The Alaska Oil and Gas Conservation Commission — the state regulatory oversight group for the hydrocarbon industry — has issued a $446,000 penalty to Cook Inlet Energy for safety valve violations in early 2014.

The final penalty order, issued Tuesday, is the conclusion of a three-year dispute between Cook Inlet Energy and the AOGCC over the original $806,000 fine.

Cook Inlet Energy began drilling its Sword No. 1 well on the Kustatan Peninsula (also known as West Forelands) of Cook Inlet’s western coastline in June 2013, and began producing oil from it in November of that year. In addition to the surface safety valve it requires of all wells, AOGCC also required Sword No. 1 to have a subsurface safety valve, with both valves successfully tested within five days of the well’s start.

According to AOGCC’s Tuesday order, a Dec. 11, 2013 inspection found the well’s surface safety valve not functioning, and its subsurface safety valve “did not appear to be installed.” Two days later, an AOGCC inspector witnessed a failed test of the surface valve. The document states that the well had nonetheless been producing since Nov. 17, 2013 and ultimately produced for 42 days — until Jan. 5, 2014 — with a “defeated” valve system. In a later penalty review, Cook Inlet Energy claimed the subsurface valve had been installed at the time of the December 2013 inspection and had been functioning since January 2014. On Feb. 16, 2014, an AOGCC inspector witnessed a test in which the subsurface safety valve failed to close, which required the well to be shut in unless the valve could be repaired within 48 hours. Cook Inlet Energy unsuccessfully attempted to get a waiver for this requirement while trying to repair the valve, while the well continued to produce without it until the well was shut in on March 7, 2014.

AOGCC and Cook Inlet Energy corresponded about the safety valve system through 2014, until AOGCC sent the company a notice of proposed enforcement action on Dec. 8, 2014 — noting that in addition to regulatory violations, Cook Inlet Energy had failed to provide requested information about the safety valve system. The notice proposed corrective actions, as well as a $860,000 civil penalty.

Cook Inlet Energy requested a hearing, which was held Feb. 17, 2015. In a letter to AOGCC Chair Cathy Foerster prior to the hearing, Cook Inlet Energy Production Manager David Kumar wrote that the well’s design makes the safety valves unnecessary — it’s a low energy well requiring a hydraulic jet pump to send fluid into the well in order to create flow, according to Kumar.

“In simple terms, if producing lines from Sword #1 were open to atmospheric pressure due to a catastrophic failure, there would be a lack of any natural flow to the surface on account of the low energy associated with the well,” he wrote.

Other safety features were installed in the well, Kumar wrote, as a remote shut-off for the jet pump.

“Given the nature of the unconventional way of producing Sword #1 coupled with the fact that safety valve systems are geared toward more conventional completions, CIE (Cook Inlet Energy) implemented several comparable safety systems in addition to the (safety valve system),” Kumar wrote. “These comparable safety systems are equally effective and add additional layers of protection to prevent an uncontrolled release of hydrocarbons to the surface.”

Tuesday’s AOGCC order states these claims “have no merit” in the absence of the regulation-mandated safety valve system.

“CIE’s installation of an SVS (safety valve system), albeit a non-functional SVS, its eventual request for a waiver, and the fact Sword #1 now has a functional SVS establish CIE’s awareness of the regulatory requirements and seriously erode its claim that an alternative system was necessary,” states AOGCC’s Tuesday order.

Nonetheless, the February 2015 hearing led AOGCC to reduce the $806,000 penalty to $446,000 in an order issued May 1, 2015. Cook Inlet Energy appealed the new penalty ten days later, contesting none of AOGCC’s regulatory findings but claiming the penalty was excessive. A second appeal hearing was scheduled, then canceled at Cook Inlet Energy’s request because only two of the three AOGCC commission seats were filled at the time.

The hearing was rescheduled after Gov. Bill Walker appointed Hollis French, a former oil worker and former Democratic state senator representing Anchorage, to the vacant AOGCC seat designated for members of the public in July 2016.

AOGCC’s Tuesday order includes the commission’s reasons for upholding the $466,000 penalty at that hearing.

“CIE’s attempts to justify its violations by claiming its approach provided ‘additional layers of protection’ demonstrate that CIE believes it has the authority to make decisions regarding the necessity of compliance without AOGCC involvement,” the order states. “CIE’s actions allowed it the benefit of producing from the Sword #1 well for three months. The need to deter similar behavior and CIE’s prior history of non-compliance are also significant considerations. The only mitigating factor is the absence of harm to the public or the environment.”

AOGCC recorded eight violations by Cook Inlet Energy between 2011 and June 2016, some of which resulted in enforcements. They include a late 2014 citation for Cook Inlet Energy’s unapproved flaring of 24,668 million cubic feet of natural gas between Nov. 26, 2013 and Feb. 2014. AOGCC proposed a $294,834 fine for the flaring, which was dropped after a review.

According to previous Clarion reporting, Cook Inlet Energy originally planned to drill another well, Sabre, off the shore of the Kustatan Peninsula in summer 2014. Those plans were delayed when Cook Inlet Energy’s parent company, Houston, Texas-based Miller Energy Resources, was forced into involuntary bankruptcy in August 2015, and two of its executives and an accounting partner were investigated by the Security and Exchange Commission for overvaluing company assets — ultimately receiving a $5 million fine.

After Cook Inlet Energy was purchased by two of Miller Energy Resource’s creditors — private equity firms Apollo Investment Corp and High Bridge Principal Strategies — the company resumed plans for the Sabre well by applying for an Army Corps of Engineers permit in late 2016.

Reach Ben Boettger at ben.boettger@peninsulaclarion.com.