Court says CIRI can push for Kenai gas royalty payments
A Buccaneer Energy flag tops a drilling rig operating Aug. 30, 2011, off Marathon Road near Walmart in Kenai. Gas tapped from the Kenai Loop field where the rig is located is at the heart of a dispute between Buccaneer, which has declared bankruptcy, Cook Inlet Region Inc. and the state Mental Health Trust Land Office. CIRI alleges it is owed millions in royalties from Buccaneer and the state for draining gas from its lands adjacent to the Kenai Loop producing wells.
A federal South Texas Bankruptcy Court has ruled that Cook Inlet Region Inc. can continue its quest through the Alaska Oil and Gas Conservation Commission for natural gas royalties from the state and Buccaneer Energy.
Judge David Jones signed an agreement between CIRI, Buccaneer and creditors Aug. 18 to lift a stay the court had put in place on the Alaska commission proceedings while Buccaneer, its creditors and the court attempted to sort out the Houston-based independent’s bankruptcy. The agreement was filed in U.S. Bankruptcy Court for the Southern District of Texas Aug. 14.
CIRI has been trying to get royalty payments from Buccaneer and the Alaska Mental Health Trust Land Office through the AOGCC since early this year.
Buccaneer filed for Chapter 11 bankruptcy on May 31, a move that has slowed the AOGCC process, along with a parallel lawsuit CIRI filed in state court to recover its purported damages. A stay on the state lawsuit is still in place.
CIRI Vice President of Land and Energy Development Ethan Schutt said the Southcentral region Alaska Native corporation owns 20 percent of the Kenai Loop gas field geologically that Buccaneer is producing from via an operating lease it has with the Mental Health Trust Land Office.
CIRI owns property adjacent to the Mental Health Trust Land Office parcel. Buccaneer has two producing wells on its Kenai Loop pad, KL 1-1 and KL 1-3, that CIRI says are draining gas from its portion of the field.
At one time Buccaneer and CIRI had a lease in place for the CIRI property, but that was terminated by the Native corporation for undisclosed violations.
Buccaneer has admitted to knowing the gas is being drained, but has not been able to reach an agreement with CIRI. Schutt said the Mental Health Trust Land Office continued to accept royalty payments after it was aware of the gas being pulled.
“That’s not acting in good faith,” he said.
Since Buccaneer became aware of the drainage situation in October 2013, more than 2 billion cubic feet, or bcf, of gas has been produced from the two wells, Schutt said, with a gross market value of about $15 million.
Overall, the wells have produced more than 6.7 bcf of gas since January 2012, according to AOGCC production records. Schutt said Buccaneer’s gas contract is for approximately $7 per thousand cubic feet, or mcf, of gas. At $7 per mcf, the value of the gas produced from KL 1-1 and KL 1-3 would be about $47.1 million — 20 percent of that is $9.42 million.
Buccaneer has remained publicly quiet during the entire process.
Mental Health Trust Land Office Executive Director Marcie Menefee said Buccaneer had set up an escrow account, as ordered by the AOGCC, to hold funds while the royalty dispute remains unsettled.
“As I understand it funds are being segregated,” she said.
With the stay lifted, the next step is for a party, likely CIRI, to request another hearing before the AOGCC. It is usually 60 days between when a commission hearing is sought and when it takes place.
As of early Aug. 19 CIRI had not requested a hearing, Schutt said.
In the meantime the parties — CIRI, the Trust Land Office, Buccaneer and the Alaska Department of Natural Resources, which oversees the Division of Oil and Gas and the Trust Land Office — could still conceivably reach a settlement, but Schutt said he doesn’t see that happening.
The AOGCC has encouraged negotiations outside of the commission, saying it would defer to settlement terms if possible, rather than hand down a ruling. Menefee said the Trust Land Office would be interested in continuing negotiations.
Prior negotiations between the landowners “continued to fall apart” over six to eight months, he said, and CIRI never pulled their offer off the table.
Elwood Brehmer can be reached at email@example.com.