DNR terminates North Slope unit after long delays

Eric Lidji | Petroleum News

After an Superior Court ruling in its favor last fall, the Department of Natural Resources is terminating the Arctic Fortitude oil exploration unit on the North Slope.

The decision comes six years after the state approved the 6,363-acre unit adjacent to the southern edge of the Prudhoe Bay unit and follows nearly four years of litigation between the state and San Antonio, Texas-based Alaskan Crude Corp.

"Given the record here, coupled with your longstanding failure to abide by work commitments, I have no reason to believe that further extensions of (Alaskan Crude Corp.'s unit) obligations will result in any activity by the company," DNR Commissioner Dan Sullivan wrote to company president Jim White on May 14.

Alaskan Crude argues the termination is premature because the company is working through an appellate review before the Alaska Oil and Gas Conservation Commission. The company asked the state for permission to begin drilling next winter.

Alaskan Crude accused state agencies of putting "roadblocks" in its way as it tries to work on the North Slope. "Unfortunately, trying to navigate those roadblocks has required one administrative proceeding after another, with subsequent appeals, and (Alaskan Crude Corp.'s) efforts to negotiate a settlement have been met with stony indifference by the state," the company wrote in an April 22 letter to oil and gas officials.

The ruling is open to a 30-day appeal.

The debate revolves in part around oil spill response planning.

When DNR approved the three-lease Arctic Fortitude unit in June 2006, the agreement called for Alaskan Crude to work over and test the 1980s-era Burglin 33-1 well, drill two additional wells and shoot 3D seismic over the entire unit. A late 2007 settlement between the state and the company gave Alaskan Crude until May 2008 to deliver a rig to the unit in preparation for beginning well work that October.

Alaskan Crude revised its description of the Burglin project from an oil and natural gas well to a "gas only" well, a change that would trigger a large reduction in its response planning standard. When the AOGCC denied the request, Alaskan Crude appealed.

Because the issue remains unsettled, Alaskan Crude said it could not meet the May 2008 rig deadline. The state disagreed, placing the unit into default and requiring the company to bring a rig to Arctic Fortitude by March 2009 or risk losing the unit.

A lower court found in favor of the state, saying the conservation commission appeal did not constitute a "force majeure." The Alaska Superior Court upheld the ruling last October.

Alaskan Crude continues to argue that it cannot cure the default until the response planning issue is resolved and wants to drill in late 2012 and early 2013.

"(Alaskan Crude Corp.) cannot mobilize a drilling rig without a contingency plan, and it cannot get a contingency plan without knowing what the (response planning standard) is going to be," the company wrote. "That question remains in the court's hands."

The state remains skeptical. Alaskan Crude Corp. "proposes a remedy that is virtually assured to lead to significant additional delay," Sullivan wrote.

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