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DNR upholds rejection of Cohoe unit Says Aurora Gas has not shown proposed Kenai Peninsula unit overlies oil or gas pool; lease expiry not a reason for unitization Alan Bailey Petroleum News
Since July 2010 Cook Inlet independent Aurora Gas has been trying to persuade the State of Alaska to combine a couple of state leases near the community of Kasilof on the Kenai Peninsula with an adjoining Cook Inlet Region Inc. lease to form the Cohoe unit. The state leases had been due to expire in September 2010, but Aurora said that it wanted to conduct a seismic survey and do exploratory drilling in the proposed unit — unitization of the leases would head off the lease termination.
But all came to naught on May 3 when Dan Sullivan, commissioner of the Alaska Department of Natural Resources, issued a decision upholding an earlier Division of Oil and Gas rejection of the unitization request.
Sullivan said that he affirmed the finding of the division’s director, William Barron, that it is “not in the state’s interest to allow Aurora to retain the leases and benefit from the lease term extensions provided by unitization without having demonstrated the need for unitization.”
“Aurora is obviously disappointed by the commissioner’s decision to affirm the director’s denial of the Cohoe unitization,” Ed Jones, president of Aurora Gas, told Petroleum News in a May 8 email. Aurora does not plan a further appeal of the decision, he said.
Cohoe well The leases in question include the Cohoe Unit No. 1 well, drilled by Unocal in 1973 to a depth of 15,683 feet, presumably in search of oil. The well bottomed out in the West Foreland formation. Drill stem tests conducted in nine zones at various levels in the well detected small amounts of natural gas in three of the zones, two in the Sterling formation and one in the Beluga formation.
Two consortia acquired the state leases in the 2003 Cook Inlet areawide lease sale, with Aurora subsequently acquiring the leases in March 2004. And in August 2006 Aurora leased the Cook Inlet Region Inc. acreage that forms part of the package that Aurora has subsequently wished to unitize.
According to Sullivan’s May 3 decision document, no one has conducted any exploration work on the three leases in question over the past seven years, although Aurora has conducted a re-assessment of seismic and well data relating to the leases — in addition to the drilling of the 1973 Cohoe well, a seismic survey was conducted on the acreage in 1972.
After Aurora submitted its unitization request in 2010 there was a delay of a year or so in dealing with the request, while state officials waited for Aurora to submit a unit agreement that included both the state and Cook Inlet Region Inc.
And under that unit agreement Aurora proposed a two-year plan of exploration involving the re-entry of the old Cohoe well and the gathering of some new 3-D seismic data. Aurora told Petroleum News in 2010 that its preference would be to first conduct the seismic survey, to determine whether the Cohoe well had penetrated the crest of the geologic structure at Cohoe — depending on the seismic results the company might drill a new well in a different location, the company said.
The company also said that it hoped to head off lease termination, if necessary, by re-entering the Cohoe well before the lease expiry date. The company subsequently said that, because of drilling commitments on the west side of the Cook Inlet, it had not proved possible to move the Aurora Well Services No. 1 drilling rig to the Cohoe location prior to that lease expiry date.
Timely development In his decision document Sullivan said that the primary purpose of state oil and gas leasing is to secure the timely development of state resources and that, under state statutes, the unitization of leases is intended for conserving an oil or gas pool to prevent waste; to ensure the maximum recovery of oil and gas; and to protect the correlative tights of people owning interests in the affected land.
“Thus, to justify a unit, the lessee should demonstrate that the leases contain a pool or field, that unitization will promote the efficient recovery of oil or gas, and that the lessee’s plan to move the unitized leases into production requires unitization to conserve the resource and prevent waste,” Sullivan wrote.
In the case of the Cohoe leases, Aurora Gas has not demonstrated that the proposed unit area lies over a hydrocarbon reservoir or pool, Sullivan wrote. No well has been drilled and tested that demonstrates the existence of hydrocarbons in paying quantities in any of the leases proposed for unitization, he wrote. And data presented by Aurora do not define and delineate a geologic structure that would be capable of trapping an oil or gas pool, he wrote.
Aurora had argued that the proximity of the Cohoe well to the border of the Cook Inlet Region Inc. land led to a need for unitization of the state and private leases, to enable development of the land to proceed — the Cohoe well is in state land but is located within 20 feet of the boundary with the Cook Inlet Region Inc. land, Aurora said.
However, Sullivan said that the lack of evidence for a hydrocarbon pool in the leases rendered moot any other arguments for unitization.
Lease expiry irrelevant Moreover, no statute or regulation gives lease expiry as a basis for unitizing leases, and the expiration of the leases does not in itself justify the formation of a unit, Sullivan wrote. And a review of past state unitization decisions does not support a contention by Aurora that the state has previously granted the unitization of leases when needed for exploration, he wrote.
“Unitizing state leases in this situation would make the primary term of the lease meaningless,” Sullivan wrote. “If these non-producing leases that have not been adequately explored during the primary term can be unitized on eve of their expiration date, and then remain in force through unitization, this essentially circumvents the lessee’s statutory and contractual obligation to explore and develop during the primary term of the lease.”
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