|
State conditionally approves Otter unit Cook Inlet Energy is pleased, aims to ‘prove up’ gas prospect; DNR decision on appeal clarifies Alaska policy on oil and gas units Wesley Loy For Petroleum News
Cook Inlet Energy LLC has won conditional approval to form a new oil and gas unit at the company’s Otter prospect on the inlet’s west side.
Alaska’s oil and gas director, Bill Barron, in May denied the unit application. But the Anchorage-based company appealed to the commissioner of the Department of Natural Resources.
Joe Balash, the acting commissioner, affirmed Barron’s denial. But Balash exercised his discretion under law to propose a modified Otter unit agreement.
Cook Inlet Energy could accept or reject the proposal, and on Oct. 8 the company announced its acceptance.
“We are very pleased to get this unit approved,” said David Hall, the company’s chief executive. “We will now focus our attention back to proving up the Otter prospect. During the appeal period we received a pipeline right of way approval from the DNR which will enable us to develop the field immediately upon encountering commercial quantities of gas.”
Cook Inlet Energy is a subsidiary of Tennessee-based, publicly traded Miller Energy Resources Inc.
State’s unit policy clarified The commissioner’s decision on appeal not only allows Cook Inlet Energy to consolidate and extend its Otter leases, it clarifies state policy on unit formation.
Specifically, the decision makes clear that an “exploration unit” is acceptable to the state. That is, unit status isn’t just for acreage ready for actual production.
Further, the decision shows the state is willing to approve a unit even if only one company holds the leases, as is the case with Otter.
Otter is a natural gas prospect about nine miles north of the ConocoPhillips-operated Beluga River gas field.
Cook Inlet Energy in January applied to form a 5,855-acre unit out of portions of four state leases.
The company previously had drilled an exploratory well, the Otter No. 1, on lease ADL 390579.
Technical problems plagued the project, however, and the company was unable to reach full depth. Cook Inlet Energy plugged the well in January, the commissioner’s decision said.
The company, in filing the unit application, was looking to avoid the loss of some of its Otter acreage. It faced an Oct. 1 deadline to restart operations on the Otter No. 1 well or lose the lease, and an adjacent lease was due to expire on Sept. 30.
The Otter unit approval has the effect of extending the leases. The unit will have a five-year term, the commissioner’s decision said.
Drilling obligations The commissioner essentially accepted the drilling commitments Cook Inlet Energy originally offered for the unit. Balash did, however, require the company to provide a few more specifics, such as estimated drilling start dates, well depths and bottom-hole locations.
Balash also imposed another condition: Cook Inlet Energy must post a $1.2 million performance bond, payable to DNR in the event of default on the unit agreement, including the associated plan of exploration.
The bond protects the state’s interest, the commissioner’s decision said, as the state could otherwise offer expired acreage in a future lease sale.
The hope is that Cook Inlet Energy eventually will produce at Otter, yielding royalty revenue for the state, the decision said.
Under the plan of exploration, the company must complete one of two options: re-enter and deepen the Otter No. 1 well, or drill a new exploratory well by March 31, 2015.
Further, Cook Inlet Energy will drill a delineation well by March 31, 2016.
The commissioner’s decision noted that Cook Inlet Energy could have utilized a new state law to secure a one-time extension of the expiring leases, rather than form a unit.
But Balash determined unitization offered at least some benefit over proceeding at Otter lease by lease.
No reservoir seen Balash found that Barron denied the Otter unit application primarily because Cook Inlet Energy had proposed a development plan that lacked “firm development commitments.”
Barron concluded, based on confidential geologic, geophysical and engineering data submitted by Cook Inlet Energy, that the company had shown a potential hydrocarbon accumulation but not evidence of a reservoir.
Cook Inlet Energy used a law firm, Crowell & Moring, to appeal Barron’s unit denial. The appeal noted the company already had spent more than $10 million on exploration activity at Otter. Further, the appeal argued state officials appeared to have unlawfully adopted a new policy against “exploration units.”
Balash, however, wrote that Cook Inlet Energy’s appeal repeatedly mischaracterized and misrepresented the Barron’s findings.
“In particular, CIE argues the Director found ‘that exploration units are not permissible,’ that ‘unitization is incompatible with exploration,’ and that ‘a unit can only contain a reservoir or be formed solely for production activities.’ The Commissioner has carefully reviewed the Director’s Decision and these alleged findings are nowhere stated or implied in that decision,” the commissioner’s decision said.
| 