Wednesday, July 10, 2013

Cook Inlet Energy appeals Otter unit denial, questions state’s ‘new policy’

—Wesley Loy

Cook Inlet Energy LLC is appealing the state’s recent rejection of its Otter unit application, arguing the decision goes against past practice and “undermines” the governor’s efforts to spur oil and gas development.

The June 13 appeal was filed on the letterhead of law firm Crowell & Moring.

Otter is a natural gas prospect on the west side of Cook Inlet.

Cook Inlet Energy had applied to form a 5,855-acre unit out of portions of four state oil and gas leases.

Creating the unit holds some urgency for the company, as two of the leases could soon expire. Unitization has the effect of extending lease terms.

On May 23, however, state Oil and Gas Director Bill Barron denied the Otter unit application. He found, among other things, that unitizing the acreage wasn’t necessary, and that Cook Inlet Energy had yet to prove a viable reservoir for development.

Otter in jeopardy?

Cook Inlet Energy is the young subsidiary of Miller Energy Resources Inc., a publicly traded company based in Tennessee.

The Otter unit appeal is addressed to Dan Sullivan, the commissioner of the state Department of Natural Resources.

Unless Barron’s decision is reversed, the appeal says, further drilling “will most likely not occur” on the Otter prospect.

While Barron said the company could proceed lease by lease, Cook Inlet Energy argues no prudent company would move forward with drilling if part of the lease hold overlying the Otter structure is about to expire.

“Investors simply are not going to commit capital for a project unless the acreage position is secure,” the appeal says.

The appeal further says Cook Inlet Energy already has spent, to date, more than $10 million on exploration activity at Otter, and plans to spend $2 million more to prove up the gas reservoir — if the Barron decision is reversed.

‘Rolling the dice’

The Otter prospect is about nine miles north of the ConocoPhillips-operated Beluga River gas field.

Cook Inlet Energy already has drilled one exploratory well at Otter, on lease ADL 390579, and plans to re-enter the well to deepen it. The lease’s primary term already has elapsed, but the company is able to hold it with the drilling operations.

An adjacent lease is due to expire on Sept. 30, while the other two leases are good through February 2018.

The company has spoken positively of what it has found at Otter so far, and says it already has received state approval of a gas pipeline right of way.

In its appeal, Cook Inlet Energy touted its vigor since forming in 2009, describing itself as “nimble, diligent, and willing to explore and develop prospects long neglected.”

The company noted how it took over and revived a collection of shut-in assets from Pacific Energy Resources Ltd., a company that went bust.

Since 2009, Cook Inlet Energy has invested some $41.5 million on the offshore Redoubt unit, and $13.3 million on the West McArthur River unit. What’s more, the company says it has bid millions of dollars in Cook Inlet lease sales, and is pursuing multiple drilling projects in the Cook Inlet and Susitna basins.

The appeal says Barron’s decision goes against the stated goal of Gov. Sean Parnell, as well as the Alaska Legislature, to see more investment in Cook Inlet where gas deliverability has become strained and where an “oligopoly” exists in the gas supply market.

Barron is “rolling the dice” that the Otter acreage will be developed lease by lease, and his decision “will have a chilling effect on attracting new companies and investors to Cook Inlet,” the appeal says.

Change of policy suspected

In his denial, Barron noted that while Otter shows clear potential for a hydrocarbon accumulation, Cook Inlet Energy “has been unable to provide evidence of a reservoir at the Otter structure.”

A major argument in the company’s appeal is that Barron and the Division of Oil and Gas appear to have unlawfully adopted a new policy against “exploration units.”

“This new policy runs counter to DNR’s statutes, regulations and DNR’s past practice,” the appeal says.

The company also argues that, in denying the unit, the state denies Cook Inlet Energy the ability to explore and develop the leases in the most rational manner, with the least surface impact.

Cook Inlet Energy is asking the DNR commissioner to vacate Barron’s decision, and to direct Barron to form the Otter unit and work with the company to “address any perceived deficiencies.”

The company also is asking that the commissioner clarify DNR’s unit policy, as Barron “disregarded DNR’s unitization regulations and DNR’s past practice.”

Finally, Cook Inlet Energy wants the commissioner to convene a hearing on its appeal.

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