Kachemach unit saga
 Click here to go to the full PDF version of this issue, with any maps, photos or other artwork that appears in
some of the articles.
Termination follows yearlong efforts to unify efforts west of Kuparuk
Eric Lidji For Petroleum News
The area between the Kuparuk River unit and the Colville River unit has been called “the billion-dollar fairway” because of its prospective geology and proximity to infrastructure.
And yet, the region hosts no production.
The recent termination of the Kachemach unit highlights the challenges in the crowded region, where numerous companies are simultaneously pursuing exploration projects.
Procedurally speaking, the Alaska Department of Natural Resources terminated the unit because operator Brooks Range Petroleum Corp. failed to propose an adequate remedy for curing a default. The North Slope unit went into default on July 25, 2013, after the company failed to drill either of two wells by May 31, 2013, as required by the unit agreement.
But the story behind the decision to terminate the Kachemach unit includes the work of two other lessees in the region: ASRC Exploration LLC and Repsol E&P USA Inc.
Four remedies Exploration activities in the region date to the 1960s.
But current activities began within the past decade. In December 2010, Brooks Range Petroleum asked the state to form the Southern Miluveach unit over 40 leases covering some 60,864 acres. The state approved two smaller units: the Southern Miluveach unit with five state leases covering some 8,960 acres and the Kachemach unit with 11 joint state of Alaska and Arctic Slope Regional Corp. leases covering some 16,487 acres.
The unit agreement split Kachemach into two exploration blocks - A and B - and required Brooks Range Petroleum to complete a well in Block A targeting the Caribou trend and another well in Block A targeting the Moonlight trend by May 31, 2013.
The unit went into default when Brooks Range Petroleum missed the deadline.
As is common in state land management, the Division of Oil and Gas gave the company a chance to cure the default. The cure involved drilling the two wells by May 31, 2014, with a year extension for the second well if the first one ended up being a dry hole.
Brooks Range Petroleum did not drill any wells at the unit by the new deadline.
On June 18, 2014, the Division of Oil and Gas gave the company a chance to propose a “remedy” for its failure to cure the default, which is also a standard part of the regulatory process. In such cases, one of the potential remedies is the termination of the unit.
In a July 17, 2014, response, Brooks Range Petroleum proposed four remedies.
Of those, two concerned properties outside the Kachemach unit. The first was for the state to approve an expansion of the nearby Placer unit. The second was for the state to extend the terms of nearby Brooks Range Petroleum leases located outside the unit.
The other two remedies involved shrinking the Kachemach unit.
In the first, Brooks Range Petroleum would have voluntarily relinquished the leases in Block B, which would have contracted the unit to Block A. In the second, Brooks Range Petroleum also would have contracted the unit down to Block A. But then it would have considered asking the state to expand Kachemach to include the nearby Placer unit or the proposed Tapqaq unit. If the state agreed to the expansion, the company would either have committed to specific exploration work for Block A or have relinquished the unit.
Brooks Range Petroleum asked the state to keep its July 17 response confidential because the document contained “the proprietary commercial strategy of our company.”
While state statute offers confidentiality for certain types of information, “commercial strategies” is not among them, according to the state. Petroleum News requested the document, but the Department of Law had yet to process the request by press time.
Information in this article about the contents of the July 17 response came from a paraphrased reference to the four remedies in Sept. 5 ruling from the state.
The ruling rejected all four proposed remedies.
While recognizing why Brooks Range Petroleum would want to “consider the status of other projects when making decisions about (the Kachemach unit),” Natural Resources Commissioner Joe Balash wrote that the state “considers whether to terminate a unit based on issues related to that unit.” That negated the first two proposed remedies.
Balash rejected the other two remedies “because they do not sufficiently protect the public interest.” Specifically, he wrote, the proposals would have allowed the company to hold leases without making specific work commitments for exploration activities.
The Placer saga The proposed remedies show Brooks Range Petroleum trying to unify the Kachemach unit and the Placer unit, which are adjacent in the area west of the Kuparuk River unit.
The Placer leases were originally a prospect within Kuparuk. Operator ConocoPhillips Alaska Inc. drilled Placer No. 1 and Placer No. 2 in February and March 2004, respectively, and later farmed out the prospect to ASRC Exploration LLC, an exploration arm of Arctic Slope Regional Corp., an Alaska regional Native corporation based in Barrow.
The leases contracted out of the unit in June 2005 and later expired. ASRC re-acquired the prospect in a 2006 lease sale and became operator of Placer No. 1 in June 2010.
In January 2011, ASRC applied to form the Placer unit over four leases covering some 8,769 acres. In September 2011, the state approved a four-lease unit covering just 1,480 acres, which included a 3,500-foot drainage radius around the bottom hole location of Placer No. 1. The unit agreement gave ASRC Exploration until the end of 2011 to re-process seismic data and until June 30, 2013, to drill a well or re-enter Placer No. 1.
In mid-2012, after reprocessing the seismic data, ASRC Exploration asked the state to expand the unit to include all of the acreage it had originally requested - 8,769 acres.
According to the company, the seismic data “indicates that the Kuparuk sand at Placer extends well beyond the current unit boundaries.” Specifically, the Placer sand appeared to merge with Brooks Range Petroleum’s Appaloosa prospect, located to the south.
The state denied the expansion request in January 2013, saying the company needed to meet its original work commitments before it should be granted a six-fold expansion.
ASRC Exploration appealed the ruling. Without an expansion, the company claimed, any drilling at Placer would essentially create a “twin” of the existing Placer No. 1 well.
Uniting the units The two companies came together later in the year.
Officials from ASRC Exploration and Brooks Range Petroleum met with the state on Sept. 12, 2013, to present “a unified position” for exploration in the greater Placer area.
Working together, the companies proposed drilling an exploration well in 2014.
The meeting convinced the state to approve the expansion. The decision gave ASRC Exploration until June 30, 2014, to test Placer No. 1 and drill a second well. The decision also required ASRC Exploration to post $5.4 million in performance bonds and gave the company until Dec. 15, 2013, to finalize the farm-out with Brooks Range Petroleum.
Soon after the ruling, Brooks Range Petroleum filed an exploration plan to drill the Placer No. 3 and Placer No. 4 wells. But the company told Petroleum News that the filing was merely a contingency and that the companies still needed to finalize an agreement.
The agreement never materialized, at least not to the satisfaction of the state.
“Unfortunately, and not due to a lack of effort on (ASRC Exploration’s) part, successful implementation of those terms was not achieved despite several extensions,” Balash wrote in a March 7, 2014 letter to ASRC Exploration President Teresa Imm.
By that time, the billion-dollar fairway had become even more complicated.
In addition to the pending drilling commitments at Placer and Kachemach, Repsol E&P USA Inc. had recently spud the Qugruk No. 5 exploration well in the region and appears to have applied to form the Tapqaq unit. (The March 7 letter made passing reference to the proposed Tapqaq unit, noting only that it would contain the Qugruk No. 5 well.)
With the Placer unit, the nearby Kachemach unit and the proposed Tapqaq unit, “three lessees intend to drill multiple wells in adjacent leases which are already unitized, or proposed to be unitized, and those wells may be targeting the same potential reservoir or reservoirs,” Balash wrote. Given the potential for inefficient development, “I have decided to defer unit decisions in this area until the end of the drilling season,” he added.
That deferral may have mistakenly led Brooks Range Petroleum to conclude that it had some breathing room at Kachemach. According to the Sept. 5, 2014, termination notice from Balash, Brooks Range Petroleum “referenced” the March 7 deferral letter in its July 17 response proposing the remedies for its failure to cure the default at Kachemach.
“This letter does not state, nor should it in any way be interpreted to imply, that my decision on any given matter is dependent on whether I affirm or deny another matter,” Balash wrote. “Facts pertaining to surrounding land or to the parties can be pertinent to a decision. But DNR considers each application and decision on its own merits. I will not affirm one appeal in exchange for denying another, nor will I affirm an appeal in exchange for a party agreeing to consider performing work in another area.”
Stepping stones If all goes well, Brooks Range Petroleum will become the first company to develop the billion-dollar fairway next year, when it brings the Mustang field into production.
The Mustang field is part of the Southern Miluveach unit, which the state split from Kachemach. The current Southern Miluveach unit is south of the Placer unit and southeast of the Kachemach unit. The area between is a swath of un-unitized leases.
Brooks Range Petroleum is developing the field through a public-private partnership with the Alaska Industrial Development and Export Authority. The public corporation invested $20 million in a $24 million infrastructure program including a road and drilling pad at the field and is investing up to $50 million in a $225 million processing facility.
When AIDEA was considering its initial investment in the Mustang project, no later than 2012, officials saw the potential to use the field as a “stepping stone” to improve the economics of other fields in the region. Toward that end, AIDEA required the processing facility to be established in an “open use” arrangement and has encouraged Brooks Range Petroleum to expand the facility in the future to accommodate regional production.
How those aspirations will play out remains to be seen.
| 