Hilcorp requests inlet royalty reductions

Division of Oil and Gas approves 5% royalty for oil production from Monopod Platform, denies reduction for Steelhead oil production

Kristen Nelson

The Alaska Division of Oil and Gas has approved one Cook Inlet royalty reduction request from Hilcorp Alaska and denied a second.

The requests are based on a state statue which allows lessees of oil fields offshore in Cook Inlet to pay a reduced royalty rate - 5% vs. 12.5% - for production from a platform if production is certified by the Alaska Oil and Gas Conservation Commission to be less than 1,200 barrels per day during the preceding calendar quarter.

The division said the statute applies where production equaled or was more than 1,200 bpd and dropped below 1,200 bpd based on reservoir conditions, but not if the reduction was due to mechanical factors, environmental or facility constraints or market conditions.

Hilcorp applied for royalty reduction at the Monopod and Steelhead platforms, both in the Trading Bay unit.

Monopod Platform

The statute requires that the division determine “that the reduction in production from the platform or the field is based on average daily production during the calendar quarter based on reservoir conditions, and not the result of short-term production declines due to mechanical or other choke-back factors, temporary shutdowns or decreased production due to environmental or facility constraints, or market conditions,” the division said in its Sept. 9 approval.

Hilcorp told the division the Monopod production decrease “was due to mechanical issues in the A-07 well at the platform, as well as natural; decline of the existing wells.”

The A-07 had been producing some 150 bpd.

“Even without the issue with the A-07 well, Hilcorp estimates a 13.6% natural production decline rate at Monopod.”

In its decision the division said it reviewed information provided by Hilcorp and analyzed AOGCC production data for all the Monopod wells and determined the production decline at the Monopod was due to natural decline, not mechanical or other factors. Hilcorp’s decline rate places average daily Monopod production below 1,200 bpd in both the fourth quarter of 2020 and the first quarter of 2021, the division said, and the royalty for Monopod oil production is reduced to 5%, retroactive to the January2021 production month.

Steelhead Platform

Hilcorp claims, the division said, that the production decrease was primarily due to scale issues in the M-31B well, ultimately leading to short-term production cessation from the well in the first quarter of 2021. Hilcorp also attributed the production decline to “an estimated 14.7% decline rate in the West Foreland wells.” The company said high decline rates at the West Foreland wells are because they are solely producing on primary depletion with very limited injection into the West Foreland reservoir.

Hilcorp said the M-31B well was treated with acid in April 2021 to remove scale but the electric submersible pump failed in May 2021.

The division said Hilcorp’s requested effective date of April 1, 2021, for royalty modification was based on first quarter 2021 decrease in production and does not meet statutory requirements.

“The M-31B temporarily ceased production in May 2021 due to a mechanical problem with the ESP, which caused a decrease in total Steelhead production during the 2nd quarter of 2021. If the ESP had not failed, the Division estimates that 2nd quarter production would have been greater than 1,200 BOPD, which is also consistent with Hilcorp’s submitted decline curve analysis. Therefore, the Division finds that the facts do not justify a royalty rate reduction to 5% for the Steelhead.”

The disapproval is based on the decrease being due to a mechanical failure, the division said.