ConocoPhillips reviewing state decision to rescind unit expansion

Department of Natural Resources Commissioner Andy Mack has rescinded approval to expand the Colville River oil and gas unit to include sought-after North Slope leases held by ConocoPhillips’ after the company backed off from a plan to drill the acreage.

Mack issued the determination Feb. 17, which conditionally reverses his Nov. 4, 2016, decision to add 9,146 acres over 22 leases to the Colville River Unit.

A day prior to approving the Colville River expansion last November, Mack approved the transfer of 15 of the leases to ConocoPhillips that were formerly held by small independent Brooks Range Petroleum Corp. in the defunct Tofkat Unit, a prerequisite for folding them into the unit.

ConocoPhillips had previously been awarded the seven other former Tofkat leases.

Mack wrote in the Feb. 17 ruling that Conoco representatives indicated in discussions with him prior to the November decisions that the company would be able to drill an exploration well on the acreage this winter and overall develop it faster than any other company because it had a surface use agreement with Kuukpik Corp., the Native corporation for the nearby village of Nuiqsut.

Kuukpik Corp. jointly holds surface land rights with the state and Arctic Slope Regional Corp. holds joint subsurface rights — including a royalty share of produced oil and gas — with the state as part of a historical settlement agreement.

However, the producer has not provided its agreement with Kuukpik to DNR so the agency can determine if the terms jive with expanding the unit, Mack wrote.

Disclosing the access agreement to the department is not a requirement for adding the leases to the unit, according to DNR spokeswoman Elizabeth Bluemink, but department officials would be very interested in reviewing it, she added.

The department is primarily concerned with promptly getting the area explored and subsequently into production, Bluemink noted; and lacking an agreement would be an impediment to doing so.

ConocoPhillips operates the Colville River Unit, commonly referred to as Alpine. It currently produces about 60,000 barrels of oil per day. Anadarko Petroleum Corp. holds a 22 percent working interest in the unit.

Mack’s transfer of the leases to ConocoPhillips reversed a decision by former Division of Oil and Gas Director Corri Feige, who originally denied the ownership change last year on the grounds that Brooks Range only held the Tofkat Unit leases because of an automatic 90-day lease extension 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.

ConocoPhillips previously held the leases in the mid-1990s and relinquished them back to the state after doing little with the property.

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 permitting its large Nanushuk project in the unit, which Armstrong estimates could produce upwards of 120,000 barrels of oil per day once it is fully developed.

In December Conoco told the agency it would hold off on the exploration plan it has dubbed “Putu” for the acreage after the company decided it needed more time to discuss its plans with Nuiqsut residents, according to Mack.

“This statement is at odds with Conoco’s representations that it already has a surface use agreement and is thus better positioned than others to expeditiously develop this area,” he wrote Feb. 17.

“In light of Conoco’s inability or reluctance to proceed with the promised drilling this year, the Commissioner is highly concerned that including this acreage in (the Colville unit) will indeed allow more expeditious development than if the acreage was offered for lease in a competitive sale.”

Mack continued to note there is a 1992 agreement between Kuukpik and ASRC under which Kuukpik has agreed to allow oil and gas development on the leases and ASRC or another affected party can reference that deal in efforting to access the leases.

“With multiple agreements in place allowing surface use, (the) Commissioner will not be inclined to consider a need for community engagement as justification for further delays,” Mack added.

According to ConocoPhillips Alaska spokeswoman Natalie Lowman, the company has a surface use agreement with Kuukpik for the leases in question and is evaluating Mack’s decision.

Brooks Range Petroleum cited an inability to reach its own access agreement with Kuukpik as a primary reason for its inability to develop the leases when they were apart of the Tofkat Unit.

Conoco can rectify the situation if, by March 1, it offers up $12.5 million in performance bonds and a $1.5 million lease bid replacement payment to DNR, according to Mack’s ruling. The in-lieu bid payment equates to $164 per acre for the 9,146-acre unit expansion area.

A $2.5 million bond would commit the company to drill an exploration well by May 31.

If it cannot reach the targeted Nanushuk formation by May 31, or if the well is a dry hole, the company would have to drill a second well by May 31, 2018. At that point, DNR would return the bond.

A $10 million bond would commit the company to produce oil from the expansion area by May 31, 2022. That bond would be returned contingent upon sustained production being established, according to the decision.

Finally, ConocoPhillips’ will also have to provide a more detailed plan of exploration and development in line with DNR’s wishes for specific activity commitments.

The company’s initial expansion application submitted in 2016 projected first oil in late 2024 with the expectation that developing Putu would require a lengthy environmental impact statement review.

If Conoco accepts DNR’s requirements for the expansion area, thus allowing it to again be added to the Colville River Unit, but ultimately fails to make good on the commitments, the entire unit would be subject to default, Mack noted.

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

02/28/2017 - 8:27am