July hearing set for Kenai Loop gas payments

  • By ELWOOD BREHMER Morris News Service-Alaska
  • Saturday, June 14, 2014 10:00pm
  • News

Buccaneer Energy, Cook Inlet Region Inc., and the State of Alaska will be back before the Alaska Oil and Gas Conservation Commission July 7 to duke it out once more over gas royalty rights from Buccaneer’s Kenai Loop well pad.

The hearing will be held — as has been the case with most milestones in the dispute — if the parties cannot come to an agreement on royalty payments prior to July 7.

CIRI claims Buccaneer owes it royalties for gas Buccaneer drained from the Native corporation’s land that is adjacent to the Kenai Loop pad. Buccaneer once held a now-terminated gas lease with for the CIRI property. It does not dispute that the drainage is occurring.

The Alaska Mental Health Trust Authority, which owns the property under the Buccaneer pad, also owes it money, CIRI claims, because the authority has been receiving royalties on gas that CIRI had right to.

Whether or not CIRI is liable for production expenses if it is eligible to receive gas revenue will be another point of debate at the hearing.

The commission ordered Buccaneer to set up an escrow account by June 1 to hold its Kenai Loop production revenue until the dispute is resolved and make monthly deposits to the account starting June 10.

Formation of the account has been delayed as Buccaneer asked the commission for clarification regarding details in the order and a brief comment period for the other parties was also established.

How Buccaneer’s May 31 filing for Chapter 11 bankruptcy filing in South Texas will impact negotiations and where its money goes immediately remains unclear.

All of the parties have said an agreement has been close at times during months of negotiations.

Buccaneer’s bankruptcy filings list the company’s combined assets at between $50,000 and $500,000 and liabilities of $50 million to $100 million.

In May 2013, Division of Oil and Gas Director Bill Barron denied Buccaneer’s application to form a Kenai Loop unit from its leases in the area.

When the application was submitted in July 2012 Buccaneer was the working interest owner to 7,499 acres of lease space in the proposed unit. The company had right to 4,827 acres of Mental Health Trust Authority land, its 1,275-acre lease with CIRI and 1,391 acres of state land over four leases.

Units are typically formed when an oil or gas pool extends beyond a sole landowner’s property; they are a way to parcel royalties and prevent drainage or other resource rights disputes among multiple lessees.

Before the decision to deny the unit was made, CIRI informed the division that it had terminated Buccaneer’s lease, but Buccaneer did not acknowledge that fact, according to Barron’s ruling.

CIRI’s termination of the lease has subsequently been upheld in Alaska Superior Court.

Barron wrote in the 20-page document that his decision was based on the fact that Buccaneer was at the time the sole working interest owner in the area, thus making unit formation unnecessary.

Additionally, the state land leases were set to expire at the end of September 2012 when the application was filed a couple months prior to their expiration. The only interest that would have been protected by granting the unit would have been Buccaneer’s by way of gaining state lease extensions, according to Barron’s findings.

He also claimed that Buccaneer made no commitments to fully develop the gas resources in the unit, and “exploration may be a component of unit activity but the primary purpose of unitization is development of reserves proven during the primary term of a lease,” Barron wrote.

Subsequently Buccaneer appealed Barron’s decision in April 2013 to the Department of Natural Resources commissioner. That appeal is currently unresolved before commissioner Joe Balash.

The commissioner is withholding a decision on the appeal while the “fundamental issues involving the leases that would underpin the proposed unit are addressed” through either a settlement reached by the parties or the conservation commission process, according to DNR spokeswoman Elizabeth Bluemink.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

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