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AOGCC agrees to $200,000 bond for P&A of Nicolai Creek gas wells
The Alaska Oil and Gas Conservation Commission is allowing a $200,000 surety bond for the plugging and abandonment of the wells in the Nicolai Creek gas field on the west side of Cook Inlet, according to filings in federal bankruptcy court in Alaska. As part of the bankruptcy proceedings for Aurora Gas, the field’s current owner, Aurora Exploration wants to buy the field and needs AOGCC approval of the change of field operator.
As a condition for the field operator change, AOGCC had ordered that Aurora Exploration post a $6 million bond with, as an alternative, the company posting a smaller bond but also undertaking to plug and abandon some of Aurora Gas’s other wells. After that order was found to be illegal under U.S. bankruptcy law, the commission reduced the bonding requirement to $3.6 million.
Aurora Exploration has commented that these exceptionally high bonding levels would render the field uneconomic and that the bonding requirement, much higher than the $200,000 that the commission has customarily required, was restricting Aurora Gas’s ability to transfer its gas field asset.
Settlement AOGCC has now agreed to a $200,000 bond, provided that Aurora Gas and Aurora Exploration release the state and AOGCC from any liability arising from AOGCC’s previous orders and any other aspect of the bankruptcy case. Aurora Exploration has claimed loss of income as a consequence of the delay and possible denial of the gas field transfer. The company has appealed AOGCC’s earlier bonding requirements in state Superior Court but, under the terms of the new agreement, that court case will be dismissed once the agreement becomes goes into effect.
Aurora Gas has requested bankruptcy court approval of the proposed settlement.
Despite the similarity in the names, Aurora Gas and Aurora Exploration are completely separate companies, with different ownership and management.
In a Dec. 12 email, Scott Pfoff, president of Aurora Exploration, told Petroleum News that his company is pleased to have reached a mutually agreeable settlement with the AOGCC that can enable the purchase transaction for the Nicolai Creek field to proceed.
“This agreement facilitates continued production, prevents waste of reserves, maintains field employment and avoids the need for state funded plugging and abandonment of six gas wells along with the associated surface facilities,” Pfoff said. “We look forward to consummation of the transaction, possibly by year end, and restoring Nicolai Creek unit production to profitable levels during 2018.”
AOGCC concerned The AOGCC is concerned about the bonding levels for the plugging and abandonment of wells in Alaska. In particular, the commission worries that, if operators do not have the financial wherewithal to remediate defunct wells, the state will be forced to pick up the tab for the remediation work. Under current regulations, AOGCC requires bonding of not less than $200,000 for blanket coverage of all of an operator’s wells in Alaska. And, whereas under these regulations the commission can assess a bond higher than that, the commission has in the past stuck to the $200,000 level, except in response to regulation violations.
The Nicolai Creek case has also raised questions over setting a precedent for issuing a new bonding order when transferring well operatorship, rather than simply allowing the transfer of the existing bond requirement to the new operator.
During a hearing on the Nicolai Creek bonding order, AOGCC presented testimony that the plugging and abandonment of the Nicolai Creek wells would cost substantially more than the $200,000 bonding level - hence the order for a larger bond. However, the actual cost of plugging and abandonment depends on the method used. And, with Aurora Gas bankrupt, a collapse of the sale of Nicolai Creek field to Aurora Exploration because of the bonding issue would result in the field being abandoned and the state having to pick up much of the tab for field and well remediation.
Proposed regulatory change Separately from the Nicolai Creek issue, the AOGCC has been proposing changes to the bonding requirements for wells in Alaska. The commission has proposed that an operator must demonstrate to the commission that the bonding of the wells is sufficient to ensure that the wells can be appropriately plugged and abandoned. The commission held a workshop on this topic in June, but the issues raised have yet to be resolved.
The hearing over AOGCC’s Nicolai Creek bonding order raised questions over whether this order could legally set a precedent for subsequent bonding orders for other wells, especially given the lack of resolution of bonding regulation change proposals. The oil and gas industry has argued that proposed dramatic increases in bonding levels would chill investment and decrease the recovery of Alaska’s oil and gas resources.
- ALAN BAILEY
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