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Rental reduction on small lease denied
Three Mountain Oil holds lease south of Nuiqsut, adjacent to Colville River; has proposed well and drillsite ConocoPhillips lease
Kristen Nelson Petroleum News
Derek Nottingham, director of the Alaska Department of Natural Resources' Division of Oil, has denied a request for a rental reduction received Nov. 8 from Three Mountain Oil LLC on oil and gas lease ADL 393691.
The request was filed by James Winegarner, owner/manager of Three Mountain Oil LLC on behalf of working interest owners J. Andrew Bachner, Keith C. Forsgren and Three Mountain Oil LLC.
The small lease, 102.87 acres, is some 3 miles southeast of Nuiqsut on lands with undivided interests jointly owned by the state of Alaska and Arctic Slope Regional Corp. Three Mountain Oil holds a 50% working interest in lease ADL 393691; J. Andrew Bachner holds 45%; and Keith C. Forsgren holds 5%.
The lease was issued effective May 1, 2018, with a 10-year primary term ending April 30, 2028.
The rental rate increases over time.
For years one through seven the rental is $10 per year per acre or fraction thereof; for years eight through 10 the rental rate is $250 per acre or fraction thereof.
The rental rate beginning in year eight may be reduced to $10 per acre or fraction thereof, in the year following the beginning of sustained production or, upon request and at the sole discretion of the state, if the lessee has exercised reasonable diligence in exploring and developing the lease. In making such a determination the division said the state will consider funds expended to explore and develop the lease and types of work completed.
Work cited The division's decision said Three Mountain listed work completed as subsurface interpretation of potential hydrocarbons by Shuvajit Bhattacharya PhD, dated Jan. 27, 2020, for which applicant claimed $5,000 in expenses.
Three Mountain sent a Mustard Seed No. 1 well proposal dated April 27, 2023, to ConocoPhillips Alaska Inc. and a Mustard Seed drillsite proposal letter dated July 16, 2024, to ConocoPhillips, Santos and Repsol.
The April 27, 2023, proposal for Mustard Seed No. 1, addressed to ConocoPhillips Alaska Inc., proposes a well targeting the Nanushuk formation at a true vertical depth of some 5,000 feet, to be drilled from the Mustard Seed leases, including ADL 393691 and a 5,760-acre lease held by ConocoPhillips. Three Mountain Oil is proposed as the operator; a spud date on or before April 1, 2026, is proposed; estimated dry hole cost is $20 million; and a success case is described as a horizontal sidetrack in productive formation.
Proposed costs would be borne 98.245399% by ConocoPhillips Alaska, as the working interest owner of 5,760 acres of the proposed 5,862.87 total pooled acres; 00.877300% by Three Mountain Oil, as WIO of 51.435 acres in the pooled area; 00.789571% by J. Andrew Bachner as WIO of 46.2915 acres in the proposed pooled area; and 00.087730% by Keith C. Forsgren as WIO of 5.1435 acres in the pooled area.
Winegarner attached a copy of a text reply from ConocoPhillips that the company was not interested.
The July 15, 2024, proposal for the Mustard Seed Pad also drew a lack of interest response from ConocoPhillips. That proposal was also sent to Santos and Repsol; those companies also hold acreage adjacent to ADL 393691. The proposal for the Mustard Seed Pad was to place it on the adjacent lease held by ConocoPhillips from the Arctic Slope Regional Corp. and have the pad available for use by adjacent leaseholders including Santos as well as Three Mountain Oil and ConocoPhillips.
Three Mountain Oil told the division that the Mustard Seed lease is on the west bank of the Colville River and regulations require drilling activity to be 1 mile from the river. The company said the lease "is boxed in on all sides with challenging regulatory and operational constraints."
Denial of rental reduction In denying the rental reduction the division said "Three Mountain did not conduct sufficient exploration or development activities on the Lease to inform new phases of exploration and development."
"Notwithstanding Three Mountain's references to difficulty with regulatory and operational constraints and lack of cooperation by lessees on lands adjacent to the Lease, the Division relies on significant lessee investment and action to characterize potential reservoirs and design drilling programs to develop them," the decision said, and concluded that expenditures made and work completed did not reflect "reasonable diligence to explore and develop" ADL 393691 and denied the rental reduction request for the eighth through tenth years of the primary term of the lease.
The division said Three Mountain may apply for rental reduction for the ninth and tenth years of the primary lease term.
The decision may be appealed to the DNR commissioner within 20 calendar days of the issuance date of the decision; the decision must be appealed to the commissioner before being appealed to the Superior Court.
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