State reduces fine for NordAq wells

Oil and gas company NordAq Energy will pay less in fines than the state originally proposed for not plugging two Cook Inlet wells before the end of its leases.

The Alaska Oil and Gas Conservation Commission, the state entity responsible for ensuring that the subterranean portions of oil and gas developments are cleaned up after use, announced Friday that it will fine the company $25,000 for each well. That fine is significantly reduced from the original proposed fine of $771,000 for both wells.

On Dec. 2, 2016 the commission first proposed to fine NordAq $621,000 for failing to plug and abandon its Shadura 1 exploratory gas well north of Nikiski, and $150,000 for failing to plug and abandon its exploratory Tiger Eye 1 well on the west side of Cook Inlet. After hearings, reviews, and reconsiderations held in April, June, and September 2017, the Alaska Oil and Gas Conservation Commission found mitigating circumstances and fined NordAq $25,000 for each violation.

NordAq finished plugging and abandoning the Tiger Eye well on September 9, 2017, and the Shadura well on March 19, 2018. With the two exploratory wells closed, NordAq now holds interest in some Beaufort Sea leases, but none in Cook Inlet.

NordAq incorporated in 2009 and soon after began onshore explorations in Cook Inlet — first in 2011 with Shadura 1 in the Kenai National Wildlife Refuge north of Nikiski’s Captain Cook State Park, then on the west side in May 2013 after acquiring the Tiger Eye lease, on Salamatof Native Corporation land near the west Inlet’s Kustatan Peninsula.

“Tiger Eye was intended originally to be an exploratory well for oil and gas and it turned out there were not signs of oil and so it was converted into an exploratory well for gas only,“ said attorney Robin Brena, representing NordAq in an AOGCC hearing on the penalties on September 20, 2017.

Though NordAq did find gas with Tiger Eye — estimating it could produce about 3 million cubic feet a day — it had problems with salt water entering the well, which NordAq couldn’t solve because it was too expensive, Brena said.

NordaAq also stopped work at the Shadura exploration well — which required a snow road for access, allowing work there only in the winter — in February 2012, and in June 2015 ended its lease with the Alaska Native corporation Cook Inlet Region, Inc, owner of part of the well’s mineral estate. The Tiger Eye well ended its lease with CIRI soon after, on July 15, 2015.

Alaska code requires lease operators to plug hydrocarbon wells with layers of cement before ending their land leases.

In October 2016, NordAq ended its Shadura and Tiger Eye leases with another mineral owner, the Alaska Department of Natural Resources. DNR notified the Alaska Oil and Gas Conservation Commission, which discovered that NordAq hadn’t given the required notification after ending its CIRI leases the previous summer, and hadn’t plugged the wells. The enforcement notice the commission sent NordAq in December 2016 gave it the maximum $100,000 penalty for failing to abandon the Shadura well before the end of the CIRI lease, plus $1,000 per day for the subsequent 521 days the well was left unplugged. The maximum per-day fine under Alaska code is $10,000. The Tiger Eye well earned a total $120,000 penalty.

Brena said NordAq hadn’t plugged Tiger Eye because it had been trying to sell it to another hydrocarbon extractor, Cook Inlet Energy, which had declined to buy the well by July 2016. The Shadura well hadn’t been immediately plugged, Brena said, because NordAq had been considering drilling a sidetrack “that didn’t prove viable.”

Though Brena agreed that NordAq had failed to comply with the obligation to plug the wells before the lease expired, he argued in the Sept. 20 hearing that NordAq’s good faith and the fact that no actual damage resulted from the unplugged wells merited a penalty of $10,000 for each.

In addition, the commission demanded a check from NordAq that would cover the state’s cost of plugging and abandoning the wells if the company failed to do it. The state estimated the work would be covered by $1.2 million for Shadura and $1.3 million for Tiger Eye.

Alaska statute requires companies to place bonds to cover this possibility, though some believe the amounts required — a $100,000 bond for a single well or $200,000 to cover all a company’s wells in the state — aren’t enough. Alaska Oil and Gas Conservation Commission commissioner Cathy Foerster told the Alaska House of Representatives Resource committee in February 2017 that she was “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.”

The commission changed the check requirements to bonds in May 2017. Brenasaid in the Sept. 20 hearing the move “would have been an appropriate way to work with a major that had those sorts of large credit facilities available, but in our case it isn’t.”

“Bonding is worse than the check for a small company because unlike the majors… independents have to go out on the insurance market and that’s a difficult thing to do here,” Brena said. “Ultimately for a small, independent — in our case we checked on it, they wanted 100 percent of the bond amount in cash plus they wanted a 2 or 3 percent fee.”

In July 2017 the Alaska Oil and Gas Conservation Commission lowered the $1.3 million bond amount for the Tiger Eye well to $800,000. Both wells having since been plugged, the commission dropped both requirements completely in its Friday order.

Plugging the Tiger Eye well — which required installing five cement plugs and removing 800 feet of ice that had built up in the well — cost between $700,000 and $720,000, Brena told the commissioners. Plugging the Shadura well took longer due to the snow road requirement, but was less costly because the well was about 2.1 miles from the road system, Brena said. At the September 20 hearing he said NordAq had set aside $483,826 for the work.

Reach Ben Boettger at bboettger@peninsulaclarion.com.

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