Village corporation says ConocoPhillips will drop drilling effort

Despite state demands, ConocoPhillips will not drill North Slope acreage this winter that it spent most of 2016 trying to acquire, according to an executive of the company that controls access to the land.

Kuukpik Corp. CEO Lanston Chinn said in a March 10 interview that his company was recently informed by ConocoPhillips officials that the major producer would not drill an oil exploration well on jointly held leases near the Native village of Nuiqsut in the remaining weeks of the waning North Slope winter work season.

ConocoPhillips will not move forward with the exploration project it calls Putu, “because of what the state has stipulated,” Chinn said.

A spokeswoman for ConocoPhillips Alaska would not confirm or deny Chinn’s assertion.

On Feb. 17, Department of Natural Resources Commissioner Andy Mack rescinded his November decision to expand the large Colville River oil and gas unit operated by ConocoPhillips.

The producer had petitioned the department in March 2016 to obtain the leases totaling about 9,100 acres and expand the unit on the premise it would drill the acreage this winter and could subsequently develop it faster than any other company.

However, the company notified DNR in December it would not drill the first Putu well until next winter after Nuiqsut residents voiced concerns about the program.

“Due to the proximity of the project to the community of Nuiqsut, (ConocoPhillips) has determined that more time is needed to engage the community and educate residents about the project,” Conoco wrote to DNR in December.

Kuukpik Corp., the Native village corporation of Nuiqsut, holds surface rights to the acreage. The state and Arctic Slope Regional Corp. jointly control subsurface mineral rights on the leases in the former Tofkat Unit.

Chinn said Kuukpik has a surface access agreement with ConocoPhillips that predates the current company and was once held by ARCO, which sold its Alaska holdings to a ConocoPhillips predecessor company in 2000.

“Ever since this agreement with ARCO was put in place it’s always been there to facilitate ongoing communication with the (oil) company so that there would be balance and (Kuukpik) would have something to say about its own future going forward,” he said.

ConocoPhillips acquired the leases in question — with Mack’s approval — from Brooks Range Petroleum Corp.

The small Anchorage-based independent held the leases for years when they made up the now defunct Tofkat Unit but never drilled them, citing an inability to reach an access agreement.

As a result of the inactivity, the state began the long process of revoking the leases from Brooks Range and dismantling the Tofkat Unit back in 2013.

Mack’s November transfer of the leases to ConocoPhillips reversed an earlier ruling by former Division of Oil and Gas Director Corri Feige.

She originally denied the ownership change in June last year on the grounds that Brooks Range only held a majority of the Tofkat Unit leases because of an automatic 90-day lease extension — a last ditch opportunity to work the leases — that kicks in after the unit holding the leases is terminated.

Subsequently, Feige denied ConocoPhillips’ application to include the leases in the Colville River Unit because the company did not hold the leases. She also noted that the leases would be in high-demand for their oil potential should they go back up for bid in a lease sale and thus could generate additional revenue for the state.

The acreage in question is adjacent to the southern edge of both the Colville River and Pikka units. Independent Armstrong Energy operates Pikka and is in permitting for its large Nanushuk project in the unit, which Armstrong estimates could produce at least 120,000 barrels of oil per day once it is fully developed.

Armstrong founder and CEO Bill Armstrong said in a recent interview with the Journal that results from the exploration well his company drilled this winter south of Pikka indicate the existing Nanushuk prospect reserves could double to more than 2 billion recoverable barrels.

According to Mack, a plain reading of the regulations regarding lease transfers does not specify which company must work the leases in the 90-day window, so he approved Conoco’s acquisition of the area also on the premise it would drill this winter.

ASRC, which has disagreed with the state’s actions regarding the Tofkat-Colville leases for years, according to letters to DNR, approved the assignment of its stake in the leases to ConocoPhillips last May.

An ASRC spokesman did not return multiple requests for comment on the issue.

Kuukpik generally supports development of area, but asked ConocoPhillips to reevaluate its plans to drill the first Putu exploration well within about three miles of Nuiqsut on the worry that exhaust from the diesel-fired drilling rig would land in the village, according to Chinn.

“We were discussing the particular location (of the drill site) and its proximity to the village. Basically, we wanted them to look at other alternatives because it was exceedingly close to the village,” he said.

Chinn added that talks with ConocoPhillips did not go into much more detail once the producer informed Kuukpik it would not be drilling at all this winter.

“It’s my job to ensure that we approach development in a balanced, responsible manner,” he said further.

Mack stipulated in his Feb. 17 decision that Conoco not only drill the exploration well this winter, as it previously told the state it would, but also offer up $12.5 million in performance bonds and a $1.5 million lease bid replacement payment to DNR by March 1. The in-lieu bid payment equates to $164 per acre for the Colville expansion area.

According to Mack, a 1992 agreement between Kuukpik and ASRC, under which Kuukpik has agreed to allow oil and gas development on the leases, trumps any need for additional community engagement before drilling.

Mack also prescribed that ConocoPhillips must have “sustained production” from the expansion area by June 2022, at which point $10 million of the performance bonds would be returned to the company.

ConocoPhillips estimated first oil from the Colville expansion area would be in late 2024 in its proposed work program.

What will happen to the leases if they ultimately do not become part of the Colville River Unit is unclear.

DNR officials have declined to discuss the specifics of the issue until a requisite 20-day period to allow for stakeholders to request reconsideration by the DNR commissioner closes. Because Conoco officially received Mack’s decision Feb. 23, the reconsideration period closes March 15, according to department spokeswoman Elizabeth Bluemink.

As of midday March 14, DNR had not received any requests for Mack to reconsider his Feb. 17 decision, Bluemink said.

Look for updates to this story in an upcoming issue of the Journal. Elwood Brehmer can be reached at [email protected].

03/14/2017 - 3:07pm