State gives conditions for ConocoPhillips to explore Tofkat leases

  • Alaska Department of Natural Resources Commissioner Andy Mack decided Aug. 3 to allow ConocoPhillips to again have a shot at exploring valuable North Slope acreage, if it accepts a series of conditions on timelines and bonus bid replacement payments. (Photo/Elwood Brehmer/AJOC)

ConocoPhillips is on the clock again for North Slope leases it gave up years ago and has spent the better part of the last two trying to get back.

Department of Natural Resources Commissioner Andy Mack issued a decision Aug. 3 giving the oil major another shot at a relatively small piece of sought-after acreage tucked between the company’s large Colville River field and Armstrong Energy’s massive and ever-growing Nanushuk oil discovery.

The catch is ConocoPhillips has until Aug. 14 to agree to Mack’s decision, which comes with a long list of contingencies.

In February, Mack reversed his previous ruling and denied ConocoPhillips’ application to have 22 leases totaling about 9,100 acres in the now-defunct Tofkat Unit transferred from small independent Brooks Range Petroleum Corp.

Mack’s February reversal was due to ConocoPhillips not drilling an exploration well in the acreage this past winter as it had told DNR it would as a condition for approving the transfer.

ConocoPhillips Alaska officials appealed the decision, contending they did not drill because residents of the Native Village of Nuiqsut — located inside the area in question — were concerned about diesel exhaust from the drilling rig drifting into the community, which is just a few miles from the chosen exploration site.

The rig would have been working continuously for several weeks about three miles in the direction of the prevailing winds from the village. As a result, Nuiqsut residents asked the company to look for a new place to drill.

The oil company has a longstanding surface use agreement with Kuukpik Corp. that predates the current iteration of ConocoPhillips — a company that is today the result of multiple mergers of other large oil and gas companies.

Kuukpik is the Alaska Native village corporation for Nuiqsut that owns surface rights around 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.

The company also argued Mack’s decision did not accurately recount discussions between it and DNR and he did not give the company a fair hearing before making the ruling.

Mack stated in the document released Aug. 3 that the “due process arguments are unfounded” and bluntly rebutted several other claims by ConocoPhillips raised throughout the lengthy process.

“While ConocoPhillips Alaska’s request for reconsideration (to the February decision) largely consists of legal and policy arguments that are mostly unfounded and thus did not factor into the commissioner’s reconsideration, because these arguments were raised and are somewhat troubling, DNR is providing responses to those arguments,” he wrote.

DNR is not obligated to provide the company a hearing before issuing such a decision either through the Colville River Unit agreement or department regulations, according to Mack.

He wrote further that ConocoPhillips’ claim that he made his February decision based on an incomplete record is erroneous because it is the applicant’s duty to support its request.

The company also contradicted itself in documents it submitted to the department; citing meetings between officials in one instance and claiming Mack did not discuss his concerns with its application in another, he continued.

“If there were additional or different facts that ConocoPhillips Alaska wanted the commissioner to consider, ConocoPhillips Alaska could have amended its application to provide those facts,” Mack wrote.

Brooks Range Petroleum was unable to develop the area because it could not secure a land access agreement with Kuukpik Corp. The state and Arctic Slope Regional Corp. share subsurface rights, but the state holds ultimate decision-making authority if it consults with ASRC, a key part of a 1991 court settlement to resolve a court dispute.

To that end, a DNR release that accompanied the decision states that ASRC will also have to agree to the terms of the decision if oil exploration of the area is to progress.

“It’s important for the State of Alaska to find common ground with our oil industry partners and local stakeholders as we work to bring much-need oil to the trans-Alaska pipeline,” Gov. Bill Walker said in the DNR release. “To get the full benefit of the decision, at least 80 percent of the hires must be Alaskan. ConocoPhillips has a strong record of training and hiring Alaskans. Because jobs in Alaska should go to Alaskans, my team and I will continue to ensure strong local hire provisions on this and other projects.”

Kuukpik CEO Lanston Chinn said the corporation, in representing Nuiqsut, continues “to seek a fair and balanced approach towards any oil and gas activity.”

Similarly, ASRC spokesman Ty Hardt wrote in an email that the company will be discussing any potential concerns with the residents of the village, who are its shareholders as well.

Mack said in an interview that the state certainly values the concerns of Nuiqsut residents, but it will continue to focus on advancing its interests regarding the former Tofkat area as any potential remaining issues between Kuukpik and ConocoPhillips regarding the location of drilling activity is a matter between two private parties.

According to DNR, ASRC must also approve of the decision as a joint resource owner in the area.

“We have executive rights under the (1991) decision, but they are certainly a resource owner in every sense and we view them as a really important partner in this process and when we go to make decisions about units which are affected by the settlement decision, ASRC is also an entity that approves those unit decisions,” Mack said. “This is applied across almost every decision we’ve made with the Colville River Unit since its inception.”

ASRC objected to DNR’s prior attempts under former Commissioner Marty Rutherford to put the leases in question up for bid in a lease sale, alleging the state had not fulfilled its responsibilities to consult with the Native corporation on the issue. In late June 2016 ASRC subsequently informed the department it would transfer its share in the leases to ConocoPhillips regardless of what the state decided.

ConocoPhillips held the acreage in the early 2000s but had to give it back to the state after failing to meet drilling requirements.

(At the time, ConocoPhillips referred to the area as Titania, a fairy queen character in William Shakespeare’s play “A Midsummer Night’s Dream.” Subsequently, Tofkat is an acronym for: The Opportunity Formerly Known As Titania.)

Mack’s most recent ruling gives ConocoPhillips the opportunity to add the Tofkat area to the Colville River Unit if it drills a well into the Nanushuk formation by May 31, 2018. If the company drills the well and wants to keep pursuing the prospect it will have to make a $3 million bid replacement payment to DNR by Aug. 15, 2018, in-lieu of the money the state would potentially get for putting the leases up for sale.

ConocoPhillips would additionally have to commit to drilling a second well by the spring of 2020.

If the company decides to further develop the area after 2020 and bring it to production, ConocoPhillips would need to make another $4 million bid replacement or employ at least 15 percent North Slope residents and 80 percent Alaskans on the project. Achieving the Alaska hire requirements would cut the $4 million bid replacement to $3.5 million.

The total payment amount of up to $7 million was based on the winning bids for recently leased acreage nearby, which went for between about $1,000 and $3,500 per acre, according to the decision document. Mack wrote that $7 million is appropriate for the size of the area, particularly when a deduction for ConocoPhillips’ ability to hopefully bring it into production quicker than a new lessee is factored in from the state’s perspective.

Failing to meet any of the aforementioned requirements, or deciding not to develop the leases, would terminate the Colville River expansion and the company would return the leases to the state, per Mack’s decision.

ConocoPhillips spokeswoman Natalie Lowman said the company is reviewing the document and she couldn’t comment further at this time.

Mack’s February ruling gave ConocoPhillips the option to make good on its promise and still drill the well last winter, which included putting up a $2.5 million performance bond that DNR would return upon completion, but that was also a tight timeline on which to drill from an ice pad before spring. ConocoPhillips did not agree to those terms and instead filed a request for reconsideration.

A prior 2016 ruling from former Oil and Gas Division Director Corri Feige denied the lease transfer on the grounds that it was in the state’s best interest to put the acreage up for bid in a lease sale, start fresh and gain potentially millions of dollars in bid revenue. Mack eventually overruled Feige on the premise ConocoPhillips would be drilling early in 2017.

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Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

Updated: 
08/09/2017 - 12:05pm

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