Bankruptcy court strikes down $6 million oil and gas bond

A dispute over the cost of cleaning up unused Cook Inlet hydrocarbon wells was settled by a bankruptcy court, which ordered state regulators to reconsider the $6 million clean-up bond they required of Aurora Exploration for its purchase of six gas wells from the bankrupt Aurora Gas. Aurora Exploration had originally offered a $200,000 bond for the six wells.

Following Judge Gary Spraker’s order, the Alaska Oil and Gas Conservation Commission dropped the $6 million bond requirement to $3.6 million on Wednesday.

Alaska law requires oil and gas operators to bond the cost of plugging their environmentally hazardous unused wells, a cost which may otherwise fall to the state if a bankrupt company can’t meet it. The three governor-appointed Alaska Oil and Gas Conservation Commissioners set bonds for subterranean cleanup — generally, plugging a well with cement. State law requires at least a $100,000 bond for a single well or $200,000 to cover all of a company’s wells.

In February AOGCC Commissioner Cathy Foerster advocated raising the bonding requirement in a presentation to the Alaska House of Representatives Resource committee, saying that the danger of the state paying for abandoned well cleanup was increasing “as oil fields in Alaska mature and as new and smaller companies come to the state.” For an abandoned North Slope well, “I’m not sure $200,000 would even pay for the engineering study needed to plan the plugging operations, much less any of the actual plugging costs,” she said.

2016 saw two oil and gas bankruptcies in Alaska — the North Slope operator Linc Energy and Aurora Gas, whose creditors forced it into Chapter 11 proceedings in May of that year. The company operated ten gas wells leased from the Alaska Native corporation Cook Inlet Region, Inc, (CIRI) and nine from the state — three in the Three Mile Creek gasfield and six in the Nicolai Creek gasfield, both on the west side of Cook Inlet.

Aurora Gas began as an affiliate of Aurora Power Resources, a company started in 1994 by former Marathon employee Scott Pfoff to extract and market Cook Inlet gas. Pfoff co-founded Aurora Gas as the company’s exploration and production branch, one of a number of affiliates which shared the Aurora name but were backed by differing groups of investors, Pfoff told AOGCC in an Oct. 9 hearing.

A month after its bankruptcy started, Aurora Gas had $2.5 million in outstanding debt and continued to lose money, according to a March 2017 motion by U.S Trustee Gail Geiger. At the end of 2016 it reported a $1.8 million net loss for the year, almost double its 2015 net loss, Geiger wrote. The company unsuccessfully tried to sell off nine non-operational wells on its CIRI lease and three on its state lease at Three Mile Creek.

Aurora Gas lacks the funds to plug and abandon the Three Mile Creek wells, though the Nicolai Creek wells are still productive “and continue to generate limited revenue for the debtor which has funded the closing of the nonoperational wells,” according to Spraker’s order. In August the bankruptcy court approved Aurora Exploration’s offer to buy the three working wells at Nicolai Creek, making it subject to approval by the state — represented in this case by AOGCC.

Aurora Exploration, which was also founded by Pfoff and presently has no producing wells, offered to buy the Nicolai Creek wells for $100,000, according to Spraker’s order.

Pfoff told the AOGCC commissioners he started Aurora Exploration after quitting as Aurora Gas’s president in 2009. In 2015, he said, Aurora Gas’s majority ownership partner sold the company to a German investment group, Rieck Oil, and he subsequently sold the share Aurora Power Resources held in the company. Pfoff said his former company has no ownership in his present one.

Bonding dispute

As the prospective new well operator, Aurora Exploration submitted a post-production well plugging plan backed by the minimum bond amount of $200,000 for all six Nicolai Creek wells.

AOGCC denied Aurora Exploration’s plan, estimating the cost of plugging the wells at $1 million each, for a total bond requirement of $6 million. Alternately, AOGCC offered to take Aurora Exploration’s $200,000 bond if the company would also plug Aurora Gas’s three non-operational wells in the Three Mile Creek Unit within six months.

Engineer Ed Jones, a co-founder with Pfoff of Aurora Gas and the company’s current president, said Aurora Exploration had estimated the cost based on plans his company developed for plugging and abandoning their ten wells on CIRI land. The cost to plug the CIRI wells varies due to well differences from $100,000 to $205,000, assuming that all the wells are plugged during the same equipment mobilization. Jones said the CIRI wells and the Nicolai Creek wells are similarly shallow.

AOGCC Senior Petroleum Engineer Mike Quick based the $1 million per well cost estimate on a more expensive method — building a rig to reach down the well with a length of tube that would pour cement over the hydrocarbon-producing area at the well’s bottom. Aurora’s planned method would insert cement from the top to create a continuous plug down the entire well.

“If successful the Aurora plan will leave the wells adequately plugged and abandoned, however the risk of failure for this plan is high,” Quick said.

If the continuous plug fails pressure-testing, it would “cost many times more than the AOGCC estimated cost” to do over, Quick said. Such a costly failure isn’t only hypothetical. In the past two years, Quick said, an oil company has used the continuous plug method on four North Slope wells, failing on two. These wells have yet to be permanently plugged.

Jones said the Nicolai Creek wells weren’t comparable to those on the North Slope, which suffered from complications “including perhaps winter weather, higher pressures and …the questionable condition of the tubing and casing in there.” Though some of the Nicolai Creek wells date back to the 1960s, Jones said their tubing was all replaced between 2001 and 2002.

Court Decision

About a week after AOGCC’s bond decision, Aurora Exploration filed a motion in Aurora Gas’s bankruptcy case, arguing that AOGCC was illegally discriminating against it because of its association with the bankrupt Aurora Gas.

On Sept. 26 the court ruled that AOGCC had illegally conditioned the Nicolai Creek well sale on Aurora Exploration taking over Aurora Gas’s obligation to plug the Three Mile Creek wells, which Aurora Exploration hadn’t offered to purchase. The decision states that AOGCC held “the debtor’s sale of assets to (Aurora Exploration) hostage subject to (Aurora Exploration)’s assumption of the Three Mile Creek liability.”

The decision allowed that AOGCC’s $6 million bond requirement “may be a proper exercise of the agency’s discretion in discharge of its statutory duties” but that AOGCC hadn’t given good evidence for the cost. The court decision states that AOGCC’s decision “evidences the State’s efforts to compel (Aurora Exploration) to assume (Aurora Gas’s) obligations by ‘offering’ as the only alternative a prohibitively high $1,000,000 per well bonding requirement.”

Reach Ben Boettger at ben.boettger@peninsulaclarion.com

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