North Slope powers take on state over rich oil leases

  • This map shows the proposed exploration plan for ConocoPhillips to drill the “Putu-1” well (seen at center outlined by thick red border) just northeast of the village of Nuiqsut. ConocoPhillips acquired the leases from Brooks Range Petroleum Corp. and added them to its Colville River Unit under a decision by the state Natural Resources Commissioner Andy Mack, who subsequently reversed his decision after the company informed DNR that it would not drill as it had promised this winter. (Map via ConocoPhillips Nov. 4, 2016, filing with Alaska DNR)

ConocoPhillips insists demands by top state Natural Resources officials to push the company to drill contested leases near a North Slope village and put up millions in bonds to back the activity are arbitrary and based on a flawed recollection of key events.

The biggest North Slope oil producer made the claims in a March 15 filing requesting DNR Commissioner Andy Mack reverse his mid-February decision to prevent the company from adding the leases to the large Colville River oil unit it operates.

On Feb. 17, Mack rescinded his own decision made last November to allow ConocoPhillips to acquire oil and gas leases previously held by the small Anchorage-based independent company Brooks Range Petroleum Corp. and fold the leases into the Colville River Unit.

The 22 leases in question — once part of the now defunct Tofkat Unit — cover about 9,100 acres surrounding the Village of Nuiqsut on the southern edge of the Colville River Unit. ConocoPhillips produces about 60,000 barrels per day from Colville, commonly referred to as the Alpine oil field.

The area is also adjacent to the large and growing Nanushuk oil prospect being pursued by partners Armstrong Energy and Spanish major Repsol.

While a small area in North Slope terms, its proximity to a large, established oil field and another prospect that could hold more than 2 billion barrels of recoverable oil, according to Armstrong Energy, make it a sought-after and potentially rich piece of property.

Mack’s November decision to award ConocoPhillips the leases and expand the Colville unit was largely made on the premise the company would drill a first exploration well into the acreage this winter, and assuming oil was found, start the multi-year process of developing the area for sustained production, according to DNR documents.

However, ConocoPhillips informed the department in mid-December that it would not drill this winter following discussions with Nuiqsut leaders and Kuukpik Corp., the Native village corporation for Nuiqsut and surface rights holder of the lease area.

Kuukpik CEO Lanston Chinn said the Native corporation generally supports developing the area but asked ConocoPhillips to look at other drilling sites. Nuiqsut residents were concerned diesel exhaust from the drilling rig and associated activity would migrate from the site, just a few miles from Nuiqsut, into the village.

Thus, by honoring the residents’ request, ConocoPhillips appeared to be reneging on its commitment to DNR, which is obligated to do its part to ensure the potential oil resource is developed.

Nuiqsut is located along the Colville River on traditional Iñupiat hunting and fishing grounds. The village, with about 450 residents, was established in 1973 when nearly 30 families resettled the area after having moved from Barrow.

Construction of the village was funded by Arctic Slope Regional Corp. and Nuiqsut was incorporated in 1975.

Mack’s subsequent Feb. 17 decision requires Conoco to drill a well into the Nanushuk formation this winter work season and put up a $2.5 million performance bond that DNR would return upon completion of the well.

He also stipulated the company put up another $10 million bond to be refunded if oil production from the area has commenced by May 2022.

Finally, Mack ordered the company make a $1.5 million lease bid replacement payment to the department, which equates to about $160 per acre for the overall area.

In a March 16 letter to company representatives, Mack agreed to stay his February decision at ConocoPhillips’ request until the department’s review of the matter is complete. There is no definitive timeline for Mack to issue a final ruling.

An appeal of Mack’s final decision on the matter would go to Alaska Superior Court.

ConocoPhillips Alaska Land Manager John Schell wrote in the March 15 reconsideration request that the company “clearly communicated to DNR” last summer that it would try to drill the well this winter, but couldn’t make any promises that it would be able to obtain the requisite permits to do so if it was not awarded the leases and unit expansion area by Aug. 1, 2016.

According to ConocoPhillips, it first made that known to DNR last June and reiterated concerns about the exploration work timeline in July.

Reversal of a reversal

Mack’s early November approval of the lease transfer to ConocoPhillips and subsequent Colville unit expansion reversed a June 2016 decision by former Division of Oil and Gas Director Corri Feige.

She denied transfer of 15 of 22 of the leases because Brooks Range, the company ConocoPhillips would have obtained the leases from, still held them in the short-term only on a regulatory technicality, according to Feige.

As a result, she determined the state should put the “valuable exploration acreage” back up for bid in a lease sale that “is likely to attract a wide range of potential bidders and substantial competitive bonus bids for the state,” Feige wrote last June.

ConocoPhillips appealed Feige’s ruling to the DNR commissioner, which became Mack last July 1, setting up his November decision in which he determined a “plain language” reading of the relevant regulations did not preclude the lease transfer.

Brooks Range held the Tofkat leases for years but was unable to work them due in part to not being able to secure a surface access agreement with Kuukpik and a permit from the North Slope Borough.

Leases around the Tofkat area drew sizable bids from ConocoPhillips and others in the state and federal oil and gas lease sales held last December, which added up to the third-largest total since the areawide offerings began in 1998.

Mack contends the plan of operations application for the area that ConocoPhillips provided to the department on Oct. 3, 2016, still led him to believe “it was Conoco’s intention to drill this well by June 1, 2017.”

DNR officials have been hesitant to discuss the dispute in detail until it is resolved.

Conversely, according to ConocoPhillips’ Schell, Mack and other DNR officials never made an attempt to clarify any uncertainty regarding the company’s ability to meet its previously stated exploration timeline before rescinding the November unit expansion approval in February.

Stalled exploration plan

Last Nov. 4, ConocoPhillips submitted a 2016-17 winter exploration program plan to DNR for the “Putu-1” well, a day after Mack approved the lease transfer, which had to happen before the leases could be added to the Colville River Unit.

Mack then approved the unit expansion that same day.

The Putu-1 exploration well plan called for drilling from mid-January to mid-February, with well testing to be finished by mid-March. It notes the company’s access agreement with Kuukpik and states that ConocoPhillips “will be working with (Kuukpik) closely for this exploration program.”

The only issue the company offered that could’ve thrown off that timing was “field conditions including tundra opening,” according to the exploration plan.

Additionally, ConocoPhillips is arguing that the bond requirements and development timeline prescribed by Mack break precedent set by the state and are premature given the first exploration well has not been drilled.

DNR has not previously required leaseholders proposing to drill an exploration well to commit to a full area development plan, Schell wrote.

“The fact that a successful exploration well establishing production in paying quantities has not been drilled cannot be downplayed — it is the exploration aspect that defines what timelines may appropriately apply. The schedule of terms that the (Feb. 17) decision lays out does not fit a proposed exploration project,” he wrote.

“Before development can be analyzed, designed and planned, a successful exploration well must be drilled and appropriate delineation and appraisal must be completed. Even if (ConocoPhillips) were to be allowed to drill the exploration well in 2018, requiring production by established by May 2022 cannot reasonably be guaranteed.”

The company’s general development timeline submitted to DNR before the November expansion approval puts first production in late 2024, as Conoco expects the conceptual project would require the multi-year federal environmental impact statement review.

Further, Schell notes that failing to meet the 2022 production deadline could put the entire Colville River Unit — which currently produces about 60,000 barrels of oil per day — at risk of default, per Mack’s latest ruling.

Finally, the company asserts that the Feb. 17 decision ignores the fact that the company’s access agreement with Kuukpik does not alleviate or trump the concerns of Nuiqsut residents, which can be raised in the North Slope Borough’s permitting process.

Schell also wrote that Arctic Slope Regional Corp. requested the company pause its exploration program for a year.

“The lack of adequate time to engage with Nuiqsut and the request to defer the drilling by Kuukpik and ASRC were also discussed with (Mack). Every indication was that he understood the situation and agreed with (Conoco’s) proposal,” he wrote.

ConocoPhillips suggests in the request for reconsideration that Mack issue a revised decision requiring the exploration well be done by May 31, 2018, without the $12.5 million bond and $1.5 million bid replacement payments. Failing to meet a spring 2018 drilling deadline would trigger relinquishment of the leases back to the state, at which point they could be put up for bid in the 2018 fall North Slope lease sale.

ASRC weighs in

Further complicating matters between ConocoPhillips and the state is that ASRC, the North Slope Native regional corporation and the largest company based in Alaska, jointly holds subsurface rights to the leases with the State of Alaska.

That is the result of a 1991 settlement agreement between the state and ASRC that attempted to settle a decades-long legal battle over ownership of lands around Nuiqsut and Point Lay, which is on the far western North Slope.

While an ASRC spokesman has not responded to repeated requests for comment from the Journal, in correspondence with state officials ASRC has consistently demanded that the former Tofkat leases be transferred to ConocoPhillips.

ASRC Vice President of Resource Development Teresa Imm wrote to then-acting DNR Commissioner Marty Rutherford last June 28 that the department moved to default the Tofkat Unit without consulting ASRC.

The letter was sent about two weeks after Oil and Gas Division Director Feige denied the transfer of 15 of the 22 leases held by Brooks Range Petroleum to ConocoPhillips.

Also on June 28, ConocoPhillips appealed Feige’s decision to Rutherford, who shortly thereafter retired, leading to Mack’s appointment and his November decision to overturn Feige’s ruling.

According to Imm, because DNR failed to include ASRC in discussions regarding the Tofkat Unit, the state forfeited its executive rights to the leases per the 1991 agreement.

ASRC spent two years as an intermediary working to put together a deal to transfer the leases from Brooks Range to ConocoPhillips that it, the oil companies, Nuiqsut and Kuukpik could all agree to at the behest of former DNR Commissioner Joe Balash, who served under former Gov. Sean Parnell.

DNR issued Brooks Range its first default notice for failing to drill Tofkat in July 2013 under the Parnell administration. The Tofkat Unit was established in March 2011.

The department allowed Brooks Range another winter to drill the two wells detailed in its exploration plan but the company again did not drill, citing the lack of an access agreement for the land, according to DNR records.

For its part, ASRC went as far as to approve the processing of the lease transfers and was not told Feige decided to partially deny them, according to Imm.

She sent a letter to ConocoPhillips and the Brooks Range owner companies June 29 notifying them of ASRC’s lease assignment approval and lease term extensions.

“Only DNR has objected to this hard won understanding among the primary stakeholders. When the parties tried to set up meetings to present the proposed plan, the DNR repeatedly cancelled the meetings and, it seems, purposely ‘timed out’ the Tofkat Unit,” Imm wrote in the June 28 letter to Rutherford. “Instead, as is made clear in the (lease) Assignment Decision, DNR hopes to recapture the Tofkat leases so they can be sold in another lease sale.”

To that end, Imm wrote in an Aug. 3 letter to John Hendrix, Gov. Bill Walker’s oil and gas policy advisor, that ASRC would exert its authority under the 1991 agreement to block the Tofkat leases from being part of a future lease sale.

Putting the leases back up for bid could generate substantial revenue for the state, but it would just restart the whole process and unnecessarily delay production for additional years even if the new operator could get an access agreement with Kuukpik, which Brooks Range couldn’t, according to Imm.

In other letters to DNR officials, Imm contended the department has “repeatedly ignored” its requirements under the 1991 settlement and claimed the company was told it is an “old agreement.”

“We are frustrated that the (DNR) continues to try to deny the assignment of the leases in order to place them in a future lease sale; we cannot allow that to happen,” she wrote to Hendrix.

In that email, which Hendrix shared with Mack, Imm wrote that in 2014 ASRC was getting “significant push-back from our shareholders in Nuiqsut” regarding oil and gas activity near the village.

Nuiqsut residents were also concerned about unfamiliar companies working the area, according to Imm. She wrote that the 2012 blowout of an exploration well drilled by Repsol in the Colville River delta was “of grave concern to the village” and its residents would be more comfortable with ConocoPhillips holding the acreage, given the company’s long history of working near the village.

The Repsol well blowout did not result in an oil spill but it did release drilling mud and natural gas.

Dispute resolution

The aptly titled “1991 Settlement Agreement Between Arctic Slope Regional Corp. and the State of Alaska,” which was ratified by the Alaska Legislature the following year, prescribes in detail a path for the state and Native corporation to resolve potential conflicts arising from the lands with jointly held subsurface rights.

Under the agreement, the state generally holds executive rights to the areas it covers, allowing the state to hold lease sales and manage the land at its discretion, but that does not mean ASRC is left out.

The Native corporation has a right to review any subsurface agreements the state enters into and can further sit in on any negotiations between the state and a third party seeking such an agreement.

The state also must consult in good faith with ASRC before finalizing a subsurface agreement, such as a lease. However, it leaves incorporating ASRC’s input into an agreement up to the state’s discretion if the proper communication has occurred.

According to the state’s written records concerning the Tofkat leases, Imm alleges DNR violated the agreement by not consulting with ASRC in its handling of the leases and finalizing the unit default.

If an amicable solution cannot be reached after the appropriate consultation has occurred between the state and ASRC, the agreement specifies an avenue for ASRC to protest, which ultimately ends in a “qualified independent consultant” being selected to arbitrate the dispute.

If the agreement is violated, the issue at hand can be taken to Alaska Superior Court.

Elwood Brehmer can be reached at [email protected].

03/22/2017 - 12:22pm