Crude Corp. is scheduled for Jan. 23 at 1 p.m. at AOGCC’s Anchorage offices, with written comments accepted through the end of the hearing.
Alaskan Crude’s response is from attorney James B. Gottstein, who takes issue with the constitutionality of the commission’s actions, as well as with the fact that the commission’s letter was sent to the wrong address, so James White, president of Alaskan Crude, only received the July 9 letter July 24.
Alaskan Crude has three existing wells, Burglin 33-1, Mike Pelch 1 and Katalla KS-01 and the additional bonding amount would be $1 million (three times $400,000 less the existing $200,000 bond).
Gottstein said increasing bonding requirements for existing permit holders is not legal under the Alaska Constitution. He also said the commission’s new regulations “go beyond the scope of the authorizing statute.” He cites Alaska statutes on the commission’s bonding authority which describe a “reasonable bond” sufficient to plug dry or abandoned wells or repair a well causing waste, while the new regulations “go far beyond that allowed by the statute.”
Amaroq Resources LLC A hearing on an application for reconsideration of bonding amounts by Amaroq Resources is set for Feb. 18 at 10 a.m. at the commission’s Anchorage offices, with written comments accepted through the end of the hearing.
Amaroq’s request for reconsideration and hearing is from attorney William Bankston of Bankston Gronning Brecht.
Bankston said AOGCC told Amaroq its new bonding requirement would be $2.4 million for six permitted wellheads. Amaroq, previously Aurora Exploration, acquired five state leases and associated wells in the Nicolai Creek from Aurora Gas in a bankruptcy proceeding.
Amaroq posted the required $200,000 blanket bond - a requirement for approval of the lease transfers.
The Department of Natural Resources notified Amaroq in early July that a dismantlement, removal and restoration agreement between DNR and Amaroq might not be a sufficient substitute for AOGCC’s new bonding requirements.
Bankston said the DR&R agreement requires Amaroq to fund a trust account over a five-year period “for the amount independently determined to be required to dismantle, remove, and restore the surface of the Nicolai Creek Unit after production ceases,” with any residual funds in the trust account and a $500,000 bond held by DNR to be released only after Amaroq submits a letter from AOGCC stating that Amaroq has plugged and abandoned all Nicolai Creek wells to the satisfaction of AOGCC.
“Amaroq accepts responsibility for the full cost of plugging and abandoning the six wells at the Nicolai Creek Unit,” Bankston said, and has financial incentive to do the work because of the $700,000 (the total of the bonds and trust account).
He said the actual cost of plugging and abandoning the six wells “is significantly less than the $2,400,000 bond now required by the AOGCC,” and cites an estimate by J.E. Jones, former president of Aurora Gas, that AOGCC had approved a procedure to plug and abandon wells on Cook Inlet Region Inc. land at an estimated cost of between $100,000 and $250,000 per well. “Jones knows of no reason why the costs to plug and abandon wells in the Nicolai Creek Unit would be significantly different from the estimated costs related to the wells on CIRI land,” Bankston said.
He listed six grounds as the basis for the reconsideration request.
“AOGCC’s additional bonding requirement is not reasonable or based upon any articulated facts and appears to be a decision unsupported by any financial information, cost estimates, or bids for plugging and abandoning the Nicolai Creek wells.”
AOGCC requires an additional $2.2 million from Amaroq, in addition to the $200,000 bond the company already has for its wells. Bankston said the revised regulation “places the onus on an operator to challenge the increased bonding requirement, rather than placing the burden on the agency to first prove the necessity of the bond.”
Second, the additional bonding requirement retroactively applies a new bond requirement not in place when Amaroq acquired the leases, Bankston said, and since Amaroq already had a bond in place, the regulation “may not be retroactively applied to impose an additional $2,200,000 in bonding.”
Third, “AOGCC has violated Amaroq’s due process rights by issuing findings without a hearing,” Bankston said, arguing that an agency “must comply with notions of due process enshrined in the Alaska Constitution, Art. 1, sec. 7.”
The fourth ground is that the new regulation “places a disproportionate bond requirement on small scale producers.”
Bankston notes that the minimum bond per well in each of the four categories is $400,000 (for one to 10 wells), $150,000 (11-40 wells), $100,000 (41-100 wells), $20,000 (101-1,000 wells) and $29,970 (for more than 1,000 wells), with large companies receiving the most favorable treatment (those operating up to 1,000 wells), followed by those operating more than 1,000 wells.
“The practical impact of the new bonding requirements is to discriminate against small companies and discourages small operators.”
Fifth, Bankston says that forcing Amaroq to post an additional bond “constitutes a regulatory taking” which “could easily render Amaroq illiquid and torpedo its attempts to develop the Nicolai Creek Unit.”
And sixth, because “AOGCC has declined to consider a variance from the bonding requirements without allowing Amaroq an opportunity for a hearing,” which requires publishing notice, it “may unduly delay operations of the Nicolai Creek Unit.”
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