DNR issues default to Furie for failure to drill

  • Furie Operating Alaska’s Julius R Platform, installed in 2016 in Cook Inlet, is now producing more than 13 million cubic feet of natural gas for several Southcentral utilities. The company was issued a default notice by the state on Dec. 26 for not drilling wells it said it would in the 2017 plan of development for its Kitchen Lights Unit. (Photo/Courtesy/ Furie Operating Alaska)

Department of Natural Resources officials issued a notice of default to Furie Operating Alaska Dec. 26 for failing to make good on its drilling commitments in the Kitchen Lights Unit the company operates.

In a letter to the company’s Alaska leaders, DNR Commissioner Andy Mack recalled the drilling plans the company submitted to the agency since 2015 that went unmet.

“Operation of the KLU previously and up through the present reflects a history of committing to drilling activities, but then delaying or changing those work commitments,” Mack wrote.

The Kitchen Lights Unit is a large natural gas producing unit in the central part of Cook Inlet north of Nikiski and east of Trading Bay.

Mack continued to note that Furie said it would drill two development wells in its 2015 plan of exploration, but in August that year proposed deferring that work until 2016. The change was approved by the Division of Oil and Gas.

The company’s 2017 development plan called for completing the KLU-A1 well and drilling another to be completed later.

That work was not done and instead was deferred to 2018 in Furie’s latest development plan, which Division of Oil and Gas Director Chantal Walsh approved Dec. 28.

Furie leaders had intended to do a workover of the KLU-3 well, finish drilling its A-1 well and then drill another gas well and a deep oil test well, according to Webb in an interview with the Journal this past November.

“Although the Randolph Yost jack-up rig was 100 percent staffed to commence drilling operations in April of this year, Furie was forced to delay its 2017 drilling plans — including purchasing tangible items with substantial lead times — until additional funding for the purchase of tax credits was approved by the Legislature and the governor,” Furie’s 2018 Kitchen Lights development plan states.

The document was sent to the Division of Oil and Gas Oct. 6.

Mack cited the Kitchen Lights Unit Agreement in his default notice, which states that the DNR commissioner can, at his or her discretion, determine that the company’s failure to meet its commitments constitutes a unit default.

To cure the default Furie must follow through with its 2018 development plan.

Failing to resolve the default could lead to DNR seeking to contract or terminate the Kitchen Lights Unit, according to the default notice.

Furie officials contended in their 2018 plan that the drilling work was not done last year because the State of Alaska has not fulfilled its obligation to repay the “very substantial amount” of refundable production tax credit certificates it owes the company for previous work.

“These certificates are a key component to funding further exploration and development activities in the KLU and were relied upon by Furie when putting together its work program and budget,” the 2018 Kitchen Lights plan states.

Oil and gas companies and industry backers have roundly criticized Gov. Bill Walker for vetoing $630 million worth of appropriations in 2015 and 2016 to pay the industry tax credits. Walker has been steadfast in his assertion that the state could not afford to make the large credit payments while dealing with annual budget deficits upwards of $3 billion at the time.

His fiscal year 2019 budget plan released in December includes a proposal for the state to bond for $900 million to pay off the state’s full credit obligation.

Exactly how much Furie is owed is unknown. Senior Vice President Bruce Webb said he couldn’t comment on the matter and state officials cannot reveal the tax credit amounts because it is confidential tax information.

While Furie didn’t drill last year, the 2018 plan further asserts that it “conducted substantial well and pipeline work in 2017,” noting the company removed plugs from the KLU-3 well readying it for production. It also flow tested KLU-3 and another well in August and achieved combined gas production 31 million cubic feet per day during the test.

Also, Mack did not mention the two wells Furie did drill in 2016 in his Kitchen Lights default notice.

Alaska Oil and Gas Conservation Commission records indicate the company applied for permits to drill the KLU-A1 and KLU-A2 wells in June 2016 and completed the KLU-A2 and KLU-A2A in July and September of that year.

According to previous interviews with Furie leaders, those natural gas wells were allocated to feed the contract it has with regional utility Enstar Natural Gas, which commences this April.

Furie also has an existing supply contract with Homer Electric Association, which uses natural gas to fuel its power plants, and last spring signed a 10-year contract to supply Chugach Electric Association starting in 2023.

DNR officials asked to reschedule a Jan. 9 interview with the Journal to discuss the default decision and how it could impact Furie’s supply contracts if it is not resolved.

In 2015 the company installed the Julius R platform in the Kitchen Lights Unit, from which it now produces the gas for its contracts.

Furie is also looking to produce oil, which much of its currently planned work is aimed at. Company officials have said they could foresee eventually installing an oil-focused platform in the unit if exploration proves successful.

Furie has 20 days from the issuance of the default to request Mack reconsider his decision.

Elwood Brehmer can be reached at [email protected].

01/10/2018 - 10:28am