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Home My WebLink AboutCO 391 BConservation Order Cover Pa~ XHVZE This page is required for administrative purposes in managing the scanning process. It marks the extent of scanning and identifies certain actions that have been taken. Please insure that it retains it's current location in this file. ~_~',//_',~ Conservation Order Category Identifier Organizing RESCAN DIGITAL DATA OVERSIZED (scannable with large plotter/scanner) [3 Color items: [] Diskettes, No. [] Maps: [] Grayscale items: [] Other, No/Type [] Other items [] Poor Quality Originals: OVERSIZED (Not suitable for [] Other: plotter/scanner, may work with 'log' scanner) [] Logs of various kinds [] Other · NOTES: BY: ~~ARIA Scanning Preparation TOTALPAGES-<~l C~-- Production Scanning Stage 1 PAGE COUNT FROM SCANNED DOCUMENT: ~ )~ PAGE COUNT MATCHES NUMBER IN SCANNING PREPARATION: ~YES NO Stage 2 IF NO IN STAGE 1, PAGE(S) DISCREPANCIES WERE FOUND: YES NO ~t J MARIA (SCANNING IS COMPLETE AT THIS POINT UNLEBB BPECIAL ATTENTION IS REQUIRED ON AN INDIVIDUAL PAGE BASIS DUE TO QUALITY, GRAYBCALE OR COLOR IMAGES) General Notes or Comments about this Document: 5/21/03 ConservOrdCvrPg.wpd RECORD OF REMAND FOR HEARING CONSERVATION ORDER 391B VOLUME 1 1. December 3, 2001 - Fax from Mr. Donkel regarding Commission Decision 2. December 24, 2001 - Petitioners Application for Rehearing, signed by Donkel and Allen 3. December 24, 2001 - Petitioners Application for Rehearing signed by Brown 4. December 24, 2001 - George Kasper's "An affected person's application for rehearing under Alaska Statute 31.05.080 5. January 3, 2002 - Commission's Order Granting Rehearing For Further Consideration 6. January 22, 2002 - Order Extending Time for Decision on Applications for Rehearing 7. February 8, 2002 - Final Decision on Applications for Hearing, Errata Notice 8. February 8, 2002 - Decision on Remand 9. March 8, 2002 - Order Allocating Costs Of Hearing COI, SNSEL OF RECORD KEEP ON TOP OF FILE NAME MAILING ADDRESS & PHONE NUMBER FOR WHOM CASE NO. COUNSEL OF RECORD NAME MAILING ADDRESS & PHONE NUMBER o! TF-900 (1/98)(5½ x 8½)(canary-cs) KEEP ON TOP OF FILE FOR WHOM TRANSMITTAL OF AGENCY RECORD TO: Superior Court Appeals Clerk Date: June 21, 2002 P.O. Box l141ff) (Corot Addre.~) Juneau, 3X 99811 FROM: Alaaka Oil & Gas Conservation Ccmnission (Nnme of Agency) Jody Colonbie (Nnm¢ of Pcr~on at Ag~cy) 333 West 7th Ave. #100 (Address) Anchorage, AK 99501 Case Name: lknco International Oil & Gas Inc. et al vs Alm.qka Oil g C.q.q ('Dn.q=rvat~on Cn-~,~sion et a' Trial Court Case Number: 1JU - 02 2~2CI Agency Case Number: Pagination of the agency file has been completed. In accordance with Appellate Rule 604(b)(1)(B)(ii)and (iii), the following items are being forwarded to you: volumes of agency file (a copy) The file is numbered from page 1 to 4638. volumes of transcript (original) volumes of depositions (copies) 20 list of exhibits being forwarded (List only thOse not included in the agency file.) 14 envelopes/boxes' containing exhibits 0 Attached list of exhibits retained by agency X other: NotiCe Re: IndJvJdum].q A~rhorized to view confidenl;iol _mrt~ons of records. If the court needs any of the exhibits being retained by the agency, the court must contact the following person: Name: Title: Special Staff Assistant Phone No. 907-793-1221 June 21, 2002 Date AP-312 (7/94)(cs) O- ~/t~ge~y ~tepresentative Location' Anchorage, AK TRANSMITTAL OF AGENCY RECORD OVERSIZED EXHIBITS RETAINED BY AGENCY Non-Confidential Bates # 1438 Bates # 1712 Bates # 1713 Bates # 1721 Bates # 1722 Bates # 1906 Bates # 1907 Bates # 2616 Bates # 2749 Bates # 3918 Bates # 3664 Bates # 3934 Bates # 4618 Bates # 4619 Bates # 4638 Confidential Bates # 4620 Bates # 4621 Bates # 4622 Bates # 4623 Bates # 4624 Bates # 4625 Bates # 4626 Bates # 4627 Bates # 4628 Bates # 4629 Bates # 4630 Bates # 4631 Bates # 4632 Bates # 4633 Bates # 4634 Bates # 4635 Bates # 4636 Bates # 4637 N-S Cross Section North Cook Inlet Field North Cook Inlet Gasfield Expanded Unit A1 North Cook Inlet Gasfield Expanded Unit A2 ,/ North Cook Inlet Gasfield Expanded Unit A 1 W-E Cross Section North Cook Inlet Field Discovery Well Pan Am Cook Inlet State 1 Discovery Well Pan Am Cook Inlet State 1 W-E Cross-Section North Cook Inlet Field NCIU Type Logs Feb. 23, 2001 · NCIU Type Logs Feb. 23,200. N-S Cross Section North Cook Inlet Field W-E Cross Section North Cook Inlet Field Commission Exhibit 1 NCIU Area Map, dated 4/23/01 .Lappi Exhibit 2-9 Sunfish Prospect, dated 3/13/01 BMC 6.11 Hand Drawing Map 1 Shot Point Base Line 1 Nose Line (Strike) · Map 2 Productive Isochron Line 2 Platform Line Line 2A Platform Line Map 3 Near Top Sterling Gas Line 3 Seismic Line 3A Seismic Nose Line Dip Map 4 N Top Sterling AMP Line 4 Saddle Seismic Line 4A Saddle Seismic · .Map 5 Channel Sands Map 6 Time Contouring in Top Sterling Gas Map 7 Near Unit Base :'Map 8 Deep Beluga? Reflector .'Map 9 Deep Reflector .,Map 10 Deep Reflector Map 11 Deepest Reflector 90'72798644 ATTORNEY 6ENERAL'$ OFF ·.. ~ O0 2,/0¢'8 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 W 7th Ave., Suite 100 Anchorage, Alaska 9950 ! Re: THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North'Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit March 7, 2001 ORDER REGARDING CONFIDENTIALITY Phillips Alaska Inc and Phillips Petroleum Co. ("Phillips") has filed certain seismic data and related testimony under seal and has requested a protective order under which the petitioners would have access to this confidential material subject to specified restrictions. The petitioners have opposed this motion and have also moved to strike all of Phillips' pre-filed testimony and exhibits on several grounds including attorney-client privilege. The petitioners argue the seismic data and related testimony should not be treated as confident/al at all, for several reasons including an asserted fiduciary relationship with Phillips. They have not suggested any alternate form of protective order or taken specific issue with any of the particulars of the proposed protective order. in the absence of any proof that the petitioners are entitled to the seismic data under the terms, of a fiduciary relationshil~, the Commission fmcis that the data are entitled to protection. The Commission further finds that the restrictions proposed by Phillips are reasonable under the circumstances. The petitioners motion to strike is still pending, as Phillips has not yet had an opportunity to respond. In order to insure the petitioners will have an opportunity to review the seismic data and related testimony in preparation for the hearing in this matter, the Commission will grant Phillips' requested protective order subject to a later ruling on the motion to strike, NOW THEREFORE IT IS ORDERED: The attached Order Governing Confidentiality of Phillips' Seismic Information Filed Under Seal is granted. 2003 .. ..... Ot~D~R REGAI~D1]~G CO~~LI]']~ DANCO~ INC. ATTORNEY GENERAL'S OFF Ma~h 7, 200] I~ 0(:'3,,,"(;,6,8 DONE at Anchorage, Alaska, this 7th day of March, 2001. Seamount, Jr., Commissioner Alaska Oil and Gas Conservation Commission '1 CarniI16 Oechsli Taylor, CommiSsioner Alaska Oil and Gas Conservation Commission I certify that on. J- '~J ~/~ ,a copy of the above was faxed amd mailed to each of the following at their addresses of record: Mr. William B. Rozell Mr. C. R, Kennelly Ms. Toni Tadolini Mr. Frederic E. Brown Daniel B. Helmiek, Municipal Light & Power Warren Z. Buck 90727~8644 ^TTORNE'f ~ENER^L'$ OFF I~ 0 0 ~ ,,," 0 0 8 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West Seventh Ave., Suite 100 Anchorage, Alaska 99501 Re: THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook inlet Unit ORDER GOVERNING CONFIDENTIALITY OF PHILLIPS' SEISMIC INFORMATION FILED UNDER SEAL Phillips Petroleum Company and Phillips Alaska, Inc. (jointly "Phillips") have flied a Motion to Protect the Confidentiality of Certain Seismic information dated February 27, 2001. The entry of such an order is necessary to protect the confidentiality of valuable proprietary seismic information for the reasons set forth in Phillips' motion. The terms permitting access to and usage of the sealed information as proposed in Phillips' motion are reasonable. Accordingly, IT IS ORDERED THAT: I - The information filed by PhilLips under seal will be maintained by the Commission under seal. No one other than the Commission, its staff and I] E~,,'" 11 ,,'" ..' . . V °0.0° 14'5] ~A',K $072758G44 ATTORNEY GENERAL'S OFF I~ 0 0 5 ,," 0 0 8 representatives of Phillips will be allowed to see the information except as provided here, 2 - The petitioners, their counsel and expert witnesses testifying in this ,. hearing ("Danco Litigation Group") shall be allowed to view the sealed information at the AOGCC offices or at Phillips' offices on the following conditions: a. that they limit their use of the sealed information to use in this proceeding only, and they will make no use of the information for commercial, competitive, or other purposes; b. that they not discuss the information or make any other disclosure of the information to any person other than the Danco C. Litigation Group or Phillips or AOGCC representatives~, ~' Pt~ c"~ / )' that the petitioners will not make any copies or notes concerning the sealed information; d. that petitioners' counsel and experts may make copies of sealed testimony and notes regarding sealed exhibits for use in , preparing for and presenting their case in this proceeding, but they may not make copies of sealed exhibits; e. that petitioners' counsel and experts will not disclose the contents of their notes or copies of testimony to any other persons (except to discuss them with petitioners for purposes of 9072798644 ATTORNEY 6ENER^L'$ OFF ~ 6('. 6,,," O0 @ .preparing their case herein), and that they will return or destroy all copies, notes or records of any kind concerning the sealed information at the conclusion of this proceeding. this proceeding will be deemed concluded 30 days after the entry of a final order, judgment or decision and the expiration of any statutory or court rule deadline for seeking reconsideration or for filing, an appeal from such' a final order, judgment or'. decision; g~ any memoranda, exhibits or' other papers prepared by the Danco Litigation Group for use in this proceeding that discuss or disclose'sealed information shall also be filed with the Commission (or any subsequent adjudicatory body) under seal, and protected in the same manner as the originally sealed information; h. individual members of the Danco Litigation Group shall be allowed access to sealed information only after they have signed a copy of the Commission's order governing access to and use of sealed information, stating that they have read the order and agree to comply with its terms. Copies of the signed order shall be filed with the Commission and served on Phillips. 3 - The portion of any hearing discussing the sealed information will be closed to the public. Any transcript or other record of that portion of the hearing shall be separately transcribed or recorded and will also be maintained under @072798644 ATTORNEY 6ENER^L'$ OFF seal and protected in the same manner as the originally protected information. Attendance at that portion of the hearing will be limited to the Danco Litigation Team and representatives of Phillips and the AOGCC. 4 - Should any other party seek to participate in this proceeding, that party and its representatives will not be allowed access to sealed information unless a separate order is entered governing their access to and use of such Information, DONE at Anchorage, Alaska, this "7 day of /h .~.,-c'~ ,2001. Daniel T. Sea...~~, Jr., Commissioner Alaska OI1 ~d Gas Conservation Commission Camill60echsli Taylor. Commid6Joner Alaska Oil and Gas Conservation Commission' Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission AGREEMENT TO COMPLY WITH TERMS OF ORDER /~'/~t..¢.~../I~'i,,/.)~-Y"~. states that he or she is a member of the Danco [_~i~ation-Gr~u.p as defined in the foregoing Order, has read the Order, and agrees to comply with the terms and provisions of the Order, Dated this z.-~, day of Sr'~, 200~. FAX 807279884,4 ATTORNEY BENERAL'S OFF [~ CI CI I~ .,'" (,'1 0 8 l certify that on , a copy of the above was mailed and faxed to each of the following: C.R. Ke e~lly [ad,~es's of record] WiLliam B. Rozell [address of record] Freder) ,B~~wn [a,~ss of record] Toni T~i~''~ la.ss of record] of the above was '~ed/~i~ to eacl! .of the fol~n§ ~:t thor ~~ ~ IN THE SUPERIOR COURT FOR THE STATE OF ALASKA FIRST JUDICIAL DISTRICT AT JUNEAU Danco International Oil & Gas, Inc. et al., Appellants, VS. Alaska Oil and Gas Conservation Commission, et al., Appellees. Case No. 1JU-02-00252 CI NOTICE REGARDING CONFIDENTIAL PORTIONS OF RECORD In addition to representatives of Phillips Petroleum Co. and Phillips Alaska, Inc., and members and staff of the Alaska Oil and Gas Conservation Commission, the following individuals, having signed the required confidentiality agreement, are as of this date authorized to view the confidential portions of the record in this case: 1. David LapPi 2. Neil Kennelly 3. Fredrick Brown 4. William Hieronymus 5. Monte Allen 6. James Givens DONE at Anchorage, Alaska, this 20th day of June 2002. Cammy Oe~sli Taylor, Chai~ Alaska Oil ~d Gas Conservation Commission Daniel T. Seamount, Jr., Commissioner Alaska Oil and Gas Conservation Commissi0r~ t certify t~st on ~Z~¢.~ of ~e a~ve ~ ~mai~ #1 DEC 03, 01 16:03 FMDS FAX PORT #1 P1 He,:~'m are the messaBes taken b9 Answerin8 Service, Inc. ,, (907) Z79-B76Z 850- 1Z/03/01 3:qSP 1Z/03/01 Z:18P TO: OFFICE NAME: DAN DONKEL~ CO NAME: NA PHONE; 30S q38 lllq$ URG V/N:: NO MESSAGE: TRYING TO FIND OUT IF THE COMMISSION RULED IN FAVOR OF DANCO AIND ALLEN EXPANSION OF NORTH COOK INLET UNIT 858: ~$~~~ END OF MESSAGES ~$$$~~ ThanR Dou for usin8 ABAS Answerin8 Service. .We,.appreciate Nour business! 3405 #2 Table of Contents Petitioners' Application for Rehearing ................................................................... 1 List of Exhibits ...................................................................................................... 2 Exhibit "A". ........................................................................................................... 3 Exhibit "B". ........................................................................................................... 4 Exhibit "C". ........................................................................................................... 5 RECEIVED Alaska Oil & Gas Cons. Commissior~ Anchorage 3406 #1 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 W. 7th Avenue, Suite 100 Anchorage, Alaska 99501 Re: THE APPLICATION OF DANCO, ) INC., for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 and ) ADL 369101 ) North Cook Inlet Unit December 24, 2001 PETITIONERS' APPLICATION FOR REHEARING Petitioners, Danco Inc. and Monte Allen ("Petitioners") hereby apply to the Alaska Oil and Gas Conservation Commission ("Commission"), pursuant to Alaska Statutes Section 31.05.080, for rehearing of the matters addressed in Conservation Order 391A (the "Order"), with respect to the involuntary expansion of the existing voluntary North Cook Inlet Unit ("NCIU") and integration of state oil and gas leases ADL 369100 and ADL 369101 (the "Danco Leases") into the NCIU. In support of this application, Petitioners state: Commission Erroneously Applied Standard for Creation of a New Unit to the Petition for Integration into an Existing Unit The Order concluded that Petitioners had failed to meet any "of the statutory requirements for an order requiring an expansion of the North Cook Inlet Unit .... "See Order, CONCLUSIONS at ¶13. This erroneous conclusion was based on the Commission's findings that the Petitioners presented no evidence that the integration of the Danco Leases into the existing voluntary NCIU would result in satisfaction of the factors set forth in Alaska Statute 31.05.110(b). See Order, CONCLUSIONS at ¶¶ 5-8. 3407 Namely, the Commission erroneously concluded that the Petitioners had the burden of demonstrating the following: "[T]hat the unitized management, operation and further development of the pool or portion of the pool is reasonably necessary in order to . . . substantially increase the ultimate recovery of oil and gas from the pool.. "[That one or more unitized methods is feasible...will prevent waste... and result in the increased recovery of substantially more oil and gas from the pool .... "[T]hat the estimated cost . . . of conducting such operations will not exceed the value of oil and gas so recovered. "[T]hat the unitization.., is for the common good." See id.; see also, AS 31.05.110(b). While Petitioners agree that the four factors set forth above (hereafter referred to as the "Unit Creation Factors") are applicable to the creation of a new involuntary unit, Petitioners dispute the Commission's finding that the Unit Creation Factors are applicable to a petition for integration and expansion into an existing voluntary unit. Section 31.05.110 (b) clearly states that if upon a petition for creation of a new unit, the Commission finds that the Unit Creation Factors are satisfied, then the Commission "shall make a finding to that effect, and make an order creating the unit .... "AS 31.05.110(b) (emphasis supplied). The Unit Creation Factors are irrelevant and do not apply to the Petitioners' request for expansion and integration into the existing voluntary NCIU, and they need only allege that integration of the Danco Leases into the NCIU is necessary to protect Petitioners' rights. See AS 31.05.110(a) (stating: "[T]o protect the correlative rights of persons owning interests in the tracts of land affected, these persons may validly integrate their interests .... Where... they have not agreed to integrate 3408 their interests, the commission.., has jurisdiction, power and authority, and it is its duty to make and enforce orders and do the things necessary and proper to carry out the purposes of this section.") (emphasis supplied). The Commission's conclusion that the Unit Creation Factors were determinative in a resolution of the Petitioners' claims on the merits of the petition is clearly erroneous in light of Alaska Statutes Section 31.05.110(q). Subsection (q) expressly states that subsection (b) of Section 31.05.110 is inapplicable to voluntary units such as the NCIU, yet the Commission has consistently, and erroneously, asserted that the Unit Creation Factors as set forth in subsection (b), are the Petitioners' burden to establish in these proceedings. See AS 31.05.110(q) (stating that "subsections (a) and (g)- (p) of this section [31.05.110] apply to all voluntary units formed in the state .... "). The costly burden that the Commission has applied to Petitioners is contrary to its duty to protect the rights of interest holders in lands affected by the NCIU. See AS 35.01.110(a); see also, Allen v. Alaska Oil and Gas Conservation Commission, 1 P.3d 699, 704 (Alaska 2000) (noting that Chapter 31, and specifically the statutes governing unitization, protect "the owners of rights of production... [and] rights of persons holding lesser interests."). Legislative history indicates that the Commission, and its predecessor agency, were established to force working and royalty interests to cooperatively unitize their interests so that such rights would be protected. See Letter of Intent, HB 815. If every overriding royalty interest owner or others seeking expansion of, and integration into, a unit voluntarily created by the big oil companies was required to satisfy the burden of establishing the Unit Creation Factors and many other burdens imposed by the Commission, then unit operators would be free to simply exclude those persons owning 34O9 interests in the tracts of land affected by such voluntary unit, who were without the extensive resources required to overcome such a burden. Clearly, this could not have been the Alaska legislature's intent when it created the Commission, charged it with a duty to protect such interest holders' rights, and granted it police powers to prevent just such an injustice from occurring. See, e.g., AS 31.05.027. Commission Failed to Investigate Petitioners' Properly Pled Petition Alaska Statutes Section 31.05.030(b) charges the Commission with a duty to "investigate to determine whether or not waste exists.., or whether or not other facts exist which justify or require action by it." The Commission has failed to take any such action with respect to Petitioners' properly pled petition. Even the findings of the Commission in the Order, demonstrate that the Commission has undertaken no independent investigation of the matters, but instead simply adopted to use the skewed and very limited data presented by Phillips Petroleum Company and Phillips Alaska (hereafter collectively referred to as "Phillips"). The contradictory and incomplete factual findings recited in the Order clearly demonstrate that the Commission ignored its statutory duty to undertake an investigation of Petitioners' claims. See Statement of Peter Huddleston, P.E., attached hereto as Exhibit "A" (opining that the Commission's findings and conclusions as stated in the Order demonstrate that "the Commission is either in error with respect to its conclusions, or has a basic misunderstanding of the principles of petroleum engineering, geology and geophysics."). The Commission noted that Petitioners' witness, Dr. James Givens, presented evidence relating to the doubling, by nearly one trillion cubic feet, of the gas pool affected by the NCIU. See Order, Summary of Testimony and Findings at ¶ 3. Dr. 3410 Givens asserted that the doubling demonstrated that the pool clearly extended to the Danco Leases and, therefore, the NCIU was draining gas from the same. See id. The Commission found that the doubling "if any, in estimated reserves is explained by factors other than an increase in the areal extent of the reservoir." See id. The Commission seems to have found that on the one hand, no doubling of the gas pool has occurred (c.f., Alien, 1 P.3d at 700 (noting that the DNR reported an estimated increase in "previously undetected reserves of one trillion cubic feet of gas in the North Cook Inlet Pool"), and on the other, that if there has been a doubling of the gas pool, it is for reasons other than those advanced by Petitioners' experts. Clearly, because such questions remain unresolved, and because the Commission has failed to conduct an investigation into these matters, Petitioners have not had a full and fair hearing on the merits of their petition. In further contradiction of its conclusions in the Order, the Commission found that "one could not rule out" the "possibility" that the NCIU was draining gas from the Danco Leases. See Order, Burden of Proof at ~] 4. The Commission further found that because the Petitioners' had not established the Unit Creation Factors, this "possibility" was not sufficient to trigger full factual findings related to the merits of the petition for integration. See id In fact, the Commission found that simply the "possibility" that the Danco Leases were being drained of gas and deprived of royalties which at some estimates could exceed Two Hundred Million Dollars ($200,000,000.00), not only did not require thorough investigation or full exercise of the Commission's subpoena power, but that Petitioners' assertion that such investigation was appropriate made "nonsense" of the unitization statute. See id. Statements such as these throughout the Order not only clearly demonstrate the Commission's blatant disregard of its statutory duties and the 3411 member's oaths of office, but also openly and outwardly shows the bias of the Commission against Petitioners and their claims. In similar contradictory fashion, the Commission found both that Petitioner's expert witness, David Lappi, demonstrated the "possibility that the Tyonek Deep reservoir extends under the Danco Leases," and that the evidence did not show that any reservoir extended under the Danco Leases. See Order, Specific Findings at ¶¶ 105 and 106. This "possibility" also triggered the Commission's investigative duties, as the remand from the Alaska Supreme Court, per Allen, mandated full hearing and determination on the merits of Petitioners' claims. See Alien, 1 P.3d at 705. Petitioners' acknowledge that the Commission was free to assess the testimony and evidence presented by their witnesses. However, Petitioners' experts vigorously dispute the erroneous findings of the Commission with respect to the evidence presented. In support of their specific objections to the individual findings of the Commission, Petitioners submit the statements attached hereto as Exhibit "B". Commission Failed to Provide Petitioners with Due Process The Alaska Supreme Court has recognized that "[a]n impartial tribunal is basic to a guarantee of due process." Amerada Hess Pipeline v. Alaska Public Utilities Corp., 711 P.2d 1170, 1180 (Alaska 1986). Petitioners repeatedly objected throughout the course of proceedings before the Commission with respect to Commission members' conflicts of interest. One member of the Commission is a former employee of one of the parties, and, therefore, has a potential conflict. See Appointment Notice of Julie M. Heusser, Commissioner, attached as Exhibit "C", (noting that Commissioner Heusser was employed by ARCO, a company which has since been acquired by Phillips, 3412 and which owned a 40 % interest in the Danco Leases which are contiguous with the North Cook Inlet Unit). Another Commission member, Camille Taylor, is apparently conflicted because formerly, as an attorney with the Department of Law, Division of Oil and Gas, this member represented the Commission and/or the Department of Natural Resources. The Department of Law, Division of Oil and Gas participated in the proceedings before the Supreme Court which led to the May 12, 2000 opinion in Allen. The Department of Law, Division of Oil and Gas vigorously advocated against the Petitioners whose rights Commissioner Taylor is now statutorily charged with protecting in the proceedings before the Commission. With potentially biased members, the Commission arguably lacked the required two members to constitute a quorum to make the appropriate findings. ,gee AS 31.05.011. Due to this apparent bias the Petitioners reasonably believe that they cannot get a fair and full hearing with this Commission. Adding to the conflict, the Commission and the Alaska Department of Natural Resources have adverse interests in this matter, yet both are being represented by the Department of Law. The Alaska legislature contemplated such conflicts and expressly provided in AS 31.05.021 that the Commission~could seek independent counsel. Despite this apparent conflict, no such independent counsel has been appointed, and the Commission never even attempted to seek approval from the Attorney General for independent counsel. The Petitioners cite the statements found on the AOGCC's website The A. OGCC Official Website, Commission History, concerning this conflict of interest: "With the advent of production from Prudhoe Bay in 1977, the Legislature became concerned that there was the appearance of a conflict of interest with the Department of Natural Resources, an owner of oil and gas rights, also acting as the regulator of other owners of oil and gas rights. To obviate its concern, the Legislature amended AS 31..05 by Chapter 158, SLA 1978 to restore the 3413 Commission, effective January 1, 1979, as an independent quasi-judicial agency within the executive branch of the state. Initially, the new Commission was housed within the Department of Natural Resources, but in 1980 it was transferred to the Department of Commerce and Economic Development. More recently, Governor Hickel transferred the Commission to the Department of Administration on February 17, 1994." The Commission appears to have ignored the power and authority vested in them as a quasi-independent judicial agency by not exercising its apparent authority over AS 38.05.180(p), which requires that a unit plan "...must adequately protect all parties of interest, including the State." Clearly the North Cook Inlet Unit does not protect the State nor does it protect the Petitioners in our belief. Dr. Ovens testimony clearly shows that the State of Alaska and the Petitioners have apparently been severely damaged by not receiving the just fair share of the hydrocarbons produced. Furthermore, the Petitioners believe the State of Alaska is not getting its fair share of the price paid at the market for the gas produced when Phillips sells it at the Nikiski LNG (liquefied natural gas), and then it appears Phillips pays the State its royalty share based on that low price and not on the high price that Phillips receives when they truly market the gas in Japan, in our belief. According to the substantial amount of gas wrongfully draining open acreage, as indicated in Dr. Givens testimony, belonging to the State of Alaska could be costing the people of the State of Alaska hundreds of millions of dollars in lost revenue in which the Commission should be investigating and protecting the State's royalty interests as mandated under AS 31.05. The Commission has an affirmative duty to protect the Petitioners as well as the State whether petitioned or non-petitioned. The Administrative Codes promulgated under AS 38.05.180(p) concerning unitization are available to the AOGCC because the AOGCC must usurp AS 38.05.180(p) as indicated by law and such arrangement has been evidenced by understanding AS 31.05.110(q), which states: "This 3414 section applies to all involuntary units formed in the state. Subsections (a) and (g) through (p) of this section apply to all voluntary units formed in the state and to a voluntary cooperative or unit plan of development or operation entered into in accordance with AS 38.05.180(p)." [Emphasis added]. In further support of this argument we quote AS 31.05.027: "Land subject to commission's authority. "The authority of the commission applies to all land in the state lawfully subject to its police powers, including land of the United States and land subject to the jurisdiction of the United States. The authority of the commission further applies to all land included in a voluntary cooperative or unit plan of development or operation entered into in accordance with AS 38.05.180(p)." The AOGCC erred when they failed to fulfill the unit regulation and statutes. It is reasonable to find the Administrative Codes promulgated under 38.05.180(p) are available to the AOGCC when it comes to units. important findings and conclusions. The Order erred to make these In addition, in further derogation of Petitioners' due process rights, the findings and conclusions in the Order are based upon seismic data which the Commission denied Petitioners access to. See Petitioners' Post-Hearing Memorandum at ¶ 4 (noting that Alaska Rule of Evidence 106 was violated by Phillips ability to selectively' disclose seismic data relevant to Petitioners' claims). The Commission failed to provide Petitioners' expert witnesses the opportunity to evaluate and respond to Phillips testimony upon which the Commission based the majority of its findings in the Order. In addition, Petitioners' objections to a Phillips witness who had previously consulted with Petitioners' on the very issues on which he was to testify, were dismissed by the Commission as not "demonstrat[ing] the existence of a conflict of interest .... " See Order, Summary of Testimony and Findings at '~ 1. Petitioners' renew their objection 3415 with respect to this matter and in support thereof, submit the statement of David T. Gross, attached hereto as Exhibit "C." Under the purported authority granted to the Commission by 20 AAC 25.540(f), which was notably not in effect at the time the Petitioner's original petition was properly filed, the Commission has erroneously exercised its "discretion" to implement procedures which have consistently denied Petitioners due process. See 20 AAC 25.540(f) (enacted in 1999, and stating that "[t]he commission will, in its discretion, establish additional procedures for a specific hearing.., necessary to provide due process to a party"). These "procedures" placed onerous and unwarranted burdens on Petitioners, caused numerous delays, and cost Petitioners substantial sums of money, suffering and mental anguish. In this same vein, the Commission has chosen to ignore other established procedures under the law with respect to the proceedings. The Petitioner, Danco, Inc., through its proper officer, Mr. Donkel in attendance at the AOGCC Pre-Hearing Conference, October 12, 2000, made a point of order as stated in the Transcript, page 8, lines 8-9: "MR. DONKEL: I would object to anything that is not enforced by the Administrative Codes and Alaska Statute." The AOGCC's Order No. 391-A, fails to enforce the Alaska Statutes and Administrative Codes herein, and therefore once again is unfair to the Petitioners. The statute in effect at the time the original petition was filed, provided a fifteen day period in which interested parties could object to the Petition. See 20 AAC 25.540(a) ("A proper protest.., must be filed with the commission at its office in Anchorage, Alaska, within 15 days after the publication date by any person who may be harmed if the requested order issued.")(emphasis supplied). The administrative record does not indicate that any such protest was ever filed by Phillips. Despite Phillips' failure 10 3416 to interpose a proper objection within the statutorily permitted period, the Commission erroneously permitted Phillips to appear, after the fact, to oppose Petitioners' claims. Clearly, the selective access to data and pertinent evidence (which the Commission has a statutory duty to investigate), the conflict of both Commission members and adverse witnesses, the failure to of the Commission to make full and fair findings on the merits of Petitioners' claimed, and the procedural burdens placed on Petitioners, have denied Petitioners an impartial tribunal and due process of law. Clearly, the AOGCC failed to make a finding that the Petitioners have fulfilled all obligations under the law to receive full and just compensation. Petitioners require that the Commission fulfill its duty and make a finding and issue its order for Phillips to pay for the fair market value of the production that is due to the Petitioners, including interest since 1986. The Commission failed to make a finding according to AS 31.05.110 that a Petitioner is only required to file a Petition which invokes the Commission's affirmative statutory duty to do all things necessary to protect said Petitioners. Nothing further was required under law for Petitioners to do. Please do your duty and protect, safeguard and adjust the State of Alaska' s Lost Royalty Revenue as well as the Petitioners. The failure of the Commission to investigate and protect the Petitioners is in violation of Alaska Statutes and Administrative Code and is the major cause that renders Conservation Order No. 391-A, totally erroneous, in our belief. 11 3417 WHEREFORE, Petitioners request the Commission grant this Application for Rehearing and vacate Conservation Order No. 391A. Respectfully submitted, Daniel K. Donkel Danco, Inc. ~onte ~e~ Co-Pe~fioner CZaX CA ,Or Sra ,v!,, I hereby certify that true and correct copies of this Application for Rehearing were delivered to the following individuals: William B. Rozell PMB 506 617 W. Willoughby Ave. ea~ Alaska 99801 ..----.. Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, Suite 100 Anchor.age, Alaska 99501,. Dated this,~"' day of December, 2001. Toni Tadolini (or her successor) Phillips Alaska, Inc. 700 G Street, ATO 20 Anchorage, Alaska 99510 12 3478 #2 LIST OF EXHIBITS Statement of Peter Huddleston, P.E., attached hereto as Exhibit "A" Petitioners submit the statements attached hereto as Exhibit.,','B" Appointment Notice of Julie M. Heusser, Commissioner, attached as Exhibit "C" 3419 #3 December 21, 2001 __Via e-mail Mr. Daniel K. Donkel Danco, inc. 2121 North Bayshore Drive Miami, Flodda 33137 Re: AOGCC Conservation Order 391A Dear Mr. Donkel: Pursuant to your request we have performed a preliminary review of the AC)GCC finding reported in Conservation Order 3glA. On an overall basis, it would appear that the Commission has elected to report as fact the testimony of the Phillips experts and representatives and has totally disregarded the testimony of the Danco representatives. Although one might determine that the weight of evidence of one party or the other might prevail in such a situation, it is inconceivable that one position is totally correct and another is completely implausible. In some cases, it would appear that the Commission has mischaracterized the testimony of Dr. Givens. In others it has disregarded the testimony of Mr. Lappi on the grounds that he disregarded information such as check shot surveys. However, one must recall that the commission itself limited the amount of information available to Mr. Lappi under the subpoena requested by Dance. It is our understanding that it is highly uncommon for testimony to be allowed related to technical data that is not available to both parties. In the decision, the commission has placed itself in the position of stating facts relating to reservoir concepts. However, it also contradicts itself in at least on instance when discussing the matedal balance' calculations performed by Geoquest and the existence of multiple water contacts for separate horizons. A technical review relating to matedal balance will 'confirm that such methods apply only to a single reservoir or pressure system. In the event that them are multiple water contacts, then there must be multiple pressure systems and therefore separate reservoirs. It would appear, from reading the commission order, that either the commission regards itself as an authority on geology, geophysics and reservoir engineering, or in the alternative has adopted the entire body of testimony by Phillips as fact. However, to adopt the Phillips testimony, one must disregard at least some previous Phillips testimony provided in the formation of the unit, particularly with respect to the net pay included in the subject reservoir, This gives rise to a question of Phillips' credibility: if they are now correct, they must have been in error previously. 3420 Mr. Daniel K. Donkel Danco, Inc. December 21,2001 Page Two On an overall basis, it would appear that there are a number of instances where the commission is either in error with respect to its conclusions or has a basic misunderstanding of the principles of petroleum engineering, geology and geophysics. Please contact me at your convenience if we can be of any further assistance in this matter. Respectfully submitted, PDH:klh Peter D. Huddleston, P.E. 3421 #4 MEMORANDUM December 20, 2001 TO: Dan Donkel FROM: James W. Ovens Response to AOGCC Conservation Order No. 391A The following comments are my opinions and thou~s regarding the subject Order. In the limited time available, I have prepared these comments on errors that I have observed at this time. However, this does not limit further observanc~ made by me in the future noting that all the record in this case exc, c~s 10,500 pages. D. CIS, !0N,0N P. aVtXt I disagree with the Commission on their Order regarding the Petition of Danco and Allen and its denial. PROCEDURAL HISTORY AND SUMMARY OF PROCEEDINGS Dan, as you know this section covers meetings, hearings and etc., in which you and your attorneys have been involved. I think that you may have tried to obtain data and records about the North Cook Inlet Unit from Phillips in the year 2000 by some form of discovery and the Commission did not allow it and refused you and your experts the opportunity to prepare fully for the Hearing on March 13, 2001. On December 21, 2000, I did submit prefiled testimony and exhibits for the March 13, 2001 hearin~ and on May 21, 2001, prefiled testimony and exhibits for the June 14, 2001 continuation of the hearing were submitted. My testimony given at the March 13, 2001 hearing was qualified regarding information which had become available to prepare the prefiled presentatiom My testimony given at the June 14, 2001 continuation of the hearing was based on the same information and the information gained from Phillips' testimony and exhibits presented for the March 13, 2001 session, and the Commission's well files for the Unit wells which were obtained after the close of the March 14, 2001 session and without utilization of any seismic data from Dave Lappi's study of portions of Phillips seismic. (I believe this work of Dave Lappi was done in late May, 2001.) I testified to the AOGCC that my opinions and information base grew as the Hearing proceeded and more information became available to me. My May 21, 2001 testimony and exhibits represents what was known at its. preparation time. The June 14, 2001 sessions have added more knowledge by having heard Lappi's testimony and the Phillips experts' testimony. 3422 ISSUES ~OR DECtS~ON Dan, the first pan of this section is yours for response; i.e., Standing_ Standards. fo~ Involuntary Unit Expansion,. Extent of'Productive Reservoir, Additional Standards. Tho Multiple Pools sections needs to have the deep oil zone tested in the Shell No. 1 well added to the Iast paragraph. The Retroactivity issue is not addressed due to their denial of your Petitior~ Dan you need to comment on Burden of Proof. I believe that Commission has a duty to fully study and investigate and gather data to reach a proper conclusion of the facts. Phillips has data, interpretations and studies which have been withheld. Therefore, the Petitioners lack data to further prove their position is correct and proper. Also, the last paragraph of Burden of Proof is wrong in their statemem "...concludes that evidence fails to show...that NCIU is draining gas from Dance leases." My May 21, 2001 testimony shows draining is occur~g in all sands under the platform and removed from the platform, and the Phillips Order 40 testimony proved that the entire Sterling and Beluga sands can be drained by a single well at the platform. Hence, the Dance leases are being drained. FINDINGS Summary. Of. Testimony And Findings - Under this section at the second paragraph, first sentence, the end of the sentence where it states that my testimony focused on the implications of an fincrease in the estimated gas reserves in the NC1U and on several maps he proposed of gas reservoir limits showing the reservoir to extend under the Dance leases, "...based on reserves estimates..." This should be changed to: "...based on Phillips testimony at the Order 40 hearing, Phillips prefiled testimony and exhibits for March 13 and June 14 hearing sessions, exploratory well records, records of NCIU wells; discussions with Dan Donkel, David Lappi and Monte Allen; data received from the AOC~C files, reserves data from the ADNR, reserves data from GeoQuest, reserves a_n~lyses by Givens, and other materials referenced in his preffled testimony. The second sentence is okay. The third sentence should be changed to read, ~Iis main contentions are: (1) that the doubling of estimated for the NCIU since the 1960's is explained mainly by increasing the drainage area of the reservoirs; (2) that a linear projection of the top of the Stealing reservoir (Cook Inlet No. 1 Sand) in two exploration wells shows the reservoir extends under the Dance leases; (3) that NCIU well data shows that the lowest known gas for the Sterling and Beluga sands are lower than reported by Phillips and prove that the Sterling and Beluga sands are productive of gas under the Dance leases; (4) tl~ the measured bottom hole pressures (RFT data) show that the cluster well spacing has drained gas from the entire reservoirs as testified by Phillips at the 3423 Order 40 hearing (i.e., the Dance leases and NCIU are being drained); (5) that the Phillips 1967 map showed the productive limits cutting across two comers of what later bec~me the lease bounda~ of ADL 369101 and that parts of the adjacent leases which were totally outside the productive limits were included in the partiei~ing area and the Dance leases were not included; and (6) that Givens has shown thru the Dance leases and State of Alaska leases are productive and that the correlative rights and/or persons holding lesser interests of Dance and the State of Alaska have been violated. Dr. Givens does not agree with AOGCC £mds regarding that they reported as eomentions (1), (3), (4) and (5). SPECIFIC FINDINGS History Of Lease_s Dan, I have not checked the dates on leases or completeness of Findings 1-14. II. History.of Exploration and Delineation of Structth~ and Reservoirs Finding 15. Unfommately, the discovery well had a prolonged blow out with the well bore uncased over the Sterling and Beluga Formations as well as the deeper sands to approximately 10,000 feet. As I recall, the well blew uncontrolled for ±438 days. Add Finding 15:A. The Cook Inlet State 17589NO. l-Awas drilledto kill the blow out. The well was drilled to the depth and location of the No. 1 well when the blow out occairred. Saltwater was pumped and the blowout was stopped. Finding 18. I question that the Beluga sands "are largely discontinuous between wells." I heard no such testimony at the Hearing. The Beluga sands are capable of flowing at high rates as were the Sterling sands. Finding 20. The statement "that do not have common gas-water contacts" is erroneous and not supported by the testimony. Finding 22 correctly states: "... gas water contacts in the Beluga Formation reservoks have not been directly observed .... ' Finding 2!. Should give the well locations as 17591 No. 1 was west- southwest and 18741 No. 1 was southeast of the discovery well. Finding 21-/~ There were no dry holes drilled between the ADL 369100 and ADL 369101 leases and the productive exploratory wells. That is, the reservoir limits have been defined for the ADL 369100 and ADL 369101 area. Finding 23. Not supported. I do not believe that the gas accumulation is structurally controlled. 3424 Finding 24. This is not supported and false. Finding 25. Not a true fact. It is only the largest reservoir observed by drilled wells. Lappi's seismic study shows gas anomalies at the northern end of the lease ADL 369100. ~ Please refer to Ovens Exhibit V. This exhibit shows the participating area does not include any of the Dance leases but does include a considerable area outside the G/W contact on other leases. The Dance leases did not receive the same treatment as given a number of other leases. Dance actually had mapped productive area and was given no credit. Finding .28. I would like to see copies of these undisclosed engineering studies. I have seen the testimony in Order 40; however, nothing else has been represented at the Hearing that was done in the 1960's. The Order 40 testimony proves that the gas in a reservoir could be drained by a single well at the top of structure (page 20, paragraph 1). Finding 3!. Same comments as given for Finding 27. Finding 38. The cluster drilling on top of structure had little or no chance of extending the reservoir limits. Findings 39 and 40. Please note that the lowest known gas for Cook Inlet sands is at -4324 feet ss in the A-12 well. The sand is the Cook Inlet sand 11. In Phillips Exhibit SJW 12, the A4 well is shown to have a lowest known gas depth of 4320 feet ss for the Cook Inlet Sand 11. Hence, the lowest known gas for the Cook Inlet Formation is not 4260 feet ss, but is the value 4324 feet ss as found in the A=12 well. The 4260 feet ss used for the gas water contact by Phillips is not correct. Finding 41. The Unit well A-12 has productive gas at a depth of-6794 feet ss. See Givens Exhibit 27, page 27-4. I do not find the AOGCC's Finding 41 to be correct. The above gas water contact (-6794) extends the gas reservoir limit outside of the limit for Sterling or Cook Inlet sands. There is a geologic unconformity between the Sterling and Beluga Formations that allow the formations to have different gas water contacts. Finding 42. The AOGCC was in error when they made this finding. Finding 43 - 50. Dan, these are part of the David Lappi material. I would say that expendable exploration wells that are plugged and abandoned may have found hydrocarbon. 3425 Finding 51 - 56. It is my opinion that the Beluga Formation has a lowest known gas depth of-6794 feet ss. I have testified that the Sterling and Beluga reservoirs or sands do not have vertical pressure communication. That is, there is no vertical flow betw~ the layers. It points away from the wells. However, the perforated sands are commingled in the well bores over the past thirty-two' years. The blow out at the discovery well had ail the sands in communication for over a year (i.e., Sterling and Beluga sands). The initial pressures reported by the AOGCC are represented by Givens in Exhibit VIlI~ Attachment I, Page VIII-3. The pressure gradient for the Sterling and Beluga are the same since the Formations are in pressure communication. The Beluga and Sterling Formations in my opinion have their own gas w~ter contacts for each formation. The Beluga gas water contact or lowest known gas valve is -6794 feet ss, and the Sterling gas water contact or lowest known gas is -4324 feet ss. I believe that the Beluga and Sterling sands are productive down to these levels. Givens Exhibits 20 Revised and 21 Revised use the same Beluga gas Findings 57 - 68. The Givens testimony onthe projection of the top of the Sterling Formation appears to be in error due to the Phillips Exhibits which were presented on June 15, 2001. This data was received by Givens on June 13, 2001 and not looked at until Phillips testimony presentation on June 15, 2001. In Givens' testimony presented on March 13 and 14, 2001, there were two projections made: one using the discovery well and the Shell No. I well, and a second using the Unit well A- 10 and the Shell No. 1 well. In both of these projections the subsea top of sand used for the Shell No. 1 well were not correct. However, when one uses the corrected gas water contact of -4324 feet ss rather than the -4260 feet ss used by Phillips, the Sterling sands are projected onto the Dance lease and show that lease is productive of gas from the Sterling sands. This projection was performed using the Unit Well A-10 and the Shell No. 1 well with the mud line well log depth adjustment. Findings 69 - 84. Givens Testimony on Doubling of Estimated Gas Reserves. The Givens testimony is dear on this subject. His pre~iled testimony and exhibits describes in detail.' what analysis was performed by him and others. Table I of Exhibit VIH summarizes the five estimates of initial gas in place and recoverable gas reserves using data and computations given in Attachments I, H, HI, IV, and V. This testimony is complete and there are no missing facts as to what was done or how it was performed. Reserve estimates were made for data taken from the AOGCC 1972 and 1999 Annual Reports. The AOGCC published data annually on the net pay, porosity, drainage area, water saturation, etc. which are needed to volumetric, ally compute the reserves. It is interesting to note that the annually reported net pay values were constant (the same) for the period from 1972 through 1998. In 1999 the values were increased considerably~ Why? That is simple. The g_~s reserves had been 3426 increased by GeoQuest and ADNR and the AOGCC had to have a larger container to hold them. I don't know who made this change. Maybe it is based on new data .from Phillips or an AOGCC staff member who provided the new values for the Sterling and Beluga net pay? Givens disagrees with the tone and false statements and erroneous interpretations presented in Findings 69 through 84. Givens will discuss each of these Findings at the requested hearing. Findings 69 through 84 are only a morass by the AOGCC. Phillips has all the studies and evaluations and interpretations of well log data required to prove some of the statements in the AOGCC findings; however, Phillips has not presented a complete presentation of these facts. They chose to only show dam for two wells in their Extfibit SJW-12. Why didn't they show all the wells (Unit Wells and Exploratory Wells)? Findings 85 - 87. Exhibit 24, Page 24-1 is the correct reference to the P/z graph for the NCIU. Givens statement about this graph is "the production of gas causes the reservoir pressure to decrease." Finding 85 states that "Dr. Givens presemed a graph.., as evidence that the Dance leases are being drained by NCIU productiotL" Finding 86 is only an opinion and Givens believes it to be false. F~mding 87 is wrong. Exhibit 25 is a strong set of data which when understood tells you that the Sterling and Beluga sands are being drained at the Sunfish location. The reservoir pressures (for Sterling and Beluga Sands) are being depleted or drained at a point or location (at Sunfish Well) removed from the cluster well production. This fact is very much in .agreement with the Order 40 testimony by Phillips that the Sterling and Beluga Formations have high permeability and can be drained by the cluster well pattern; i.e., the entire reservoirs will be drained in the cluster pattern. The AOGCC 1972 Annual Report (Givens Exhibit VIII~ Page VIII-3) shows the Sterling to have a permeability of 178 md and the Beluga to have 175 md. These formations will drain gas from great d'mtances as testified by Phillips. Givens testimony and exhibits prefiled for the June 14 continuation of the hearing contains a section entitled "Drainage" which is clear, concise and comprehensive and also correct. CONCLUSIONS Conclusion No. 2. The AOGCC has omitted the deep oil zone tested in the Shell No. 1 well at 2000+ BOPD. This needs to be added. Conclusion No. 3. Conclusion No. 4. This conclusion is wrong. This conclusion is wrong. 3427 Conclusion No. 8-A_ Add a conclusion that !'as to the Tertiary System Gas Pool, the correlative fights and/or persons holding lesser interests of Danco and the State of Alaska are being violated." Conclusion No. 9. Add a conclusion that "As to the Shell No. 1 deep oil reservoir and the Tyonek Deep reservoir that the correlative fights and/or personal holding lesser interests and the State of Alaska are being violated." Conclusion Bio. 10. Add a conclusion that "As to the Shell No. I deep oil reservoir and the Tyonek Deep reservoir that the correlative rights and/or personal holding lesser interests and the State of Alaska are being violated." Conclusion No. 11. Add a conclusion that "As to the Shell No. l deep oil reservoir and the Tyonek Deep reservoir that the correlative rights and/or personal holding lesser interests and the State of Alaska are being violated." Conclusion No. 12. Add a conclusion that "As to the Shell No. I deep oil reservoir and the Tyonek Deep reservoir that the correlative fights and/or person holding lesser interests and the State of Alaska are being violated." Conclusion 12-A. Add into conclusion that "AS to the Tyonek Deep reservoir the correlative rights and/or persons holding lesser interests and the State of Alaska are being violated." Conclusion 13. This conclusion is wrong. Conclusion 14. The correlative rights and/or persons holding lesser interests of Danco and the State of Alaska have been violated. 3428 12-18-01 to: Daniel IC Donkel fr: David T. Gross re: Dance's July 6, 2000 meeting with Ryder Scott Company, Petroleum Consultants. & ¢onservat±on Order No. 391AConservation Order Index STATE OF ALASKA AIJ~KA OIL AND GAS CONSERVATION COMMISSION I have just finished reading the Conservation Commission's decision. I will not address here the appalling tom of the doaunent. I do f~el obligated to make a comment on the Commission's finding regarding my affidavit. In the Commission's Summm~ of Testimony and F~gs, they stated: Win addition, written testimony by David T. Gross was submitted, purportedly on the issue of whether one of Phillips 'witnesses had a "conflict of interest." The Commission finds that Mr. Gross's testimony did not demonstrate the existence of a conflict of interest or other ground to disqualify any Phillips witness." R would bo an understat~ to say thai I was dismayed by this evaluatiom As you well know, I have a considerable mount of experience as a petroleum geologist. This includes my ten years with Chevron that began with my work along the Texas and Louisiana Cmlf Coast and wound up with my being charged with the sole responsibility to evahate Chevron's holdin~/n the Cook Inlet/n 1990. Since I ~ to consult for Dance Exploration in 1992, you and I have attended numerous meetings with companies interested in Dance's Cook Inlet acreage. Needless to say, I am quite familiar with the normally accepted ground rules ass0ch~l ~ meetings between two different companies. It is understood tlmt each person is motivated to act in the best interest of their respective company and that at any time, either company may decide not to pursue the matter at hand any further. I have never met anyone who has held that it is acc~table professional behavior for a company to meet with one company in a dispute, participate in an exchange of information and ideas regarding the dispute, and th~n turn. around and represent the second company in that dispute at an official governmental hearin~ I am at a loss to understand how the Commi~ion could fail to see this as an egregious lapse in professional ethics and acceptable business practices. I encourase you to appeal the Commission's findinss in an appropriate venue. Dave 3429 Telephone: I (907)248-5684 David W. Lappi 4900 Sportsman Ddve Anchorage, Alaska USA 99502-4169 e-mail: lapres@gci.net Facsimile: 1 (907) 248-7278 December 22, 2001 Alaska Oil and Gas Conservation Commission 333 W. 7th Ave #100 Anchorage, Alaska, 99501-3539 Danco, Inc. 2121 North Bayshore Drive, Suite 1219 Miami, FL 33137 Re: Review of AOGCC Conservation Order 391A dated December 3, 2001 Dear Dan: At Mr. Donkel's request I have reviewed the various points set out in the AOGCC's Conservation Order 391A as set out below: General Comments Atter reviewing the Conservation Order, I was dismayed by the general tone of the document and I strongly object to the, I believe intentional, mischaracterization of my testimony by the Commission. The Commission's statement that "Mr. Lappi's analysis as described in his testimony does not conform to generally accepted professional methods for petroleum geology and geophysics and is not credible or persuasive." is particularly damaging in light of the confidential nature of my testimony. Members of the public were cleared from the hearing during most my testimony, and my testimony, my exhibits and transcripts from the hearing remain sealed and not available for any other persons to review. Under these circumstances, the Commission must refrain from making value judgements about a person and these types of generalized derogatory statements as the relevant hearing records are closed to the public. The Commissions statements regarding my testimony were reported in the weekly industry newspaper "Petroleum News Alaska", and published internationally. They were read by members of my immediate family, my business acquaintances, clients, friends, neighbors and thousands of strangers who have never met me and cannot judge for themselves the truth, or lack thereof, of the Commission' s statements. I respectfully and strongly request that the Commission cause a retraction of their derogatory statements to be published in the same publication, and a letter of apology be sent to me personally. 3430 ...-~appi Review of CO 391A December 22, 2001 Page 2 of 10 Standing It appears that the AOGCC has made a decision in this case without addressing the question of standing, that is, whether an overriding royalty owner has the ability to petition for expansion of an existing unit, or further, whether a settlement should be applied retroactively to compensate for gas drained from the leases. Thus it appears that even if the Commission had decided in the Petitioners' favor on the merits, there still may be protracted and expensive legal proceedings on the question of standing and retroactivity. The State' s statutory definitions include the following (emphasis added): Sec. 31.05.170. Definitions. In this chapter, unless the context otherwise requires (5) "field" means a general area which is underlain or appears to be underlain by at least one pool, and includes the underground reservoir containing oil or gas; and the words "pool" and "field" mean the same thing when only one underground reservoir is involved, but "field" unlike "pool" may relate to two or more pools; (9) "owner" means the person who has the right to drill into and produce from a pool and to appropriate the oil and gas the person produces from a pool for that person and others; (11) "pool" means an underground reservoir containing, or appearing to contain, a common accumulation of oil or gas. Each zone of a general structure which is completely separated from any other zone in the structure is covered by the term "pool"; Alaska statutes provide the Commission with all the required powers to carry out its duties as follows (emphasis added): Sec. 31.05.110. Unitization and unitized operation of pools and integration of interests by agreement. To prevent, or to assist in preventing waste, to insure a greater ultimate recovery of oil and gas, and to protect the correlative rights of persons owning interests in the tracts of land _affected, these persons may validly integrate their interests to provide for the unitized management, development, and operation of such tracts of land as a unit. Where, however, they have not agreed to integrate their interests, the commission, upon proper petition, after notice and hearing, has jurisdiction, power and authori~. , and it is its dut~ to make and enforce orders and do the things necessary or proper to carry out the purposes of this section. 3431 '.~.~appi Review of CO 391A December 22, 2001 Page 3 of 10 In reference to AS 31.05.110(a), the Petitioners believe that the context requires a broader definition of"owner" than that carried by AS 31.05.170 (9) above, and thus the Petitioners have standing as persons owning interests in tracts of land affected. Clearly they have overriding royalty interests in those tracts. Further, AS 38.05.180(p) requires that all parties of interest be protected, clearly royaky owners are parties of interest. Hearing The Commission is treating this petition as if it is a new altair and issued a new procedural order September 27, 2000. The Petition has been pending since August 30, 1996, and it is not a new hearing, but merely a continuation of the hearings held by the Commission beginning in 1997. New procedural orders that disadvantage the Petitioners' should not be allowed, midway through the process. This is changing the rules in the middle of the game. In particular, the Commission acted unfairly in eliminating any chance to consider the deep oil accumulations below the currently producing shallower North Cook Inlet Gasfield. If the North Cook Inlet Unit continues to the center of the earth, just like the leases it contains, and thus the deeper producible horizons are relevant. Standards for Involuntary Unit Expansion This section starts with a false premise. Despite the confusing nature of the various unitization statutes, the petitioners do not invoke the Commission's powers of involuntary unitization (AS 31.05.110 (b)), they simply request that a voluntary_ unit be expanded by the inclusion of two leases owned by Phillips Petroleum, who also already own the rest of the North Cook Inlet Unit (NCIU). The tests set out under AS 31.05.110 (b) does not apply to this case under the facts since it is a voluntary unit, but subsections (a) and (g) - (p) do, as clearly stated by AS 31.05.110(q) as follows: (q) This section applies to all involuntary units formed in the state. Subsections (a) and (g) - (p) of this section apply to all voluntary units formed in the state and to a voluntary cooperative or unit plan of development or operation entered into in accordance with AS 38.05.180(p). The Alaska Oil and Gas Conservation Commission (AOGCC) argues that it has no jurisdiction over a unit created by the Department of Natural Resources (DNR), even though the AOGCC itself was part of DNR when the unit was created. In addition, the laws creating the separate AOGCC as a "quasi-judicial" organization specify that the AOGCC's powers extend over all parties, including other government agencies. The buck stops with AOGCC (see AS 31.05.027 and AS 31.05.030). The administrative codes for forming, expanding, and contracting units written while AOCJCC was part of DNR do not become irrelevant simply because the Alaska State Legislature recognized that conflicts of interest arise if AOGCC remained part of DNR. Indeed, most of the AOGCC' s own 3432 .._~appi Review of CO 39 lA December 22, 2001 Page 4 of 10 regulations regarding units cite the authorizing statute AS 3 8.05.180 (administered by DNR). The final arbiter of units created in the State cannot be the DNR (because of their recognized conflicts of interest since they also control the sale of leases, for instance, those contracted out of units). The final arbiter must be the AOGCC as a separate independent quasi-judicial agency. The AOGCC maintains that it has no power to enforce the North Cook Inlet Unit Agreement that requires areas be brought into the Unit as follows: The above-described unit area shall, when practicable, be expanded to include therein any additional tract or tracts regarded as reasonably necessary or advisable for the purposes of this agreement, or shall be, contracted to exclude lands not within any participating area whenever such expansion or contraction is necessary or advisable to conform with the purposes of this agreement. The Petitioners believe the NCIU extends to the center of the earth, just like the leases that make it up, and therefore it includes the deep oil horizons. The Petitioners believe that the Operator, if he maintains that the Unit does not include the deep oil horizons, is obligated to expand the Unit to include them as indicated above in the Unit agreement. If those deep oil horizons are included, it is reasonably proved by published public 3-D seismic interpretations conducted by ARCO Alaska that those oil horizons extend into the Petitioners' leases, and therefore those new leases should be included in the Unit. The State's standards for areas to be included into units are set out as follows in 11 AAC 83.356. UNIT AREA; CONTRACTION AND EXPANSION: (a) A unit must encompass the minimum area required to include all or part of one or more oil or gas reservoirs, or all or part of one or more potential hydrocarbon accumulations [emphasis added]. The definitions for "potential hydrocarbon accumulation", "reservoir", and "unit" under 11 AAC 83.395 DEFINITIONS is set out below [emphasis added]: (5) "potential hydrocarbon accumulation" means any structural or stratigraphic entrapping mechanism which has been reasonably defined and delineated through geophysical, geological, or other means and which contains one or more intervals, zones, strata, or formations having the necessary physical characteristics to accumulate and prevent the escape of oil and gas; (6) "reservoir" means an oil or gas accumulation which has been discovered by drilling and evaluated by testing and which is separate from any other accumulation of oil and gas; 3433 Review of CO 391A December 22, 2001 Page 5 of 10 (7) "unit" means a group of leases covering all or part of one or more potential hydrocarbon accumulations, or all or part of one or more adjacent or vertically separate oil or gas reservoirs, which are subject to a unit agreement; In other words, potential hydrocarbon accumulations must be included in the unit even if they are not "continuous" with or in "pressure communication" with other reservoirs in the field. The State' s view of"Participating Area" is set out below in 11 AAC 351 PARTICIPATING AREA [emphasis added]: (c) A participating area must be expanded to include acreage reasonably estimated through the use of geological, geophysical, and engineering data to be capable of producing or contributing to the production of ~_ drocarbons in pco?ing quantities, and must be contracted to exclude acreage reasonably proved through the use of geological, geophysical or engineering data to be incapable of producing hydrocarbons in p~_ ing quantities, ... The Commission did not ask Phillips the simplest basic questions in this case: Are you draining gas from the Petitioners' leases? Why was Phillips' volumetric data about the reservoirs not presented at the hearing? Are the deep oil horizons within the NCIU? If not, why has the Phillips not put them in the Unit? It may be that Phillips is waRRing for their favorable resolution of this case to develop their deep oil horizons to the detriment of the Petitioners. If the unproven and undeveloped Redoubt Shoal Oilfield can be put into production by construction and placement of a new platform by a company new to the Inlet (Forest Oil), why has the proven certified capable of producing in paying quantities Tyonek Deep Oilfield not been developed from an existing platform? The State lists proven recoverable oil reserves in the currently drilled wells in the Tyonek Deep Oilfield at 25 million barrels (25MMBO) worth about $500,000,000 even at today's depressed oil prices. The State also lists proven recoverable gas reserves in the Tyonek Deep Oilfield at 30 BCF worth about $75 million at today's gas prices. During field development, it is very likely that drilling delineation or stepout wells will discover and prove up additional producible oil and gas reserves. Additional Standards Again, the Commission is using the standards for forming an involuntary unit (AS 31.05 110 (b)), not expanding a voluntary one. The Petitioners believe that the standards set out in (b) that the Commission is bent on using are meaningless when applied to the simple case of drainage. If 110 (b) were the appropriate standard, an operator could drain his 3434 ,,.~z~appi Review of CO 391A December 22, 2001 Page 6 of 10 neighbors with impunity, and get away with it. This is not correct. The Commission was set up to safeguard the rights of all parties (including the State). As to the Commission's comments about the Tyonek Deep Oilfield, they maintain that it cannot be brought into the Unit somehow (if it isn't already in the Unit - that has yet to be decided), because it is not in production now. Again they use AS 31.05.110 (b) for involuntary units as their standard. This flies in the face of other Units in the State that were formed or expanded before production started. How does an adjacent royalty owner protect his property rights from an operator bent on stripping him of those royalties? Does not the operator and working interest owner have a fiduciary responsibility toward other owners? If they do, then let them exercise it. If not, then the Oil and Gas Commission should have the responsibility to assist the royalty owners and force integration of potential oil and gas fields. If, aRer integration, no development occurs, nobody has lost any money. If, alternatively, development occurs after the royalty owners are stripped of their rights, then a theft has taken place, a theft committed with the assistance of our State agencies. Retroactivity Again, the Commission has set up the petitioners for more litigation by reserving a range of issues to be decided later in other actions. Burden of Proof The Commission refused to subpoena key information from the North Cook Inlet Gasfield requested by the Petitioners, and refused to consider the Petitioners' arguments about the Tyonek Deep Oilfield. While Phillips kindly made it's shallow seismic data available to the Petitioners' experts to view only, on a computer workstation costing $1,000 per day, Phillips refused to allow the Petitioners or their experts to see the seismic data on the Tyonek Deep Oilfield. The Commission allowed this to take place, severely limiting the ability of the Petitions' experts to develop arguments about the extent of the oil and gas at deeper levels. Also, while the Commission found no valid arguments in the testimony of the Petitioner's experts, it also found that the 3-D seismic maps of the Tyonek Deep (Sunfish) Oilfield published by ARCO were somehow not relevant to their deliberations. This was allowed because the Commission was allowed to change the rules for the continued hearing in the middle of the game with their Procedural Order of September 27, 2000. Also at issue is the role of the Commission in investigating, in addition to deciding a case. Reading the clear meaning of the statutes and regulations that set up the Commission, it was the intent of the Legislature that the Commission should have all powers necessary to carry out their duties. Perhaps a court needs to review the Commissions duties and obligations to their citizens, and decide what the statutes actually mean in practice. 3435-~~ x._~appi Review of CO 391A December 22, 2001 Page 6 of 10 neighbors with impunity, and get away with it. This is not correct. The Commisison was set up to safeguard the rights of all parties (including the State). As to the Commission's comments about the Tyonek Deep Oilfield, they maintain that it cannot be brought into the Unit somehow (if it isn't already in the Unit- that has yet to be decided), because it is not in production now. Again they use AS 31.05.110 (b) for involuntary units as their standard. This flies in the face of other Units in the State that were formed or expanded before production started. How does an adjacent royalty owner protect his property rights from an operator bent on stripping him of those royalties? Does not the operator and working interest owner have a fiduciary responsibility toward other owners? If they do, then let them exercise it. If not, then the Oil and Gas Commission should have the responsibility to assist the royalty owners and force integration of potential oil and gas fields. If, after integration, no development occurs, nobody has lost any money. If, alternatively, development occurs after the royalty owners are stripped of their rights, then a theft has taken place, a theR committed with the assistance of our State agencies. Retroactivity Again, the Commission has set up the petitioners for more litigation by reserving a range of issues to be decided later in other actions. Burden of Proof The Commission refused to subpoena key information from the North Cook Inlet Gasfield requested by the Petitioners, and refused to consider the Petitioners' arguments about the Tyonek Deep Oilfield. While Phillips kindly made it's shallow seismic data available to the Petitioners' experts to view only, on a computer workstation costing $1,000 per day, Phillips refused to allow the Petitioners or their experts to see the seismic data on the Tyonek Deep Oilfield. The Commission allowed this to take place, severely limiting the ability of the Petitions' experts to develop arguments about the extent of the oil and gas at deeper levels. Also, while the Commission found no valid arguments in the testimony of the Petitioner's experts, it also found that the 3-D seismic maps of the Tyonek Deep (Sunfish) Oilfield published by ARCO were somehow not relevant to their deliberations. This was allowed because the Commission was allowed to change the rules for the continued hearing in the middle of the game with their Procedural Order of September 27, 2000. Also at issue is the role of the Commission in investigating, in addition to deciding a case. Reading the clear meaning of the statutes and regulations that set up the Commission, it was the intent of the Legislature that the Commission should have all powers necessary to carry out their duties. Perhaps a court needs to review the Commissions duties and obligations to their citizens, and decide what the statutes actually mean in practice. 3436 l..~_~-,appi Review of CO 39 lA December 22, 2001 Page 7 of 10 Findings- Summary of Testimony and Findings The Commission generally dismissed Mr. Lappi's testimony about the 3-D seismic amplitude anomalies by saying that they "are likely to represent coal deposits and that, in any event, those areas are not continuous with the gas reservoirs in the NCIU." The Commission then states that "Mr. Lappi's analysis as described in his testimony does not conform to generally accepted professional methods for petroleum geology or geophysics and is not credible or persuasive." Exactly what methods of petroleum geology or geophysics did Mr. Lappi use that are not generally accepted practice in the industry? Again, the Commission is using the AS 31.05.110 (b) standard as their only tool to decide what areas warrant unitization. The Commission's Finding 98 concludes that Mr. Lappi provided no evidence that seismic amplitudes of less than -10,000 units uniquely represent producible gas. Mr. Lappi selected that level because inspection of the amplitude anomalies within the known producing gasfield (as evidenced by well and production data, see Commission Finding 90) showed that level to represent producible gas. This is standard industry practice, extending known, real-world empirical results, and is much more accurate than calibrating a seismic survey based on laboratory measurements or model studies. Is the Commission suggesting we use these less accurate techniques? It is unlikely that thick blanket sand deposits like the Cook Inlet Sands would suddenly become coaly, and that those coals would display amplitude anomalies like the gassy sands within the North Cook Inlet Field. It is more likely that at these amplitudes the anomalies represent gas, not coal. In the thinner underlying Beluga Sands, the resolution of the 3-D seismic survey is insufficient to identify individual gas-bearing sands (or coal beds) at all. In the Beluga formation, many of the amplitude anomalies are likely to represent several stacked gas-bearing sands in stratigraphic traps. Phillips' expert witness Brian Campbell describes this [geological] section as follows: "The lower Beluga section of the NCI field is dominated by thin channelized sands, encased in siltstones, shales, and thin, stacked coals." This is the ideal environment for stratigraphic traps. As to the Commission' s Findings 43 through 50, there is no subsurface evidence of gas or an absence of gas in the North Cook Inlet State 18741 #1 well, except to say the mud log had no indications of gas during drilling. It is very common in oil and gas drilling for a company to drill through and oil or gas reservoir and have no indication of oil or gas on the mud log. May fields have been bypassed in this way, only to be discovered by later drilling or though improved wireline logging techniques. Alternatively, there are many indications of oil or gas on mud logs that are not related to producible hydrocarbons. Thus, mud log evidence is not credible or decisive in either direction. It is used as one piece of evidence in a large matrix of remotely sensed information about the rocks one is drilling through. 3437 ,_,_~appi Review of CO 391A December 22, 2001 Page 8 of 10 The evidence Mr. Lappi cites is on the drilling reports that the Operator of the well submitted to the State declaring the well was a gas well. Again, the well was abandoned, not because it was a dry hole, but because it was an expendable exploratory well, because wireline logging was impossible because of mechanical difficulties, and because the Operator, Pan American on or about that time had assigned its interest in the lease to others and no longer had an interest in pursuing production. As to the level of the gas-water contact in the field, Phillips' own Exhibit SJW-12 shows producible gas in the Cook Inlet Sands as deep as -4320 feet subsea, meaning that the original Phillips gas water contact at - 4260 feet subsea (and accepted by this Commission as fact) cannot be correct. The true gas-water contact must be at least 60 feet deeper, based on Phillips' own exhibit. As to Commission Finding 99, there is no requirement that new leases brought into an existing voluntary unit have hydrocarbon pools that are continuous with those of the unit. They may contain entirely new pools, and still be eligible for integration into the unit. As indicated before, Phillips owns both the leases in question and the North Cook Inlet Unit, and if development of these new pools does not occur, no one has lost any money. In Commission Finding 100, the Commission claims that Mr. Lappi's interpretation does not follow generally accepted procedures for the interpretation of seismic data. Mr. Lappi was assisted in his interpretation by Mr. Bill Heronimus, a Houston-based geophysicist with extensive experience in 3-D seismic interpretations (five years full time) using exactly the same workstation and interpretation software used in this case. Check shot surveys were not used because they were not relevant to showing the presence of hydrocarbons within the Petitioners' leases. Check shot surveys would be relevant to correlating the interpreted horizons to various levels within the drilled wells (i.e., naming a horizon a particular sand, like the "Beluga B" sand). The naming of particular horizons is not something the Petitioners were required to do to make their case, and given the time and budget constraints of the Petitioners, they opted not to spend the time required to do this, although it would have been a convenience to all the parties to have done so. The naming conventions that we did use are common in industry seismic interpretations, such as the "11,000 foot sand", "near middle Stealing" or "near top Beluga". The Petitioners made use of well data to identify areas of production and areas which are not productive, to calibrate their seismic interpretation (as in Finding 90). This is standard industry practice. It is the Petitioners' view (and Phillips' seismic expert agreed during testimony under oath) that this areal approach to calibrating seismic data interpretations is more accurate than modeling the results on specific pieces of evidence. Specific pieces of evidence may come from a single well and be applicable to only a localized area around that single well. As to the deeper hydrocarbon zones, there is adequate evidence in the record of probably hydrocarbon zones in the Tyonek Deep Oilfield. Several Tyonek Deep wells were certified by the State as "capable of producing in paying quantities". In addition, the West Foreland 3438 -.~appi Review of CO 391A December 22, 2001 Page 9 of 10 formation produced a large condensate (light oil) flow from about 11,000 feet in an early exploration well much closer to the Petitioners' leases. It was also certified by the State as "capable of producing in paying quantities". All of these certified wells are located on the same structure as the Tyonek Deep Oilfield and the North Cook Inlet Gasfield, which structure extends under the Petitioners' leases, particularly at the deeper levels. The following testimony by Mr. Lappi appears to have been completely ignored by the Commission: The Shell North Cook Inlet State #1 well encountered 2,270 BOPD of light oil and 842 MCFD gas at 11,020 to 11,040 feet on DST #1 (September 6, 1964). This producing horizon is only slightly lower than our truncated seismic allows us to see. Our deepest contour maps (Map 10 and 11) show that this discovery is likely to be a separate closure northeast of the top of the North Cook Inlet structure several square miles in area. This discovery has never been evaluated, and it indicates that at least some of the porous beds have been charged with oil and gas, and it therefore should be included in the NCI Unit. Since the Commission has discounted all of the seismic interpretations presented by the Petitioners, it needs only to rely on the 3-D seismic maps prepared by ARCO (and presented to the commission in 1997 and again more recently) to reach the same conclusion - that reasonable evidence exists for the presence of producible oil and gas within the NCI structure on the Petitioners' leases at the deeper horizons. Even ARCO's interpretation has misrepresented the potential reserves. When they delineated the area of"Potential Reserves", they followed a specific contour line (oil-water contact) around the southern end of the field, but chose a different (higher) contour line around the north end of the field, without any justification for doing so. In standard industry practice, the same elevation should be used for an oil or gas-water contact all around the limits of the field without evidence to the contrary. Mr. Lappi pointed this out in his testimony (Commission Finding 103), but it was ignored by the Commission in its decision. In fact, the Commission ignored Mr. Lappi's re-interpretation of the ARCO structure map correcting it's gas-water contact discrepancy, and stated in Finding 104 that "Mr. Lappi did not present any independently interpreted subsurface data in support of his conjectures." Mr. Lappi" Exhibit on this subject is clearly a new independent interpretation of ARCO' s original subsurface structure map. Nearly all of the wells drilled into these deeper horizons produced oil, and reasonable geologists and geophysicists would call for stepout wells to be drilled on the leases in question (or even further north) to see how far the oil producing horizons extend to the north. Without unitizing these horizons, exploration and development of these targets could be chaotic and wasteful. Unitization would allow for orderly development, and again, all the leases in question, and the North Cook Inlet Unit, are owned by Phillips. 3439 ...~appi Review of CO 391A December 22, 2001 Page 10 of 10 Mr. Lappi did not present any independently interpreted seismic data from the Tyonek Deep or West Forelands horizons only because the Commission refused to allow the Petitioners or their experts access to the deep seismic data, even though the experts had signed confidentiality agreements regarding any data they were allowed by Phillips to see. The Commission says that Mr. Lappi's exhibits "suggest the possibility that the Tyonek Deep reservoir extends under the Danco leases" (Commission Finding No. 105). The Petitioners maintain that this is sufficient to justify unitization of those leases. The Petitioners believe that the State's body of unitization rules and their intent, must override the Procedural Order. The Alaska Statute 31.05.110 (b) subsection that the Commission has used to justify its decision does not apply to this case under the facts. As to Commission Finding 106, if the standard for unitization were to show that a reservoir extends under every lease in a unit, each lease would need to be drilled. This would lead to economic waste in areas where more than one lease can be drained from a single location, like the offshore platform at the NCIU. Standard oilfield practice dictates that an entire structure be unitized, then as the required delineation drilling occurs, the unit is expanded or contracted as the field is developed. It should be sufficient to show that it is reasonably proved on the basis of geological, engineering, or geophysical methods that an area or structure is likely to be productive to include it in the unit. Please let me know if you have questions on this review of Conservation Order 39 IA. Sincerely, David W. Lappi 3440 #5 Petroleum News Alaska NEWS BULLET! N November 2, 2000 Vol. 6, No. 51-3 November 2000 AOGCC engineer seat filled Petroleum engineer Julie M. Heusser has been named to the engineer seat previously held by Bob Christenson on the three-member Alaska Oil and Gas Conservation Commission, Gov. Tony Knowles said Oct. 26. Bom and raised in Alaska, Heusser worked as a field petroleum engineer and reservoir engineer for BP Exploration (Alaska) Inc. from 1977 until joining ARCO Alaska Inc. in 1981 where she worked tmtil 1994 as a reservoir engineer, field development engineer, workover/s, timulation engineer, annular communication engineer and well services supervisor. Most recently, Heusser has worked as a self- employed consulting engineer. For information on Petroleum News Alaska's news bulletin service, call 907-522-9469. PO Box 231651, Anchorage, AK 99523 - 1651 http://kcal.corrdpnalaska/nbawM06513-2.htm 12/3/2000 -- _ 3441 Julie/~1. He.rinser was employed by ARCO during part of the time leases ADL 369100 and ADL 369101 were being drained of their hydrocarbons. Therefore, she nccds to dm=lam that she has a conflict of interest in regards to this Petition. 3442 OFFICE OF' THE GOVERNOR ..... "~"-'"~-' .... '' _._ Press ReleaSes.. .......... ALASKA IN THE NEWS EXPERIENCED PETROLEUM ENGINEER NAMED TO OIL AND GAS COMMISSION Knowles Al:)ix~nts Lomb-Time Alaskan Julie M. Heus.ser to AOGCC Julie M. Heusser of~, I'ms been nmned to a sea, on the Naska Oil and Gas ~ C~mmission (AOGCC), Gov. Tony Knowles announced today. oil industry." Heusser, who was bom a'~ raisecl in Alaska, majored in ~ ~ at the Colorado School of Mines, where she earned her Bachelor's degree in 1977. She worked as afraid pelmleum engineer and a reservoJ' engineer for British Pelroleum (BP) from 1977 until joining Atlantic R~ Company(ARCO) in 1981 where she worked iZlb] 1994 as a reservoir engineer, field devel~ engk~e~. F~ I~mre inf~ p/ease conlact AOGCC re:ling ctmir Cammy Oechsl. i Taylor, (g07) 279-1433 x221. 3443 #3 Re: STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION RECEIVED 333 W. 7th Avenue, Suite 100 Anchorage, Alaska 99501 THE APPLICATION OF DANCO, ) INC., for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 and ) ADL 369101 ) DEC 2 4 ~3l~(a Oil & &3s Cons. Commission Anchorage North Cook Inlet Unit December 24, 2001 PETITIONERS' APPLICATION FOR REHEARING Petitioners, Danco Inc. and Monte Allen ("Petitioners") hereby apply to the Alaska Oil and Gas Conservation Commission ("Commission"), pursuant to Alaska Statutes Section 31.05.080, for rehearing of the matters addressed in Conservation Order 391A (the "Order"), with respect to the involuntary expansion of the existing voluntary North Cook Inlet Unit ('~NCIU") and integration of state oil and gas leases ADL 369100 and ADL 369101 (the '~Danco Leases") into the NCIU. In support of this application, Petitioners state: Commission Erroneously Applied Standard for Creation of a New Unit to the Petition for Integration into an Existing Unit The Order concluded that Petitioners had failed to meet any "of the statutory requirements for an order requiring an expansion of the North Cook Inlet Unit .... "See Order, CONCLUSIONS at ¶13. This erroneous conclusion was based on the Commission's findings that the Petitioners presented no evidence that the integration of the Danco Leases into the existing voluntary NCIU would result in satisfaction of the factors set forth in Alaska Statute 31.05.110(b). See Order, CONCLUSIONS at ~ 5-8. Application of Danco, Ina Petitioner's Application for Rehearing. Page 1 of 12 3444 Namely, the Commission erroneously concluded that the Petitioners had the burden of demonstrating the following: "[T]hat the unitized management, operation and further development of the pool or portion of the pool is reasonably necessary in order to... substantially increase the ultimate recovery of oil and gas from the pool.. "[That one or more unitized methods is feasible...will prevent waste... and result in the increased recovery of substantially more oil and gas from the pool .... "IT]hat the estimated cost.., of conducting such operations will not exceed the value of oil and gas so recovered. "[T]hat the unitization.., is for the common good." See id.; see also, AS 31.05.110(b). While Petitioners agree that the four factors set forth above (hereat~er referred to as the "Unit Creation Factors") are applicable to the creation of a new involuntary unit, Petitioners dispute the Commission's finding that the Unit Creation Factors are applicable to a petition for integration and expansion into an existing voluntary unit. Section 31.05.110 (b) clearly states that if upon a petition for creation of a new unit, the Commission finds that the Unit Creation Factors are satisfied, then the Commission "shall make a finding to that effect, and make an order creating the unit .... "AS 31.05.110(b) (emphasis supplied). The Unit Creation Factors are irrelevant and do not apply to the Petitioners' request for expansion and integration into the existing voluntary NCIU, and they need only allege that integration of the Danco Leases into the NCIU is necessary to protect Petitioners' rights. See AS 31.05. 110(a) (stating: "[T]o protect the correlative rights of persons owning interests in the tracts of land affected, these persons may validly integrate their interests .... Where... they have not agreed to integrate Application of Danco, Ina Petitioner's Application for Rehearing. Page 2 of 12 3445 their interests, the commission.., has jurisdiction, power and authority, and it is its duty to make and enforce orders and do the things necessary and proper to carry out the purposes of this section.") (emphasis supplied). The Commission's conclusion that the Unit Creation Factors were determinative in a resolution of the Petitioners' claims on the merits of the petition is clearly erroneous in light of Alaska Statutes Section 31.05.110(q). Subsection (q) expressly states that subsection (b) of Section 31.05.110 is inapplicable to voluntary units such as the NCIU, yet the Commission has consistently, and erroneously, asserted that the Unit Creation Factors as set forth in subsection (b), are the Petitioners' burden to establish in these proceedings. See AS 31.05.110(q) (stating that "subsections (a) and (g) - (p) of this section [31.05.110] apply to all voluntary units formed in the state ...."). The costly burden that the Commission has applied to Petitioners is contrary to its duty to protect the fights of interest holders in lands affected by the NC1U. See AS 35.01.110(a); see also, Allen v. Alaska 0il and Gas Conservation Commission, 1 P.3d 699, 704 (Alaska 2000) (noting that Chapter 31, and specifically the statutes governing unitization, protect "the owners of fights of production... [and] fights of persons holding lesser interests."). Legislative history indicates that the Commission, and its predecessor agency, were established to force working and royalty imerests to cooperatively unitize their interests so that such fights would be protected. See Letter of Intent, FIB 815. If every overriding royalty interest owner or others seeking expansion of, and integration into, a unit voluntarily created by the big oil companies was required to satisfy the burden of establishing the Unit Creation Factors and many other burdens imposed by the Commission, then unit operators would be free to simply exclude those persons owning Application of Danco, Ina Petitioner's Application for Rehearing. Page 3 of 12 3446 interests in the tracts of land affected by such voluntary unit, who were without the extensive resources required to overcome such a burden. Clearly, this could not have been the Alaska legislature's intent when it created the Commission, charged it with a duty to protect such interest holders' rights, and granted it police powers to prevent just such an injustice from occurring. See, e.g., AS 31.05.027. Commission Failed to Investigate Petitioners' Properly Pled Petition Alaska Statutes Section 31.05.030(b) charges the Commission with a duty to "investigate to determine whether or not waste exists.., or whether or not other facts exist which justify or require action by it." The Commission has failed to take any such action with respect to Petitioners' properly pled petition. Even the findings of the Commission in the Order, demonstrate that the Commission has undertaken no independent investigation of the matters, but instead simply adopted to use the skewed and very limited data presented by Phillips Petroleum Company and Phillips Alaska (hereafter collectively referred to as "Phillips"). The contradictory and incomplete factual findings recited in the Order clearly demonstrate that the Commission ignored its statutory duty to undertake an investigation of Petitioners' claims. See Statement of Peter Huddleston, P.E., attached hereto as Exhibit "A" (opining that the Commission's findings and conclusions as stated in the Order demonstrate that "the Commission is either in error with respect to its conclusions, or has a basic misunderstanding of the principles of petroleum engineering, geology and geophysics."). The Commission noted that Petitioners' witness, Dr. James Givens, presented evidence relating to the doubling, by nearly one trillion cubic feet, of the gas pool affected by the NCIU. See Order, Summary of Testimony and Findings at ¶ 3. Dr. Application of Danco, Ina Petitioner's Application for Rehearing. Page 4 of 12 3447 Givens asserted that the doubling demonstrated that the pool clearly emended to the Danco Leases and, therefore, the NCIU was draining gas from the same. See id. The Commission found that the doubling "if any, in estimated reserves is explained by factors other than an increase in the areal extent of the reservoir." See id The Commission seems to have found that on the one hand, no doubling of the gas pool has occurred (cf., Allen, 1 P.3d at 700 (noting that the DNR reported an estimated increase in "previously undetected reserves of one trillion cubic feet of gas in the North Cook Inlet Pool"), and on the other, that if there has been a doubling of the gas pool, it is for reasons other than those advanced by Petitioners' experts. Clearly, because such questions remain unresolved, and because the Commission has failed to conduct an investigation into these matters, Petitioners have not had a full and fair hearing on the merits of their petition. In further contradiction of its conclusions in the Order, the Commission found that "one could not rule out" the "possibility" that the NCIU was draining gas from the Danco Leases. See Order, Burden of Proof at ¶ 4. The Commission further found that because the Petitioners' had not established the Unit Creation Factors, this "possibility" was not sufficient to trigger full factual findings related to the merits of the petition for integration. See id In fact, the Commission found that simply the "possibility" that the Danco Leases were being drained of gas and deprived of royalties which at some estimates could exceed Two Hundred Million Dollars ($200,000,000.00), not only did not require thorough investigation or full exercise of the Commission's subpoena power, but that Petitioners' assertion that such investigation was appropriate made "nonsense" of the unitization statute. See id Statements such as these throughout the Order not only clearly demonstrate the Commission's blatant disregard of its statutory duties and the Application of Danco, Ina Petition~'s Application for Rehearing. Page 5 of 12 3448 member's oaths of office, but also openly and outwardly shows the bias of the Commission against Petitioners and their claims. In similar contradictory fashion, the Commission found both that Petitioner's expert witness, David Lappi, demonstrated the "possibility that the Tyonek Deep reservoir extends under the Danco Leases," crud that the evidence did not show that any reservoir extended under the Danco Leases. See Order, Specific Findings at ~ 105 and 106. This "possibility" also triggered the Commission's investigative duties, as the remand from the Alaska Supreme Court, per Allen, mandated full heating and determination on the merits of Petitioners' claims. See Allen, 1 P.3d at 705. Petitioners' acknowledge that the Commission was free to assess the testimony and evidence presented by their witnesses. However, Petitioners' experts vigorously dispute the erroneous findings of the Commission with respect to the evidence presented. In support of their specific objections to the individual findings of the Commission, Petitioners submit the statements attached hereto as Exhibit "B". Commission Failed to Provide Petitioners with Due Process The Alaska Supreme Court has recognized that "[a]n impartial tribunal is basic to a guarantee of due process." Arnerada Hess Pipeline v. Alaska Public Utilities Corp., 711 P.2d 1170, 1180 (Alaska 1986). Petitioners repeatedly objected throughout the course of proceedings before the Commission with respect to Commission members' conflicts of interest. One member of the Commission is a former employee of one of the parties, and, therefore, has a potential conflict. See Appointment Notice of Julie M. Heusser, Commissioner, attached as Exhibit "c."_, (noting that Commissioner Heusser was employed by ARCO, a company which has since been acquired by Phillips, Application of Danco, Inc Petitioner's Application for Rehearing. Page 6 of 12 3449 and which owned a 40 % interest in the Danco Leases which are contiguous with the North Cook Inlet Unit). Another Commission member, Camille Taylor, is apparently conflicted because formerly, as an attorney with the Department of Law, Division of Oil and Gas, this member represented the Commission and/or the Department of Natural Resources. The Department of Law, Division of Oil and Gas participated in the proceedings before the Supreme Court which led to the May 12, 2000 opinion in Allen. The Department of Law, Division of Oil and Gas vigorously advocated against the Petitioners whose rights Commissioner Taylor is now statutorily charged with protecting in the proceedings before the Commission. With potentially biased members, the Commission arguably lacked the required two members to constitute a quorum to make the appropriate findings. See AS 31.05.011. Due to this apparent bias the Petitioners reasonably believe that they cannot get a fair and full hearing with this Commission. Adding to the conflict, the Commission and the Alaska Department of Natural Resources have adverse interests in this matter, yet both are being represented by the Department of Law. The Alaska legislature contemplated such conflicts and expressly provided in AS 31.05.021 that the Commission could seek independent counsel. Despite this apparent conflict, no such independent counsel has been appointed, and the Commission never even attempted to seek approval from the Attorney General for independent counsel. The Petitioners cite the statements found on the AOC~C's website The AOGCC Official Website, Commissio.n History, concerning this conflict of interest: "With the advent of production from Pmdhoe Bay in 1977, the Legislature became concerned that there was the appearance of a conflict of interest with the Department of Natural Resources, an owner of oil and gas fights, also acting as the regulator of other owners of oil and gas rights. To obviate its concern, the ~lpplication of Danco, Ina Petitioner's Application for Rehearing. Page 7 of 12 3450 Legislature amended AS 31.05 by Chapter 158, SLA 1978 to restore the Commission, effective January 1, 1979, as an independent quasi-judicial agency within the executive branch of the state. Initially, the new Commission was housed within the Department of Natural Resources, but in 1980 it was transferred to the Department of Commerce and Economic Development. More recently, Governor Hickel transferred the Commission to the Department of Administration on February 17, 1994." The Commission appears to have ignored the power and authority vested in them as a quasi-independent judicial agency by not exercising its apparent authority over AS 38.05.180(p), which requires that a unit plan "...must adequately protect all parties of interest, including the State." Clearly the North Cook Inlet Unit plan does not protect the State nor does it protect the Petitioners in our belief. Dr. Givens testimony clearly shows that the State of Alaska and the Petitioners have apparently been severely damaged by not receiving the just fair share of the hydrocarbons produced. Furthermore, the Petitioners believe the State of Alaska is not getting its fair share of the price paid at the market for the gas produced when Phillips sells it at the Nikiski LNG (liquefied natural gas), and then it appears Phillips pays the State its royalty share based on that low price and not on the high price that Phillips receives when they truly market the gas in Japan, in our belief. The wrongful drainage of gas from areas outside the Unit, as indicated in Dr. Givens testimony, could be costing the people of the State of Alaska hundreds of millions of dollars in lost revenue. These are matters that the Commission should be investigating and thereby protecting the State's royalty interests as mandated under AS 31.05. Of course, the Commission also has an affirmative duty to protect the Petitioners as well as the State whether petitioned or non-petitioned. The Administrative Codes promulgated under AS 38.05.180(p) concerning unitization are available to the AOGCC because the AOGCC must usurp AS 38.05.180(p) as indicated by law and such arrangement has been Application of Danco, Inc. Petitioner's Application for Rehearing. Page 8 of 12 345'~ evidenced by understanding AS 31.05.110(q), which states: "This section applies to all involuntary units formed in the state. Subsections (a) and (g) through (p) of this section apply to all voluntary units formed in the state and to a voluntary cooperative or unit plan of development or operation entered into in accordance with AS 38.05.180(p)." [Emphasis added]. In further support of this argument we quote AS 31.05.027: Land subject to commission's authority. "The authority of the commission applies to all land in the state lawfully subject to its police powers, including land of the United States and land subject to the jurisdiction of the United States. The authority of the commission further applies to all land included in a voluntary cooperative or unit plan of development or operation entered into in accordance with AS 38.05.180(p)." The AOGCC erred when they failed to follow the unit regulation and statutes. It is reasonable to find the Administrative Codes promulgated under 38.05.180(p) are available to the AOGCC when it comes to units. The Order erred to make these important findings and conclusions. In addition, in further derogation of Petitioners' due process fights, the findings and conclusions in the Order are based upon seismic data to which the Commission denied Petitioners access. See Petitioners' Post-Heating Memorandum at ¶ 4 (noting that fairness doctrine of Alaska Rule of Evidence 106 was violated by Phillips' ability to selectively disclose seismic data relevant to Petitioners' claims). The Commission failed to provide Petitioners' expert witnesses the oppommity to evaluate and respond to Phillips testimony upon which the Commission based the majority of its findings in the Order. In addition, Petitioners' objections to a Phillips witness who had previously consulted with Petitioners on the very issues on which he was to testify, were dismissed by the Commission as not "demonstrat[ing] the existence of a conflict of interest .... " Application of Danco, Ina Petitioner's Application for Rehearing. Page 9 of 12 3452 See Order, Summary of Testimony and Findings at ¶ 1. Petitioners' renew their objection with respect to this matter and in support thereof, submit the statement of David T. Gross, attached hereto as Exhibit "C." Under the purported authority granted to the Commission by 20 AAC 25.540(0, which was notably not in effect at the time the Petitioner's original petition was properly filed, the Commission has erroneously exercised its "discretion" to implement procedures which have consistently denied Petitioners due process. See 20 AAC 25.540(0 (enacted in 1999, and stating that "[t]he commission will, in its discretion, establish additional procedures for a specific hearing.., necessary to provide due process to a party"). These "procedures" placed onerous and unwarranted burdens on Petitioners, caused numerous delays, and cost Petitioners substantial sums of money. In this same vein, the Commission has chosen to ignore other established procedures under the law with respect to the proceedings. The Petitioner, Danco, Inc., through its proper officer, Mr. Donkel in attendance at the AOGCC Pre-Hearing Conference, October 12, 2000, made a point of order as stated in the Transcript, page 8, lines 8-9: "MR. DONKEL: I would object to anything that is not enforced by the Administrative Codes and Alaska Statute." The AOGCC's Order No. 391-A, fails to enforce the Alaska Statutes and Administrative Codes herein, and therefore once again is unfair to the Petitioners. The statute in effect at the time the original petition was filed, provided a fifteen day period in which interested parties could object to the Petition. See 20 AAC 25.540(a) ("A proper protest.., must be filed with the commission at its office in Anchorage, Alaska, within 15 days after the publication date by any person who may be harmed if the requested order issued.")(emphasis supplied). The administrative record does not indicate that any such Application of Danco, Inc Petitioner's Application for Rehearing. Page 10 of 12 3453 protest was ever filed by Phillips. Despite Phillips' failure to interpose a proper objection within the statutorily permitted period, the Commission erroneously permitted Phillips to appear, at, er the fact, to oppose Petitioners' claimst Clearly, the selective access to data and pertinem evidence (which the Commission has a statutory duty to investigate), the conflict of both Commission members and adverse witnesses, the failure to of the Commission to make full and fair findings on the merits of Petitioners' claims, and the procedural burdens placed on Petitioners, have denied Petitioners an impartial tribunal and due process of law. Clearly, the AOGCC failed to make a finding that the Petitioners have fulfilled all obligations under the law to receive full and just compensation. Petitioners require that the Commission fulfill its duty and make a finding and issue its order for Phillips to pay for the fair market value of the production that is due to the Petitioners, including "back" pay and interest since 1986. The Commission failed to make a finding according to AS 31.05.110 that a Petitioner is only required to file a Petition which invokes the Commission's affirmative statutory duty to do all things necessary to protect said Petitioners. Nothing further was required under law for Petitioners to do. The Commission should perform its duty and protect, safeguard and adjust the State of Alaska's lost royalty revenue as well as that of the Petitioners. The Commission's failures to investigate all these matters and to protect the Petitioners' fights are violations of Alaska Statutes and Administrative Code. These failures and violations render Conservation Order No. 391-A, totally erroneous. Application of Danco, lne Petitioner's Application for Rehearing. Page 11 of 12 3454 (The Exhibits hereto are to be considered text of this Application, including Exhibit D, provided by David Lappi. By this reference, all the exhibits are hereby incorporated here as though set forth fully in this text.) WHEREFORE, Petitioners request the Commission grant this Application for Rehearing and vacate Conservation Order No. 39 lA. ~'~ric E. Bro~fi Co-Counsel for Petitioners CER.TIFICATE OF,, S,ERVlCE I hereby certify that on this date tree and correct copies of this Application for Rehearing were served by mailed upon the following individuals: William B. Rozell PMB 506 617 W. Willoughby Ave. Juneau, Alaska 99801 Barbara Fullmer Phillips Alaska, Inc. 700 G Street, ATO 20 Anchorage, Alaska 99510 Dated this 24th day of December, 2001. ~am~ Frederic E. ~Brown Application of Danco, Inc. Pe61ioner's Application for Rehearing. Page 12 of 12 3455 Dec 23 01 05:56p URN DOHKEL ~u~ December21,2001 Via e-mail Mr. Daniel K. Donkel Danco, Inc. 2121 North Bayshore Drive Miami, Flodda 33137 Re: /~OGCC Conservation Order 391A Dear Mr. Donkel: Pursuant to your request we have performed a preliminary review of the AOGCC finding reported in Conservation Order 391A. On an overall basis, it would appear that the Commission has elected to report as fact the testimony of the Phillips experts and representatives and has totally disregarded the... testimony of the Danco representatives. Although one might determine that the weight of evidence of one party or the other might prevail in such a situation, it is inconceivable that one position is totally correct and another is completely implausible. In some cases, it would appear that the CommissiOn has mischaractedzed the testimony of Dr. Givens. In others it has disregarded the testimony of Mr. Lappi on the grounds that he disregarded information such as check shot surveys. However, one must recall that the commission itself limited the amount of information available to Mr. Lappi under the subpoena requested by Danco. It is our understanding that it is highly uncommon for testimony to be allowed related to technical data that is not available to both parties. In the decision, the commission has placed itself in the position of stating facts relating to reservoir concepts. However, it also contradi~s itself in at least on in~ance when discussing the mateda! balance calculations performed by Geoquest and the existence of multiple water contacts for separate horizons. A technical review relating to rnatedal balance will confirm that such methods apply only to a single . reservoir or pressure system. In the event that there are m, uitiple water contacts, then there must be - multiple pressure systems and therefore separate reservoirs. It would appear, from reading the commission order, that either the commission regards itself as an authority on geology, geophysics and reservoir engineering, or in the alternative has adopted the entire body of testimony by Phillips as fact. However, to adopt the Phillips testimony, one must disregard at least some previous Phillips testimony provided in the formation of the unit, particularly with respect to the net pay included in the subject reservoir. This gives rise to a question of Phillips' credibility: if they are now correct, they must have been in error previously. 3456 Dec 23 01 05:56p DRM DOMKEL 305 438 1119 Mr. Daniel K. Donkel Danco, Inc. December 21, 2001 Page Two On an overall basis, it would appear that there are a number of instances where the commission is either in error with respect to its conclusions or has a basic misunderstanding of the principles of petroleum engineering, geology and geophysics. Please contact me at your convenience if we can be of any further assistance in this matter. Respectfully submitted, PDH:klh Peter D. Huddleston, P.E. 3457 Dec 23 O1 05:5Sp DR~ DO~KEL 305 438 1119 p.5 MEMORANDUM December 20, 2001 TO: Dan Donkel FROM: James W. Givens Response to AOGCC Conservation Order No. 391A The following comments are my opinions and thoughts regarding the subject Order. In the limited time available, I have prepared these comments on errors that I have observed at this time. However, this does not limit further observances made by me in the future noting that all the record in this case exceeds 10,500 pages. DECISION ON REMAND I disagree with the Commission on their Order regarding the Petition of Danco and Allen and its denial. " t PROCEDURAL HISTORY AND SUMMARY OF PROCEEDINGS Dan, as you know this section covers meetings, hearings and etc., in which you and your attorneys have been involved. I think that you may have tried to obtain data and records about the North Cook Inlet Unit from Phillips in the year 2000 by some form of discovery and the Commission did not allow it and refused you and your experts the opportunity to prepare fully for the Hearing on March 13, 2001. On December 21, 2000, I did submit prefiled testimony and exhibits for the. March 13, 2001 hearing, and on May 21, 2001, prefiled testimony and exhibits for the June 14, 2001 continuation of the hearing were submitted. My testimony given at the March 13, 2001 hearing was qualified regarding information which had become available to prepare the prefiled presentation. My testimony given at the June 14, 2001 continuation of the hearing was based on the same information and the information gained from Phillips' testimony and exhibits presented for the March 13, 2001 session, and the Commission's well files for the Unit wells which were obtained after the close of the March 14, 2001 session and without utilization of any seismic data from Dave Lappi's study of portions of Phillips seismic. (I believe this work of Dave Lappi was done in late May, 2001.) I - testified to the AOGCC that my opinions and information base grew as the Hearing proceeded and more information became available to me. My May 21, 2001 testimony and exhibits represents what was known at its preparation time. The June 14, 2001 sessions have added more knowledge by having heard Lappi's testimony and the Phillips experts' testimony. 3458 1 Dec 23 01 05:57p DAN DONKEL 305 438 1119 ~.6 ISSUES FOR DECISION Dan, the first part of this section is yours for response; i.e., Standing, Standards for Involuntary. Unit Expansion, Extent of Productive Reservoir., Additional Standards. The Multiple Pools sections needs to have the deep oil zone tested in the Shell No. 1 well added to the last paragraph. The Retroactivity issue is not addressed due to their denial of your Petition. Dan you need to comment on Burden of Proof. I believe that Commission has a. duty to fully study and investigate and gather data to'reach a proper conclusion of the facts. Phillips has data, interpretations and studies which have been withheld. Therefore, the Petitioners lack data to further prove their position is correct and proper. Also, the last paragraph of Burden of Proof is wrong in their statement "... concludes that evidence fails to show.., that NC1-U is draining gas from Danco leases." My May 21,2001 testimony shows draining is occurring in all sands under the platform and removed from the platform, and the Phillips Order 40 testimony proved that the entire Sterling and Beluga sands can be drained by a single well at the platform. Hence, the Danco leases are being drained. · · FINDINGS Summary. Of Testimony And Findings - Under this section at the second paragraph, first sentence, the end of the sentence where it states that my testimony focused on the implications of an fincrease in the estimated gas reserves in the NCR/and on several maps he proposed of gas reservoir limits showing the reservoir to extend under the Danco leases, ".'.. based on reserves estimates..." This. should be changed to: "... based on Phillips testimony at the Order 40 hearing, Phillips prefiled testimony and exhibits for March 13 and June 14 hearing sessions, exploratory well records, records of NCIU wells; discussions with Dan Donkel, David Lappi and Monte Allen; data received fi.om the AOGCC files, reserves data from the ADNR, reserves data from GeoQuest, reserves analyses by Givens, and other materials referenced in his prefiled testimony. /he second sentence is okay. The third sentence should be changed to read, "His main contentions are: (1) that the doubling of estimated for the NCIU since the 1960' s is explained mainly by increasing the drainage area of the reservoirs; (2) that a linear projection of the top of the Sterling reservoir (Cook Inlet No. 1 Sand) in two exploration wells shows the reservoir extends under the Danco leases; (3) that NCIU well data shows that the lowest known gas for the Sterling and'Beluga sands are lower than reported by Phillips and prove that the Sterling and Beluga sands are productive of gas under the Danco leases; (4) that the measured bottom hole pressures (RFT data) show that the cluster welI spacing has drained gas from the entire reservoirs as testified by Phillips at the 3459 Dec 23 O1 05:57p DRH DOHKEL 305 438 1119 Order 40 hearing (i.e., the Danco leases and NCIU are being drained); (5) that the Phillips 1967 map showed the productive limits cutting across two comers of what later became the lease boundary of ADL 369101 and that parts of the adjacent leases which-were totally outside the productive limits were included in the participating area and the Danco leases were not included; and (6) that Givens has shown that the Danco leases and State of Alaska leases are productive and that the correlative fights and/or persons holding lesser interests of Danco and the State of Alaska have been violated. Dr. Givens does not agree with AOGCC finds regarding that they reported as contentions (1), (3), (4) and (5). SPECIFIC FINDINGS · . History Of Leases Dan, I have not checked the dates on leases or completeness of Findings 1-14. II. History of Exploration and Delineation of Structure and Reservoirs Finding 15. Unfortunately, the discovery well had a prolonged blow out with the well bore uncased over the Stealing and Beluga Formations as well as the deeper sands to approximately 10,000 feet. As I recall, the well blew uncontrolled for +438 days. - Add Finding 15-A. The Cook Inlet State 17589 NO. 1-A was drilled to kill the blow out. The well was drilled to the depth and location of the No. I well when the blow out occurred. Saltwater was pumped and the blowout was stopped. Finding 18. I question that the Beluga sands "are largely discontinuous between wells." I heard no such testimony at the Hearing. The Beluga sands are capable of flowing at high rates as were the Sterling sands. Finding 20. The statement "that do not have common gas-wa~er- contacts" is erroneous and not supported by the testimony. Finding 22 correctly states: "...gas water contacts in the Beluga Formation reservoirs have not been directly observed .... " Finding 2 I. Should give the well locations as 17591 No. 1 was west- southwest and 18741 No. 1 was southeast of the discovery well. Finding 21-A. There were no dry holes drilled between the ADL 369100 -. and ADL 369101 leases and the productiv9 exploratory wells. That is, the reservoir limits have been defined for the ADL 369100 and ADL 369101 area. Finding 23. Not supported. I do not believe that the gas accumulation is structurally controlled. 3460 O1 05: 57~ DAM DOMKEL ' ~Ub 4~ 111~ p.B Finding, 24. This is not supported and false. Finding 25. Not a true fact. It is only the largest reservoir observed by drilled wells. Lappi' s seismic study shows gas anomalies at the no?them end of the lease ADL 369100. Finding 27. Please refer to Givens Exhibit V. This exhibit shows the participating area does not include any of the Danco leases but does include a considerable area outside the G/W contact on other leases. The Danco leases did not receive the same treatment as given a number of other leases. Danco actually had mapped productive area and was given no credit. Finding 28. I would like to see cop!es of these undisclosed engineering' studies. I have seen the testimony in Order 40; however, nothing else has been represented at the Hearing that was done in the 1960's. The Order 40 testimony proves that the gas in a reservoir could be drained by a single well at the top of structure (page 20, paragraph 1). Finding 31. Same comments as given for Finding 27. Finding 38. The cluster drilling on top of structure had little or no chance of extending the reservoir limits. · . Findings 39 and 40. Please note that the lowest known gas for Cook Inlet sands is at -4324 feet ss in the A- 12 well. The sand is the Cook Inlet sand 11. In Phillips Exhibit SJW 12, the A-6 well is shown to have a lowest known gas depth of-4320 feet ss for the Cook Inlet Sand 11. Hence, the lowest known gas for the Cook Inlet Formation is not -4260 feet ss, but is the value -4324 feet ss as found in the A-12 well. The -4260 feet ss used for the gas water contact by Phillips is not correct. Finding 41. The Unit well A-12 has productive gas at a depth of-6794 · feet ss. See Givens Exhibit 27, page 27-4: I do not find the AOGCC's Finding 41 to be correct. The above gas water contact (-6794) extends the gas reservoir limit outside of the limit for Sterling or Cook Inlet sands. There is a geologic unconformity between the Sterling and Beluga Formations that allow the formations to have different gas water contacts. Finding_42. The AOGCC was in error when they made this finding. Finding 43 - 50. Dan, these are part of the David Lappi material. I would say that expendable exploration wells that are plugged and aban~ioned may have found hydrocarbons. 4 34151 Dec 05: 57p DOMKEL 305 1119 Finding 51 - 56. It is my opinion that the Beluga Formation has a lowest known gas depth of-6794 feet ss. I have testified that the Sterling and Beluga reservoirs or sands do not have vertical pressure communication. That is, there is no vertical flow between the layers. It points away from the wells. However, the perforated sands are commingled in the well bores over the past thirtY-two years. The blow out at the discovel-y well had all the sands in communication for over a year (i.e., Sterling and Beluga sands). The initial pressures reported by the AOGCC are represented by Givens in Exhibit VIII~ Attachment I, Page VIII-3. The pressure gradient for the Sterling and Beluga are the same since the Formations are in pressure communication. The Beluga and Sterling Formations in my opinion have their own gas water contacts for each formation. The Beluga gas water contact or lowest known gas valve is -6794 feet ss, and the Sterling gas water contact or lowest known gas is -4324 feet ss. I believe that the Beluga and Sterling sands are productive down to these levels. Givens Exhibits 20 Revised and 21 Revised use the same Beluga gas water contact. Findings 57 - 68. The Givens testimony on the projection of the top of the Sterling Formation appears to be in error due to the Phillips Exhibits which were presented on June 15, 2001. This data was received by Givens on June 13, 2001 and not looked at until Phillips testimony presentation on June 15, 2001. In Givens' testimony presented on March 13 and 14, 2001, there were two projections made: one using the discovery well and the Shell No. 1 well, and a second using the Unit well A-10 and the Shell No. 1 well. In both of these projections the subsea top of sand used for the Shell No. 1 well were not correct. However, when one uses the corrected gas water contact of-4324 feet ss rather than the -4260 feet ss used by Phillips, the Sterling sands are projected onto the Danco lease and show that lease is productive of gas from the Stealing sands. This projection was performed using the Unit Well A- 10 and the Shell No. 1 well with the mud line well log depth adjustment. Findings 69 - 84. Givens Testimony on Doubling of Estimated Gas Reserves. The Givens testimony is clear on this subject. His prefiled testimony arid exhibits describes in detail what analysis was performed by him and others. Table I of Exhibit VI/I summarizes the five estimates of initial gas in place and recoverable gas reserves using data and computations given in Attachments I, II, III, IV, and V. This testimony is complete and there are no missing facts as to what was done or how it was performed. Reserve estimates were made for data taken from the AOGCC 1972 and 1999 Annual Reports. The AOGCC published data annually on the net pay, porosity, drainage area, water saturation, etc. which are needed to volumetrically Compute the reserves..It is interesting to note that the annually, reported net pay values were constant (the same) for the period from 1972 through 1998. In 1999 the values were increased considerably. Why? That is simple. The gas reserves had been 3462 23 O1 05:58p DRM DOMKEL 305 438 1119 p. lO increased by GeoQuest and ADNR and the AOGCC had to have a Iarger container to hold them. I don't know who made this change. Maybe it is based on new data from Phillips or an AOGCC staff member who provided the new values for the Sterling and Beluga net pay? Givens disagrees with the tone and false statements and erroneous interpretations presented in Findings 69 through 84. Ovens will discuss each of these Findings at the requested hearing. Findings 69 through 84 are only a morass by the AOGCC. Phillips has all the studies and evaluations and interpretations of well log data required to prove some of the statements in the AOGCC findings; however, Phillips has not presented a complete presentation of these facts. They chose to only show data for two wells in their Exhibit SJW-12. Why didn't they show all the wells (Unit Wells and Exploratory Wells)? Findings 85 - 87. Exhibit 24, Page 24-I is the correct reference to the P/z graph for the NCIU. Givens statement about this graph is "the production of gas causes the reservoir pressure to decrease." Finding 85 states that "Dr. Givens presented a graph.., as evidence that the Danco leases are being drained by NC1-U production." Finding 86 is only an opinion and Givens believes it to be false. Finding 87 is wrong. Exhibit 25 is a strong set of data which when understood tells you that the Sterling and Beluga sands are being drained at the Sunfish location. The reservoir pressures (for Sterling and Beluga Sands) are being depleted or drained at a point or location (at Sunfish WeI1) removed from the cluster well production. This fact is very much in agreement with the Order 40 testimony by Phillips that the Sterling.and. Beluga Formations have high permeabiliW and can be drained by the cluster well pattern; i.e., the entire reservoirs will be drained in the cluster pattern. The AOGCC 1972 Annual Report (Givens Exhibit VIII, Page VIII-3) shows the Stealing to have a permeability of 178 md and the Beluga to have 175 md. These formations will drain gas from great distances as testified by Phillips. Givens testimony and exhibits prefiled for the June 14 continuation of the hearing contains a section entitled "Drainage" which is clear, concise and comprehensive and also correct. .. ; CONCLUSIONS Conclusion No. 2. The AOGCC has omitted the deep oil zone tested in the Shell No. I well at 2000+ BOPD. This needs to be added. Conclusion No. 3. This conclusion is wrong. Conclusion No. 4. This conclusion is wrong. 3463 23 01 05:58p DRH DOMKEL 305 ~38 1119 · p.11 Conclusion No. 8-A. Add a conclusion that "as to the Tertiary System Gas Pool, the correlative rights and/or persons holding lesser interests of Danco and the State of Alaska are being violated." Conclusion No. 9. Add a conclusion that "As to the Shell No. 1 deep oil reservok and the Tyonek Deep reservoir that the correlative rights and/or personal holding lesser interests and the State of Alaska are being violated." Conclusion No. 10. Add a conclusion that "As to the Shell No. 1 deep oil reservoir and the Tyonek Deep reservoir that the correlative rights and/or personal holding lesser interests and the State of Alaska are being violated." Conclusion No. 11. Add a conclusion that "As to the Shell No. 1 deep oil reservoir and the Tyonek Deep reservoir that the correlative rights and/or personal holding lesser interests and the State of Alaska are being violated." Conclusion No. 12. Add a conclusion that "As to the Shell No. 1 deep oil reservoir and the Tyonek Deep reservoir that the correlative rights and/or p.erso~ holding lesser interests and the State of Alaska are being violated." Conclusion 12-A. Add into conclusion that "As to the Tyonek Deep reservoir the correlative rights and/or persons holding lesser interests and the State of Alaska are being violated." Conclusion 13. This conclusion is wrong. Conclusion 14. The correlative rights and/or persons holding lesser interests of Danco and the State of Alaska have been violated. 3464 23 O1 05: 59p DRM DOMKEL 305 438 1119 12-18-01 to: Daniel K. Donkel fr: David T. Gross re: Danco's July 6, 2000 meeting with Ryder Scott Company, Petroleum Consultants. & Conservation Order No. 391AConservation Order Index STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION p.12 I have just finished reading the Conservation Commission's decision. I will not address here the appalling tone of the document. I do feel obligated to make a comment on the Commission's finding regarding my affidavit. In the Commission' s Summary of Testimony and Findings, they stated: ~'In addition, written testimony by David T. Gross was submitted, purportedly on the issue of whether one of ,Pkillips'witnesses had a "conflict of interest." The Commission finds that Mr. Gross's testimony did not demonstrate the existence of a conflict of interest or other ground to disqualify any Phillips witness." It would be an understatement to say that I was dismayed by this evaluation. As you well know, I have a considerable amount of experience as a petroleum geologist. This includes my ten years with Chevron that began with my work along the Texas and Louisiana Gulf Coast and wound up with my being charged with the sole responsibility to evaluate Chewon's holdings in the Cook Inlet in 1990. Since I began to consult for Danco Exploration in 1992, you and I have attended numerous meetings with companies interested in Danco's Cook Inlet acreage. Needless to say, I am quite familiar with ~he normally accepted ground rules associated with meetings between two different companies. It is understood that each person is motivated to act in the best interest of their respective company and that at any time, either company may decide not to pursue the matter at hand any further. I have never met anyone who has held that it is acceptable professional behavior for a company to meet with one company in a dispute, participate in an exchange of information and ideas regarding the dispute, and then mm around and represent the second company in that dispute at an official governmental heating. I am at a loss to understand how the Commission could fail to see this as an egregious lapse in professional ethics and acceptable business practices. I encourage you to appeal the Commission's findings in an appropriate venue. Dave 3465 Dec 23 O1 05:59p DRH Dor, IKEL 305 438 1119 p.13 Petroleum News Alaska NEWS BU LLETi N November 2, 2000 Vol. 6, No. 51-3 November 2000 AOGCC engineer seat filled Petroleum engineer Julie M. Heusser has been named to the engineer seat previously held by Bob Chr/stenson on the three-member Alaska Oil and Gas Conservation Commission, Gov. Tony Knowles said Oct. 26. Bom and raised in Alaska, Heusser worked as a field petroleum engineer and reservoir engineer for BP Exploration (Alaska) Inc. from 1977 until joining ARCO Alaska Inc. in 1981 where she worked until 1994 as a reservoir engineer, field development engineer, workover/stimulation engineer, annular communication engineer and well services supervisor. Most recently, Heusser has Worked as a self- employed consulting engineer. For information on Petroleum News Alaska's news bulletin service, call 907-522-9469. PO Box 231651, Anchorage, AK 99523 - 1651 3466 Dec 23 01 05:59p DRH DOHKEL 305 438 1119 p. 14 ' ~ Julie'l~l. He.~ser was employed by ARCO during part of the time leases ADL 369100 and ADL 369101 were being drained of their hydrocarbons. Therefore, she needs to declare that she has a conflict of interest in regards to this Petition. 3467 Dec 23 O1 O6:OOp DRH DOHKEL 305 438 1119 p. 15 :.:-.~:i/i!.~:.OFFICE OF THE GOVERNOR ..~~ Pr-ess Releases- _-:- ALASKA IN THE NEWS 00270 October 28, 2000 EXPERIENCED PETROLEUM ENGINEER NAMED TO OIL AND GAS COMMISSION Knowles Appoints Long-Time Alaskan Julie M. Heusser to AOGCC A petroleum engineer with more than 20 years of subsurface experience in the Alaska oil induslzy, Julie M. Heusser of Anchorage. has been framed to a seat on the Alaska Oil and Gas Conservation Commission (AOGCC), Gov. Tony Knowtes announced today. "With Me educational, subsurface, and oil industry experience that's required for the job, Julie Heusser is a Ceat choice to serve on the Oil and Gas Conservation Commission," Knowtes said. "It's great to have someone on our team with so many years of varied experience working in the Alaska's oil industry." Heusser, who was bom and raised in Alaska, majored in petroleum engineering at the Colorado School of Mines, where she earned her Bachelor's degree in 1977. She worked as a field petroleum engineer and a reservoir engineer for British Petroleum (BP) from 1977 until joining Atlantic Richfield Company (ARCO) in 1981 where she worked until 1994 as a reservoir engineer, field development engineer, w~rkover/stimula.tion engineer, annular communication engineer, and well services supervisor. From Apdl 1996 to the present Heusser has worked as a self-employed consulting engineer. Heusser has subsurface experience in oil production and development, reservoir depletion, and drilling and metering operations. She also has extensive experience with Alaska's Class ii U~lerground Injection Project at bo'th the state and federal level. As a consulting engineer, Heusser was the primary engineering support for the BP Endicott Waste Investigation. The three-member AOGCC is responsible for the regulation of oil and gas drilling, development, and production in Alaska. Heusser fills a seat for an engineer, previously held by Bob Christenson. Appointed to a six-year term, she will earn approximately ~3'0,700 annually. .C~r~. tact: For l~re information please contact AOGCC acting chair Cammy Oechsli Taylor, (907) 279-1433 x221. _ 3468 Deo 24 O1 Ol:08p David W. Lappi 1 so7 248-7278 Telephone: I (907)248-5684 David W. Lappi 4900 Sportsman Drive Anchorage, Alaska USA 99502-4169 e-mail: lapres@gci.net .. Facsimile: I (907)248-7278 December 22, 2001 Alaska Oil and Gas Conservation Commission 333 W. 7th Ave #100 Anchorage, Alaska, 99501-3539 Dance, Inc. 2121 North Bayshore Drive, Suite 1219 Miami, FL 33137 Re: Review of AOGCC Conservation Order 391A dated December 3, 2001 At Mr. Donkel's request I have reviewed the various points set out in the AOGCC's Conservation Order 391A as set out below: General Comments After reviewing the Conservation Order, I was dismayed by the general tone of the document and I strongly object to the, I believe intentional, mischaracterization of my testimony by the Commission. The Commission's statement that "Mr. Lappi's analysis as described in his testimony does not conform to generally accepted professional methods for petroleum geology and geophysics and ls not crech'ble or persuasive." is particularly damaging in light of the confidential nature of my testimony. Members of the public were cleared from the heating during most my testimony, and my testimony, my exhibits and transcripts from the hearing remain sealed and not available for any other persons to review. Under these circumstances, the Commission must refrain from makingvalQe judgements about a person and these types of generalized derogatory statements as the relevant hearing records are closed to the public. The Commissions statements regarding my testimony were reported in the weekly industry newspaper "Petroleum'News Alaska", and published internationally. They were read by members of my immediate family, my business acquaintances, clients, friends, neighbors and thousands of strangers who have never met me and cannot judge for them~lves the troth, or lack thereot~ of the Commission's statements. .. I respectfully and strongly request that the Commission cause a retraction of their derogatory statements to be published in the same publication, and a letter of apology be sent to me personally. 3469 Doc 24 O1 Ol:08p David W. Lappi 1 Standing 807 248-7278 p.2 Lappi Review o£ CO 391A I~cemb~r 22, 2001 Page 2 ~ 10 It appears that the AOGCC has made a decision in this case without addressing the question of standing, that is, whether an overriding royalty owner has the ability to.petition for expansion of an existing unit, or further, whether a settlement should be applied retroactively to compensate for gas drained from the leases. Thus it appears that even if the Commission had decided in the Petitioners' favor on the merits, there ~ may be protracted and expensive legal proceedings on the question of standing and retroactivity. The State's statutory definitions include the following (emphasis added): Sec. 31.05.170. Definitions. In this chapter, unless the context otherwise requires (5) "field" means a general area which is underlain or appears to be underlain by at least one pool, and includes the underground reservoir containing oil or gas; and the words "pool" and "field" mean the same thing when only one underground reservoir is involved, but "field" unlike "p. ool" may relate to two or more pools; (9) "owner" means the person who has the fight to drill into and produce from a pool and to appropriate the oil and gas the person produces from a pool for that person and others; · . (11) "pool" means an underground reservoir containing, or appearing to contain, a common accumulation of oil or gas. Each zone of a general stmc~e which is completely separated from any other zone in the structure is covered by the term "pool"; Alaska statutes provide the Commission with all the required powers to carry out its duties as follows (emphasis added): .. Sec. 31.05.110. Unitization and unitized operation of pools and integration of interests by agreement. To prevent, or to assist in preventing waste, to insure a greater ultimate recovery of oil and gas, and to protect the correlative rights of persons owning interests m the tracts qf land affected, these persons may validly integrate their interests to provide for the unitized management, development, and operation of such tracts of land as a unit. Where, however, they have not agreed to integrate their interests, the commission, upon proper petition, atter notice and heating, _has jurisdiction, power and authori_ty, and it is its duty to make and enforce orders and do the things necessa~_ or proper to Car~ out the _purposes of this section. 3470 Dec 01 01: 08p Day i d W. Lapp i 1 907 848-7278 p.3 La~i Renew ~ CO 391A Decem~r 22, 2001 P~3 ~10 .In reference to AS 31.05.110(a), the Petitioners believe that the context requires a broader definition of"owner" than that carried by AS 31.05.170 (9) above, and thus the Petitioners have standing as persons owning interests in tracts of land affected. Clearly they have overriding royalty interests in those tracts. .. Further, AS 38.05.180(p) requires that all parties of interest be protected, clearly royalty owners are parties of interest. Hearing The Commission is treating this petition as if it is a new affair and issued a new procedural' order September 27, 2000. The Petition has been pending since August 30, 1996, and it is not a new heating, but merely a continuation of the hearings held by the Commission beginning in 1997. New procedural orders that disadvantage the Petitioners' should not be allowed, midway through the process. This is chan~ng the rules in the middleofthe game. In particular, the Commission acted unfairly in eliminating any chance to consider the deep oil accumulations below the currently producing shallower North Cook Inlet Gasfiel& If the North Cook Inlet Unit continues to the center of the earth, just like the leases it contains, the deeper producible horizons are relevant. Standards for Involuntary Unit Expansion This section starts with a false premise. Despite the confusing nature of the various unitization statutes, the petitioners do not invoke the Commission's powers of involuntary unitization (AS 31.05.110 (b)), they simply request that a voluntary unit be expanded by the inclusion of two leases owned by Phillips Petroleum, who also akeady own the rest of the North Cook Inlet Unit (NC1U). The tests set out under AS 31.05.110 (b) does not apply to this case under the facts since it is a voluntary unit, but subsections (a) and (g) - (p) do, as clearly stated by AS 31.05.110(q) as follows: (q) This section applies to all involuntary units formed in the state. Subsections (a) and (g) - (p) ofthis section apply to all voluntary units formed in the state and to a voluntary cooperative or unit plan of development or operation entered into in accordance with AS 38.05.180(p). .. The Alaska Oil and Gas Conservation Commission (AOGCC) argues that it has no jurisdiction over a unit created by the Department of Natural Resources (DNR), even though the AOGCC itself was part of DNR when the unit was created. In addition, the laws creating the separate AOGCC as a "quasi-judicial" org~_nization specify that the AOGCC's powers extend over all parties, including other government agencies. The buck stops with AOGCC (see AS 31.05.027 and AS 31.05.030). The admini.qtrative codes for forming, expanding, and contracting units written while AOGCC was part of DNR do not become irrelevant simply because the Alaska State Legislature recognized that conflicts of interest arise ifAOGCC remained part of DNR~ Indeed, most ofthe AOGCC's own 3471 Deo 84 O1 Ol:09M Dmvid W. LmpMi 1 807 848-7878 Lappi Review of CO 391A December 22, 2001 Page 4 of 10 regulations regarding units cite the authorizing statute AS 38.05.180 (administered by DNR). The final arbiter of units created in the State cannot be the DNR (because of their recogni?ed conflicts of interest since they also control the sale of leases, for instance, those Contracted out of units). The final arbifer must be the AOGCC as a separate independent quasi-judicial agency. The AOGCC maintains that it has no power to enforce the North Cook Inlet Unit Agreement that requires areas be brought into the Unit as follows: " The above-described unit area shall, when practicable, be expanded to include therein any additional tract or tracts regarded as reasonably necessary or advisable for the purposes of this agreement, or shall be, contracted to exclude lands not within any participating area whenever such expansion or contraction is necessary or advisable to conform with the purposes of this agreement. The Petitioners believe the NC1U extends to the center of the earth, just like the leases that make it up, and therefore it includes the deep oil horizons. The Petitioners believe that the Operator, if he maintains that the Unit does no~ inclu~le the deep oil horizons, is obligated to expand the Unit to include them as indicated above in the Unit agreement. If those deep oil horizons are included, it is reasonably proved by published public 3-D seismic interpretations conducted by ARCO Alaska that those oil horizons extend into the Petitioners' leases, and therefore those new leases should be included in the Unit. The State's standards for areas to be included into units are set out as follows in 11 AAC 83.356. UNIT AREA; CONII~CTION AND EXPANSION: (a) A unit must encompass the minimum area required to include all or part of one or more oil or gas reservoirs, or all or part of one or more potential ~_ drocarbon accumulations [emphasis added]. The definitions for '¥otential hydrocarbon accumulation", "reservoir", and "unit" under 11 AAC 83.395 DEFINITIONS is set out below [emphasis added]: (5) "potential hydrocarbon accumulation" means any structural or stratigraphic entrapping mechanism which has been reasonably defined and delineated through geophysical, geological, or other means and which contains one or more intervals, zones, strata, or formations having the necessary physical characteristics to accumulate and prevent the escape of oil and gas; (6) "reservoir" means an oil or gas accumulation which has been discovered by drilling and evaluated by testing and which is separate from any other accumulation of oil and gas; 3472 I~ec 84 01 O1: lop David W. Lappi 807 848-7878 Lappi Review of CO 391A December 22, 2001 Page 5 of 10 · . (7) "unit" means a group of leases covering all or part of one or more potential hydrocarbon accumulations, or all or part of one or more adjacent or vertically separate oil or gas reservoirs, which are subject to a unit agreement; In other words, potential hydrocarbon accumulations must be included in the unit even if they are not "continuous" with or in '¥ressure communication" with other reservoirs in the field. The State's view of''ParticiPating Area" is set out below in 11 AAC 351 PARTICIPATING AREA [emphasis added]: (c) A participating area must be expanded to include acreage reasonably estimated through the use of geological, geop~_ sical, and engineering data to be capable of producing or contributing to the production of hydrocarbons in p~. ing quantities, and must be contracted to exclude acreage reasonably proved through the use qf geological, geop~, sical or engqneering data to be incapable qf producing ~. drocarbons ~n paying quantities, ... The Commission did not ask Phillips the simplest basic questions in this case: " Are you draining gas from the Petitioners' leases? Why was Phillips' volumetric data about the reservoirs not presented at the heating? Are the deep oil horizons within the NCIU? If not, why has the Phillips not put them in the Unit? It may be that Phillips is waking for their favorable resolution of this case to develop their deep oil horizons to the detriment of the Petitioners. ,Ifthe unproven and undeVeloped Redoubt Shoal Oilfield can be put into production by construction and placement of a new platform by a company new to the Inlet (Forest Oil), why has the proven certified capable of producing in paying quantities Tyonek Deep Oilfield not been developed from an existing platform? The State lists proven recoverable oil reserves in the currently drilled wells in the Tyonek Deep Oilfield at 25 million barrels (25MMBO) worth about $500,000,000 even at today's depressed oil prices. The State also lists proven recoverable gas reserves in the Tyonek Deep Oilfield at 30 BCF worth about $75 million at today's gas prices. During field development, it is very likely that drilling delineation or stepout wells will discover and prove up additional producible oil and gas reserves. Additional Standards Again, the Commission is using the standards for forming an involuntary unit (AS 31.05 110 (b)), not expanding a voluntary one. The Petitioners believe that the standards set out in (b) that the Commission is bent on using are meaningless when applied to the simple case of drainage. If 110 (b) were the appropriate standard, an operator could drain his p.5 3473 84 01 Ol:llp Dmvid W. Lmppi 1 907 248-727'8 Lappi Review of CO 391A December 22, 2001 Page 6of~0 neighbors with impunity, and get away with it. This is not correct. set up to safeguard the fights of all parties (including the State). The Commisison was As to the Commission' s comments about the Tyonek Deep Oilfield, they maintain that it cannot be brought into the Unit somehow (if it isn't already in the Unit - that has yet to be decided), because it is not in production now. Again they use AS 31.05.110 (b) for involuntary units as their standard. This ~es in the face of other Units in the State that were formed or expanded before production starteck How does an adjacent royalty owner protect his property rights from an operator bent on stripping him of those royalties? Does not the operator and working interest owner have a fiduciary responsibility toward other owners? If they do, then let them exercise it. Ifnot, then the Oil and Gas Commission should have the responsibility to assist the royalty owners and force integration of. potential oil and gas fields. If; aRer integration, no development occurs, nobody has lost any money. If, alternatively, development occurs after the royalty owners are stripped of their rights, then a theft has taken place, a theft committed with the assistance of our State agencies. Retroactivity Again, the Commission has set up the petitioners for more litigation by reserving a range of issues to be decided later in other actions. Burden of Proof The Commission refused to subpoena key information from the North Cook Inlet Gasfield requested by the Petitioners, and refused to consider the Petitioners' arguments about the Tyonek Deep Oilfielck While Phillips kindly made it's shallow seismic data available to the Petitioners' experts to view only, on a computer workstation costing $1,000 per day, Phillips refused to allow the Petitioners or their experts to see the seismic data on the Tyonek Deep Oilfield. The Commission allowed this to take place, severely limiting the ability of the Petitions' experts to develop arguments about the extent of the oil and gas at deeper levels. Also, while the Commission found no valid arguments in the testimony of the Petitioner's experts, it also found that the 3-D seismic maps of the Tyonek Deep (Sunfish) Oilfield published by ARCO were somehow not relevant to their deh'berations. This was allowed because the Commission was allowed to change the rules for the continued heating in the middle of the game with their Procedural Order of September 27, 2000. Also at issue is the role of the Commission in investigating, in addition to deciding a case. Reading the clear meaning of the statutes and regulations that set up the Commission, it was the intent of the Legislature that the Commission should have all powers necessary to carry out their duties. Perhaps a court needs to review the Commissions duties and obligations to their citizens, and decide what the statutes actually mean in practice. 3474 Dec 2~ O1 01: llp David W. Lappi 1 807 248-7278' December 22, 2001 Page 7 of 10 Findings- Summary of Testimony and Finding.s. The Commission generally dismissed Mr. Lappi's testimony about the 3-D seismic amplitude anomalies by saying that they "are likely to represent coal deposits and ~hat, in any event, those areas are not continuous with the gas reservoirs in the NCIU." The Commission then states that "Mr. Lappi's analysis as described in his testimony does not conform to generally accepted professional methods for petroleum geology or geophysics and is not credible or persuasive." Exactly what methods ofpetroleum geology or geophysics did Mr. Lappi use that are not generally accepted practice in the industry? Again, the Commission is using the AS 31.05.110 (b) standard as their only tool to decide what areas warrant unitization. The Commission's Finding 98 concludes that Mr. Lappi provided no evidence that seismic amplitudes of less than -10,000 units uniquely represent producible gas. Mr. Lappi selected that level because inspection of the amplitude anomalies within the known producing gasfield (as evidenced by Well and production data, see Commission Finding 90) showed that level to represent producible gas. This is standard industry practice, extending known, real-world empirical results, and is much more accurate than calibrating a seismic survey based on laboratory measurements or model studies. Is the Commission suggesting we use these less accurate techniques? .- k is unlikely that thick blanket sand deposits like the Cook Inlet Sands would suddenly become coaly, and that those coals would display amplitude anomalies like the gassy sands within the North Cook Inlet Field. It is more likely that at these amplitudes the anomalies represent gas, not coal In the thinner underlying Beluga Sands, the resolution of the 3-D seismic survey is insufficient to identify individual gas-bearing sands (or coal beds) at all In the Beluga formation, many of the amplitude anomalies are likely to represent several stacked gas-bearing sands in stratigraphic traps. Phillips' expert witness Brian Campbell describes this [geological] section as follows: "The lower Beluga section of the NCI field is dominated by thin channelized sands, encased in:siltstones, shales, and thin, stacked coals." This is the ideal environment for strafigraphic traps. As to the Commission's Findings 43 through 50, there is no submrface evidence of gas or an absence of gas in the North Cook Inlet State 18741/ti well, except to say the mud log had no indications of gas during drilling. It is very common in oil and gas drilling for a company to drill through and oil or gas reservoir and have no indication of oil or gas on the mud log. May fields have been bypassed in this way, only to be discovered by later drilling or though improved wireline logging techniques. Alternatively, there are many indications of oil or gas on mud logs that are not related to producible hydrocarbons. Thus, md log evidence is not credible or decisive in either direction. It is used aa one piece of evidence in a large matrix of remotely sensed information about the rocks one is drilling through. 3475 24 O1 01: 1Bp Dmvid W, Lappi i 807 ~48-7~78 · . Lappi Review of CO 391A December 22, 2001 Page $ ell0 The evidence Mr. Lappi cites is on the drilling reports that the Operator ofthe well submitted to the State declaring the well was a gas well Again, the well was abandoned, not because it was a dry hole, but because it was an expendable exploratory well, because wireline logging was impossible because of mechanical difficulties, and because the Operator, Pan American on or about that time had assigned its interest in the lease to others and no longer had an interest in pursuing production~ As to the level ofthe gas-water contact in the field, Phillips' own Exhibit SJW-12 shows producible gas in the Cook Inlet Sands as deep as -4320 feet subsea, meaning that the original Phillips gas water contact at - 4260 feet subsea (and accepted by this Commission as fact) cannot be correct. The true gas-water contact must be at least 60 feet deeper, based on Phillips' own exhibit. As to Commission Finding 99, there is no requirement that new leases brought into an existing voluntary unit have hydrocarbon pools that are continuous with those of the unit. They may contain entirely new pools, and still be eligible for integration into the unit. As indicated before, Phillips owns both the leases in question and the North Cook Inlet Unit, and if development of these new pools does not occur, no one has lost any money. In Commission Finding 100, the Commission claim~ that Mr. Lappi's interpretation does not follow generally accepted procedures for the interpretation of seismic data. Mr. Lappi was assisted in his interpretation by Mr. Bill Heronimus, a Houston, based geophysicist with extensive experience in 3-D seismic interpretations (five years foil time) using exactly the same workstation and interpretation software used in this case. Check shot surveys were not used because they were not relevant to showing the presence of hydrocarbons within the Petitioners' leases. Check shot surveys would be relevant to correlating the interpreted horizons to various levels within the drilled wells (i.e., naming a horizon a particular sand, like the "Beluga B" sand). The naming ofparticular horizons is not something the Petitioners were required to do to make their case, and given the time and budget constraints of the Petitioners, they opted not to spend the time required to do this, although it would have been a convenience to all the parties to have done so. The naming conventions that we did use are common in industry seismic interpretations, such as the "11,000 foot sand", 'hear middle Sterling" or "near top Beluga". The Petitioners made use of well data to identify areas of production and areas which are not productive, to calibrate their seismic interpretation (as in Finding 90). This is standard industry practice. It is the Petitioners' view (and Phillips' seismic expert agreed during testimony under oath) that this areal approach to calibrating seismic data interpretations is more accurate than modeling the results on specific pieces of evidence. Specific pieces of evidence may come from a single well and be applicable to only a localized area around that single well. As to the deeper hydrocarbon zones, there is adequate evidence in the record of probably hydrocarbon zones in the Tyonek Deep Oilfield. Several Tyonek Deep wells were certified by the State as "capable of producing in paying quantities". In addition, the West Foreland Io.8 3476 Dec 2~ 01 O1: 13p David W. Lappi SO7 248-7278 p.S Lappi Review of CO 3913, December 22, 20Qt Page 9 of 10 formation produced a large condensate (light oil) flow from about 11,000 feet in an early exploration well much closer to the Petitioners' leases. It was also certified by the State as "capable of producing in paying quantities". Ail ofthese ceffified wells are located on the same structure as the Tyonek Deep Oilfield and the North Cook Inlet Crasfield, which structure extends under the Petitioners' leases, particularly at the deeper levels. The following testimony by Mr. Lappi appears to have been completely ignored by the Commission: The Shell North Cook Inlet State #1 well encountered 2,270 BOPD oflight oil and 842 MCFD gas at 11,020 to 11,040 feet on DST #1 (September 6, 1964). This producing horizon is only slightly lower than our trtmcated seismic allows us to see. Our deepest contour maps (Map 10 and 11) show that this discovery is likely to be a separate closure northeast of the top of the North Cook Inlet structure several square miles in area. This discovery has never been evaluated, and it indicates that at least some of the porous beds have been charged with oil and gas, and it therefore should be included in the NCI Unit. Since the Commission has discounted aH of the seismic interpretations presented by the Petitioners, it needs only to rely on the 3-D seismic maps prepared by ARCO (and presented to the commission in 1997 and again more recently) to reach the same conclusion - that reasonable evidence exists for the presence ofproducible oil and gas within the NCI structure on the Petitioners' leases at the deeper horizons. Even ARCO's interpretation has misrepresented the potential reserves. When they delineated the area of''Potential Reserves", they followed a specific contour line (oil-water contact) around the southern end of the field, but chose a different (higher) contour line around the north end of the field, without any justification for doing so. In standar..d industry practice, the same elevation should be used for an oil or gas-water contact all around the limits of the field without evidence to the contrary. Mr. Lappi pointed this out in his testimony (Commi~ion Finding 103), but it was ignored by the Commission in its decision. In fact, the Commission ignored Mr. Lappi's re-interpretation ofthe ARCO structure map correcting it's gas-water contact discrepancy, and stated in Finding 104 that "Mr. Lappi did not present any independently interpreted subsurface data in support of his conjectures." Mr. Lappi" Exhibit on this subject is clearly a new independent interpretation of ARCO's original subsurface structure map. Nearly all of the wells drilled into these deeper horizons produced oil, and reasonable geologists and geophysicists would call for stepout wells to be drilled on the leases in question (or even timber north) to see how far the oil producing horizons extend to the north. Without unitizing these horizons, exploration and development of these targets could be chaotic and wasteful. Unitization would allow for orderly development, and again, all the leases in question, and the North Cook Inlet Unit, are owned by Phillips. 3477 O1 Ol:14p W.m ~app~ Lappi Review of CO 391A December 22, 2001 Page ~0 of ~o Mr Lappi did not present any independently interpreted seismic data from the Tyonek Deep or West Forelands horizons only because the Commisson refused to allow the Petitioners or their experts access to the deep seismic data, even though the experts had signed confidentiality agreements regarding any data they were allowed by Phillips to see. The Commission says that Mr. Lappi's exhibits "suggest the possibility that the Tyonek Deep reservoir extends under the Danco leases" (Commission Finding No. 105). The Petitioners maintain that this is sufficient to justify unitization of those leases. The Petitioners believe that the State's body of unitization rules and their intent, must override the Procedural Order. The Alaska Statute 31.05.110 (b) subsection that the Commission has used to justify its decision does not apply to this case under the facts. As to Commission Finding 106, ifthe standard for unitization were to show that a reservoir extends under every lease in a unit, each lease would need to be drille& This would lead to economic waste in areas where more than one lease can be drained from a single location, like the offshore platform at the NCIU. Standard oilfield practice dictates that an entire smcmre be unitized, then as the required delineation drilling occurs, the unit is expanded or contracted as the field is developed. It should be sufficient to show that it is reasonably proved on the basis of geological engineering, or geophysical methods that an area or structure is likely to be productive to include it in the unit. Please let me know if you have questions on this review of Conservation Order 391A. Sincerely, David W. Lappi 3478 #4 · , From:ltL NOtaTE MEI)IP~ CLINIO 12/'~/2001 12:92 #103 P.O01/O08 STATE OF* ~ OIL'AND GaS 00NSE~ION CO~4/BSION 333 W. ?th A~enue, Sut~e 100 An~ho=age, Alaska 99501 32,..0s...0s0 rol~lty :Ln~t: u ret~eotod /,n ~ .AO~CC'$ re~oEd~ =onc~Fnlng. ~he Danoo/Allen, August 30, 1996 .24, 2001, App//~=ton for Z mn filing said A~plt~tion in my indi~~ Cmm~saion, Z there~oz~ a~pIy to the AlmLkaOil and Gas Conservation Commission l~uant Co ~ 31.05,080 fo= a ~in~ of ~ matters addressed __ ~ ~.~se~v~tiOn RECEIVEU Orcbr No. 391-A wi~ respout to the DEC 2 4 ?_001 Alaska Oil & Gas Co~s. Comm~ I -d ST ! l 8G:'I, 3479 Fr~:I~_.L NOR~ I~DI~ OLINIC 707 41~ 31~ 12/~/2001 12:38 #1US F.~Z~t~ s~ otl ~d gas X~ees ~ 369100 ~ ~ 369101 C~ssio~e ~ p~o~~on ~o ~ ~~~ . ~ s~ ~ ~ ~~~ ~o ~ ~g1~n ~~on un~ ~ 3Z.05.110 p~o~l~, ~ Uni~ Sta~ o~ ~i~ by ~~ a ~orae~ BIII 8E6 9D~ 3480 oanno~ £u~E41i the.~f dukes in providing pro~eotion, inves~ga~on and policing o£ big oil. unsuspocttng C].J,:~ :BLt,t~Z~L.n, a I~:FOV"LOUS pet, d.Y,~.~ WhO a~-~fnptod to invoke the AOG(~ t.o l:~Cf'om the.'~ cbJt'~ undo~ AS 3:1..05.'f~.0 to be £rm3.uded :i,nt:o ~ Bel'ug~ Gas Unit:. 9y patting, h~s l~tit~on ~ugh a sis~~ ~oz~ss as took b2. BurgXtn &12oo~ ~~ ~s ~ ~~y ~ out ~d ~~ ~a ~~ ~ Law ~ ~s ~s ~ D~~ ~. ~ ~n~ ~~ p~~on ~s , ~o~ on o~noe ~ 30~ 1996 ~ ~n ~ ~o ~ c~r~y ~ ~low o~~ s~ as a ~~ ~ ~aeka who b~~ ~h~ ~r ~o~a~ 3481 From:~L ~ ~DI~ ~]NIC ,, 707 46B 318B 12/23/2001 12:~ #10~ P.~/~6 ~ woz~Lmoo, ~ ~~Ly ~t ~ ~ p~~ion no~ ~i~~~ ~o~t a ~son'8 ~ ~ z~ ~ 31.05 it is c~m tht law, ~ ~~0~ n~ not ~ ~ o~ ~ ~e ~ooion, ~8 law . 3482 Frc~:DEL NORTE I/EDI~ ~ IN]O 12/23/2~1 12:M #1(B P.006/006 la~ge. and ~o u~hold. Plebe r~onsi~ ~ err~o~ Conse~a~on Peri.on fo= p=o~t~on ~t ~t h~p ~ou f~ght off ~d ~l~tic~ ~s ~t ~C ~ swa~i~ you. no~ so ~earl~ co~Li~ ou~. 370 N~n~h $~r~t Crescent C1~, CA 95531 3483 From:DEL NORTE I~i)lO& IIlNIO 707 48~ 3186 127Za/'3:)Ol 12:~//108 P.005/006 · s p~ovided ~us~ ~ike when a l~-~son :pe~t~Lons ~e ~ the hose to ~ ~c~, or ~ a ~son ~~ ~u~, ~ ~1~ o~~ ~~'~ ~ out ~ ~ the ~ to ~e ~o~ ~ ~ 'go ~t t~.' ~ . 31.05.110 wh~ it s~~ ~ ~s~ will o~ o~rs of ov~i~ng r~~es. ~s C~ss~on do~:c~:O ~o ~2 3484 ALASKA OIL AND GAS CONSERVATION COMMISSION 333 WEST 7TH AVENUE, SUITE 100 ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: Barbara Fullmer (907) 265-6998 FROM: Jody Colombie Special Staff Assistant DATE: December 31, 2001 Re: Fax from George Kasper MD Total No. Of Pages Including Cover: 7 NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276-7542 3485 99'1;,g Phone No. (907) 793-122! Fax No. (907) 276-.7542 , L :SqDYd SOS l, lg 7¥I01 , , 6gO ){0 (I,I) (IN. IS L ,,Og ,g 8669qgg lld !,I :gO l,g-03(] z dQ ~ ~ION 3dAf S~O~d 3NIl Xl ~3^I3038 I~IS 31~Q * l~d gl,:gO blO~ ~0 120d32 NO IiO~SN~2I #5 ae~ STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit January 3, 2002 ORDER GRANTING REHEARING FOR FURTHER CONSIDERATION On December 3, 2001, the Commission issued its Decision on Remand in this matter. Applications for rehearing were filed by the petitioners and by George Kasper, M.D., on December 24, 2001. AS 31.05.080(a) deems the Commission's failure to act on an application for rehearing within 10 days as the refusal of the application. Because of the large number of points raised by the applications and the coincidence of the holidays, the Commission needs additional time to fully consider the applications. Accordingly, the applications will be granted for the limited purpose of allowing adequate time for further consideration. NOW THEREFORE IT IS ORDERED: 1. The applications for rehearing are granted for the limited purpose of allowing adequate time for further consideration by the Commission. 2. Unless otherwise ordered, the Commission will issue a further decision on the applications for rehearing no later than January 23, 2002. DONE at Anchorage, Alaska, this 3rd day of January 2002. Cammy Oec~)sli Taylor, Cha~ /~~~~~.o ervationCommission lJ'a~iel T. Sej~i'ount, Jr., Commissioner Alaska Oil and Gas Conservation Commission _ __- ~ ~/[. {dO.x/~~ 3487 Julie M. Heusser, Commissioner Alaska Oil and G C t'on. .. _ ~.S.c~~i{ _ Commission · ~j~ - ~ ~ ~..~ 'T2a " ' ALASKA OIL AND GAS CONSERVATION COMMISSION 333 WEST 7TH AVENUE, SUITE 100 ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: C.R. Kennelly (907) 279-9353 FROM: Barbara FuHmer (907) 265-6998 Fred Brown (907) 452-3733 Bart RozeH (907) 463-5647 DATE: Re: Order Granting Rehearing for Further Consideration Total No. Of Pages Including Cover: 1 Jody Colombie Special Staff Assistant January 3, 2002 NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276-7542 3488 NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276-7542 , g : S39¥d SITP ]¥I01 * , [90 ~0 (N) ON3S 8 .~ S~LSggbL06[ NW ~:OI ~O-NW? , to'd 06~ Phone No. (907) 793-1221 Fax No. (907) 276-7542 .- , 6~0 ~0 (N) ~N~S ~ .L~ ~9866L~ Ng Lb:O[ ~ dd ~ 3iON 3dA£ S39~d 3~I£ ×i 83813038 i8~£S 3i~d , , £80d~8 NOI£O~SN~8£ , , IO'd , NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276-7542 ~ 090 NO (N) ~N35 E .9~ ~66999~ NW 6~:0[ EO-N~f , ~ dd ~N ~£ON ~dli S~O~d ~NIi Xi N~AI~O~ &N~£S ~&~& ~ , £80d38 NOI£O~SN~8£ * , [O'd * Phone No. (907) 793-1221 Fax No. (907) 276-7542 , [0 'd 3£0N 280d38 NOI£O~SNgH£ #6 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit January 22, 2002 ORDER EXTENDING TIME FOR DECISION ON APPLICATIONS FOR REHEARING On January 3, 2002, the Commission granted the applications for rehearing in this matter for the limited purpose of allowing time for further consideration by the Commission. The Commission anticipated issuing a further decision on the applications for rehearing no later than January 23, 2002. However, it now appears that the Commission will need additional time, due in part to the limited availability of one member of the Commission. Accordingly, the Commission will extend the time for issuing a further decision until February 8, 2002. NOW THEREFORE IT IS ORDERED: Unless otherwise ordered, the Commission will issue a further decision on the applications for rehearing no later than February 8, 2002. DONE at Anchorage, Alaska, this 22nd day of January 2002. Cammy Oect[~i Taylor, Chair ~ Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission ALASKA OIL AND GAS CONSERVATION COMMISSION 333 WEST 7TH AVENUE, SUITE 100 ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: Re.' C. R. Kennelly Barbara Fullmer Fred Brown Bart Rozell (907) 279-9353 (907) 265-6998 (907) 452-3733 (907) 463-5647 FROM: Jody Colombie Special Staff Assistant DATE: January 22, 2002 Order Extending Time for Decision on Applications for Rehearing Total No. Of Pages Including Cover: 2 NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276-7542 3494 NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276-7542 . [60 ~0 96/~C NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276.7542 ~£ON ~dA£ S~Ogd LO:SO i80d38 NOIiOgSN~8£ (~) ON3S , Z6'lx~ NOTES/COMMENTS Phone No. (907) 793-1221 Fax No. (907) 276-7542 , (N)ON3S , , Nd 6o:~o 3nA ~O-ZZ-NUr~, , , l~Od3~ NOI£OMSN~HI , z IO'd , NOTES/COMMENTS Phone No, (907) 793-1221 Fax No. (907) 276-7542 , IO'd #7 STATE OF ALASKA ALASKA OIL ANI) GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 Re: THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit February 11, 2002 ERRATA NOTICE The Commission has found the following errors in its Final Decision on Applications for Rehearing, issued February 8, 2002, which should be corrected as noted. Affected portions are underlined. p. 11, first full paragraph: "... Arco Alaska, Inc., did not even own any interest in the NCIU leases until after Commissioner Heusser had left the company" should read ". ~. Arco Alaska, Inc., did not even own any interest in the NCIU gas reservoir before Commissioner Heusser had left the company." p. 18, first paragraph: "The Cook Inlet No. 1, has a gas water contact of-4260 feet" should read "The Cook Inlet No. 1 Sand has a gas water contact of-4260 feet." p. 19, third paragraph: "... the Commission has informally used the name 'Tyonek Deep' to refer to the oil accumulation(s) discovered in the Sunfish and North Foreland sands below approximately 11,000 feet in depth" should read "... the Commission has informally used the name 'Tyonek Deep' to refer to the oil accumulations discovered in the Tyonek Formation below approximately 11,000 feet in depth." E at Anchorage, Alaska, this 11 th day of February, 2002. £ ~;"~'~'' ~.'.'.'~ 'i!l'/~ lf'~"~'\ CammyOec~li Taylor, Ch~ir (J ~ '"",. i ' '; :¢ !',, "~:. Daniel T. Seamount, Jr¥'~ommissioner Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission 3499 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 Re: THE APPLICATION OF DANCO, ) INC. for an order granting integration) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit February 8, 2002 FINAL DECISION ON APPLICATIONS FOR REHEARING Following the Commission's issuance of its Decision on Remand in this case, the petitioners filed an application for reheating, as did Dr. George Kasper, an owner or representative of an owner of a royalty interest in the Danco leases.~ The petitioners' application was accompanied by four exhibits consisting of unsigned letters or memoranda from individuals who had been witnesses or, in one case, who had submitted prefiled testimony that was not offered in evidence. The application stated that it incorporated those documents as though set forth in the text of the application. The applications for rehearing were granted by the Commission on January 3, 2002, for the limited purpose of allowing time for further consideration. The Commission has completed its consideration of the matters raised and now issues this final decision addressing those matters, along with a slightly revised Decision on Remand. For the most part, the Commission addresses here the points raised in the order they appear in the petitioners' application and exhibits. The argument raised by Dr. Kasper is similar to one of those raised by the petitioners, and both are addressed by the Commission in the same portions of this decision. ~ The record indicates the Kasper Family Partnership as the owner, but the application for hearing states that Dr. Kasper owns an individual interest. This discrepancy does not affect the Commission's consideration of the application. Dr. Kasper previously stated that the Kasper Family Partnership had "no intention of intervening or submitting its own testimony or exhibits in the matter." Nevertheless, AS 31.05.080(a) allows "a person affected by" a Commission decision to apply for rehearing and does not appear to require that the person have been a party. 3500 Standards for Unit Expansion The petitioners first argue that the four standards set out in AS 31.05.110(b) do not apply to compulsory expansion of an existing voluntarily created unit.2 Preliminarily, it should be pointed out that it is somewhat misleading for the petitiOners to refer to the "Commission's conclusion that the Unit Creation Factors [i.e., the AS31.05.110(b) standards] were determinative in a resolution of the Petitioners' claims on the merits of the petition." The Commission held that those four standards must be met in addition to the fundamental requirement that "[o]nly so much of a pool or pools as has been def'med and determined to be productive on the basis of information available to the commission may be so included within the unit area.''3 The Commission's conclusion that no pool within the NCIU had been shown to extend under either of the Danco leases was itself determinative of the petition on the merits. One of the petitioners' arguments is that since AS 31.05.110(b) authorizes the Commission to make an order "creating the unit," that subsection must not-apply to a Commission order expanding an existing trait. But this argument ignores AS 31.05.110(o), which provides that the "unit area of a unit may be enlarged.., upon the same conditions and subject to the same limitations as provided with respect to the creation of a trait in the first instance." It seems clear to the Commission that there are only two ways to interpret this language, insofar as voluntary units are concerned. One is that a unit voluntarily created by agreement may be enlarged only in the same manner that particular unit was originally created, namely, by agreement. The other interpretation is that a trait created by agreement may be expanded either by agreement or by Commission compulsion, and that the "same manner,.., conditions and.., limitations" governing the creation of a unit by agreement or by compulsion also apply, respectively, to expansion of the unit by agreement or by compulsion. Under the first interpretation, the petitioners would have no recourse to the Commission if they failed to obtain the agreement of the NCIU interest owners to expand the unit. The Commission has adopted the second interpretation, more favorable to the petitioners, under which the Commission may order the unit expanded "upon the same conditions" that the statute provides for compulsory creation of a unit. Those conditions include the standards set out in AS 31.05.110(b). 2 This argument is a belated one. In their own petition, the petitioners purported to comply with the requirements of AS 31.05.110(b): they alleged that the four standards would be met, using nearly verbatim statutory language, and attached to the petition a map and recommended plan of unitization purporting to conform with the last sentence of AS 31.05.110(b). 3 AS 31.05.110(c). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 2 of 29 3501 Another point advanced by the petitioners is that under AS 31.05.110(q), AS 31.05.110(b) does not apply to voluntary units. The petitioners apparently conclude from this that the Commission may not order expansion of a voluntary trait under AS 31.05.110(b). If that were true, however, the likely result would be that the Commission has no power to order expansion of a voluntary unit. The alternative urged by the petitioners, that the Commission somehow has a free floating power under AS 31.05.110(a) to order trait expansion without regard to the carefully crafted criteria and requirements of AS 31.05.110(b), does too much violence to the logical structure of the statute to be plausible. For clearly, in the case of the creation of a unit, the two subsections of the statute contemplate two and only two mutually exclusive methods: either unitization by agreement under subsection (a), or unitization by compulsion under subsection (b). As the court in Burglin v. Alaska Oil and Gas Conservation CommOn4 explained, subsection (a) provides that where parties cannot voluntarily agree to integrate their interests [under that subsection], they may petition the commission for a forced unitization. Upon the filing of a petition, Subsection ll0(b) identifies the findings which are a prerequisite to the issuance of an involuntary unitization order. In other words, where the second sentence of subsection (a) refers to the triggering of Commission proceedings in the absence of agreement, the legislature must have intended such proceedings to be implemented under subsection (b). It would make no sense for the legislature to have established two options for compulsory unitization: one with specific requirements for the contents of a petition, for agency f'mdings, for the contents of the agency order, etc., and a second option with none of those requirements. But the same considerations apply to expansion of a unit as to creation of the unit in the first place: subsection (a) does not distinguish between the two situations. Indeed, AS 31.05.110(o) explicitly mandates that unit expansion follow the same path as unit creation. If the filing of a petition in the absence of an agreement triggers proceedings under subsection (b) when there is no unit, it must do the same when there is a unit sought to be expanded. What, then, of AS 31.05.110(q)? The answer is found in the language of AS 31.05.110(o) itself. The latter subsection authorizes the creation of a "new unit ... for the unitized management, operation and further development of the enlarged unit 4 NO. 3AN-82-9250, Order denying summary judgment, at 6 (Dec. 19, 1983). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 3 of 29 3502 area.''5 Conceptually, then, when a voluntary unit is expanded by the Commission's compulsory unitization powers, the Commission has created a new, involuntary trait composed of two or more tracts: one tract being the former voluntary unit and the other tract(s) being the newly added property. Thus, the Commission does have the authority under AS 31.05.110(b) to order the expansion of what was originally a voluntary unit. Finally, the petitioners contend that to require the petitioners to meet the requirements of AS 31.05.110(b) runs contrary to the legislative intent to protect the rights of those who are "without the extensive resources required to overcome such a burden." They cite Allen v. Alaska Oil and Gas Conservation CommOn,6 where the Supreme Court referred to the unitization statute's protection of "the rights of persons holding lesser [i.e., royalty] interests." But the statutory provision the Court relied on there is none other than AS 31.05.110(b). The petitioners also cite legislative history, which likewise fails to support their claim. Prior to its amendment in 1978, AS 31.05.110 contained a provision that an involuntary unitization order does not take effect until approved by at least 62.5 percent of the affected property interests.? That provision was repealed in 1978, in a bill that also enacted a variety of other amendments to AS 31.05.8 Contrary to the petitioners' suggestion, the Free Conference Committee Letter of Intent regarding this bill gives no reason to believe that the repeal was aimed at facilitating expansion of voluntary units for the benefit of adjoining tract owners excluded by "the big oil companies." Rather, the legislature's goal was to afford "the best known methods for the prevention of waste.''9 It is also significant that the Letter of Intent specified that the compulsory unitization power should only be exercised "in cases of extreme necessity.''~° This belies the petitioners' theory that the Commission and its predecessor agencies were established "to force working and royalty interests to cooperatively unitize their interests so that [their] rights would be protected." A glance at the Commission's statutory authority reveals that compulsory unitization is only one of numerous regulatory tools that the agency was established to administer, and that protection of correlative rights is only one of several statutory goals. Moreover, the primary problem that compulsory unitization is designed to solve is quite different from what the petitioners assume. An oil and gas conservation agency's power of compulsion is typically needed to force into a unit, minority tract owners who 5 Emphasis supplied. 6 1 P.3d 699, 704 (Alaska 2000). 7 AS 31.05.110(d) (repealed). 8 FCCS SCS CSHB 815 (1978). 9 House Journal 1720 (June 16, 1978). l0 Id. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 4 of 29 35O3 do not want to join, rather than to force majority tract owners to accept minority tract owners who do want to join.~ (That is not to say that the latter situation does not also arise on occasion or that it is not legitimate for an adjoining tract owner to seek inclusion by compulsory unit expansion where the statutory grounds for doing so exist. It is to say that the legislative history and purpose of the unitization statute do not support the petitioners' attempt to construe it as a kind of legal aid mechanism for needy royalty owners.) A similar misapprehension concerning the unitization concept is found in the arguments put forth in the unsigned memorandum of David Lappi that the petitioners incorporate in their Application for Rehearing. In arguing against the application of the AS 31.05.110(b) involuntary unitization standards to "the simple case of drainage," Mr. Lappi complains that the result would be that "an operator could drain his neighbors with impunity, and get away with it." The short answer to this argument is that unitization is not designed to deal with "the simple case of drainage." Rather, unitization is called for when needed "[t]o prevent, or to assist in preventing waste, to insure a greater ultimate recovery of oil and gas, and to protect the correlative rights of persons owning interests in the tracts of land affected.''n The traditional remedy for drainage is the much more direct self-help expedient of drilling a well on one's own land: The protection afforded to a landowner's correlative rights in the oil and gas reserves beneath his land under a spacing order is the right to drill within the legal location of the spacing unit. It does not provide a guarantee that no oil can ever be drained from beneath his land, [or] that his well will be successful, [or] that failure to exercise his right will result in no future loss o f resources. ~ 3 It should be understood, in any case, that Mr. Lappi's concern with drainage has nothing whatever to do with being located next to an existing unit. An operator of non- ~l See, e.g., 6 Howard R. Williams & Charles J. Meyers, Oil and Gas Law § 910, § 913.5, at 122.1 (updated and revised by Patrick H. Martin & Bruce M. Kramer, 2001); Stephen L. McDonald, Petroleum Conservation in the United States: An Economic Analysis 213-17 (1971). n AS 31.05.110(a) (emphasis supplied). 13 Adkins v. Board of Oil, Gas & Mining, 926 P.2d 880, 883 (Utah 1996) (quoting with approval the Board of Oil, Gas & Mining) (bracketed material as in court's opinion). Despite the confusingly similar terminology, a "spacing unit," also known as a "drilling unit," has nothing to do with unitization. A spacing unit is an area determined under well spacing regulation to be "the area that will be effectively and efficiently drained by a single well." 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization ¶ 5.03, at 5-78 (footnote omitted) (2001). If a property can be efficiently drained from an existing well located on an adjoining tract, then the appropriate remedy is a spacing order that defines the spacing unit around the well to include the property in question. See Adkins,, 926 P.2d at 884. In any event, however, the evidence in this case shows that there is no drainage of any sort from the Danco leases. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 5 of 29 3504 unitized property can "drain his neighbors" just as surely as the operator of unitized property. In the former case, presumably even Mr. Lappi and the petitioners would not question the legal necessity of satisfying the standards of AS 31.05.110(b) before the Commission could exercise its unitization powers. Yet, as Mr. Lappi says, those standards "are meaningless when applied to the simple case of drainage" - further demonstrating that unitization is not the correct tool to address a simple case of drainage. Mr. Lappi goes on to ask, "How does an adjacent royalty owner .protect his property fights from an operator bent on stripping him of those royalties?" Mr. Lappi provides the answer himself: if the working interest owner is violating a fiduciary (or other) obligation toward the royalty owner by not drilling an offset well or taking other appropriate action, the royalty owner may pursue whatever legal or equitable remedies are available in an appropriate forum for breach of that obligation. Again, an operator's ability or incentive to "strip" an adjacent royalty owner of royalties is not in any way dependent on whether the operator is producing from unitized or non-unitized tracts. Clearly, the unitization statute is not intended as a remedy for contract or tort claims between a property's royalty and working interest owners. Duty to Investigate The petitioners also argue that "[n]othing further was required under law for Petitioners to do" other than file their petition; that the Commission has the statutory burden to independently investigate and gather evidence relating to their allegations; and that the Commission failed to carry out that statutory duty.TM They refer to AS 31.05.030(b), which provides that the "commission shall investigate to determine whether or not waste exists or is imminent, or whether or not other facts exist which justify or require action by it." ~5 In construing how that provision might apply to this case, one must consider the relationship of the general language of AS 31.05.030, which broadly enumerates various Commission powers and duties (of which investigation is one), to the highly specific provisions of AS 31.05.110, dealing with unitization. In AS 31.05.110, the legislature prescribed a detailed process for adjudicating petitions for involuntary unitization It seems implausible that, having prescribed an adjudicatory method for Commission action on unitization, the legislature would have intended the filing of a petition under AS 31.05.110 also to trigger an additional mandatory investigative process. 14 George Kasper argues similarly in his application for reheating. ~5 The petitioners have never alleged that NCIU operations are wasteful. On the contrary, they do not propose any change in the operations currently being conducted in the NCIU; they ~nerely wish to receive a share of the production from those admittedly efficient and non-wasteful operations. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 6 of 29 3505 This is particularly so in light of the fact that AS 31.05.110(b) provides two different ways in which involuntary unitization proceedings may be initiated: a petition may be filed with the Commission, or a petition may be filed by the Commission. This provision gives the Commission the option to act on its own motion, in which case the Commission presumably could function as a proponent of unitization and take on the burden of developing the evidence. But this provision clearly does not require the Commission to act on its own motion. (Under the petitioners' theory, however, the Commission would effectively be obligated to serve that same role in response to a petition filed by a person other than the Commission. That theory renders one of the two options largely redundant.) It should be emphasized that under the petitioners' theory it was not sufficient for the Commission to afford them a full evidentiary hearing and to consider all of the evidence presented; rather, the Commission would have been obligated, merely on the basis of the petitioners' unsupported allegations, to conduct its own program of fact- gathering, including issuing subpoenas to obtain documents from others, and to carry out its own review and technical analysis of (all?) potentially relevant data- in other words, to do the petitioners' work for them. But the concept of "investigation" is not that narrow. In a case involving the statutory duty of the Alaska Public Utilities Commission, "upon complaint.., to make (an) investigation of (the complaint) which it considers necessary or convenient," the Supreme Court interpreted this language as obligating the Commission only to "conduct a hearing" and to "afford [the complainant] an opportunity to present evidence" after the complainant had demonstrated what amounted to probable cause that his complaint was valid.~6 To the extent that AS 31.05.030(b) applies at all to a petition for compulsory unitization, it would undoubtedly be satisfied by the proceedings that the Commission conducted in this case. Furthermore, any practical interpretation of AS 31.05.030(b) must recognize that the Commission is allowed to use its discretion and judgment in determining how to conduct investigations and how to allocate its limited investigative resources among all the potential matters that might be investigated.~7 "There is no 'right' to have the commission act.''~8 As indicated earlier in these proceedings, in applying its "judgment and discretion in responding to allegations and information and in allocating its limited 16 Jager v. State, 537 P.2d 1100, 1108, 1111 (Alaska 1975) (parenthetical material as in opinion). 17 See Jager v. State, 537 P.2d at 1106 ("the [Alaska Public Utilities C]ommission must be free to weigh the charges and data presented and the costs to the public and the utility, against which a complaint has been brought, to determine whether further proceedings are in the public interest"). ~ .lager v. State, 537 P.2d at 1106. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 7 of 29 35O6 resources," the Commission has simply "not discerned a need independently to use its subpoena powers for investigative purposes" in the case of the North Cook Inlet Unit.19 Finally, as a practical matter, even if the petitioners' interpretation of AS 31.05.030(b) were correct, it has effectively been satisfied in this case, given the extensive evidence that Phillips presented. That evidence allowed the Commission to determine with a high degree of confidence that the Danco leases are not being and have not been drained by NCIU production. The Commission f'mds that the evidence in the record is sufficient "to determine whether or not waste exists or is imminent, or whether or not other facts exist which justify or require action by the Commission"2° concerning the petitioner's allegations in their petition. Alleged Inconsistencies in Commission Findings The petitioners misinterpret several statements in the Decision on Remand and argue on that basis that the decision is inconsistent. In discussing the petitioners' argument that it was sufficient at this stage for them to show that the NCIU "may" be draining gas from the Danco leases, the Commission among other things hypothesized an alternate meaning for the concept of "may be draining" and rejected the notion that "may be draining" means "one could not rule out the possibility of drainage with absolute certainty," because that would lead to nonsensical results.21 This language was intended simply to illustrate the general concept that it is not practicable to prove a negative with absolute certainty. The petitioners seem now to be saying that the Commission may not deny their petition unless it finds the facts against them with absolute certainty.22 Not even criminal convictions require absolute certainty. Because the language in question is not essential to the decision in this case and because it is apparently susceptible to misinterpretation at least by the petitioners, this language will be deleted in the revised Decision on Remand. 19 Supplemental Pre-Hearing Order at 3 (Nov. 30, 2000). However, as a factual matter, the petitioners' implication that the Commission played a completely passive role with respect to evidence in the case is erroneous. For example, the Commission on its own initiative had its staff review the agency files to identify potentially relevant material and then distributed to the parties a list of that material. In addition to making the material (and other Commission records) available to the parties in paper form, the Commission also had most of the material converted to digital form and provided each side a CD-ROM containing the digital data. See letter from Cammy Oechsli Taylor to Stephen M. Ellis and C.R. Kennelly (Dec. 1, 2000). 20 AS 31.05.030(b). 22 The petitioners further misinterpret language in the Decision on Remand as characterizing the petitioners' position as nonsense. On the contrary, the Commission assumed that the petitioners would not be advocating a nonsensical position. Unfortunately, the petitioners' Application for Rehearing suggests that the Commission's assumption was wrong. 22 As stated in the Decision on Remand, the Commission believes in any event that a petitioner has the burden of proving the facts required for involuntary unit expansion. As it happened in this case, not only did the petitioners fail to meet that burden, but the evidence affirmatively and convincingly demonstrated the contrary facts with regard to the extent of the producing gas reservoir. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 8 of 29 350'7' A somewhat similar misinterpretation concerns the supposed inconsistency between the Commission's finding that "Mr. Lappi's exhibits and testimony do no more than suggest the possibility that the Tyonek Deep reservoir extends under the Danco leases," and the finding that "The evidence does not show that any oil reservoirs extend under the Danco leases." The only way these two findings could be viewed as inconsistent is by refusing to recognize the difference between "suggesting the possibility" that a fact exists and actually "showing" that it exists. (The Commission will slightly revise the finding language to make this distinction even clearer.) The Commission may only include in a unit area "so much of a pool.., as has been defined and determined to be productive on the basis of information available to the commission."23 The information available is simply insufficient to support a determination that any productive oil pool extends under the Danco leases. The petitioners also point to the Commission's findings regarding Dr. Givens' testimony on gas reserves, in which the Commission criticized Dr. Givens' assertion that the reserves estimates had doubled and also found that even if they had doubled it would not cast any doubt on the reservoir limits that were previously determined. The Commission acknowledges that these findings may not be organized or expressed in a sufficiently clear manner, and they will be clarified in the revised Decision on Remand. The point of some of the Commission's criticisms was not that the recent reserves estimate is too high, but that what Dr. Givens identified as the earlier estimate was not a comparable number. In any event, the critical element of the Commission's findings is that recent reserves estimates - whatever their relation to earlier and less accurate estimates - are completely consistent with the gas reservoir's not extending under the Danco leases. Due Process Claims The petitioners claim that they "repeatedly objected throughout the course of proceedings before the Commission with respect to Commission members' conflicts of interest." Since the petitioners fail to cite to anything in the record supporting this claim, the Commission has had to search the record itself, and this search reveals no such instance in which the petitioners raised any objection to Commissioner Heusser's participation.24 As for Commissioner Taylor, the single instance when petitioners raised 23 AS 31.05.110(c). 24 On March 6, 2001, the petitioners filed an Original Application for Relief in the Supreme Court which, among numerous other complaints, alleged that Commissioners Heusser and Taylor and the Department of Law had conflicts. The Court denied the application. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 9 of 29 3508 an issue of conflict of interest involved the following exchange at the pre-heating conference on October 12, 2000: MR. KELLy25: One issue that's raised and by one client is the potential for conflict of interest. And that is to the extent that a Commissioner has had any involvement with any of the parties either at their former positions, that that would have to be put on the record. We would suggest it be put on the record so that any potential for conflict be disclosed so that that not become an issue later on. Is that... And more specifically, the issue that Commissioner Taylor worked for the Attorney General's Office Oil and Gas Division at some point, that the matter was before the Commission, and whether the Commissioner was or was not involved with this proceeding or with the parties at all. That's -- the extent that that presents a conflict, it would have to be addressed. It doesn't call for a response at this stage. MR. MINTZ: Do you have any other particulars? MR. KELLY: That's it. MR. MINTZ: You're saying that Commissioner Taylor was at the AG's office during the early part of the current case? MR. KELLY:. That is what I have been told or what my client has been told anyway, and to the extent that Commissioner Taylor was working in the Oil and Gas Division and may have had contact with the case at that time, they would like to have that addressed if, in fact, that's true. COMMISSIONER OECHSLI TAYLOR: Representing the Commission? MR. KELLY: Involvement in the case. MR. MINTZ: No, representing the Department of Natural Resources. COMMISSIONER OECHSLI TAYLOR: Division of Oil and Gas. MR. MINTZ: Yeah. COMMISSIONER OECHSLI TAYLOR: Okay. I understand your question. MR. KELLY: I think as long as that's puts on Mr. Kelly was the petitioners' attorney at the time of the pre-hearing conference. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 10 of 29 35O9 the record, then that will be a point that will be resolved and no longer a problem, so... COMMISSIONER OECHSLI TAYLOR: What would you be looking for in terms of something to be put on the record? MR. KELLY: To the extent that there was no contact with the case or involvement with the -- with this case or the parties, that would show there would not be conflict of interest I guess. COMMISSIONER OECHSLI TAYLOR: Do you want that handled now or do you want to do something... MR. MINTZ: If you can. COMMISSIONER OECHSLI TAYLOR: I don't have any recollection of being involved with anything related to this case either with the Division of Oil and Gas or the Oil and Gas Conservation Commission. MR. KELLY: Okay. That's -- okay. I mean I assume that resolves the issue then if it's on the record. So... MR. DONKEL: May I? I have a question. (Whispered side conversation) MR. KELLY: Anyway, moving along... It is clear, then, that the petitioners' objections raised in their Application for Rehearing are untimely in the extreme (and, in the case of Commissioner Taylor, inconsistent with their previous representation that the issue had been resolved). Even if they were not untimely, they lack merit. Commissioner Heusser left the employment of Arco Alaska, Inc. (now Phillips Alaska, Inc.) more than six years before she joined the Commission; her work there did not involve the Cook Inlet region; and Arco Alaska, Inc. did not even own any interest in the NCIU leases until after Commissioner Heusser had left the company. The petitioners have provided no authority or reason why Commissioner Heusser's previous employment with Arco Alaska, Inc., should disqualify her from participating in this case. Nor have they provided any sound explanation why Commissioner Taylor's previous employment in the Department of Law, which did not involve her in the present case, should disqualify her. The petitioners' objection to the Department of Law's representation of the Commission is likewise both untimely and unfounded. It was only during the heating on June 14, 2001 - eight months after the pre-hearing conference occurred and three months after the hearing commenced- that the petitioners expressed an objection to the Department of Law's advising the Commission. Perhaps in recognition of the untimeliness of this objection, the petitioners' counsel did not request any relief but FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 11 of 29 3510 merely said, "I just want to make it for the record because I need the record." 26 On the merits, one central flaw in the petitioners' complaint is the fact that the Department of Natural Resources ("DNR"), which the petitioners characterize as having "adverse interests" to the Commission in this matter, is not a party. On October 12, 2000, DNR wrote the Commission stating that it had decided not to participate as a party and that it would not attend the pre-heating conference.27 Since that time DNR has not even been included on the list of persons to be served or to receive notice in this case. As to the claim that the Commission denied access to the seismic data that the Decision on Remand relied on, not only did the petitioners have access to the seismic data that Phillips introduced, but the Commission went out of its way to ensure that the petitioners would have access to extensive additional seismic data, to avoid the potential for unfairly selective disclosure by Phillips.28 The petitioners complain that the Commission "erroneously exercised its 'discretion' to implement procedures which have consistently denied Petitioners due process." It is impossible to respond to this statement, because the petitioners have fa/led to identify any procedures they object to. Finally, the petitioners assert that the Commission failed to enforce against Phillips a regulatory requirement, under 20 AAC 25.540(a), to object to their petition within 15 days after publication of notice. The petitioners have misread the regulations. Under 20 AAC 25.540(a) and 20 AAC 25.540(b), both as in effect at the time the petition was filed and as amended in 1999, there are two ways the Commission may handle matters as to which there is a fight to a hearing. The first way, under 20 AAC 25.540(a), is to publish notice of the opportunity for a hearing. If-- under the earlier version of the regulation -- a "proper protest and request in writing for a hearing" are filed within 15 days after the publication date, or- under the current regulation - a written request is filed within that period, a heating must be granted. Otherwise, the Commission may issue an order without a hearing, or it may hold a hearing notwithstanding the absence of a request. The second way the Commission may handle a matter as to which there is a fight to a hearing, either if it receives a written request for a public hearing at the outset 26 The Commission asked the petitioners' counsel if he had made such an objection before. He answered in the affirmative but was unable to say when or where in the record any such objection was made. Based on the Commission's search of the record it does not appear that the petitioners ever raised the issue with the Commission earlier than June 14. 27 Letter from Kenneth A. Boyd to Commissioners Seamount and Taylor, at 2 (Oct. 12, 2000). 28 See Order Denying Motion to Strike and Regarding Seismic Data and Other Documents (March 23, 2001); Order Regarding Data Production and Supplemental Testimony (April 6, 2001); Order Regarding 2D Seismic Data (April 10, 2001); Order Regarding Petitioners' Request for Assistance from the Commission (April 27, 2001); Order Granting Extension of Time (May 22, 2001); Order Regarding Motion to Extend Time (May 23, 2001); Order Granting Further Extension of Time (May 24, 2001). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 12 of 29 3~5~ or if the Commission determines at the outset to hold a hearing, is to proceed directly to publish notice of the hearing, under 20 AAC 25.540(b). In this case, the Supreme Court remanded for a hearing, and the petitioners repeatedly demanded a hearing. There was no question but that a hearing was necessary, so the Commission published notice under 20 AAC 25.540(b). No protest or request for hearing under 20 AAC 25.540(a) was solicited or needed to hold the hearing. However, as noted above, even if the Commission had proceeded under 20 AAC 25.540(a), it would have retained the discretion to order a hearing irrespective of the absence of a request. Peter D. Huddleston, P.E. One of the exhibits incorporated into the petitioners' application for rehearing is a copy of an e-mailed letter to Daniel K. Donkel from Peter D. Huddleston, P.E., reporting Mr. Huddleston's "preliminary review of the AOGCC f'mding reported in Conservation Order 39 lA." There is no indication that Mr. Huddleston reviewed the evidence in this case. For example, he states that the Commission contradicts itself in at least one instance when discussing the material balance calculations performed by Geoquest and the existence of multiple water contacts for separate horizons. A technical review relating to material balance will confmn that such methods apply only to a single reservoir or pressure system. There was no contradiction. While it is tree that material balance calculations ideally would be done separately for separate reservoirs, that is not what the Geoquest study did. It was the petitioners' witness, Dr. Givens, who cited the Geoquest study in his testimony. Geoquest analyzed the Tertiary System Gas Pool as a whole, no doubt because pressure and production data were not available for each separate reservoir. Under these circumstances, application of the material balance method to the entire system, as Geoquest did, is the only option. Mr. Huddleston is mistaken when he asserts that the Commission "disregarded" the testimony of the petitioners' witness and "adopted the entire body of testimony by Phillips as fact." The Commission independently evaluated and considered all of the testimony in the case and made findings of fact based on all the evidence in the record. Mr. Huddleston argues that variations between Phillips' testimony in this case and "at least some previous Phillips testimony provided in the formation of the unit.., give FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 13 of 29 3512 rise to a question of Phillips' credibility..." The previous testimony Mr. Huddleston refers to was given some 34 years ago, very early in the development of the reservoir. Phillips' recent testimony had the benefit of the production history of the North Cook Inlet Unit since 1967, data from additional wells drilled since then, and 3-D seismic data. Revisions in Phillips' analysis of the Tertiary System Gas Pool since 1967 do not reflect poorly on Phillips' credibility; they merely reflect an appropriate willingness to incorporate into one's analysis additional information as it becomes available. In referring to Mr. Lappi's testimony on seismic data, Mr. Huddleston expresses the belief that the Commission allowed Phillips to present testimony on seismic data that was "not available to both parties." On the contrary, the Commission went out of its way to ensure that Phillips made available to the petitioners, subject to appropriate protections regarding confidentiality, whatever additional seismic data would be "necessary to a fair presentation and evaluation of the evidence.''29 In particular, Mr. Lappi had access to the results of checkshot surveys, which Mr. Huddleston implies were not available to Mr. Lappi. James W. Givens Dr. Givens' memorandum to Dan Donkel, incorporated in the petitioners' application for rehearing, sets out numerous points of disagreement with the Commission's findings and conclusions or suggested additions or modifications to such findings and conclusions. Because of the large number of points raised and the lack of explanation as to their significance for rehearing, the Commission will not respond to each one but instead will address only those points that might appear to be potentially material. In taking exception to the Commission's conclusion that the evidence fails to show that the NCIU is draining gas from the Danco leases, Dr. Givens refers to his testimony showing draining is occurring in all sands under the platform and removed from the platform, and the Phillips order 40 testimony proved that the entire Sterling and Beluga sands can be drained by a single well at the platform. Dr. Givens then states, "Hence the Danco leases are being drained." As in Dr. Givens' hearing testimony, this statement is simply a non sequitur. The proposition that platform wells are draining all sands under the platform would be relevant to the Danco leases only 29 Order Denying Motion to Strike and Regarding Seismic Data and Other Documents, at 2 (March 23, 2001). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 14 of 29 3513 if the gas pools under the platfOrm extended under the Danco leases. this case shows that they do not so extend. The evidence in Finding 18. Dr. Givens questions the Commission's statement that the Beluga Formation sands "are largely discontinuous between wells." The wording of this finding was indeed ambiguous and will be clarified in a revised Decision on Remand. The Commission did not intend to say that the sands are largely discontinuous between each pair of wells, but only that the sands are largely discontinuous across the area of NCIU well control. The fact that the Beluga sands are capable of flowing at high rates does not contradict that point. Finding 20. Dr. Givens expresses disagreement with the finding that the Beluga "B" and "C" sands gas accumulations do not have common gas water contacts but does not cite any evidence on which he bases his disagreement. The well data cited by the Commission support the Commission's finding. Finding 21-A. Dr. Givens' statement that "[t]here were no dry holes drilled between the [Danco] leases and the productive exploratory wells" is true but incomplete. In fact, there were no wells of any sort drilled in this area. What persuasively establishes the reservoir limits with respect to the Danco leases is the combination of the following facts: (1) the exploration and development wells drilled in the NCIU area demonstrate the depth of the gas water contact for the most areally extensive gas accumulation (the Cook Inlet No. 1 sand); and (2) 3-D seismic data demonstrate that the Danco leases are structurally lower than the depth of that gas water contact. Finding 23. Dr. Givens' statement that he does not believe "that the gas accumulation is structurally controlled" is inconsistent with his own testimony and with the other evidence in this case. For example, Dr. Givens' linear extrapolation approach to estimating the reservoir limits, referred to in Findings 57 through 68, assumes that the reservoir is contained within a structural trap. The seismic data presented in the case demonstrate conclusively that the gas being produced in the NCIU is from accumulations within a closed structure. Even Dr. Givens' new memorandum itself recognizes that the reason a single well drilled from the NCIU platform could theoretically drain the entire gas accumulations is that the well would be located "at the top of structure."3° Finding 24. Dr. Givens fails to point to any evidence contradicting the Commission's finding that the Beluga Formation gas accumulations are present only in the highest portion of the structure. Among the evidence supporting that finding is Exhibit SJW 13, which shows a well high on the structure penetrating gas in the Beluga 3o Memorandum from James W. Givens to Dan Donkel at 2, 4 (Dec. 20, 2001) (unsigned). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 15 of 29 3514 Formation and wells further down the flanks of the structure penetrating only water and not gas in the Beluga Formation. Finding. 25. Dr. Givens' statement that "Lappi's seismic study shows gas anomalies at the northern end of the lease ADL 369100," even if tree, would not support the petitioners' claim that the NCIU should be expanded to include the Danco leases. The northern end of ADL 369100 is as far away from the NCIU as one can get on the Danco leases. The proposition that there is a separate gas accumulation at that location is completely consistent with the proposition that the gas reservoir within the NCIU does not extend under the Danco leases. Moreover, as addressed elsewhere in the Decision on Remand and in this decision, the evidence does not support the conclusion that areas characterized as "anomalous" by Mr. Lappi correspond to gas deposits. Finding 27. Dr. Givens is mistaken in his claim that the "Danco leases did not receive the same treatment as given a number of other leases" in the formation of the NCIU participating area several decade ago. First of all, there were no lease tracts corresponding to the Danco leases at the time the participating area was formed. The land that later became the Danco leases was part of larger lease tracts that extended across the participating area boundary. Phillips owned the property on both sides of the boundary, so it is difficult to understand what incentive Phillips had to exclude its own property from the participating area. Second, inspection of the exhibit Dr. Givens refers to, Givens Exhibit V, reveals that there were additional tracts or portions of tracts that were excluded from the participating area despite the presence of small "notches" within the estimated productive reservoir limits; in other words, the tracts that later became the Danco leases were not singled out for such treatment. Exhibit SJW 2A indicates that the Department of Natural Resources determined that it would apply a rule of approximation excluding from the participating area any quarter section that contained under 20 acres within the productive reservoir limit. Finding 28. The Commission's finding did not rely on what Dr. Givens calls "undisclosed" engineering studies but on the engineering testimony and exhibits presented at the Conservation Order 40 hearing, in particular Exhibits 9 and 10. Findings 39 and 40. Dr. Givens' comment combines a misreading of the Commission's own findings, a misreading of the Phillips testimony, and confusion about the relationship of different gas sands in the Sterling Formation. The Commission did not state that the lowest known gas in the Sterling (Cook Inlet) Formation is at -4260 feet, nor did Phillips' witnesses testify that -4260 feet is the lowest gas water contact in FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 16 of 29' 3515 ~vj this formation. Phillips' witnesses testified, and the Commission found, that the gas water contact in the Cook Inlet No. 1 Sand is at -4260 feet and that it is the most areally extensive gas water contact in the Sterling Formation. It is true that the Cook Inlet No. 11 Sand is deeper than the Cook Inlet No. 1 Sand, that the former also contains gas, and that the gas water contact in the former occurs deeper than -4260 feet. These facts, however, are consistent with the Commission's findings and conclusions. It may be difficult to visualize the relationship between the different sands without a graphic aid; Exhibit SJW 13 (derived from CO 40 hearing Exhibit 6) is helpful in this regard. The important point is that the portions of the Cook Inlet No. 11 Sand that contain gas are confined to an area inside the perimeter of the more extensive Cook Inlet No. 1 Sand. Where the top of the Cook Inlet No. 1 Sand has dipped to a depth of 4260 feet (i.e., the reservoir limit), the underlying Cook Inlet No. 11 Sand has already dipped to a depth below its own gas water contact. This is confirmed by the logs for wells Shell Cook Inlet State/ti, Pan Am State 18741 #2, and Pan Am State 18740 #1 (CO 40 Exhibits 5 and 6 and Ex. SJW 13), which show water, not gas, in the Cook Inlet No. 11 Sand. Finding 41. Dr. Givens seems to be arguing that there is a single gas water contact in the Beluga Formation at-6794 feet such that any shallower Beluga sand that contains gas high in the structure must also contain gas all the way down to -6794 feet. This theory is simply not reconcilable with the facts. For example, in the A-10 well a water saturated sand exists at the top of the Beluga section at -4959' subsea (6570' measured depth ("MD")), a gas filled Beluga sand exists at-5046' subsea (6690' MD), a water saturated sequence exists from-5427' to-5492' subsea (7220' MD to 7310' MD), and a prominent gas sand exists at -5708 subsea (7625' MD). This contradicts the proposition that there is one common gas water contact for the Beluga formation. Data from other wells are to similar effect. In addition, as noted in the Decision on Remand, Dr. Givens' claim that gas exists at -6794 feet in the A-12 well has not been substantiated. However, even if that claim were shown to be tree, such gas would be well inside the perimeter of the Cook Inlet No. 1 Sand. Findings 51-56. The Commission is simply unable to make sense of Dr. Givens' statement regarding Findings 51-56. In part Dr. Givens' statement seems to repeat the theory that there is a single gas water contact for each of the Beluga and Sterling formations; as pointed out above, this theory is fallacious. Findings 57-68. Dr. Givens now concedes that his interpretation of the reference datum in the Shell North Cook Inlet # 1 well was erroneous, but he claims that a corrected projection would show productive sands extending under "the Danco lease" if one used a FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 17 of 29 3516 gas water contact of -4324 feet rather than -4260 feet. As indicated above, the gas water contact at -4324 pertains to a different and deeper sand (the Cook Inlet No. 11 Sand) than the sand(s) whose top(s) was(were) projected by Dr. Givens (the Cook Inlet No. 1 Sand31). The Cook Inlet No. 1, has a gas water contact of-4260 feet. In fact, Dr. Givens used that depth in his projection testimony. All the Sterling sands in the Shell North Cook Inlet #1 well are wet below -4260 feet. Dr. Givens correctly notes that his testimony described two projections, one using the A-10 well instead of the discovery (Pan Am 17589 #1) well. In both cases, however, using an incorrect gas water contact yields incorrect results. In any event, moreover, Dr. Givens' conclusions as to the reservoir limits are disproved by the highly accurate 3-D seismic data. The Commission notes that its £mdings use some imprecise language, referring to the "top of the Sterling Formation" when they should refer to the top of the Sterling Formation pay or to the top of the Sterling Formation gas sands. They will be corrected accordingly. Findings 69-84. Dr. Givens defends his hearing testimony as "clear" and "complete," and says he disagrees "with the tone and false statements and erroneous interpretations presented in Findings 69 through 84" but does not specify in what respects those findings contain errors. The Commission has reviewed the findings and their basis in the record and concludes that the findings are not in error. The relationship among the findings would be easier to understand with some reorganization and clarifying language, which will be added in the revised version of the Decision on Remand. Dr. Givens speculates about the source of changes in net pay data from the 1972 AOGCC Annual Report to the 1999 AOGCC Annual Report. The answer is that Annual Reports compile data submitted by operators. Dr. Givens also complains the Phillips did not present data for all the wells. The Commission made available to all parties in this case data on file for all NCIU wells and for all exploration wells within a 25 square mile area. In addition, the Commission had most of those well records scanned and provided them to the parties, including the petitioners, in digital form on CD-ROMs. Phillips also made available to the petitioners raw well data in its possession. The petitioners' witnesses never satisfactorily explained why they failed to take advantage of the availability of this information. 3~ Dr. Givens extrapolated three lines, ostensibly corresponding to three different sands. However, these were actually three benches within the Cook Inlet No. 1 Sand. His testimony is confusing because he called the upper bench within the Cook Inlet No. 1 Sand the "A" Sand, he called the second bench within the Cook Inlet No. 1 Sand the "B" sand, and he called the bench immediately below that the "Cook Inlet No. I" Sand. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 18 of 29 3517 Finding 82. Givens Exhibit 26 presents a summary of perforations from initial completion to present day and documents new perforations added and former perforations squeezed. The exhibit shows that 994 measured feet of Sterling (Cook Inlet) Formation and 270 measured feet of Beluga Formation perforations were added to NCIU wells since their initial completion. Findings 85-87.32 Dr. Givens' statements continue to assume their conclusion, as his hearing testimony on this subject did.33 There is no dispute that NCIU reservoir pressures "are being depleted or drained at a point or location.., removed from the cluster well production," or that gas in the Sterling and Beluga formations can be drained "from great distances." What is in dispute is whether any portion of the reservoir being drained extends under the Danco leases. The data on pressure depletion discussed by Dr. Givens simply cannot answer that question. Conclusion No. 2. Dr. Givens seems to be saying that the "deep oil zone tested in the Shell No. 1 well at 2000+ BOPD" should be recognized as a separate oil pool from the Tyonek Deep reservoir. Ordinarily, a pool is unambiguously def'med in a Commission order prescribing rules to govern development and operation of the pool ("pool rules"), in accordance with 20 AAC 25.520. But there has been no occasion to prescribe pool rules for a Tyonek Deep reservoir, because development and production have not been proposed there. In the absence of a formal and specific definition of a pool, the Commission has informally used the name "Tyonek Deep" to refer to the oil accumulation(s) discovered in the Sunfish and North Foreland sands below approximately 11,000 feet in depth. The Commission intended this informal usage to include what Dr. Givens refers to as the deep zone tested in the Shell No. 1 well. The very potential for confusion or disagreement as to what the name "Tyonek Deep" refers to illustrates why the Commission was correct in earlier expressing "grave doubts about whether the question of involuntary unitization of [the Tyonek Deep] reservoir could be ripe for consideration." 32 The Commission accepts Dr. Givens' correction to the citation to his exhibit, which should read "Exhibit 24, page 24-1" rather than "Exhibit 24-1." 33 Dr. Givens is also in error with regard to the specific claim that the Sunfish Well (now called the A-13 well) is draining the reservoir at a point "removed from the cluster well production." The open perforations in this highly directional well are not at its total depth of 17,318', but rather are no deeper than 7,410' MD, which is 3,410 lateral feet from the platform - a distance typical of the cluster producing wells. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 19 of 29 3518 David T. Gross One finding in the Decision on Remand relates to the written testimony of David K. Gross, which the Commission described as purportedly addressing "the issue of whether one of Phillips' witnesses had a 'conflict of interest.'" The Commission found that Mr. Gross's testimony did not demonstrate the existence of a ground to disqualify any Phillips witness. Among the materials the petitioners incorporate in their application for rehearing is a "comment" by Mr. Gross on this finding, which concludes, "I am at a loss to understand how the Commission could fail to see [Phillips' consultant's conduct] as an egregious lapse in professional ethics and acceptable business practices." A review of the record indicates that the Commission's finding in the Decision on Remand contains an erroneous implication as to the role of Mr. Gross's testimony in this case. On March 6, 2001, the petitioners moved to strike all of Phillips' prefiled testimony on the ground, inter alia, that it "contain[ed] information obtained in confidence by [consultant] Ryder Scott when approached to act as experts for applicants in this matter as a breach of confidentially [sic] and attorney client relationship." No evidence was submitted in support of this assertion, and no further argument beyond that single sentence was made by the petitioners. In opposing the motion, Phillips submitted on March 9, 2001, an affidavit of its witness Scott Wilson, who was employed by Ryder Scott, in which Mr. Wilson stated that in July of 2000 he had attended a meeting "with Danco's representative to determine whether Ryder Scott would agree to enter into a consulting agreement with Danco"; that Mr. Scott left the meeting with no information beyond what was in the public record; and that he "made no use of any information provided to Ryder Scott by the Danco group." The Commission denied the petitioners' motion to strike. On March 12, 2001, the petitioners filed a written notice referring for the first time to Mr. Gross and stating that he would be called to testify by telephone at the hearing "for rebuttal impeachment purposes of the testimony presented through Phillips by Scott James Wilson." As it mined out, Mr. Gross was not called to testify at that time, but later, on May 21,2001, the petitioners submitted his affidavit as pre-filed supplemental testimony. That testimony, which was the subject of the Commission's f'mding referred to above, concerned Mr. Gross's July 6, 2000, meeting with representatives of Ryder Scott. The petitioners did not renew their attempt to exclude any testimony by any Phillips witness or provide the Commission any argument on any question of witness disqualification.34 It is apparent, therefore, that Mr. Gross's testimony was offered for the purpose described originally, i.e., "for rebuttal impeachment purposes." 34 If the petitioners had timely advanced a legal and evidentiary basis for disqualifying a witness, and if ruling on such disqualification would have required resolving contradictions between the testimony of Mr. Gross and that of Mr. Wilson as to what occurred at the July 6, 2000, meeting, the Commission would certainly have wanted to hear FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 20 of 29 - 3519 In light of this procedural history, it is not necessary for the Commission to make any fmdings on any issue of witness conflict of interest or disqualification. As for rebuttal or impeachment, Mr. Gross's testimony did not address the subjects addressed in Mr. Wilson's prefiled testimony but only the subject addressed in Mr. Scott's affidavit submitted in opposition to the March 6 motion to strike. The Commission notes that according to Mr. Gross's affidavit, Ryder Scott disclosed to the Danco representatives the possibility that Ryder Scott might not be able to work for Danco due to conflicts of interest. Mr. Gross's affidavit did not contradict Mr. Wilson's assertions that the latter learned no confidential information at the meeting and that he made no use of any information provided by the Danco group. The Commission f'mds no reason to disbelieve Mr. Wilson's prefiled testimony. The Decision on Remand's reference to Mr. Gross' testimony will be corrected accordingly. David W. Lappi Another exhibit incorporated into the petitioners' application for reheating is a letter from Mr. Lappi addressed to the Commission and Danco, Inc. A number of Mr. Lappi's points concern legal issues. Legal Issues Mr. Lappi first complains that "even if the Commission had decided in the Petitioners' favor on the merits, there still may be protracted and expensive legal proceedings on the question of standing and retroactivity." But the Commission did not decide in favor of the petitioners on the merits; accordingly the question of standing is moot. The Commission has previously explained that, in light of the remand from the Supreme Court, the Commission felt itself bound to hear~ and decide the case on the merits notwithstanding that Phillips had not yet been given the opportunity to have its (negative) position on standing considered. Since the Commission has treated the petitioners as having standing, it is difficult to understand Mr. Lappi's enthusiasm for revisiting that issue. Any change from the status quo in this case could only be to the petitioners' disadvantage. As for retroactivity, Mr. Lappi would apparently have the Commission decide the hypothetical issue of whether a hypothetical unitization order that the Commission is not oral testimony on the points in dispute from both witnesses and possibly others, with the opportunity for cross- examination. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 21 of 29 3520 issuing would appropriately be retroactive under some hypothetical facts that were not found by the Commission. Such an exercise would not be meaningful or appropriate. Mr. Lappi refers to a procedural order issued September 27, 2000, and states that "[n]ew procedural orders that disadvantage the Petitioners' should not be allowed, midway through the process." Mr. Lappi fails to explain how the procedural order disadvantaged the petitioners, and it is difficult to see how it could be so interpreted. The procedural order granted the petitioners' request for a pre-hearing conference and denied a request by the Department of Natural Resources to defer a hearing on the merits, which request had been opposed by the petitioners. Mr. Lappi mistakenly claims that the Commission "eliminate[d] any chance to consider the deep oil accumulations below the currently producing shallower North Cook Inlet Gasfield." On the contrary, in its Pre-Hearing Order, the Commission asked the parties, without restriction, to outline in pre-hearing memoranda their positions and evidence "[f]or each pool for which unit expansion is sought." The Petitioners' Pre- Heating Memorandum referred only to "the" pool and to draining of gas from their leases; it failed to mention anything about any deep oil accumulation. Nevertheless, the Commission allowed the petitioners to introduce evidence relating to deep oil accumulations and considered that evidence in reaching a decision on the merits. In his argument concerning the standards for unit expansion (which issue is more fully addressed above in this order), Mr. Lappi mischaracterizes the Commission's decision as "argu[ing] that it has no jurisdiction over a unit created by the Department of Natural Resources." Clearly the Commission's entire heating process and decision in this case presuppose that it has jurisdiction over the North Cook Inlet Unit. What the Commission actually said is that its unitization authority is limited to administering AS 31.05.110 and does not extend to administering AS 38.05.180. Mr. Lappi's statement that "most of the AOGCC's own regulations regarding units cite the authorizing statute AS 38.05.180 (administered by DNR)" is unfathomable. The Commission's regulations are all located in 20 AAC 25, and none of those regulations cites AS 38.05.180. Mr. Lappi's assertion that "[t]he final arbiter of units created in the State... must be the AOGCC" begs the question of what powers the legislature has and has not delegated to the Commission concerning voluntary units.3s It is worth noting that the Commission's powers are not based on and do not vary according to land ownership: they apply equally to land owned by the state, private persons, and the federal 35 This question is also begged by the petitioners' citation of AS 31.05.027, which provides that the Commission's authority applies to land included in a voluntary unit under AS 38.05.180(p), and of AS 31.05.110(q), which provides that portions of AS 31.05.110 apply to such voluntary units. It simply does not follow that the Commission may administer the Department of Natural Resources' statutory authority, AS 31.05.180(p), as the petitioners assert. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 22 of 29 3521 government.36 To the extent that, as Mr. Lappi argues, the Commission may enforce or decide disputes arising under unit agreements covering state land, the Commission may also enforce or decide disputes arising under unit agreements covering private land. But the Commission is not a tribunal of general jurisdiction authorized to adjudicate any and all controversies that arise under unit agreements.37 Factual Issues We now mm to the technical or factual issues raised by Mr. Lappi. Mr. Lappi first criticizes a general finding by the Commission regarding his analysis, which he characterizes as a "value judgment [] about a person." The f'mding was limited to the analysis described in Mr. Lappi's testimony and was not a value judgment about a person. However, there may be some merit to the point that since most of Mr. Lappi's testimony took place in in camera sessions and is not available to the public, his ability to defend his analysis outside of these proceedings is limited. In recognition of this point, the Commission will withdraw the language in question. Seismic Evidence Regarding Gas Reservoir(s) To place Mr. Lappi's seismic testimony in this case in context, it is helpful to point out that seismic data can and did contribute in two different, though complementary, ways toward determining whether a productive pool in the NCIU eXtends under the Danco leases? The first way is by mapping the structure that contains the Tertiary System Gas Pool. The second way is by imaging the distribution of gas in a known gas accumulation. As to structural mapping, the seismic evidence presented by Phillips proved that the Cook Inlet No. 1 Sand, the most areally extensive gas-containing stratum in the Tertiary System Gas Pool, dips below 4260 feet subsea before it crosses the NCIU boundary in the direction of the Danco leases. Since well data demonstrate that the gas water contact in the Cook Inlet No. 1 Sand occurs at 4260 feet subsea, this means that the Tertiary System Gas Pool does not extend under the Danco leases. Mr. Lappi's seismic testimony did not contradict Phillips' structural mapping. Indeed, Mr. Lappi did not complete his own structural interpretation because he did not convert the seismic data from time units to depth units. However, Mr. Lappi's time structure map resembled and appears to be consistent with Phillips' depth structure map. 36 See AS 31.05.027. 37 Cf Samson Resources Co. v. Corporation Commission of the State of Oklahoma, 702 P.2d 19 (Okla. 1985) (oil and gas conservation agency did not have jurisdiction to hear claim that operator of a spacing unit under a voluntary 8ooling agreement was operating to the detriment of other interest holders or to order a change in operator). See AS 31.05.110(c) ( Only so much of a pool or pools as has been defined and determined to be productive on the basis of information available to the commission may be so included within the unit area"). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 ___ _ Page 23 of 29 3522 As to gas imaging, Phillips' evidence identified a seismic amplitude39 that specifically corresponds to gas saturated portions of the Cook Inlet No. 1 Sand.® This amplitude was shown to disappear at a structural elevation corresponding to the gas water contact derived from well data and at a location inside the boundary between the NCIU and the adjoining Danco lease. This independently verifies that the Tertiary System Gas Pool does not extend under the Danco leases. Mr. Lappi's seismic testimony did not contradict Phillips' interpretation of the extent of the gas in the Cook Inlet No. 1 Sand. If Mr. Lappi's seismic testimony did not contradict Phillips on either of these crucial points, what was the import of his seismic testimony? What Mr. Lappi purported to do in his testimony was to directly image the presence of all potential gas deposits (to the extent of the available seismic data) under the Danco leases and the NCIU and to show that there are or may be gas deposits in addition to those that have been shown to exist on the basis of well data and structural data. Mr. Lappi's method was to have a computer highlight all areas ("events") with a seismic amplitude of less than-10,000 units. Mr. Lappi asserted that "most of those events we believe are gas charged sands," or "would probably be the result of gas charged sandstone," or are "consistent with gas," or "are indicative of gas charged sandstone." Such amplitudes, however, may indicate a variety of conditions: not only producible natural gas saturation in a sandstone, but also non-producible low natural gas saturations, coal, non-hydrocarbon gases, artifacts based on subsurface geometry or structure ("bed dip"), other lithological changes, or processing or acquisition anomalies. In particular, the Cook Inlet Basin is known to contain a large amount of subsurface coal, so that almost any seismic line from the Cook Inlet will contain seismic amplitudes of this magnitude. The mere presence of a seismic amplitude of less than -10,000 units is simply insufficient to support Mr. Lappi's interpretation of such events as gas deposits. Of course since there is known to be producible gas within the NCIU, in the structurally controlled Sterling and Beluga gas sands, it is likely that some of the events highlighted by the computer at Mr. Lappi's direction correspond to such gas sands. (Unfortunately, because Mr. Lappi failed to convert time units to depth units, it is difficult to match his highlighted events with known geological features.) But as to the 39 Leaving aside effects related to subsurface geometry and data acquisition, the strength ("amplitude") of a properly migrated seismic reflection is a function of a difference in acoustic impedance between two layers of rock. The acoustic differences between the two layers may be due to strongly differing rock types such as coal and shale or due to finite saturations of gas (either natural gas or non-hydrocarbon gas) in some lithologies such as sandstone. If the amplitude is affected by natural gas, the gas saturation could range from minor (<10%) and unproducible to appreciable and productive. 40 This amplitude also correlates with the gas saturated sand Cook Inlet No. 2 Sand in the upper portion of the structure immediately below the Cook Inlet No. 1 Sand. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 24 of 29 3523 events that do not correspond to known gas sands, there is substantial reason to doubt that they represent additional, previously unknown gas deposits. One reason is that any such additional gas deposits cannot be explained as structurally trapped accumulations consistent with known well data. As mentioned in the Commission's f'mdings and as further explained below, Mr. Lappi largely dealt with this problem by ignoring the available well data. But he also attempted to explain his interpretations using the theory that the highlighted events represent stratigraphically trapped accumulations.4~ While such accumulations cannot be rejected as a theoretical possibility, Mr. Lappi's theory collides with the fact that no stratigraphically trapped gas accumulation has ever been proved to exist in the entire Cook Inlet Basin. Moreover, even if stratigraphically trapped gas accumulations did exist within the NCIU or under the Danco leases, by definition they would not be continuous with the structural accumulations in the NCIU. In fact, Mr. Lappi's own interpretation does not indicate any continuity between highlighted events under the Danco leases and productive gas accumulations in the NCIU. In his memorandum, Mr. Lappi seems to concede this point, arguing instead that "there is no requirement that new leases brought into an existing voluntary unit have hydrocarbon pools that are continuous with those of the unit.''42 But AS 31.05.110(o) only allows for the enlargement of a unit area "to include adjoining portions of the same pool." 43 Moreover, Mr. Lappi's blanket interpretation of highlighted events as gas deposits fails when tested against actual well control. Mr. Lappi's interpretation would have producible gas in the Sunfish and North Forelands wells, yet Phillips witness Campbell demonstrated that the wells are in fact wet. In his memorandum, Mr. Lappi defends his approach with the claim that he selected the cutoff value of-10,000 units "because inspection of the amplitude anomalies within the known producing gasfield (as evidenced by well and production data, see Commission Finding 90) showed that level to represent producible gas." Mr. Lappi's testimony, however, did not explain any such "inspection," and his comparison of his approach with the supposedly less accurate techniques of "calibrating a seismic survey 41 A stratigraphic trap forms where reservoir rock disappears up-dip and is replaced by another bed that acts as a seal or where the permeability diminishes up-dip within the reservoir bed itself. In the thin Beluga formation sands, which Mr. Lappi acknowledges cannot be individually identified as gas-bearing within the resolution of the 3-D seismic survey, he proposes that he has imaged "several stacked gas- bearing sands in stratigraphic traps." 42 Given the petitioners' and Mr. Lappi's emphasis on alleged drainage across the NCIU boundary as the basis for seeking unit expansion - e.g., if "development occurs after the royalty owners are stripped of their rights, then a theft has taken place, a theft committed with the assistance of our State agencies" -- it would be mild to characterize this rationale as a belated attempt to move the goalposts. 43 Emphasis supplied. Similarly, AS 31.05.110(c) limits the unit area for a given pool to "[o]nly so much of [the] pool.., as has been defined and determined to be productive." FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 25 of 29 3524 based on laboratory measurements in model studies" is misleading. The correct comparison is between taking into account all the available relevant data, as Phillips' analysis did, and ignoring much of the available relevant data, as Mr. Lappi did. If Mr. Lappi is alluding to Phillips' use of checkshot data to convert time to depth, that involves the use of field measurements, not laboratory measurements, and is an essential step in completing a valid seismic analysis. This can be called a "model" study, but so can Mr. Lappi's approach. In any event, it is simply not correct to assume as Mr. Lappi did that an amplitude that corresponds to a particular gas accumulation- and still less any amplitude beyond a particular cutoff value-- also represents gas at other depths and other locations. Similar amplitudes, as noted above, can and are caused by non-gas features. For that matter, the presence of gas deposits at different depths or locations may be associated with amplitudes different from one another. Seismic amplitudes can vary according to such factors as the depth of the stratum in question, its thickness and the thicknesses of the overlying and underlying strata, and the composition of the various strata. In defense of his seismic testimony Mr. Lappi also claims that it "is unlikely that thick blanket sand deposits like the Cook Inlet Sands would suddenly become coaly, and that those coals would display amplitude anomalies like the gassy sands within the North Cook Inlet Field." It is not clear what Mr. Lappi means by sands "suddenly becom[ing] coaly." No one has suggested that sands are transformed to coals, so presumably Mr. Lappi is questioning the likelihood that coals exist in close proximity to sands. In fact, however, well logs demonstrate just such occurrences in the field. And these occurrences are consistent, as Phillips witness Blaine Campbell explained, with the geology of a fluvial depositional system such as the Cook Inlet Sands. Mr. Lappi asserts that the "Petitioners made use of well data to identify areas of production and areas which are not productive, to calibrate their seismic interpretation (as in Finding 90).''44 The Commission is not able to make sense of this statement with reference to Mr. Lappi's testimony, nor has Mr. Lappi cited where in the record "Phillips' seismic expert agreed" with Mr. Lappi's "areal approach.''45 What is clear from the record is that Mr. Lappi did not perform the sort of analysis that is necessary to tie a particular seismic reflector to a discrete stratigraphic interval. In fact, in defending his failure to use check shot surveys, Mr. Lappi states, "Check shot surveys would be relevant to correlating the interpreted horizons to various levels within the drilled wells... "But 44 Emphasis in original. 45 The closest thing that the Commission can locate in the record is Mr. Campbell's testimony regarding the fact that extrapolating a long distance from well control is a common technique, but Mr. Campbell also testified that when he tied Mr. Lappi's mapping into well control he found most of it to be invalid. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 26 of 29 3525 correlating interpreted horizons to specific levels within drilled wells is a prerequisite to drawing reliable inferences from the seismic amplitude data. What is also clear is that Mr. Lappi ignored other relevant well control data in preparing his seismic testimony: April 23, 2001, 64-23: Q Mr. Lappi, do you know where the North Forelands well is? A Not specifically, no. Q Do you know whether it's inside or outside the unit? A No, I don't. June 14, 2001, 50-20: Q Did you show us where all these other wells that were drilled previously around there would be on those maps? A It's -- it's kind of hard to see where all- where they all are on-- on the maps in the -- the seismic lines. I don't -- I -- I personally am not familiar enough with the locations of all the wells and which ones are termed to be dry holes and which ones aren't that -- at this point I can't make a comment on that June 14, 2001, P. 51: Q: So, just for the record, have you looked at the pictures of the well logs on the wells that had been drilled off [th]at platform? Lappi: "Some of them." Depth of Gas Water Contact(s) Mr. Lappi now apparently concedes that there is no subsurface data supporting the contention that the Cook Inlet State 18741 #1 well penetrated a gas reservoir. What he says he relied on is "the drilling reports that the Operator of the well submitted to the State declaring the well was a gas well." As Exhibits SJW 5a, 5b, and 5c show, the Commission forms that were then in use and that were submitted by the operator provided three options for describing a well: checking a box labeled "Oil Well," checking a box labeled "Gas Well," or filling in a blank labeled "Other." It is not reasonable to infer from the fact that the "Gas Well" box was checked that a gas reservoir was penetrated. On the contrary, the gas chromatograph and mud log indicated the absence of producible gas. Indeed, a copy of the Sundry Notices and Reports on Wells, included in Mr. Lappi's exhibits, bear an AOGCC member's handwritten 1967 note of a telephone FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 27 of 29 3526 conversation reporting that "Pan American did not think this was an indicated gas well - just had gas shows!''46 Mr. Lappi goes on to argue that Phillips Exhibit SJW 12 shows a gas water contact in the Cook Inlet Sands at least 60 feet deeper than 4260 feet subsea. This involves the same confusion displayed by Dr. Givens, which is addressed above. As Exhibit SJW 13 makes clear, the deeper gas water contact referred to by Mr. Lappi and Dr. Givens is not for the Cook Inlet No. 1 Sand gas water contact but for the deeper and less extensive Cook Inlet No. 11 Sand. Tyonek Deep Reservoir Mr. Lappi correctly notes that the Commission's findings (inadvertently) omitted reference to the Shell North Cook Inlet State #1 well, and the Decision on Remand will be corrected accordingly. He is wrong, however, in assuming that his testimony regarding that well was ignored by the Commission. The range of distances set out in Finding 102 included this well· The Shell well, however, did not produce from the "West Foreland" formation as Mr. Lappi states, which is a deeper formation than the Tyonek Deep reservoir. The evidence in the record does not name the zone that the Shell well produced from, but it is a different 1,000-feet shallower accumulation than the Sunfish sand found to be productive in the other three wells· Mr. Lappi's criticism of the ARCO structure map as lacking any justification for the choice of contour lines47 is conjectural, because the map does not include an explanation or supporting data. However, by inspection of the map it is reasonably clear that the two different contour lines were drawn in separate fault blocks, and there is no reason why oil accumulations in separate fault blocks would have oil water contacts at the same depth. The fundamental fact remains that the evidence is utterly insufficient to determine the extent of the Tyonek Deep reservoir. Mr. Lappi appears to acknowledge as much, noting that the Shell North Cook Inlet State #1 "discovery has never been evaluated," and that "reasonable geologists and geophysicists would call for stepout wells to be drilled.. · to see how far the oil producing horizons extend to the north." But Mr. Lappi argues 46 Emphasis supplied. The term "gas shows" means that gas is present in some quantity, but slight gas shows -- as in this well -- do not indicate a producible gas reservoir. Nearly all wells drilled in the Cook Inlet basin have gas shows, due largely to the prevalence of coal. In fact the only gas shows in this well were associated with coal intervals (Exhibit SJW 6a). 47 Mr. Lappi claims that his correction of a gas-water contact discrepancy on the ARCO map is "a new independent interpretation" and that therefore the Commission was wrong in finding that he "did not present any independently interpreted subsurface data in support of his conjectures." What Mr. Lappi did clearly does not constitute what is ordinarily meant by a presentation of independently interpreted subsurface data. FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 28 of 29 3527 that unitization should be ordered anyway, to facilitate further exploration.48 This is beyond the Commission's authority. As pointed out elsewhere, the Commission may only include within a unit area so much of a pool or pools as has been defined and determined to be productive. Contrary to Mr. Lappi's assertion, it is not true that every lease must be drilled in order to show that it overlies a reservoir. Well control and seismic structural delineation can be used to demonstrate a productive area without necessarily drilling on each tract within the area. The Danco leases, however, are not within such an area. Conclusion The applications for rehearing have not identified any material errors in the Decision on Remand or the procedures in this case and have not shown any reason why the petition for an order of unitization should not be denied. Review of the applications for rehearing has found several minor respects in which the Decision on Remand should be corrected, clarified, or revised as indicated above. The Decision on Remand will be modified accordingly. The Decision on Remand is otherwise reaffirrned. IT IS SO ORDERED. DONE at Anchorage, Alaska, this 8th day of February, 2002. i ::~'... ~ .... ~~?.;" ~:. f~, ~.... ,:..~,. ,'., '?~. 'x; ':'~.~",i .... I ceni~ that'a-copy'ot ve was h~d deliver~mail~ on Febm~ 8, 2002 to each of the following at their addresses of record: G~rge K~per, MD, mailed C.R. Kennelly, hand deliver~ Fr~efic E. Brom, mail~ Cammy Oe~hsli Taylor, Ch~ir ka Oil C se ation Commission Daniel/~'. Seamoun ,~r., Commissioner Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission William B. Rozell, hand delivered Barbara Fullmer, hand delivered Daniel Helmick, mailed Warren Z. Buck, mailed Jod~J °olo~ie, Sp~'a,cd~~ Staff Assistant 48 Mr. Lappi also uses the term "development," although development by the Commissidn's definition pertains only to a known productive pool. See 20 AAC 25.990(18). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 29 of 29 3528 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 Re.' THE APPLICATION OF DANCO, ) INC. for an order granting integration) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) Conservation Order 391B North Cook Inlet Unit February 8, 2002 DECISION ON REMAND This is the decision on the merits in this case, which involves a petition for a Commission order of unitization under AS 31.05.110. The Commission denies the petition. PROCEDURAL HISTORY AND SUMMARY OF PROCEEDINGS On August 30, 1996, Danco, Inc., and Monte Allen ("petitioners") filed a petition with the Commission asking that two oil and gas lease tracts in which they owned overriding royalty interests (referred to below as the "Danco leases") be "unitized into the North Cook Inlet Gas Unit." The two lease tracts, ADL 369100 and ADL 369101, were located outside of, but adjacent to or near, the existing North 'Cook Inlet Unit ("NCIU"). On March 7, 1997, the Commission dismissed the petition based on its conclusion that the petitioners had no property interest in the tracts sought to be included in the unit because the leases expired the day after they filed their petition. On June 20, 1997, the Commission reaffnxned that order in a Decision on Reheating. Following Allen's appeal to superior court, which affn'med the Commission's decision, and then to the Supreme Court, the Supreme Court issued an opinion on May 12, 2000, reversing and remanding the case for a hearing before the Commission on the merits. The Court concluded that the petition was not moot as long as the Commission had the discretion to make a unitization order retroactive to the date the petition was filed, and that "the possibility of retroactivity could not properly be eliminated without 3529 determining the merits of the petition for tmitization.''~ returned to the Commission effective August 23, 2000. Jurisdiction over the case was In a procedural order issued September 27, 2000, the Commission determined that it would first hear the issues of whether the tracts should be ordered unitized with the North Cook Inlet Unit and, if so, whether such order should be made retroactive. The Commission deferred determination of the details of a plan of unitization until after a decision was made on the former question, noting that "it may be appropriate to consider at that time whether.., the Commission may and should refer some or all of the details of a plan of unitization" to the Department of Natural Resources. A pre-hearing conference was held on October 12, 2000, and a Pre-Hearing Order was issued by the Commission on October 20, 2000. Public notice of the hearing was published on February 10, 2001. In addition, personal notice was effected on all persons known to own interests in the Danco leases or in tracts within the North Cook Inlet Unit. The hearing began on March 13,2001, and continued on March 14 and June 14, 15, 19, and 20, 2001 (with scheduling conferences April 17 and April 23, 2001). Appearing as parties, in addition to the petitioners, were Phillips Petroleum Company and Phillips Alaska, Inc. (collectively "Phillips"), all represented by counsel. Phillips owns the working interest in the tracts within the NCIU and owned the working interest in the Danco leases. Both sides submitted pre-filed written testimony and exhibits and called witnesses who explained, and in some instances supplemented, their pre-filed testimony and stood for cross-examination. Portions of the hearing dealing with proprietary seismic data were conducted in camera. Following the submission of post- hearing briefs by both sides, oral argument was heard on November 2, 2001. The Commission issued a decision on December 3,2001, as Conservation Order 39 IA, which was followed by applications for rehearing. Pursuant to the Commission's Final Decision on Applications for Rehearing issued this date, which is incorporated herein by reference, Conservation Order 39 lA is superseded and replaced by the present Decision on Remand, Conservation Order 39 lB. Allen v. Alaska Oil and Gas Conservation Comm'n, 1 P.3d 699, 705 (Alaska 2000). Decision on Remand February 8, 2002 Page 2 of 25 3530 ISSUES FOR DECISION Standin~ Phillips argues that the petitioners do not have standing to petition for involuntary unitization because they do not own any working interest in the leases. Phillips notes that in the Commission's 1997 Decision on Rehearing, the Commission stated: The Commission has previously decided not to reject Danco's petition on the ground that it owned no working interest in the leases. This decision, however, was made without notice to other interested parties and is subject to being revisited at the request of an interested party. Because the Supreme Court directed that the petitioners be given a hearing on the merits, the Commission has not revisited its earlier decision. Likewise, Phillips urges that the Commission "decide the case on the facts so that the matter is finally resolved on the merits." In this order, the Commission decides the petition on its merits and does not address the standing issue. We observe, however, that the issue is open to fimher Commission consideration in any furore petition for involuntary unitization brought by a person other than a working interest owner. Standards for InvolUntar~ Unit Expansion Extent of Productive Reservoir The petitioners have invoked the Commission's involuntary unitization powers under AS 31.05.110, seeking to expand the existing North Cook Inlet Unit to include two tracts located outside the unit. The existing unit was not formed by order of the Commission; rather, it is a voluntary unit whose creation was approved by the Department of Natural Resources under AS 38.05.180(p). Leaving aside any potential difficulties relating to the apparently overlapping authority of the two agencies concerning expansion of such a unit,2 AS 31.05.110(o) directs the Commission to apply the same procedures and standards to the "enlargement [of a unit area] to include adjoining portions of the same pool''3 as are applied to the creation of a unit in the first 2 See 1996 Op. Att'y Gen. (663-96-0121; July 3) (Re: AOGCC/DNR Unitization Jurisdiction). 3 A "pool" is "an underground reservoir containing, or appearing to contain, a common accumulation ofoil or gas. Each zone of a general structure which is completely separated from any other zone in the structure is covered by the term 'pool.'" AS 31.05.170(11). The Commission's regulations use the term "reservoir" as well as "pool" and provide that the term "reservoir" has the same meaning as "pool." 20 AAC 25.990(59). - Decision on Remand February 8, 2002 -- Page 3 of 25 353 place.4 Perhaps the most decisive of those standards for present purposes is that set out in AS 31.05.110(c): Only so much of a pool or pools as has been def'med and determined to be productive on the basis of information available to the commission may be so included within the unit area. There was no disagreement among the parties that this standard- or something like it - must at a minimum be met in order for the petitioners to prevail. However, at times the petitioners or their witness seemed to assume or contend that instead of AS 31.05.110(c), the applicable standard is that found in one of DNR's regulations or in the trait agreement that established the NCIU. The DNR regulation in question, 11 AAC 83.35 l(c), provides, in relevant part: A participating area must be expanded to include acreage reasonably' estimated through use of geological, geophysical, or engineering data to be capable of producing or contributing to the production of hydrocarbons in paying quantities... The unit agreement uses similar language. Whatever uncertainty might exist about the respective jurisdictions of the two agencies regarding unitization of state oil and gas leases, there can be no doubt that the Commission's authority is limited to administering AS 31.05.110 and does not extend to administering AS 38.05.180. The latter authority is granted to the Commissioner of Natural Resources.5 Nor does the Commission have the authority, as the petitioners appear to suggest, to order specific performance of a contractual provision in the North Cook Inlet Unit Agreement. In sum, a necessary condition for the Commission to order one or both of the Danco leases included in the NCIU is a determination under AS 31.05.110(c) that a productive pool within the NCIU extends under one or both of those leases.6 4 The superior court so held in Burglin v. Alaska Oil and Gas Conservation Comm'n, No. 3AN-82-9250, Order denying summary judgment, at 7 (Dec. 19, 1983): "[W]hether a petition is filed for involuntary creation of a unit or for an involuntary enlargement of an existing unit, the four criteria set forth in Subsection 110(b) apply." 5 See, e.g., AS 31.05.180(p). It is worth noting that shortly after this case was remanded to the Commission, DNR invited the petitioners to apply for expansion "[u]nder the terms of the NCIU Agreement and applicable statutes and regulations." Letter from Kenneth A. Boyd to Danco, Inc., and Monte Allen (July 25, 2000). The petitioners declined. Letter from Paul D. Kelly to Dan Seamount (August 25, 2000). 6 Even if the DNR or unit agreement standard were applicable here, the Commission's findings in this case exclude the possibility that either of those standards has been met. Decision on Remand February 8, 2002 Page 4 of 25 -- -- 3532 Additional Standards In addition to the requirement that only Productive reservoir acreage may be included within the unit area, the statute establishes four other standards for involuntary unitization: namely that the Commission must find that (1) the unitized management, operation and further development of a pool or portion of a pool is reasonably necessary in order to effectively carry on pressure control, pressure-maintenance or repressuring operations, cycling operations, water flooding operations, or any combination of these, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool; (2) one or more of the unitized methods of operation as applied to the pool or portion of it is feasible, and will prevent waste and will with reasonable probability result in the increased recovery of substantially more oil and gas from the pool than would otherwise be recovered; (3) the estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered; and (4) the unitization and adoption of one or more of the unitized methods of operation is for the common good .... 7 As Phillips notes, the petitioners made no attempt to show that these standards have been satisfied. Rather, the petitioners asserted that there is no need for the Commission to make the fmdings set out in this subsection because such findings were previously made in connection with the initial creation of the NCIU. That assertion is plainly mistaken: since, as noted above, the NCIU is a voluntary unit, there was never any occasion for the Commission or its predecessor agency to address the requirements of involuntary unitization. AS 31.05.110 does not require the findings in question to be made in order for tract owners to form a voluntary unit.8 Where a trait has been formed by the Commission's compulsory powers and on the basis of the Commission's findings that the criteria of AS 31.05..110(b) have been met, an argument might be made that it is not necessary to revisit those criteria merely in order later to expand the unit to ensure that the entire pool.is included.9 However, the Commission does not need to decide that question here. The statute clearly restricts application of the involuntary unitization power to pools where, among other things, "the unitized management, operation and fimher development of [the pool] is reasonably 7 AS 31.05.110(b). 8 DNR applies certain criteria under AS 38.05.180(p) when it decides whether to approve a voluntary unit of state oil and gas leases, but those criteria are different from and broader than those set out in AS 31.05.110(b). See 11 AAC 83.303. For example, DNR may approve a unit at the exploratory stage, while exercise of the Commission's involuntary unitization authority presupposes that a pool has been discovered and shown to be roductive. But the Burglin decision, supra note 4, seems to be to the contrary. Decision on Remand February 8, 2002 Page 5 of 25 3533 necessary in order to carry on... [a] form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool . . . [and] the estimated additional cost, if any, of conducting such [joint] operations will not exceed the value of the additional oil and gas so recovered...,,10 Since no findings have previously been made to this effect for any pool within the NCIU, the Commission would have to make those findings now in order to exercise its involuntary unitization powers to expand the unit. Multiple Pools In its Pre-Heating Order, the Commission directed the parties to file pre-hearing memoranda outlining, among other things, their positions with respect to whether the five standards enumerated above are met "[f]or each pool for which unit expansion is sought.''~ This reflected the Commission's understanding that AS 31.05.110 deals with involuntary unitization on a pool basis: i.e., where tracts overlie more than one pool, unitization of a particular pool does not necessarily mean that the tracts are unitized with respect to another pool. Rather, each pool must be evaluated individually with reference to the statutory criteria for involuntary unitization. The statute is explicit in its focus on a specific pool and provides that "[e] ach unit and unit area may be limited to all or a portion of a single pool.''~2 This is consistent with the general approach to involuntary ~3 unitization followed in other states. Most of the petitioners' testimony addressed the extent of the producing gas reservoir. However, they also presented testimony concerning whether any deeper oil reservoir(s), known as the Tyonek Deep reservoir or the Sunfish prospect, may extend beyond the NCIU under their leases. The Tyonek Deep reservoir was never brought into regular production, and its working interest owners decided not to develop it. The Commission earlier pointed out that it had grave doubts whether the question of involuntary unitization of such a reservoir could be ripe for consideration.14 Moreover, the petitioners' potential property interest in the Tyonek Deep reservoir is entirely dependent on their gaining retroactive unit expansion with respect to the producing gas reservoir. For it is only by virtue of the allocation of unit production to the Danco leases as of the date the leases' primary term expired at the end of August, 1996, that those leases might be kept alive or revived and l0 AS 31.05.110(b)(1) and (3). ~ Pre-Heating Order at 3 (Oct. 20, 2000) (emphasis supplied). 12 AS 31.05.110(c). ~3 See 1 Bruce M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization ¶ 6.02, at 6-10 (3d ed. 2001). ~4 Order Denying Request for Subpoenas at 4 (Nov. 22, 2000). Decision on Remand February 8, 2002 Page 6 of 25 3534 thus potentially benefit from unit expansion as to the non-producing Tyonek Deep reservoir.~5 Thus, as previously noted, the Commission's decision whether or not to expand the unit as to Tyonek Deep cannot affect the expiration of the Danco leases. Nonetheless, the Commission has considered all the evidence presented relating to any reservoir identified within the NCIU, including the Tyonek Deep reservoir. Retroactivity As noted above, one of the subjects of the hearing was whether, if the Danco leases were ordered unitized with the North Cook Inlet Unit, such order should be effective retroactively to the date the petitioners' petition was filed.~6 Because, as set out below, the Commission concludes that there is no basis to order unit expansion, the question of effective date is moot and will not be addressed here. Burden of Proof Phillips argues that the petitioners have the burden of proof in this case, citing a unitization treatise~? as well as the general proposition that the party seeking a change in the status quo ordinarily has the burden of proof.~8 The petitioners note that the burden of proof in an involuntary unitization petition has not been addressed by an Alaska court. The Commission agrees with Phillips and believes that the involuntary unitization statute contemplates that a petitioner must show that the conditions for exercise of the involuntary unitization power have been met in order for that power to be exercised. Moreover, in light of the actual evidence in this case, the allocation of the bur'den of proof is academic, since the Commission finds that Phillips has affirmatively shown that no producing reservoir in the North Cook Inlet Unit extends under the Danco leases. At oral .argument, the petitioners advanced the theory that because the Commission had bifurcated the hearing in this matter, with the details of a possible plan of unitization deferred until after a decision is made on whether to order unit expansion, it was sufficient at this stage for the petitioners to show that the NCIU "may" be draining gas from the Danco leases. There is no merit to thi's notion, which would render futile and superfluous the considerable expenditure or'time, effort, and money in connection 25 See~lllen, supra, note 1, 1 P.3d at 702. ~ 16 Procedural Order at 3 n. 1 (Sept. 27, 2000); SUpplemental Pre-Hearing Order at 2 (Nov. 30, 2000). 17 1 Bruce M. Kramer & Patrick H. Martin, supra note 13,~at¶ ! 1.0511]. la State v. Decker, 700 P.2d 483,485 (Alaska 1985), Decision on Remand February 8, 2002 Page 7 of 25 3535 with the hearing that commenced last March and, with several interruptions, ended in June. It is completely clear that it was the purpose of that hearing, and not some furore hearing, to present whatever evidence the parties wished to be considered on the question of whether the statutory conditions for involuntary unit expansion were met in this case. FINDINGS Summary of Testimony and Findings The petitioners presented three witnesses on the substantive issues: Dr. James Givens, a petroleum engineer; David Lappi, a geologist and geophysicist; and Monte Allen, one of the petitioners. In addition, written testimony by David T. Gross was submitted for "rebuttal impeachment purposes." Dr. Givens' testimony focused on the implications of an increase in the estimated gas reserves in the NCIU and on several maps he proposed of gas reservoir limits showing the reservoir to extend under the Danco leases, based on reserves estimates and on certain limited well data. Dr. Givens presented various criticisms of Phillips' analysis of the gas reservoir limits as had been submitted to the Commission's predecessor agency in 1967 in support of an application for a well spacing exception (which was granted in Conservation Order No. 40). His main affirmative contentions~were: (1) that a doubling of estimated reserves since the 1960's implies a doubling in the areal extent of the reservoir; (2) that a linear projection of the top of the Sterling reservoir using two pairs of NCIU wells shows the reservoir extending under the Danco leases; (3) that certain well data show a deep gas water contact in the NCIU (in the Beluga Formation) that implies a gas reservoir extending under the Danco leases; and (4) that declining gas pressure in the NCIU over time indicates that the Danco leases are being drained. Dr. Givens also noted (5) that Phillips' 1967 map showed the productive reservoir limit cutting across several small comers of what later became the boundary of lease ADL 369101; however, this point was not a substantial element of the petitioners' Case, since Dr. Givens' proposed maps of the reservoir limits extended far beyond the Phillips 1967 gas water contact. The Commission finds that Dr. Givens' various, and conflicting, proposed reservoir limits extending into the Danco leases are inconsistent with well control. Notably, at least one dry hole is present within each of the proposed reservoir limits.. As to contention (1) above of Dr. Givens, the Commission finds that recent reserves estimates do not support an increase in the areal extent of the reservoir and that, in any event, Dr. Givens' comparison of earlier and recent reserves estimates is flawed. As to contention (2), the Commission fmds that Dr. Givens' projection analysis is based on erroneous depth data and is contradicted by more precise and persuasive seismic, well, Decision on Remand February 8, 2002 Page 8 of 25 3536 and production data. As to comention (3), the Commission f'mds that Dr. Givens' assertion as to a deeper gas water contact is erroneous because it ignores a documented lack of pressure communication among different sands and assumes the productivity of an interval not shown to be productive. As to contention (4), the Commission finds that the evidence of declining gas pressure in the NCIU does not show whether or not the Danco leases are being drained. As to contention (5), the Commission finds that more recent seismic data show 'that the gas reservoir in the vicinity of the Danco leases is less extensive than shown on the Phillips 1967 map and does not extend under any portion of the Danco leases. The Commission also finds that Dr. Givens' testimony was inconsistent and self-contradictory and that his analysis as described in his testimony does not conform to generally accepted professional methods for petroleum engineering and is not credible or persuasive. Mr. Allen presented his interpretations of various well and geological and geophysical data. Mr. Allen's main point in this regard appears to be that the orientation of the NCIU gas reservoir is closer to north-south than shown by Phillips, with the result that the reservoir extends under the Danco leases. Mr. Allen was not qualified as an expert, and the Commission finds that his testimony on technical issues is not based on and does not reflect the application of generally accepted geological, geophysical, or engineering principles or techniques, and it is not credible or persuasive. The Commission specifically fmds that Mr. Allen was not aware of the location of the seismic data he referred to and that he did not offer (and his data are insufficient to support) a valid interpretation of the structural orientation of the gas reservoir. Mr. Allen also made a number of assertions concerning the alleged misconduct of unit or lease operators or state officials. The Commission f'mds those assertions to be erroneous or irrelevant to the issues in this case or both. Mr. Lappi's testimony focused on interpreting Phillips' seismic data with regard to whether it indicates gas under the Danco leases. He stated that seismic amplitude anomalies or high-amplitude seismic events probably indicate the presence of gas there, particularly in stratigraphic traps. Mr. Lappi's testimony also addressed the possible presence under the Danco leases of deep gas or oil associated with the Tyonek Deep reservoir. Finally, Mr. Lappi testified that data from one well indicate that a critical gas water contact in the Sterling Formation is approximately 100 feet lower than Phillips' analysis shows. The Commission finds that the seismic data and .well control show that areas under the Danco leases that Mr. Lappi characterized as consistent with gas are likely to represent coal deposits or other seismic phenomena besides gas accumulations and that, in any event, those areas are not continuous with the gas reservoirs in the NCIU. Hence, if any gas exists under the Danco leases, it is not in reservoirs that extend from the NCIU. As to the Sterling gas water contact, the Commission finds that Mr. Lappi misread and misinterpreted or selectively ignored the relevant well data. As to the Decision on Remand February 8, 2002 Page 9 of 25 3537 deeper zones, the Commission f'mds that the evidence in the record does not demonstrate any oil reservoir or deep gas reservoir extending under the Danco teases. The petitioners did not present evidence pertaining to the four unitization standards set out in AS 31.05.110(b). Phillips presented five witnesses: Scott Wilson, a registered petroleum engineer; Blaine Campbell, a petroleum geophysicist; Brian Seitz, a petroleum engineer; Dora Sofia, a senior landman for Phillips; and John Hom, a retired Phillips manager. Mr. Wilson rebutted aspects of the testimony of Dr. Givens and Mr. Lappi on the basis of well control and other evidence. Mr. Wilson addressed reserves estimates and the implications of a doubling of estimated gas reserves in the NCIU, testifying that there are several parameters in addition to a reservoir's areal extent that affect reserves. He explained how an increase in the net pay thickness in the NCIU was sufficient itself to support a doubling of estimated gas reserves. Mr. Wilson described Sterling and Beluga reservoir characteristics, including the lack of continuity and the lack of a common gas water contact among sands in the Beluga formation. He testified that the Cook Inlet No. 1 Sand (Sterling) is the areally most extensive gas reservoir in the NCIU and that its gas water contact is at a depth of 4260 feet below sea level. The Commission finds Mr. Wilson's testimonY to be credible and persuasive. Mr. Campbell rebutted aspects of the testimony of Dr. Givens, Mr. Lappi, and Mr. Allen. Mr. Campbell's testimony focused on presenting and interpreting seismic data pertaining to the NCIU, including correlating the seismic data with well control. Mr. Campbell's interpretation incorporated well' control from the exploration, delineation, and production wells drilled in the NCIU as well as recently acquired 3-D seismic data. The data Mr. Campbell relied on are more complete and accurate than those used to define the gas pool and unit in the 1960's, due to significant advances in seismic techniques and greater well control. He testified that these data show that the gas accumulation in the Cook Inlet No. 1 Sand is the most areally extensive reservoir in the NCIU and that it does not extend under the Danco leases. Mr. Campbell found that the more recent 3-D seismic data generally confn'm Phillips' earlier interpretation of the reservoir limits except that the 3-D data show the structure as having somewhat steeper flanks, so that the limits are not as extensive as earlier thought. In particular, he testified, the 3D seismic data show that the so-called "notches"- i.e., minor areas where the reservoir boundary was earlier shown, as cutting across several comers of what became lease ADL 369101 - are non-existent. The Commission f'mds Mr. Campbell's testimony to be credible and persuasive. Mr. Seitz testified as to the availability of relevant data to the petitioners, the commercial value of Phillips' seismic data, and the development history of the NCIU and the Tyonek Deep reservoir. In particular, he testified that the working interest owners had decided not to develop or produce the Tyonek Deep reservoir and had Decision on Remand February 8, 2002 Page 10 of 25 3538 written off their investments in it. The Commission f'mds Mr. Seitz's testimony to be credible and persuasive. Ms. Soda provided written testimony as to the ownership and related history of the NCIU and of leases in and near the NCIU. In particular, her testimony showed that at the time the NCIU was contracted to its current boundaries,. Phillips' ownership interest covered land both inside and outside those boundaries, including the land thai later became the Danco leases. The Commission fmds Ms. Sofia's testimony to be credible and persuasive. Mr. Horn provided written testimony on the history of the NCIU and rebutted certain testimony by Mr. Allen. He stated that it was the intention of Phillips to include within the NCIU all of the commercially productive gas regions in the area and that Phillips had no reason to exclude from the trait productive lands already leased by Phillips, including the lands within what later became the Danco leases. The Commission finds Mr. Horn's testimony to be credible and persuasive. Specific Findings L Histor~ o, fleases 1. In 1961 and 1962, DNR issued oil and gas leases that included lease tracts covering certain submerged lands in Upper Cook Inlet. 2. DNR approved the unit agreement establishing the North Cook Inlet Unit ("NCIU") in 1967. 3. Leases ADL 17593, ADL 18749, and ADL 18755 were included in the original North Cook Inlet Unit area. 4, In 1972 DNR required the NCIU to be contracted, excluding portions of leases ADL 17593, ADL 18749 and ADL 18755. Phillips owned an undivided working interest in these leases in the depths from the surface to 7,760 feet. The acreage excluded from the North Cook Inlet Unit eventually lapsed. 5~ Subsequent leases comprised of the portions ADL 17593, ADL 18749 and ADL 18755 excluded from the North Cook Inlet Unit were allowed by their owners to expire without drilling. 6. The area that comprised tracts ADL 369100 and 369101 was originally part of tracts ADL 17593, ADL 18749 andADL 18755. 7. In 1986 Danco, Inc. ("Danco") acquired leases ADL 369100 and 369101. Decision on Remand February 8, 2002 Page 11 of 25 3539 o , 10. 11. 12. In 1988 Danco assigned all working interest in those leases to Amoco Production Co., reserving an overriding royalty interest, fractions of which were assigned to others including Monte Allen. In 1992, through drilling an oil exploratory well on an adjacent lease, ARCO eamed 100% of the working interest in ADLs 369100 and 369101, among a number of other leases from Amoco Production Company. In 1992 Arco and Phillips cross-assigned interest in a number of leases including ADLs 369100 and 369101 in a cooperative effort to assess the deep oil potential in the North Cook Inlet general area. The Arco-Phillips parmership conducted exploratory drilling on leases other than ADLs 369100 and 369101. Subsequent to the exploratory drilling the Arco-Phillips parmership wrote off investment and discontinued the oil exploration activity in the North Cook Inlet. 13. On August 31, 1996, the primary terms of ADL's 369100 and 369101 expired. 14. In April 1999 and August 2000 portions of lands comprising ADL's 369100 and 369101 were reoffered for lease by DNR. These leases received no bids. II. Histo~. of Exploration and Delineation of Structure and Reservoirs 15. In 1962 initial drilling on the North Cook Inlet structure was an-oil exploration well, the Cook Inlet State 17589 No. 1, located in a near crestal position on a 2-D seismically delineated structure. 16. Early well results identified gas accumulations in the Sterling and the Beluga Formations. 17. The gas bearing sandstones in the Sterling Formation were named the Cook Inlet Sands and consist of a series of thick and highly porous sands that are continuous over large areas. 18. The Beluga Formation sands, which underlie the Sterling Formation, are thin, clay rich, and fine grained, and are largely discontinuous across the 25 square mile area of well control. 19. A common gas accumulation within the upper portion of the Cook Inlet Sands with a gas water contact of 4260 feet below sea level was delineated with test, borehole geophysical and mud log data in wells Pan Am Cook Inlet State 17591 No. 1, Cook Decisic~n on Remand February 8, 2002 Page 12 of 25 3540 Inlet State 17589 No. 1, Cook Inlet State 17589 No. I-A, Cook Inlet State 18740 No. 1, Pan Am State 18741 No. 1, Pan Am State 18741 No. 2 and the Shell North Cook Inlet No. 1 well. This accumulation occurs within what is referred to as the Cook Inlet No. 1 Sand. 20. Test, borehole geophysical and mud log data in wells Pan Am Cook Inlet State 17591 No. 1, Cook Inlet State 17589 No. 1, Cook Inlet State 17589 No. l-A, Cook Inlet State 18740 No. 1, Pan Am State 18741 No. 1, Pan Am State 18741 No. 2 and the Shell North Cook Inlet No. 1 well demonstrated gas accumulations in the Beluga Formation "B" and "C" sands that do not have common gas water contacts. 21. The Cook Inlet State 17591 No. 1 and Pan Am State 18741 No. 1 wells were dry holes. The acreage on which they were drilled was subsequently contracted out of the NCIU. 22. Gas water contacts in the Beluga Formation reservoirs have not been directly observed and are estimated from "highest known water" and "deepest known gas" data established by well control in these reservoirs. 23. The areal extent of the Beluga Formation and Cook Inlet Sand gas accumulations were shown to be structurally controlled, i.e. sands that were deposited in a planar attitude were subsequently deformed by compressional forces into a concave upward closed structure in which the gas was trapped. 24. The Beluga Formation gas accumulation was shown by well, test production, and seismic data to be present only in the highest portion of the structure. 25. The Cook Inlet No. 1 Sand gas accumulation was shown by well, test production, and seismic data to be the most areally extensive of the gas reservoirs in the NCIU. 26. DNR approved the formation of a participating area conforming to the portion of the North Cook Inlet structure that well control showed to be above the Cook Inlet Sand gas water contact. DNR later required the NCIU to be contracted to the extent of the participating area. 27. Contrary to the petitioners' suggestion or implication that the boundary of the North Cook Inlet Unit may have been drawn so as to exclude the Danco leases from participating in unit production draining those leases, the facts show just the opposite: namely, that the boundary of the North Cook Inlet Unit was contracted to conform to the presence of productive gas reservoir, and the area later designated tracts ADL 369100 and 369101 (the Danco leases) was excluded from the Unit because that area was believed not to contribute to unit production. Decision on Remand February 8, 2002 Page 13 of 25 3541 28. Engineering studies by the operator in the 1960's indicated that wells of sufficient density and reach located on a single platform near the structural apex were capable of efficiently producing gas from the structurally controlled gas accumulation. 29. In the course of the 1967 Conservation Order No. 40 hearing before the Alaska Oil and Gas Conservation Committee, well and seismic data were presented that defined the stratigraphic and areal extent of the gas accumulations in the NCIU. 30. In Conservation Order No. 40, issued in 1967, the Alaska Oil and Gas Conservation Committee designated the combined interval of the Cook Inlet Sands and the Beluga FOrmation gas accumulations as a gas pool called the Tertiary System Gas Pool. The vertical limits of the pool were defined as the correlative interval from 3500 to 6200 feet in the Pan American Petroleum Corp. Well North Cook Inlet State 17589 No. 1. 31. The areal limits estimated for the Tertiary System Gas Pool at that time' did not extend under the lands that. later became the Danco leases,-except for several small comers (sometimes referred to as "notches" in the present hearing) of what later became ADL 369101. 32. In Conservation Order No. 40, the Alaska Oil and Gas Conservation Committee approved a well spacing plan for the Tertiary System Gas Pool based on a single platform. 33. 34. Regular production from the Tertiary System Gas-Pool began in March 1969 and has continued to the present day. In 1993 Phillips Petroleum Company and ARCO Alaska, Inc. acquired a 3-D seismic survey over the NCIU. The survey was designed, acquired and processed using the latest technology available to image both the structural and stratigraphic details in the subsurface. The survey was conducted to better def'me a deeper part of the structure, known as the Tyonek Deep play; however it also provides important data on the Tertiary System Gas Pool. 35. Several wells drilled into the Tyonek Deep play confmned the existence of an oil reServoir under the NC1U in the Sunfish and North Foreland formations, below approximately 11,000 feet in depth. 36. The Tyonek Deep reservoir has not been brought into regular production. There is no plan of development for this reservoir, no current plan of operations, and no existing participating area. 37. After spending over 300 million dollars on Tyonek Deep exploration, Phillips and ARCO wrote off those expenditures and ceased exploration activity. Decision on Remand February 8, 2002 Page 14 of 25 3542 IIL What Well and Production Data Show about the Extent of the Tertiar~ System Gas Pool Central Facts 38. Additional well and production data available since 1967, including data from wells drilled since that time, have supported and verified the data relating to the distribution of productive gas reservoir that was presented in the Conservation Order No. 40 hearing. 39. Wells drilled to the Sterling Formation at locations where the top of the Cook Inlet No. 1 Sand is deeper than 4260 feet subsea have not encountered gas. 40. The most areally extensive gas water contact in the Sterling Formation has been shown to occur at 4260 feet subsea. This gas water contact occurs in the Cook Inlet No. 1 Sand. 41.Gas bearing sands in the Beluga Formation, which occurs deeper in the Same structure that contains the Sterling Formation, are confined to a much less extensive area within the perimeter of the Cook Inlet No. 1 Sand gas accumulation. 42. The well and production data, even without considering Phillips' 3-D seismic data, do not show that the Tertiary System Gas pool extends under the Danco leases. Laot}i Testimony on Gas Water Contact 43.Mr. Lappi's testimony incorporated the statement that the Cook Inlet State 18741 #1 well "penetrated a gas reservoir and was declared a gas well". 44. Mr. Lappi also stated, "This gas well places the gas-water contact at a minimUm of at least 100 feet lower than the existing map on the top Cook Inlet Sand No. 1 shows it." 45. 46. Extending the gas water contact in the CoOk Inlet Sand No.1 100 feet deeper would increase the likelihood the Danco leaseS had been drained by NCIU gas production. Mr. Lappi did not cite subsurface data in support of his statementS~ about the Cook Inlet State 18741 #1 well. 47. The Cook Inlet State 18741 #1 well was plugged and abandoned as a dry hole. 48. Due to mechanical difficulties with the COok Inlet State 18741 #1 open hole logs were not obtained in the well: However, the well was mud logged. Decision on Remand February 8, 2002 Page 15 of 25 3543 49. The Cook Inlet State 18741 #1 gas chromatograph and mud log establish that the Cook Inlet Sand interval in this well did not have gas saturation sufficient to warrant further evaluation. 50. Mr. Lappi's claim that the Cook Inlet State 18741 #1 well shows a lower gas water contact in the Cook Inlet No. 1 Sand is contrary to data from the Cook Inlet State 18741 #1 well and other wells and is erroneous. 51. 52. 53. 54. 55. 56. Givens Testimony on Gas Water Contact Dr. Givens claimed that perforation and well log data showed a gas water contact at 6794' subsea for the Beluga sands in well A-12. He applied the claimed 6794' subsea gas water contact to a map of the Beluga B sand to imply that the productive.limit of the Beluga B sand extends beyond the limit mapped for Conservation Order No. 40. The sand that is equivalent to the Beluga B is located at a depth of 4546' subsea in Well A-12, some 2250' shallower than the Beluga U sand where Dr. GiVens claims there is a gas water contact. Dr. Givens applied an unsubstantiated gas water contact depth from a deeper Beluga U sand to conclude the area of the Beluga reserVoir is much larger. It is fallacious to apply data from different and deeper sand level (6794' subsea) to a structural map of the Beluga B, which is at 4546' subsea, in well A-12 and is not in pressure communication with the deeper sand. Also, Dr. Givens did not present the data to substantiate the claiTM of a gas water contact at 6794' subsea in well A-12 in the form of an electric log trace, test data or production data. The Beluga U Sand has never been shown to contain producible gas. Dr. Givens made a similar claim to infer that the Beluga C sand has a gas water contact common to the Beluga B sand. This claim is erroneous, since the Beluga B sand is not in pressure communication with the Beluga C sand. Dr. Givens acknowledged that the Beluga sands were not in pressure communication with each other. Givens Testimony on Projection of Top of FOrmation 57. One of the ways by which Dr. Givens attempted to show that the gas accumulation in the Sterling Formation extends under the Danco leases was to extrapolate lines Decision on Remand February 8, 2002 Page 16 of 25 3544 connecting the tops of three Sterling Formation gas' sands (actually three benches within the Cook Inlet No. 1 Sand) in the Pan Am 17589 #1 well, located near the highest point in the reservoir, on the southern flank of the structure, and the Shell North Cook Inlet gl well, located to the northeast, on the northern flank of the structure. (His testimony is confusing because he called the upper bench within the Cook Inlet No. 1 Sand the "A" Sand, he called the second bench within the Cook Inlet No. 1 Sand the "B" sand, and he called the bench immediately below that the "Cook Inlet No. 1" Sand.) Dr. Givens extrapolated all three lines to a point beyond the Shell well where they intercepted the -4260 subsea datum. He did a similar extrapolation using the A-10 well and the Shell North Cook Inlet gl well. The intersection of the lines with the -4260 datum was different for each pair of wells. · 58. Dr. Givens testified that the top of the gas sands in the latter well is at a depth of 3948 feet below sea level, which is 101 feet higher than the depth.to the top of the gas sands as determined by Phillips in estimating the extent of the reservoir in the 1960's. 59. Dr. Givens' extrapolation technique projected a reservoir limit that extends under the Danco leases. 60. Dr. Givens testified that the basis for his disagreement with Phillips regarding the depth of the top of the Sterling Formation gas sands in the Shell North Cook Inlet gl well was that Phillips interpreted the well dam as showing depths measured from the sea floor while Dr. Givens interpreted the well data as showing depths measured from the kelly bushing on the drill rig, 101 feet above the sea floor. 61. The kelly bushing is the drive mechanism for the drill string and is typically the reference elevation for wellbore measurements on a stationary drill rig. 62. The mud log and some wireline log headers from the well and drilling reports filed by the operator state that measurements are referenced from the sea floor, not from the kelly bushing for the Shell North Cook Inlet gl well. 63. 64. Dr. Givens chose to ignore the information in the Shell North Cook Inlet #1 well records that stated the reference datum for well bore measurements in this well. He referred instead to certain of the records that omitted a specific description of the reference datum. Dr. Givens' interpretation of the reference datum is not persuasive. Although it is common for depth measurements to be taken from the kelly buShing on stationary drilling rigs, there is a good reason why this was not done in the case of the Shell North Cook Inlet gl well: namely, the well was drilled from a floating drillship rather than a fixed platform. The kelly bushing would have risen and fallen with the substantial tides in Cook Inlet, so using the kelly bushing as the reference point for measuring and stating depths would have caused complications. Decision on Remand February 8, 2002 Page 17 of 25 3545 65. 66. 67. 68. Dr. Givens' interpretation of the depth of the top of the Sterling Formation gas sands in the Shell North Cook Inlet #1 well is erroneous. The validity of Dr. Givens' extrapolation involving the Pan Am 17589 #1 well also depends on the assumption that the Pan Am 17589 #1 well and the North Cook Inlet #1 well are located on the same flank of the structure, and that the structural dip between and beyond them is linear. In fact, the two wells are located on opposite flanks of the structure, which means that the structural dip between the two wells is necessarily non-linear. Dr. Givens' extrapolation technique also fails to take into account other available well and seismic data that generally accepted petroleum engineering and petroleum geology methods would require be considered. Dr. Givens' projection of the limit of the reservoir based on his extrapolation technique is erroneous. Givens Testimony on Doubling of Estimated Gas Reserves 69. 70. Another way that Dr. Givens attempted to show that productive gas reservoir extends under the Danco leases was presented in his testimony that estimates of recoverable gas in the NCIU have essentially doubled since the pool was discovered in 1965 and that this doubling indicates that the pool extends under the Danco leases. Dr. Givens prepared a map showing that the "areal size of the North Cook Inlet Unit natural gas pool has been increased by a factor of approximately two to account for the increased ultimate recoverable gas reserves." It is not a generally accepted petroleum engineering technique to determine reservOir limits based on estimates of reserves. The process works the other way: volumetric estimates of reserves can be calculated based on known reservoir area and thickness and other reservoir characteristics. 71. The most that Dr. Givens' type of approach could legitimately be used for is to indirectly test the plausibility of reservoir limits determined according to standard techniques (i.e., based on well log data, well test data, and seismic data). The evidence shows that Dr. Givens' reserves estimates do not cast any doubt on the reservoir limits as determined in the 1960's and validated by subsequent well and seismic data. 72. Dr. Givens mistakenly assumes that more gas reserves means a greater areal extent of the reservoir. In fact, the volume of gas contained in a reservoir depends.on several factors, including not only the area (length and width) but also the thickness of the productive interval and the gas saturation (expressed as 1 minus water saturation, 1- Decision on Remand February 8, 2002 Page 18 of 25 3546 73. Sw), net to gross sand ratio, porosity, and gas formation volume factor at initial and f'mal reservoir conditions of the productive sand interval(s). Evidence submitted at the hearing shows that the thickness of the productive intervals in both the Stealing and Beluga formations is now known to be substantially greater than was apparent or counted at the time of initial field development. In addition, there are intervals that were initially counted as productive that have produced more gas than expected. Dr. Givens himself demonstrated that his estimated increase in NCIU reserves could be easily accounted for without increasing areal extent, solely by using reasonable estimates for net pay thickness. Based on data from Commission reports in 1972 and 1999 (Givens Ex. VIII-3 to VIII-8), Dr. Givens estimated an increase in total recoverable NCIU gas from 1.119178 TSCF to 2.928426544 TSCF with no increase in reservoir area (the Sterling and Beluga areas are 8300 acres and 2500 acres respectively in both years) but with an increase in net pay thickness from 130 feet to 310 feet in the Sterling formation and from 30 feet to 160 feet in the Beluga formation (from 160 feet to 470 feet total in the Sterling plus the Beluga formations). 74. Dr. Givens testified that a Phillips Exhibit, SJW-12, showed a net pay increase in one NCIU well, Cook Inlet 17589 No. 1, of only 29% over a 1967 estimate. But he ignored the fact that a nearby well, NCIU A-06, presented on the same exhibit, showed a net pay increase of nearly 78%. In addition, the net pay represented even by the 29% increase (510') represents more net pay than Dr. Givens used (470') for his reserves estimate of 2.928426544 TSCF in 1999. 75. Givens Exhibit 26 presents a stmun~ of perforations from initial completion to present day and documents new perforations added and former perforations squeezed. Inspection of the exhibit indicates that 994 measured feet of Sterling (Cook Inlet) Formation and 270. measured feet of Beluga Formation perforations were added to NCIU wells since their initial completion. 76. Dr. Givens apparently understated the increases in perforations by ignoring the feet of perforations that have been squeezed (i.e., sealed with cement after depletion). This is incorrect, since all productive intervals, whether previously produced or currently producing, contribute to the total volume of gas recovered and recoverable from the reservoir. 77. Feet of perforations are generally not equivalent to feet of net pay. Net pay represents the thickness of productive interval. Often only a fraction of a productive interval is perforated in order to produce gas from that interval. 78. Dr. Givens' comparison of earlier and recent reserves estimates is also flawed. In stating that reserves have essentially doubled, Dr. Givens was comparing an early deliverability projection that was based on very little data to later material balance analyses. Decision on Remand February 8, 2002 Page 19 of 25 3547 79. The deliverability projection,contained in an exhibit in the 1967 Conservation Order No. 40 hearing, estimated gas deliverability from 1969 through 1983 based on the Sterling Formation Sand represented by State 18740 Well No. 1 interval 4140-4180 (40 feet of sand). At the time the deliverability calculation was done, there were 7 wells drilled and there was no significant production. The deliverability estimate was done to illustrate pressure decline assuming constant gas production for 15 years. There was no accounting for deliverability from the Beluga formation in this estimate and the estimate is based on a 40-foot interval of the Stealing Formation. Dr. Givens used this exhibit to calculate deliverable reserves of 1.19 TSCF. Not surprisingly, this figure is low compared to more accurate estimates using material balance analysis and more complete data. 80. To derive reserves from a deliverability estimate and treat them as equivalent to estimates from material balance analysis, as Dr. Givens did, is a fundamental misapplication of this data. 81.Neither Phillips nor its partners made any claims of gas in place ("GIP") or recoverable gas reserves during the hearing for Conservation Order No. 40 in May 1967. 82. The material balance analyses referred to by Dr. Givens were presented in the Geoquest Report, Proven Reserve Assessment Cook Inlet, Alaska Effective January_ 1, 1996, (Givens Exhibit XVI - Reference 3). The Geoquest Report relied on the material balance technique to estimate proven reserves that are in communication with producing wellbores. The evidence of communication is the measured pressure and volumes of gas produced from each well. Material balance analysis is the generally accepted standard petroleum engineering method to determine or prove gas reserves for the purpose of sales, contracts, and establishing equity, The volume of gas produced is plotted versus pressure measured at the time divided by the gas deviation factor to develop a trend to predict GIP and recoverable GIP. 83. Contrary to the suggestion that reserves estimates were recently doubled, the Geoquest Report indicates that data from as early as 1975 (Exhibit VIII-15) established a material balance trend that projects recoverable reserves of 2.36 TSCF, with GIP of 2.72 TSCF. The report found that 1.049 TSCF of gas remained in the Sterling and Beluga Formations in communication with the wells based on material balance calculations. Ultimate recoverable reserves are determined by adding cumulative production to remaining, which totals 2.36 TSCF. The Geoquest Report also concluded there were approximately 0.115 TSCF of undeveloped reserves based on analogy and additional compression. (Exhibit XVI - Reference 3, Reserve Evaluation Worksheet). 84. Utilizing the same Geoquest data and extrapolating back to day one of production, a reservoir pressure very close to that actually measured can be demonstrated. This Decision on Remand February 8, 2002 Page 20 of 25 3548 technique indicates the NCIU ultimate recoverable reserves have not changed significantly since the beginning of production. Any statement referring to a doubling of reserves is incorrect and ignores actual data. Givens Testimony on Pressure Decline 85. Dr. Givens also presented a graph (Exhibit 24, p. 24-1) of bottom hole pressure (expressed as p/z, pressure divided by gas deviation factor) versus cumulative production as evidence that the Danco leases are being drained by NCIU production. 86. The Exhibit 24 graph is a material balance estimate and cannot be used to estimate area drained. A material balance such as this will only validate volume. There are no references to thickness or area in the material balance method. Well data in the form of electric logs, cores, well test and seismic data are the only information that can be used to validate area and thickness of the gas producing reservoir sands. 87. Givens Exhibit 25 illustrates that pressures measured in the same reservoir reflect the same level of depletion and proves that at least some of the referenced sands are in communication. Discontinuous sands that are not in communication with their offset neighbor wells will have more or less depletion. The data simply have no bearing on the Danco leases. IV. What Seismic Data Show about the Extent o,f the Tertiar~ S~stem Gas Pool Central Facts 88. 3-D seismic surveys such as Phillips and ARCO acquired over the NCIU are acquired at much greater density than 2-D seismic data and therefore require much less extrapolation between control points. The seismic data presented in the present hearings is of a much better quality and precision than that presented in the Conservation Order No. 40 hearing. 89. Migration (identifying the frequency, polarity, amplitude, and location of subsurface acoustic energy sources) of 3-D seismic is more robust than 2-D seismic techniques, particularly in areas like the NCIU where sediments have complex depositional texture and are structurally deformed. 90. By calibrating seismic data with geologic events recorded on borehole geophysical logs from wells with reflections seen on seismic sections, the seismic signature of well data from producible gas saturations can be compared with'data from wells containing only brine saturations within a given stratigraphic interval. These comparisons make it possible to identify and map characteristics of seismic data that Decision on Remand February 8, 2002 Page 21 of 25 3549 91. 92. 93. 94. 95. may be indicative of gas saturations. These techniques are also critical for converting seismic data from time (seconds) to depth (feet), a conversion necessary for structural interpretation. It is generally accepted in the petroleum industry that utilization of 3-D seismic data combined with well control provides the most accurate method of generating subsurface interpretations. The subsurface interpretations presented by Phillips included rigorous calibration of 3-D seismic with all relevant well data, including NCIU development wells and Tyonek Deep exploratory wells drilled in the unit. This work included characterization of seismic response related to gas saturation for the various NCIU gas producing intervals and depth conversion. A specific amplitude response to gas saturation in the Cook Inlet Sands (Sterling) was documented and shown to be present on portions of the NCIU structure above the Cook Inlet No. 1 Sand gas water contact determined by well data. The seismic data, as calibrated by well and production data, demonstrate that the areal extent of the Cook Inlet No. 1 Sand gas accumulation is marginally less extensive than estimated at the time of the 1967 Conservation Order No. 40 hearing, when the reservoir limit was shown as crossing small comers ("notches") of the area that later became lease ADL 369101. The seismic data, as calibrated by well and production data, demonstrate persuasively that the Danco leases are structurally lower than 4260 feet subsea, the depth of the gas water contact in the most areally extensive NCIU gas reservoir. The Danco leases do not contain any portion of any productive gas reservoir within the NCIU. Allen Testimony 96. Mr. Allen presented a facsimile of a Cook Inlet seismic line from a publication as evidence that Phillips had mismapped the NCIU structure. The .exact location of the facsimile was unknown to him at the time. The evidence Mr. Allen presented is inadequate to support his contention. Lappi Testimony 97. Mr. Lappi presented an interpretation of the seismic data on the Danco leases indicating intervals with amplitudes lower than-10,000 units (which he called Decision on Remand February 8, 2002 Page 22 of 25 3550 98. 99. 100. "amplitude anomalies") and referring to those "amplitude anomalies" as evidence of producible gas. NCIU well control indicates the amplitude anomalies reported by Mr. Lappi likely represent coals or other seismic phenomena besides gas accumulations. Mr. Lappi provided no evidence that amplitudes lower than -10,000 units were uniquely caused by sandstones containing commercially producible gas saturations. The seismic evidence shows that the intervals where Mr. Lappi interpreted amplitude anomalies under the Danco leases are not continuous with the intervals containing productive gas accumulations in the NCIU. . Mr. Lappi's interpretation of the seismic data was flawed by such fundamental errors as ignoring germane check shot surveys and other well data and changing amplitude scaling colors between exhibits. 101. 102. 103. 104. 105. 106. V. Evidence as to the Extent of the T~onek Deep Reservoir Mr. Lappi expressed the opinion that the Tyonek Deep reservoir possibly extends under the Danco leases. In support of that opinion he referred to certain wells drilled into the reservoir and to a structure map and example seismic line generated by ARCO for public distribution at one time. The wells he cited are the ARCO Sunfish Number 1, Sunfish Number 3, the North Foreland Number 1, and the Shell North Cook Inlet State Number 1 wells, which DNR has stated are capable of producing in paying quantities. These wells are located in the NCIU between approximately one and five miles from the nearest Danco lease line. No wells have been drilled under the Danco leases. Lappi's testimony raised the possibility that the publicly distributed ARCO interpretation showing "potential" reserves under the Danco leases may be understated. Lappi did not present any independently interpreted subsurface data in support of his conjectures. Mr. Lappi's exhibits and testimony do no more than suggest the possibility that the Tyonek Deep reservoir may extend under the Danco leases. The evidence does not show that any oil reservoirs extend under the Danco leases. Decision on Remand February 8, 2002 Page 23 of 25 3551 CONCLUSIONS 1. The Tertiary System Gas Pool is the only producing pool in the North Cook Inlet Unit. 2. In addition to the Tertiary System Gas Pool, the Tyonek Deep reservoir is the only other known oil or gas pool in the North Cook Inlet Unit. 3. The Danco leases do not contain any portion of the Tertiary System Gas Pool. 4. The Danco leases have not been shown to contain any portion of the Tyonek Deep reservoir. , As to the Tertiary System Gas Pool, there has been no showing that the unitized management, operation and further development of the pool or portion of the .pool is reasonably necessary in order to effectively carry on pressure control, pressure- maintenance or repressuring operations, cycling operations, water flooding operations, or any combination of these, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool. . As to the Tertiary System Gas Pool, there has been no showing that one or more of the unitized methods of operation as applied to the pool or portion of it is feasible, and will prevent waste and will with reasonable probability result in the increased recovery of substantially more oil and gas from the pool than would otherwise be recovered. . As to the Tertiary System Gas Pool, there has been no showing that the estimated additional .cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered. As to the Tertiary System Gas Pool, there has been no showing that the unitization and adoption of one or more of the unitized methods of operation is for the common good. e As to the Tyonek Deep reservoir, there has been no showing that the unitized management, operation and further development of the pool or portion of the pool is reasonably necessary in order to .effectively carry on pressure control, pressure- maintenance or repressuring operations, cycling operations, water flooding operations, or any combination of these, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool. 10. As to the Tyonek Deep reservoir, there has been no showing that one or more of the unitized methods of operation as applied to the pool or portion of it is feasible, and will prevent waste and will with reasonable probability result in the increased Decision on Remand February 8, 2002 Page 24 of 25 3552 recovery of substantially more oil and gas from the pool than would otherwise be recovered. 11.As to the Tyonek Deep reservoir, there has been no showing that the estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered. 12. As to the Tyonek Deep reservoir, there has been no showing that the unitization and adoption of one or more of the unitized methods of operation is for the common good. 13.None of the statutory requirements for an order requiring expansion of the North Cook Inlet Unit have been met. NOW THEREFORE IT IS ORDERED that: .. 1. Pursuant to the Final Decision on Applications for Rehearing, Conservation Order 39 lA is superseded and replaced by this order. 2. The petition for an order of unitization is denied. 3. The Commission will address the allocation of the costs of the hearing under AS 31.05.085 in a separate order. DONE at Aneh~.0~ Alaska, this 8th day of February, 2002. · , .. ? Cammy O4c~sli Taylor, Ch~ ~aska/Oi~i~mj1A3~onservation Commission Daniel T. Seamount, J~., Commissioner Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission I certify that a copy of the above was hand delivered/mailed on February 8, 2002 to each of the following at their addresses of record: C.R. Kennelly, hand delivered Frederic E. Brown, mailed George Kasper, MD, mailed William B. Rozell, hand delivered Barbara Fullmer, hand delivered Daniel Helmick, mailed ~, Warren Z. Buck, mailed Jody J[ ~olombi~'~;pe~,i~_~Staff Assistant This Decision is the f'mal order of the Alaska Oil and Gas Conservation Commission. Any appeal to Superior Court must be brought within 30 days from the date that this decision is mailed or otherwise distributed. Decision on Remand February 8, 2002 Page 25 of 25 3553 #8 -. STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 Re: THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) Conservation Order 391B North Cook Inlet Unit February 8, 2002 DECISION ON REMAND This is the decision on the merits in this case, which involves a petition for a Commission order of unitization under AS 31.05.110. The Commission denies the petition. PROCEDURAL HISTORY AND SUMMARY OF PROCEEDINGS On August 30, 1996, Danco, Inc., and Monte Allen ("petitioners") filed a petition with the Commission asking that two oil and gas lease tracts in which they owned overriding royalty interests (referred to below as the "Danco leases") be "unitized into the North Cook Inlet Gas Unit." The two lease tracts, ADL 369100 and ADL 369101, were located outside of, but adjacent to or near, the existing North Cook Inlet Unit ("NCIU"). On March 7, 1997, the Commission dismissed the petition based on its conclusion that the petitioners had no property interest in the tracts sought to be included in the unit because the leases expired the day after they filed their petition. On June 20, 1997, the Commission reaffirmed that order in a Decision on Rehearing. Following Allen's appeal to superior court, which affu'med the Commission's decision, and then to the Supreme Court, the Supreme Court issued an opinion on May 12, 2000, reversing and remanding the case for a hearing before the Commission on the merits. The Court concluded that the petition was not moot as long as the Commission had the discretion to make a unitization order retroactive to the date the petition was filed, and that "the possibility of retroactivity could not properly be eliminated without 3554 determining the merits of the petition for unitization.''~ returned to the Commission effective August 23, 2000. Jurisdiction over the case was In a procedural order issued September 27, 2000, the Commission determined that it would first hear the issues of whether the tracts should be ordered unitized with the North Cook Inlet Unit and, if so, whether such order should be made retroactive. The Commission deferred determination of the details of a plan of unitization until after a decision was made on the former question, noting that "it may be appropriate to consider at that time whether.., the Commission may and should refer some or all of the details of a plan of unitization" to the Department of Natural Resources. A pre-hearing conference was held on October 12, 2000, and a Pre-Hearing Order was issued by the Commission on October 20, 2000. Public notice of the heating was published on February 10, 2001. In addition, personal notice was effected on all persons known to own interests in the Danco leases or in tracts within the North Cook Inlet Unit. The heating began on March 13, 2001, and continued on March 14 and June 14, 15, 19, and 20, 2001 (with scheduling conferences April 17 and April 23, 2001). Appearing as parties, in addition to the petitioners, were Phillips Petroleum Company and Phillips Alaska, Inc. (collectively "Phillips"), all represented by counsel. Phillips owns the working interest in the tracts within the NCIU and owned the working interest in the Danco leases. Both sides submitted pre-filed written testimony and exhibits and called witnesses who explained, and in some instances supplemented, their pre-filed testimony and stood for cross-examination. Portions of the hearing dealing with proprietary seismic data were conducted in camera. Following the submission of post- heating briefs by both sides, oral argument was heard on November 2, 2001. The Commission issued a decision on December 3, 2001, as Conservation Order 39 lA, which was followed by applications for reheating. Pursuant to the Commission's Final Decision on Applications for Rehearing issued this date, which is incorporated herein by reference, Conservation Order 39 lA is superseded and replaced by the present Decision on Remand, Conservation Order 391B. Allen v. Alaska Oil and Gas Conservation Corem'n, 1 P.3d 699, 705 (Alaska 2000). Decision on Remand February 8, 2002 Page 2 of 25 3555 ISSUES FOR DECISION Standing Phillips argues that the petitioners do not have standing to petition for involuntary unitization because they do not own any working interest in the leases. Phillips notes that in the Commission's 1997 Decision on Rehearing, the Commission stated: The Commission has previously decided not to reject Danco's petition on the ground that it owned no working interest in the leases. This decision, however, was made without notice to other interested parties and is subject to being revisited at the request of an interested party. Because the Supreme Court directed that the petitioners be given a heating on the merits, the Commission has not revisited its earlier decision. Likewise, Phillips urges that the Commission "decide the case on the facts so that the matter is f'mally resolved on the merits." In this order, the Commission decides the petition on its merits and does not address the standing issue. We observe, however, that the issue is open to further Commission consideration in any future petition for involuntary unitization brought by a person other than a working interest owner. Standards for InvolUntary Unit Expansion Extent of Productive Reservoir The petitioners have invoked the Commission's involuntary unitization powers under AS 31.05.110, seeking to expand the existing North Cook Inlet Unit to include two tracts located outside the trait. The existing unit was not formed by order of the Commission; rather, it is a voluntary unit whose creation was approved by the Department of Natural Resources under AS 38.05.180(p). Leaving aside any potential difficulties relating to the apparently overlapping authority of the two agencies concerning expansion of such a unit,2 AS 31.05.110(o) directs the Commission to apply the same procedures and standards to the "enlargement [of a unit area] to include adjoining portions of the same pool''3 as are applied to the creation of a unit in the first 2 See 1996 Op. Att'y Gen. (663-96-0121; July 3) (Re: AOGCC/DNR Unitization Jurisdiction). 3 A "pool" is "an underground reservoir containing, or appearing to contain, a common accumulation of oil or gas. Each zone of a general structure which is completely separated from any other zone in the structure is covered by the term 'pool.'" AS 31.05.170(11). The Commission's regulations use the term "reservoir" as well as "pool" and provide that the term "reservoir" has the same meaning as "pool." 20 AAC 25.990(59). - Decision on Remand February 8, 2002 Page 3 of 25 3556 place.4 Perhaps the most decisive of those standards for present purposes is that set out in AS 31.05.110(c): Only so much of a pool or pools as has been defined and determined to be productive on the basis of information available to the commission may be so included within the unit area. There was no disagreement among the parties that this standard- or something like it - must at a minimum be met in order for the petitioners to prevail. However, at times the petitioners or their witness seemed to assume or contend that instead of AS 31.05.110(c), the applicable standard is that found in one of DNR's regulations or in the unit agreement that established the NCIU. The DNR regulation in question, 11 AAC 83.351 (c), provides, in relevant part: A participating area must be expanded to include acreage reasonably estimated through use of geological, geophysical, or engineering data to be capable of producing or contributing to the production of hydrocarbons in paying quantities... The unit agreement uses similar language. Whatever uncertainty might exist about the respective jurisdictions of the two agencies regarding unitization of state oil and gas leases, there can be no doubt that the Commission's authority is limited to administering AS 31.05.110 and does not extend to administering AS 38.05.180. The latter authority is granted to the Commissioner of Natural Resources.5 Nor does the Commission have the authority, as the petitioners appear to suggest, to order specific performance of a contractual provision in the North Cook Inlet Unit Agreement. In sum, a necessary condition for the Commission to order one or both of the Danco leases included in the NCIU is a determination under AS 31.05.110(c) that a productive pool within the NCIU extends under one or both of those leases.6 4 The superior court so held in Burglin v. Alaska Oil and Gas Conservation Comm'n, No. 3AN-82-9250, Order denying summary judgment, at 7 (Dec. 19, 1983): "[W]hether a petition is filed for involuntary creation of a unit or for an involuntary enlargement of an existing unit, the four criteria set forth in Subsection 110(b) apply." 5 See, e.g., AS 31.05.180(p). It is worth noting that shortly after this case was remanded to the Commission, DNR invited the petitioners to apply for expansion "[u]nder the terms of the NCIU Agreement and applicable statutes and regulations." Letter from Kenneth A. Boyd to Danco, Inc., and Monte Allen (July 25, 2000). The petitioners declined. Letter from Paul D. Kelly to Dan Seamount (August 25, 2000). 6 Even if the DNR or unit agreement standard were applicable here, the Commission's findings in this case exclude the possibility that either of those standards has been met. Decision on Remand February 8, 2002 Page 4 of 25 3557 Additional Standards In addition to the requirement that only productive reservoir acreage may be included within the unit area, the statute establishes four other standards for involuntary unitization: namely that the Commission must f'md that (1) the unitized management, operation and further development of a pool or portion of a pool is reasonably necessary in order to effectively carry on pressure control, pressure-maintenance or repressuring operations, cycling operations, water flooding operations, or any combination of these, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool; (2) one or more of the unitized methods of operation as applied to the pool or portion of it is feasible, and will prevent waste and will with reasonable probability result in the increased recovery of substantially more oil and gas from the pool than would otherwise be recovered; (3) the estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered; and (4) the unitization and adoption of one or more of the unitized methods of operation is for the common good .... 7 As Phillips notes, the petitioners made no attempt to show that these standards have been satisfied. Rather, the petitioners asserted that there is no need for the Commission to make the findings set out in this subsection because such findings were previously made in connection with the initial creation of the NCIU. That assertion is plainly mistaken: since, as noted above, the NCIU is a voluntary unit, there was never any occasion for the Commission or its predecessor agency to address the requirements of involuntary unitization. AS 31.05.110 does not require the f'mdings in question to be made in order for tract owners to form a voluntary unit.8 Where a unit has been formed by the Commission's compulsory powers and on the basis of the Commission's findings that the criteria of AS 31.05.110(b) have been met, an argument might be made that it is not necessary to revisit those criteria merely in order later to expand the unit to ensure that the entire pool is included.9 However, the Commission does not need to decide that question here. The statute clearly restricts application of the involuntary unitization power to pools where, among other things, "the unitized management, operation and further development of [the pool] is reasonably 7 AS 31.05.110(b). 8 DNR applies certain criteria under AS 38.05.180(p) when it decides whether to approve a voluntary unit of state oil and gas leases, but those criteria are different from and broader than those set out in AS 31.05.110(b). See 11 AAC 83.303. For example, DNR may approve a unit at the exploratory stage, while exercise of the Commission's involuntary unitization authority presupposes that a pool has been discovered and shown to be productive. 9 But the Burglin decision, supra note 4, seems to be to the contrary. Decision on Remand February 8, 2002 Page 5 of 25 3558 necessary in order to carry on . . . [a] form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool . . . [and] the estimated additional cost, if any, of conducting such [joint] operations will not exceed the value of the additional oil and gas so recovered...,,]0 Since no £mdings have previously been made to this effect for any pool within the NCIU, the Commission would have to make those findings now in order to exercise its involuntary unitization powers to expand the unit. Multiple Pools In its Pre-Hearing Order, the Commission directed the parties to file Pre-heating memoranda outlining, among other things, their positions with respect to whether the five standards enumerated above are met "[flor each pool for which unit expansion is sought.''~] This reflected the Commission's understanding that AS 31.05.110 deals with involuntary unitization on a pool basis: i.e., where tracts overlie more than one pool, unitization of a particular pool does not necessarily mean that the tracts are unitized with respect to another pool. Rather, each pool must be evaluated individually with reference to the statutory criteria for involuntary unitization. The statute is explicit in its focus on a specific pool and provides that "[e] ach unit and unit area may be limited to all or a portion of a single pool.'']2 This is consistent with the general approach to involuntary unitization followed in other states.~3 Most of the petitioners' testimony addressed the extent of the producing gas reservoir. However, they also presented testimony concerning whether any deeper oil reservoir(s), known as the Tyonek Deep reservoir or the Sunfish prospect, may extend beyond the NCIU under their leases. The Tyonek Deep reservoir was never brought into regular production, and its working interest owners decided not to develop it. The Commission earlier pointed out that it had grave doubts whether the question of involuntary unitization of such a reservoir could be ripe for consideration.TM Moreover, the petitioners' potential property interest in the Tyonek Deep reservoir is entirely dependent on their gaining retroactive unit expansion with respect to the producing gas reservoir. For it is only by virtue of the allocation of unit production to the Danco leases as of the date the leases' primary term expired at the end of August, 1996, that those leases might be kept alive or revived and 10 AS 31.05.110(b)(1) and (3). 1] Pre-Hearing Order at 3 (Oct. 20, 2000) (emphasis supplied). 12 AS 31.05.110(c). 13 See 1 Brace M. Kramer & Patrick H. Martin, The Law of Pooling and Unitization ¶ 6.02, at 6-10 (3d ed. 2001). 14 Order Denying Request for Subpoenas at 4 (Nov. 22, 2000). Decision on Remand February 8, 2002 Page 6 of 25 3559 thus potentially benefit from unit expansion as to the non-producing Tyonek Deep reservoir.~5 Thus, as previously noted, the Commission's decision whether or not to expand the unit as to Tyonek Deep cannot affect the expiration of the Danco leases. Nonetheless, the Commission has considered all the evidence presented relating to any reservoir identified within the NCIU, including the Tyonek Deep reservoir. Retroactivity As noted above, one of the subjects of the heating was whether, if the Danco leases were ordered unitized with the North Cook Inlet Unit, such order should be effective retroactively to the date the petitioners' petition was filed.~6 Because, as set out below, the Commission concludes that there is no basis to order unit expansion, the question of effective date is moot and will not be addressed here. Burden of Proof Phillips argues that the petitioners have the burden of proof in this case, citing a unitization treatiseS7 as well as the general proposition that the party seeking a change in the status quo ordinarily has the burden of proof. ~8 The petitioners note that the burden of proof in an involuntary unitization petition has not been addressed by an Alaska court. The Commission agrees with Phillips and believes that the involuntary unitization statute contemplates that a petitioner must show that the conditions for exercise of the involuntary unitization power have been met in order for that power to be exercised. Moreover, in light of the actual evidence in this case, the allocation of the burden of proof is academic, since the Commission finds that Phillips has affmnatively shown that no producing reservoir in the North Cook Inlet Unit extends under the Danco leases. At oral argument, the petitioners advanced the theory that because the Commission had bifurcated the hearing in this matter, with the details of a possible plan of unitization deferred until after a decision is made on whether to order unit expansion, it was sufficient at this stage for the petitioners to show that the NCIU "may" be draining gas from the Danco leases. There is no merit to this notion, which would render futile and superfluous the considerable expenditure of time, effort, and money in connection 15 SeeAllen, supra, note 1, 1 P.3dat702. 16 Procedural Order at 3 n. 1 (Sept. 27, 2000); Supplemental Pm-Heating Order at 2 (Nov. 30, 2000). 17 I Bruce M. Kramer & Patrick H. Martin, supra note 13, at ¶ 11.0511]. ~8 State v. Decker, 700 P.2d 483,485 (Alaska 1985). Decision on Remand February 8, 2002 Page 7 of 25 356O with the hearing that commenced last March and, with several interruptions, ended in June. It is completely clear that it was the purpose of that heating, and not some future heating, to present whatever evidence the parties wished to be considered on the question of whether the statutory conditions for involuntary unit expansion were met in this case. FINDINGS Summary of Testimony and Findings The petitioners presented three witnesses on the substantive issues: Dr. James Givens, a petroleum engineer; David Lappi, a geologist and geophysicist; and Monte Allen, one of the petitioners. In addition, written testimony by David T. Gross was submitted for "rebuttal impeachment purposes." Dr. Givens' testimony focused on the implications of an increase in the estimated gas reserves in the NCIU and on several maps he proposed of gas reservoir limits showing the reservoir to extend under the Danco leases, based on reserves estimates and on certain limited well data. Dr. Givens presented various criticisms of Phillips' analysis of the gas reservoir limits as had been submitted to the Commission's predecessor agency in 1967 in support of an application for a well spacing exception (which was granted in Conservation Order No. 40). His main affirmative contentions were: (1) that a doubling of estimated reserves since the 1960's implies a doubling in the areal extent of the reservoir; (2) that a linear projection of the top of the Sterling reservoir using two pairs of NCIU wells shows the reservoir extending under the Danco leases; (3) that certain well data show a deep gas water contact in the NCIU (in the Beluga Formation) that implies a gas reservoir extending under the Danco leases; and (4) that declining gas pressure in the NCIU over time indicates that the Danco leases are being drained. Dr. Givens also noted (5) that Phillips' 1967 map showed the productive reservoir limit cutting across several small comers of what later became the boundary of lease ADL 369101; however, this point was not a substantial element of the petitioners' case, since Dr. Givens' proposed maps of the reservoir limits extended far beyond the Phillips 1967 gas water contact. The Commission f'mds that Dr. Givens' various, and conflicting, proposed reservoir limits extending into the Danco leases are inconsistent with well control. Notably, at least one dry hole is present within each of the proposed reservoir limits. As to contention (1) above of Dr. Givens, the Commission finds that recent reserves estimates do not support an increase in the areal extent of the reservoir and that, in any event, Dr. Givens' comparison of earlier and recent reserves estimates is flawed. As to contention (2), the Commission finds that Dr. Givens' projection analysis is based on erroneous depth data and is contradicted by more precise and persuasive seismic, well, Decision on Remand February 8, 2002 Page 8 of 25 3561 and production data. As to contention (3), the Commission finds that Dr. Givens' assertion as to a deeper gas water contact is erroneous because it ignores a documented lack of pressure communication among different sands and assumes the productivity of an interval not shown to be productive. As to contention (4), the Commission finds that the evidence of declining gas pressure in the NCIU does not show whether or not the Danco leases are being drained. As to contention (5), the Commission f'mds that more recent seismic data show that the gas reservoir in the vicinity of the Danco leases is less extensive than shown on the Phillips 1967 map and does not extend under any portion of the Danco leases. The Commission also finds that Dr. Givens' testimony was inconsistent and self-contradictory and that his analysis as described in his testimony does not conform to generally accepted professional methods for petroleum engineering and is not credible or persuasive. Mr. Allen presented his interpretations of various well and geological and geophysical data. Mr. Allen's main point in this regard appears to be that the orientation of the NCIU gas reservoir is closer to north-south than shown by Phillips, with the result that the reservoir extends under the Danco leases. Mr. Allen was not qualified as an expert, and the Commission f'mds that his testimony on technical issues is not based on and does not reflect the application of generally accepted geological, geophysical, or engineering principles or techniques, and it is not credible or persuasive. The Commission specifically finds that Mr. Allen was not aware of the location of the seismic data he referred to and that he did not offer (and his data are insufficient to support) a valid interpretation of the structural orientation of the gas reservoir. Mr. Allen also made a number of assertions concerning the alleged misconduct of unit or lease operators or state officials. The Commission finds those assertions to be erroneous or irrelevant to the issues in this case or both. Mr. Lappi's testimony focused on interpreting Phillips' seismic data with regard to whether it indicates gas under the Danco leases. He stated that seismic amplitude anomalies or high-amplitude seismic events probably indicate the presence of gas there, particularly in stratigraphic traps. Mr. Lappi's testimony also addressed the possible presence under the Danco leases of deep gas or oil associated with the Tyonek Deep reservoir. Finally, Mr. Lappi testified that data from one well indicate that a critical gas water contact in the Sterling Formation is approximately 100 feet lower than Phillips' analysis shows. The Commission finds that the seismic data and well control show that areas under the Danco leases that Mr. Lappi characterized as consistent with gas are likely to represent coal deposits or other seismic phenomena besides gas accumulations and that, in any event, those areas are not continuous with the gas reservoirs in the NCIU. Hence, if any gas exists under the Danco leases, it is not in reservoirs that extend from the NCIU. As to the Sterling gas water contact, the Commission fmds that Mr. Lappi misread and misinterpreted or selectively ignored the relevant well data. As to the Decision on Remand February 8, 2002 Page 9 of 25 3562 deeper zones, the Commission f'mds that the evidence in the record does not demonstrate any oil reservoir or deep gas reservoir extending under the Danco leases. The petitioners did not present evidence pertaining to the four unitization standards set out in AS 31.05.110(b). Phillips presented five witnesses: Scott Wilson, a registered petroleum engineer; Blaine Campbell, a petroleum geophysicist; Brian Seitz, a petroleum engineer; Dora Sofia, a senior landman for Phillips; and John Horn, a retired Phillips manager. Mr. Wilson rebutted aspects of the testimony of Dr. Givens and Mr. Lappi on the basis of well control and other evidence. Mr. Wilson addressed reserves estimates and the implications of a doubling of estimated gas reserves in the NCIU, testifying that there are several parameters in addition to a reservoir's areal extent that affect reserves. He explained how an increase in the net pay thickness in the NCIU was sufficient itself to support a doubling of estimated gas reserves. Mr. Wilson described Stealing and Beluga reservoir characteristics, including the lack of continuity and the lack of a common gas water contact among sands in the Beluga formation. He testified that the Cook Inlet No. 1 Sand (Sterling) is the areally most extensive gas reservoir in the NCIU and that its gas water contact is at a depth of 4260 feet below sea level. The Commission finds Mr. Wilson's testimony to be credible and persuasive. Mr. Campbell rebutted aspects of the testimony of Dr. Givens, Mr. Lappi, and Mr. Allen. Mr. Campbell's testimony focused on presenting and interpreting seismic data pertaining to the NCIU, including correlating the seismic data with well control. Mr. Campbell's interpretation incorporated well control from the exploration, delineation, and production wells drilled in the NCIU as well as recently acquired 3-D seismic data. The data Mr. Campbell relied on are more complete and accurate than those used to define the gas pool and unit in the 1960's, due to significant advances in seismic techniques and greater well control. He testified that these data show that the gas accumulation in the Cook Inlet No. 1 Sand is the most areally extensive reservoir in the NCIU and that it does not extend under the Danco leases. Mr. Campbell found that the more recent 3-D seismic data generally confirm Phillips' earlier interpretation of the reservoir limits except that the 3-D data show the structure as having somewhat steeper flanks, so that the limits are not as extensive as earlier thought. In particular, he testified, the 3D seismic data show that the so-called "notches" - i.e., minor areas where the reservoir boundary was earlier shown, as cutting across several comers of what became lease ADL 369101 - are non-existent. The Commission f'mds Mr. Campbell's testimony to be credible and persuasive. Mr. Seitz testified as to the availability of relevant data to the petitioners, the commercial value of Phillips' seismic data, and the development history of the NCIU and the Tyonek Deep reservoir. In particular, he testified that the working interest owners had decided not to develop or produce the Tyonek Deep reservoir and had Decision on Remand February 8, 2002 Page 10 of 25 3563 written off their investments in it. The Commission finds Mr. Seitz's testimony to be credible and persuasive. Ms. Sofia provided written testimony as to the ownership and related history of the NCIU and of leases in and near the NCIU. In particular, her testimony showed that at the time the NCIU was contracted to its current boundaries,. Phillips' ownership interest covered land both inside and outside those boundaries, including the land that later became the Danco leases. The Commission finds Ms. Sofia's testimony to be credible and persuasive. Mr. Horn provided written testimony on the history of the NCIU and rebutted certain testimony by Mr. Allen. He stated that it was the intention of Phillips to include within the NCIU all of the commercially productive gas regions in the area and that Phillips had no reason to exclude from the unit productive lands already leased by Phillips, including the lands within what later became the Danco leases. The Commission finds Mr. Horn's testimony to be credible and persuasive. Specific Findings L Histor~ o, fleases 1. In 1961 and 1962, DNR issued oil and gas leases that included lease tracts covering certain submerged lands in Upper Cook Inlet. 2. DNR approved the unit agreement establishing the North Cook Inlet Unit ("NCIU") in 1967. 3. Leases ADL 17593, ADL 18749, and ADL 18755 were included in the original North Cook Inlet Unit area. 4~ In 1972 DNR required the NCIU to be contracted, excluding portions of leases ADL 17593, ADL 18749 and ADL 18755. Phillips owned an undivided working interest in these leases in the depths from the surface to 7,760 feet. The acreage excluded from the North Cook Inlet Unit eventually lapsed. . Subsequent leases comprised of the portions ADL 17593, ADL 18749 and ADL 18755 excluded from the North Cook Inlet Unit were allowed by their owners to expire without drilling. 6. The area that comprised tracts ADL 369100 and 369101 was originally part of tracts ADL 17593, ADL 18749 and ADL 18755. 7. In 1986 Danco, Inc. ("Danco") acquired leases ADL 369100 and 369101. Decision on Remand February 8, 2002 Page 11 of 25 3564 . e 10. 11. 12. 13. 14. In 1988 Danco assigned all working interest in those leases to Amoco Production Co., reserving an overriding royalty interest, fractions of which were assigned to others including Monte Allen. In 1992, through drilling an oil exploratory well on an adjacent lease, ARCO earned 100% of the working interest in ADLs 369100 and 369101, among a number of other leases from Amoco Production Company. In 1992 Arco and Phillips cross-assigned interest in a mtmber of leases including ADLs 369100 and 369101 in a cooperative effort to assess the deep oil potential in the North Cook Inlet general area. The Arco-Phillips partnership conducted exploratory drilling on leases other than ADLs 369100 and 369101. Subsequent to the exploratory drilling the Arco-Phillips parmership wrote off investment and discontinued the oil exploration activity in the North Cook Inlet. On August 31, 1996, the primary terms of ADL's 369100 and 369101 expired. In April 1999 and August 2000 portions of lands comprising ADL's 369100 and 369101 were reoffered for lease by DNR. These leases received no bids. II. History of Exploration and Delineation o.ieStructure and Reservoirs 15. In 1962 initial drilling on the North Cook Inlet structure was an-oil exploration well, the Cook Inlet State 17589 No. 1, located in a near crestal position on a 2-D seismically delineated structure. 16. Early well results identified gas accumulations in the Sterling and the Beluga Formations. 17. The gas bearing sandstones in the Sterling Formation were named the Cook Inlet Sands and consist of a series of thick and highly porous sands that are continuous over large areas. 18. The Beluga Formation sands, which underlie the Sterling Formation, are thin, clay rich, and fine grained, and are largely discontinuous across the 25 square mile area of well control. 19. A common gas accumulation within the upper portion of the Cook Inlet Sands with a gas water contact of 4260 feet below sea level was delineated with test, borehole geophysical and mud log data in wells Pan Am Cook Inlet State 17591 No. 1, Cook Decision on Remand February 8, 2002 Page 12 of 25 3565 Inlet State 17589 No. 1, Cook Inlet State 17589 No. I-A, Cook Inlet State 18740 No. 1, Pan Am State 18741 No. 1, Pan Am State 18741 No. 2 and the Shell North Cook Inlet No. 1 well. This accumulation occurs within what is referred to as the Cook Inlet No. 1 Sand. 20. Test, borehole geophysical and mud log data in wells Pan Am Cook Inlet State 17591 No. 1, Cook Inlet State 17589 No. 1, Cook Inlet State 17589 No. l-A, Cook Inlet State 18740 No. 1, Pan Am State 18741 No. 1, Pan Am State 18741 No. 2 and the Shell North Cook Inlet No. 1 well demonstrated gas accumulations in the Beluga Formation "B" and "C" sands that do not have common gas water contacts. 21. The Cook Inlet State 17591 No. 1 and Pan Am State 18741 No. 1 wells were dry holes. The acreage on which they were drilled was subsequently contracted out of the NCIU. 22. Gas water contacts in the Beluga Formation reservoirs have not been directly observed and are estimated from "highest known water" and "deepest known gas" data established by well control in these reservoirs. 23. The areal extent of the Beluga Formation and Cook Inlet Sand gas accumulations were shown to be structurally controlled, i.e. sands that were deposited in a planar attitude were subsequently deformed by compressional forces into a concave upward closed structure in which the gas was trapped. 24. The Beluga Formation gas accumulation was shown by well, test production, and seismic data to be present only in the highest portion of the structure. 25. The Cook Inlet No. 1 Sand gas accumulation was shown by well, test production, and seismic data to be the most areally extensive of the gas reservoirs in the NCIU. 26. DNR approved the formation of a participating area conforming to the portion of the North Cook Inlet structure that well control showed to be above the Cook Inlet Sand gas water contact. DNR later required the NCIU to be contracted to the extent of the participating area. 27. Contrary to the petitioners' suggestion or implication that the boundary of the North Cook Inlet Unit may have been drawn so as to exclude the Danco leases from participating in trait production draining those leases, the facts show just the opposite: namely, that the boundary of the North Cook Inlet Unit was contracted to conform to the presence of productive gas reservoir, and the area later designated tracts ADL 369100 and 369101 (the Danco leases) was excluded from the Unit because that area was believed not to contribute to unit production. Decision on Remand February 8, 2002 Page 13 of 25 3566 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. Engineering studies by the operator in the 1960's indicated that wells of sufficient density and reach located on a single platform near the structural apex were capable of efficiently producing gas from the structurally controlled gas accumulation. In the course of the 1967 Conservation Order No. 40 hearing before the Alaska Oil and Gas Conservation Committee, well and seismic data were presented that defined the stratigraphic and areal extent of the gas accumulations in the NCIU. In Conservation Order No. 40, issued in 1967, the Alaska Oil and Gas Conservation Committee designated the combined interval of the Cook Inlet Sands and the Beluga Formation gas accumulations as a gas pool called the Tertiary System Gas Pool. The vertical limits of the pool were defined as the correlative interval from 3500 to 6200 feet in the Pan American Petroleum Corp. Well North Cook Inlet State 17589 No. 1. The areal limits estimated for the Tertiary System Gas Pool at that time did not extend under the lands that later became the Danco leases, except for several small comers (sometimes referred to as "notches" in the present heating) of:what later became ADL 369101. In Conservation Order No. 40, the Alaska Oil and Gas Conservation Committee approved a well spacing plan for the Tertiary System Gas Pool based on a single platform. Regular production from the Tertiary System Gas Pool began in March 1969 and has continued to the present day. In 1993 Phillips Petroleum Company and ARCO Alaska, Inc. acquired a 3-D seismic survey over the NCIU. The survey was designed, acquired and processed using the latest technology available to image both the structural and stratigraphic details in the subsurface. The survey was conducted to better def'me a deeper part of the structure, known as the Tyonek Deep play; however it also provides important data on the Tertiary System Gas Pool. Several wells drilled into the Tyonek Deep play confirmed the existence of an oil reservoir under the NCIU in the Sunfish and North Foreland formations, below approximately 11,000 feet in depth. The Tyonek Deep reservoir has not been brought into regular production. There is no plan of development for this reservoir, no current plan of operations, and no existing participating area. After spending over 300 million dollars on Tyonek Deep exploration, Phillips and ARCO wrote off those expenditures and ceased exploration activity. Decision on Remand February 8, 2002 Page 14 of 25 3567 38. 39. 40. 41. 42. IIL What Well and Production Data Show about the Extent q[ the Tertiar~ S~stern Gas Pool Central Facts Additional well and production data available since 1967, including data from wells drilled since that time, have supported and verified the data relating to the distribution of productive gas reservoir that was presented in the Conservation Order No. 40 hearing. Wells drilled to the Sterling Formation at locations where the top of the Cook Inlet No. 1 Sand is deeper than 4260 feet subsea have not encountered gas. The most areally extensive gas water contact in the Sterling Formation has been shown to occur at 4260 feet subsea. This gas water contact occurs in the Cook Inlet No. 1 Sand. Gas beating sands in the Beluga Formation, which occurs deeper in the same structure that contains the Sterling Formation, are conf'med to a much less extensive area within the perimeter of the Cook Inlet No. 1 Sand gas accumulation. The well and production data, even without considering Phillips' 3-D seismic data, do not show that the Tertiary System Gas pool extends under the Danco leases. Lappi Testimony on Gas Water Contact 43.Mr. Lappi's testimony incorporated the statement that the Cook Inlet State 18741 #1 well "penetrated a gas reservoir and was declared a gas well". 44. Mr. Lappi also stated, "This gas well places the gas-water contact at a minimum of at least 100 feet lower than the existing map on the top Cook Inlet Sand No. 1 shows it." 45. Extending the gas water contact in the Cook Inlet Sand No.1 100 feet deeper would increase the likelihood the Danco leases had been drained by NCIU gas production. 46. Mr. Lappi did not cite subsurface data in support of his statements about the Cook Inlet State 18741 #1 well. 47. The Cook Inlet State 18741 #1 well was plugged and abandoned as a dry hole. 48. Due to mechanical difficulties with the Cook Inlet State 18741 #1 open hole logs were not obtained in the well. However, the well was mud logged. Decision on Remand February 8, 2002 Page 15 of 25 3568 49. The Cook Inlet State 18741 #1 gas chromatograph and mud log establish that the Cook Inlet Sand interval in this well did not have gas saturation sufficient to warrant further evaluation. 50. Mr. Lappi's claim that the Cook Inlet State 18741 #1 well shows a lower gas water contact in the Cook Inlet No. 1 Sand is contrary to data from the Cook Inlet State 18741 # 1 well and other wells and is erroneous. Givens Testimony on Gas Water Contact 51. Dr. Givens claimed that perforation and well log data showed a gas water contact at 6794' subsea for the Beluga sands in well A-12. He applied the claimed 6794' subsea gas water contact to a map of the Beluga B sand to imply that the productive limit of the Beluga B sand extends beyond the limit mapped for Conservation Order No. 40. 52. The sand that is equivalent to the Beluga B is located at a depth of 4546' subsea in Well A-12, some 2250' shallower than the Beluga U sand where Dr. Givens claims there is a gas water contact. Dr. Givens applied an unsubstantiated gas water contact depth from a deeper Beluga U sand to conclude the area of the Beluga reservoir is much larger. 53. It is fallacious to apply data from different and deeper sand level (6794' subsea) to a structural map of the Beluga B, which is at 4546' subsea, in well A-12 and is not in pressure communication with the deeper sand. 54. Also, Dr. Givens did not present the data to substantiate the claim of a gas water contact at 6794' subsea in well A-12 in the form of an electric log trace, test data or production data. The Beluga U Sand has never been shown to contain producible gas. 55. Dr. Givens made a similar claim to infer that the Beluga C sand has a gas water contact common to the Beluga B sand. This claim is erroneous, since the Beluga B sand is not in pressure communication with the Beluga C sand. 56. Dr. Givens acknowledged that the Beluga sands were not in pressure communication with each other. Givens Testimony on Projection of Top of FOrmation 57. One of the ways by which Dr. Givens attempted to show that the gas accumulation in the Sterling Formation extends under the Danco leases was to extrapolate lines Decision on Remand February 8, 2002 Page 16 of 25 3569 connecting the tops of three Sterling Formation gas sands (actually three benches within the Cook Inlet No. 1 Sand) in the Pan Am 17589 #1 well, located near the highest point in the reservoir, on the southern flank of the structure, and the Shell North Cook Inlet #1 well, located to the northeast, on the northern flank of the structure. (His testimony is confusing because he called the upper bench within the Cook Inlet No. 1 Sand the "A" Sand, he called the second bench within the Cook Inlet No. 1 Sand the "B" sand, and he called the bench immediately below that the "Cook Inlet No. 1" Sand.) Dr. Givens extrapolated all three lines to a point beyond the Shell well where they intercepted the -4260 subsea datum. He did a similar extrapolation using the A-10 well and the Shell North Cook Inlet #1 well. The intersection of the lines with the -4260 datum was different for each pair of wells. 58. Dr. Givens testified that the top of the gas sands in the latter well is at a depth of 3948 feet below sea level, which is 101 feet higher than the depth to the top of the gas sands as determined by Phillips in estimating the extent of the reservoir in the 1960's. 59. Dr. Givens' extrapolation technique projected a reservoir limit that extends under the Danco leases. 60. Dr. Givens testified that the basis for his disagreement with Phillips regarding the depth of the top of the Sterling Formation gas sands in the Shell North Cook Inlet #1 well was that Phillips interpreted the well data as showing depths measured from the sea floor while Dr. Givens interpreted the well data as showing depths measured from the kelly bushing on the drill rig, 101 feet above the sea floor. 61. The kelly bushing is the drive mechanism for the drill string and is typically the reference elevation for wellbore measurements on a stationary drill rig. 62. The mud log and some wireline log headers from the well and drilling reports filed by the operator state that measurements are referenced from the sea floor, not from the kelly bushing for the Shell North Cook Inlet #1 well. 63. 64. Dr. Givens chose to ignore the information in the Shell North Cook Inlet #1 well records that stated the reference datum for well bore measurements in this well. He referred instead to certain of the records that omitted a specific description of the reference datum. Dr. Givens' interpretation of the reference datum is not persuasive. Although it is common for depth measurements to be taken from the kelly bushing on stationary drilling rigs, there is a good reason why this was not done in the case of the Shell North Cook Inlet #1 well: namely, the well was drilled from a floating drillship rather than a fixed platform. The kelly bushing would have risen and fallen with the substantial tides in Cook Inlet, so using the kelly bushing as the reference point for measuring and stating depths would have caused complications. Decision on Remand February 8, 2002 Page 17 of 25 3570 65. Dr. Givens' interpretation of the depth of the top of the Sterling Formation gas sands in the Shell North Cook Inlet #1 well is erroneous. 66. The validity of Dr. Givens' extrapolation involving the Pan Am 17589 #1 well also depends on the assumption that the Pan Am 17589 #1 well and the North Cook Inlet #1 well are located on the same flank of the structure, and that the structural dip between and beyond them is linear. In fact, the two wells are located on opposite flanks of the structure, which means that the structural dip between the two wells is necessarily non-linear. 67. Dr. Givens' extrapolation technique also fails to take into account other available well and seismic data that generally accepted petroleum engineering and petroleum geology methods would require be considered. 68. Dr. Givens' projection of the limit of the reservoir based on his extrapolation technique is erroneous. Givens Testimony on Doubling of Estimated Gas Reserves 69. Another way that Dr. Givens attempted to show that productive gas reservoir extends under the Danco leases was presented in his testimony that estimates of recoverable gas in the NCIU have essentially doubled since the pool was discovered in 1965 and that this doubling indicates that the pool extends under the Danco leases. Dr. Givens prepared a map showing that the "areal size of the North Cook Inlet Unit natural gas pool has been increased by a factor of approximately two to account for the increased ultimate recoverable gas reserves." 70. It is not a generally accepted petroleum engineering technique to determine reservoir limits based on estimates of reserves. The process works the other way: volumetric estimates of reserves can be calculated based on known reservoir area and thickness and other reservoir characteristics. 71. The most that Dr. Givens' type of approach could legitimately be used for is to indirectly test the plausibility of reservoir limits determined according to standard techniques (i.e., based on well log data, well test data, and seismic data). The evidence shows that Dr. Givens' reserves estimates do not cast any doubt on the reservoir limits as determined in the 1960's and validated by subsequent well and seismic data. 72. Dr. Givens mistakenly assumes that more gas reserves means a greater areal extent of the reservoir. In fact, the volume of gas contained in a reservoir depends on several factors, including not only the area (length and width) but also the thickness of the productive interval and the gas saturation (expressed as 1 minus water saturation, 1- Decision on Remand February 8, 2002 Page 18 of 25 3571 Sw), net to gross sand ratio, porosity, and gas formation volume factor at initial and final reservoir conditions of the productive sand interval(s). Evidence submitted at the hearing shows that the thickness of the productive intervals in both the Sterling and Beluga formations is now known to be substantially greater than was apparent or counted at the time of initial field development. In addition, there are intervals that were initially counted as productive that have produced more gas than expected. 73. Dr. Givens himself demonstrated that his estimated increase in NCIU reserves could be easily accounted for without increasing areal extent, solely by using reasonable estimates for net pay thickness. Based on data from Commission reports in 1972 and 1999 (Givens Ex. VIII-3 to VIII-8), Dr. Givens estimated an increase in total recoverable NCIU gas from 1.119178 TSCF to 2.928426544 TSCF with no increase in reservoir area (the Sterling and Beluga areas are 8300 acres and 2500 acres respectively in both years) but with an increase in net pay thickness from 130 feet to 310 feet in the Sterling formation and from 30 feet to 160 feet in the Beluga formation (from 160 feet to 470 feet total in the Sterling plus the Beluga formations). 74. Dr. Givens testified that a Phillips Exhibit, SJW-12, showed a net pay increase in one NCIU well, Cook Inlet 17589 No. 1, of only 29% over a 1967 estimate. But he ignored the fact that a nearby well, NCIU A-06, presented on the same exhibit, showed a net pay increase of nearly 78%. In addition, the net pay represented even by the 29% increase (510') represents more net pay than Dr. Givens used (470') for his reserves estimate of 2.928426544 TSCF in 1999. 75. Givens Exhibit 26 presents a stmunary of perforations from initial completion to present day and documents new perforations added and former perforations squeezed. Inspection of the exhibit indicates that 994 measured feet of Sterling (Cook Inlet) Formation and 270 measured feet of Beluga Formation perforations were added to NCIU wells since their initial completion. 76. Dr. Givens apparently understated the increases in perforations by ignoring the feet of perforations that have been squeezed (i.e., sealed with cement after depletion). This is incorrect, since all productive intervals, whether previously produced or currently producing, contribute to the total volume of gas recovered and recoverable from the reservoir. 77. Feet of perforations are generally not equivalent to feet of net pay. Net pay represents the thickness of productive interval. Often only a fraction of a productive interval is perforated in order to produce gas from that interval. 78. Dr. Givens' comparison of earlier and recent reserves estimates is also flawed. In stating that reserves have essentially doubled, Dr. Givens was comparing an early deliverability projection that was based on very little data to later material balance analyses. Decision on Remand February 8, 2002 Page 19 of 25 3572 79. The deliverability projection,contained in an exhibit in the 1967 Conservation Order No. 40 hearing, estimated gas deliverability from 1969 through 1983 based on the Sterling Formation Sand represented by State 18740 Well No. 1 interval 4140-4180 (40 feet of sand). At the time the deliverability calculation was done, there were 7 wells drilled and there was no significant production. The deliverability estimate was done to illustrate pressure decline assuming constant gas production for 15 years. There was no accounting for deliverability from the Beluga formation in this estimate and the estimate is based on a 40-foot interval of the Sterling Formation. Dr. Givens used this exhibit to calculate deliverable reserves of 1.19 TSCF. Not surprisingly, this figure is low compared to more accurate estimates using material balance analysis and more complete data. 80. To derive reserves from a deliverability estimate and treat them as equivalent to estimates from material balance analysis, as Dr. Givens did, is a fundamental misapplication of this data. 81. Neither Phillips nor its parmers made any claims of gas in place ("GIP") or recoverable gas reserves during the hearing for Conservation Order No. 40 in May 1967. 82. The material balance analyses referred to by Dr. Givens were presented in the Geoquest Report, Proven Reserve Assessment Cook Inlet, Alaska Effective January 1, 1996, (Givens Exhibit XVI - Reference 3). The Geoquest Report relied on the material balance technique to estimate proven reserves that are in communication with producing wellbores. The evidence of communication is the measured pressure and volumes of gas produced from each well. Material balance analysis is the generally accepted standard petroleum engineering method to determine or prove gas reserves for the purpose of sales, contracts, and establishing equity. The volume of gas produced is plotted versus pressure measured at the time divided by the gas deviation factor to develop a trend to predict GIP and recoverable GIP. 83. Contrary to the suggestion that reserves estimates were recently doubled, the Geoquest Report indicates that data from as early as 1975 (Exhibit VIII-15) established a material balance trend that projects recoverable reserves of 2.36 TSCF, with GIP of 2.72 TSCF. The report found that 1.049 TSCF of gas remained in the Sterling and Beluga Formations in communication with the wells based on material balance calculations. Ultimate recoverable reserves are determined by adding cumulative production to remaining, which totals 2.36 TSCF. The Geoquest Report also concluded there were approximately 0.115 TSCF of undeveloped reserves based on analogy and additional compression. (Exhibit XVI- Reference 3, Reserve Evaluation Worksheet). 84. Utilizing the same Geoquest data and extrapolating back to day one of production, a reservoir pressure very close to that actually measured can be demonstrated. This Decision on Remand February 8, 2002 Page 20 of 25 3573 85. 86. 87. technique indicates the NCIU ultimate recoverable reserves have not changed significantly since the beginning of production. Any statement referring to a doubling of reserves is incorrect and ignores actual data. Givens Testimony on Pressure Decline Dr. Givens also presented a graph (Exhibit 24, p. 24-1) of bottom hole pressure (expressed as p/z, pressure divided by gas deviation factor) versus cumulative production as evidence that the Danco leases are being drained by NCIU production. The Exhibit 24 graph is a material balance estimate and cannot be used to estimate area drained. A material balance such as this will only validate volume. There are no references to thickness or area in the material balance method. Well data in the form of electric logs, cores, well test and seismic data are the only information that can be used to validate area and thickness of the gas producing reservoir sands. Givens Exhibit 25 illustrates that pressures measured in the same reservoir reflect the same level of depletion and proves that at least some of the referenced sands are in communication. Discontinuous sands that are not in cOmmunication with their offset neighbor wells will have more or less depletion. The data simply have no bearing on the Danco leases. IV. What Seismic Data Show about the Extent o,f the Tertiary System Gas Pool Central Facts 88. 3-D seismic surveys such as Phillips and ARCO acquired over the NCIU are acquired at much greater density than 2-D seismic data and therefore require much less extrapolation between control points. The seismic data presented in the present hearings is of a much better quality and precision than that presented in the Conservation Order No. 40 heating. 89. Migration (identifying the frequency, polarity, amplitude, and location of subsurface acoustic energy sources) of 3-D seismic is more robust than 2-D seismic techniques, particularly in areas like the NCIU where sediments have complex deposifional texture and are structurally deformed. 90. By calibrating seismic data with geologic events recorded on borehole geophysical logs from wells with reflections seen on seismic sections, the seismic signature of well data from producible gas saturations can be compared with data from wells containing only brine saturations within a given stratigraphic interval. These comparisons make it possible to identify and map characteristics of seismic data that Decision on Remand February 8, 2002 Page 21 of 25 91. 92. 93. 94. 95. may be indicative of gas saturations. These techniques are also critical for converting seismic data from time (seconds) to depth (feet), a conversion necessary for structural interpretation. It is generally accepted in the petroleum industry that utilization of 3-D seismic data combined with well control provides the most accurate methOd of generating subsurface interpretations. The subsurface interpretations presented by Phillips included rigorous calibration of 3-D seismic with all relevant well data, including NCIU development wells and Tyonek Deep exploratory wells drilled in the unit. This work included characterization of seismic response related to gas saturation for the various NCIU gas producing intervals and depth conversion. A specific amplitude response to gas saturation in the Cook Inlet Sands (Sterling) was documented and shown to be present on portions of the NCIU structure above the Cook Inlet No. 1 Sand gas water contact determined by well data. The seismic data, as calibrated by well and production data, demonstrate that the areal extent of the Cook Inlet No. 1 Sand gas accumulation is marginally less extensive than estimated at the time of the 1967 Conservation Order No. 40 heating, when the reservoir limit was shown as crossing small comers ("notches") of the area that later became lease ADL 369101. The seismic data, as calibrated by well and production data, demonstrate persuasively that the Danco leases are structurally lower than 4260 feet subsea, the depth of the gas water contact in the most areally extensive NCIU gas reservoir. The Danco leases do not contain any portion of any productive gas reservoir within the NCIU. Allen Testimony 96. Mr. Allen presented a facsimile of a Cook Inlet seismic line from a publication as evidence that Phillips had mismapped the NCIU structure. The exact location of the facsimile was unknown to him at the time. The evidence Mr. Allen presented is inadequate to support his contention. Lappi Testimony 97. Mr. Lappi presented an interpretation of the seismic data on the Danco leases indicating intervals with amplitudes lower than-10,000 units (which he called Decision on Remand February 8, 2002 Page 22 of 25 3575 98. 99. 100. "amplitude anomalies") and referring to those "amplitude anomalies" as evidence of producible gas. NCIU well control indicates the amplitude anomalies reported by Mr. Lappi likely represent coals or other seismic phenomena besides gas accumulations. Mr. Lappi provided no evidence that amplitudes lower than -10,000 units were uniquely caused by sandstones containing commercially producible gas saturations. The seismic evidence shows that the intervals where Mr. Lappi interpreted amplitude anomalies under the Danco leases are not continuous with the intervals containing productive gas accumulations in the NCIU. Mr. Lappi's interpretation of the seismic data was flawed by such fundamental errors as ignoring germane check shot surveys and other well data and changing amplitude scaling colors between exhibits. 101. 102. 103. 104. 105. 106. V. Evidence as to the Extent o.[ the Tyonelt Deep Reservoir Mr. Lappi expressed the opinion that the Tyonek Deep reservoir possibly extends under the Danco leases. In support of that opinion he referred to certain wells drilled into the reservoir and to a structure map and example seismic line generated by ARCO for public distribution at one time. The wells he cited are the ARCO Sunfish Number 1, Sunfish Number 3, the North Foreland Number 1, and the Shell North Cook Inlet State Number 1 wells, which DNR has stated are capable of producing in paying quantities. These wells are located in the NCIU between approximately one and five miles from the nearest Danco lease line. No wells have been drilled under the Danco leases. Lappi's testimony raised the possibility that the interpretation showing "potential" reserves under understated. publicly distributed ARCO the Danco leases may be Lappi did not present any independently interpreted subsurface data in support of his conjectures. Mr. Lappi's exhibits and testimony do no more than suggest the possibility that the Tyonek Deep reservoir may extend under the Danco leases. The evidence does not show that any oil reservoirs extend under the Danco leases. Decision on Remand February 8, 2002 Page 23 of 25 3576 CONCLUSIONS 1. The Tertiary System Gas Pool is the only producing pool in the North Cook Inlet Unit. 2. In addition to the Tertiary System Gas Pool, the Tyonek Deep reservoir is the only other known oil or gas pool in the North Cook Inlet Unit. 3. The Danco leases do not contain any portion of the Tertiary System Gas Pool. 4. The Danco leases have not been shown to contain any portion of the Tyonek Deep reservoir. . As to the Tertiary System Gas Pool, there has been no showing that the unitized management, operation and further development of the pool or portion of the pool is reasonably necessary in order to effectively carry on pressure control, pressure- maintenance or repressuring operations, cycling operations, water flooding operations, or any combination of these, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool. . As to the Tertiary System Gas Pool, there has been no showing that one or more of the unitized methods of operation as applied to the pool or portion of it is feasible, and will prevent waste and will with reasonable probability result in the increased recovery of substantially more oil and gas from the pool than would otherwise be recovered. . As to the Tertiary System Gas Pool, there has been no showing that the estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered. . As to the Tertiary System Gas Pool, there has been no showing that the unitization and adoption of one or more of the unitized methods of operation is for the common good. o As to the Tyonek Deep reservoir, there has been no showing that the unitized management, operation and further development of the pool or portion of the pool is reasonably necessary in order to effectively carry on pressure control, pressure- maintenance or repressuring operations, cycling operations, water flooding operations, or any combination of these, or any other form of joint effort calculated to substantially increase the ultimate recovery of oil and gas from the pool. 10. As to the Tyonek Deep reservoir, there has been no showing that one or more of the unitized methods of operation as applied to the pool or portion of it is feasible, and will prevent waste and will with reasonable probability result in the increased Decision on Remand February 8, 2002 Page 24 of 25 3577 recovery of substantially more oil and gas from the pool than would otherwise be recovered. 11. 12. 13. As to the Tyonek Deep reservoir, there has been no showing that the estimated additional cost, if any, of conducting such operations will not exceed the value of the additional oil and gas so recovered. As to the Tyonek Deep reservoir, there has been no showing that the unitization and adoption of one or more of the unitized methods of operation is for the common good. None of the statutory requirements for an order requiting expansion of the North Cook Inlet Unit have been met. NOW THEREFORE IT IS ORDERED that: 1. Pursuant to the Final Decision on Applications for Rehearing, Conservation Order 39 lA is superseded and replaced by this order. 2. The petition for an order of unitization is denied. 3. The Commission will address the allocation of the costs of the hearing under AS 31.05.085 in a separate order. DONE at Aneh~.o.~ Alaska, this 8th day of February, 2002. Cammy O~c[hsli Taylor, Ch(~r Daniel T. Seamount, J .r~, Commissioner Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission I certify that a copy of the above was hand delivered/mailed on February 8, 2002 to each of the following at their addresses of record: C.R. Kennelly, hand delivered Frederic E. Brown, mailed George Kasper, MD, mailed William B. Rozell, hand delivered Barbara Fullmer, hand delivered Daniel Helmick, mailed r. Warren Z. Buck, mailed Jody J~ _(~olombi'e",.~pe~ial~)Staff Assistant This Decision is the final order of the Alaska Oil and Gas Conservation Commission. Any appeal to Superior Court must be brought within 30 days from the date that this decision is mailed or otherwise distributed. Decision on Remand February 8, 2002 Page 25 of 25 3578 NY PUBLIC LIBRARY DIV E, GRAND CENTRAL STATION P O BOX 2221 NEW YORK, NY 10163-2221 US MIN MGMT SERV, CHIEF OCS STATS & INFO 381 ELDEN ST MS 4022 HERNDON, VA 20170-4817 OFFICE OF THE GOVERNOR, JOHN KATZ STE 518 444 N CAPITOL NW WASHINGTON, DC 20001 LIBRARY OF CONGRESS, STATE DOCUMENT SECTION EXCH & GIFT DIV 10 FIRST ST SE WASHINGTON, DC 20540 ARENT FOX KINTNER PLOTKIN KAHN, LIBRARY WASHINGTON SQ BLDG 1050 CONNECTICUT AV NW WASHINGTON, DC 20036-5339 U S DEPT OF ENERGY, PHYLLIS MARTIN MS EI823 1000 INDEPENDENCE SW WASHINGTON, DC 20585 TECHSYS CORP, BRANDY KERNS PO BOX8485 GATHERSBURG, MD 20898 US GEOLOGICAL SURVEY, LIBRARY NATIONAL CTR MS 950 RESTON, VA 22092 DPC, DANIEL DONKEL 2121 NORTH BAYSHORE DR #616 MIAMI, FL 33137 SD DEPT OF ENV & NATRL RESOURCES, OIL & GAS PROGRAM 2050 W MAIN STE #1 RAPID CITY, SD 57702 AMOCO CORP 2002A, LIBRARY/INFO CTR P O BOX 87703 CHICAGO, IL 60680-0703 ILLINOIS STATE GEOL SURV, LIBRARY 469 NATURAL RESOURCES BLDG 615 E PEABODY DR CHAMPAIGN, IL 61820 LINDA HALL LIBRARY, SERIALS DEPT 5109 CHERRY ST KANSAS CITY, MO 64110-2498 ALFRED JAMES III 107 N MARKET STE 1000 WICHITA, KS 67202-1811 UNIV OF ARKANSAS, SERIALS DEPT UNIV LIBRARIES FAYETTEVILLE, AR 72701 XTO ENERGY, SUSAN LILLY 210 PARK AVE STE 2350 OKLAHOMA CITY, OK 73102-5605 IOGCC, P O BOX 53127 OKLAHOMA CITY, OK 73152-3127 R E MCMILLEN CONSULT GEOL 202 E 16TH ST OWASSO, OK 74055-4905 OIL & GAS JOURNAL, LAURA BELL P O BOX 1260 TULSA, OK 74101 , BAPI RAJU 335 PINYON LN COPPELL, TX 75019 US DEPT OF ENERGY, ENERGY INFORMATION ADMINISTRATION MIR YOUSUFUDDIN 1999 BRYAN STREET STE 1110 DALLAS, TX 75201-6801 DEGOLYER & MACNAUGHTON, MIDCONTINENT DIVISION ONE ENERGY SQ, STE 400 4925 GREENVILLE AVE DALLAS, TX 75206-4083 SHELL WESTERN E&P INC, G.S. NADY P O BOX 576 HOUSTON, TX 77001-0574 STANDARD AMERICAN OIL CO, AL GRIFFITH P O BOX 370 GRANBURY, TX 76048 H J GRUY, ATTN: ROBERT RASOR 1200 SMITH STREET STE 3040 HOUSTON, TX 77002 XTO ENERGY, MARYJONES 810HOUSTON ST STE2000 FORT WORTH, TX 76102-6298 PURVIN & GERTZ INC, LIBRARY 2150 TEXAS COMMERCE TWR 600 TRAVIS ST HOUSTON, TX 77002-2979 RAY TYSON 2016 MAIN #1415 HOUSTON, TX 77002-8844 CHEVRON, PAUL WALKER 1301 MCKINNEY RM 1750 HOUSTON, TX 77010 OIL & GAS JOURNAL, BOB WILLIAMS 1700 W LOOP SOUTH STE 1000 HOUSTON, TX 77027 3579 PETRAL CONSULTING CO, DANIEL L LIPPE 9800 RICHMOND STE 505 HOUSTON, TX 77042 AURORA GAS, G. SCOTT PFOFF 10333 RICHMOND AVENUE, STE 710 HOUSTON, TX 77042 GAFFNEY, CLINE & ASSOC., INC., LIBRARY 1360 POST OAK BLVD., STE 2500 HOUSTON, TX 77056 MURPHY EXPLORATION & PRODUCTION CO., BOB SAWYER 550 WESTLAKE PARK BLVD STE 1000 HOUSTON, TX 77079 MARK ALEXANDER 7502 ALCOMITA HOUSTON TX 77083 MARATHON OIL CO, GEORGE ROTHSCHILD JR RM 2537 P O BOX 4813 HOUSTON, TX 77210 UNOCAL, REVENUE ACCOUNTING P O BOX 4531 HOUSTON, TX 77210-4531 EXXON EXPLORATION CO., T E ALFORD P O BOX 4778 HOUSTON TX 77210-4778 EXXON EXPLOR CO, LAND/REGULATORY AFFAIRS RM 301 P O BOX 4778 HOUSTON, TX 77210-4778 TEXACO EXPLORATION & PRODUCTION INC, CORRY WOOLINGTON PO BOX 36366 HOUSTON, TX 77236 CHEVRON USA INC., ALASKA DIVISION ATTN: CORRY WOOLINGTON P O BOX 1635 HOUSTON TX 77251 PETR INFO, DAVID PHILLIPS P O BOX 1702 HOUSTON, TX 77251-1702 PHILLIPS PETROLEUM COMPANY, W ALLEN HUCKABAY PO BOX 1967 HOUSTON, TX 77251-1967 WORLD OIL, DONNA WILLIAMS P O BOX 2608 HOUSTON TX 77252 EXXONMOBIL PRODUCTION COMPANY, GARY M ROBERTS RM 3039 P O BOX 2180 HOUSTON, TX 77252-2180 EXXONMOBIL PRODUCTION COMPANY, J W KIKER ROOM 2086 P O BOX 2180 HOUSTON, TX 77252-2180 PENNZOIL E&P, WILL D MCCROCKLIN P O BOX 2967 HOUSTON TX 77252-2967 CHEVRON CHEM CO, LIBRARY & INFO CTR P O BOX 2100 HOUSTON, TX 77252-9987 MARATHON, Ms. Norma L. Calvert P O BOX 3128, Ste 3915 HOUSTON, TX 77253-3128 ACE PETROLEUM COMPANY, ANDREW C CLIFFORD PO BOX 79593 HOUSTON TX 77279-9593 , WATTY STRICKLAND 2803 SANCTUARY CV KATY, TX 77450-8510 TESORO PETR CORP, LOiS DOWNS 300 CONCORD PLAZA DRIVE SAN ANTONIO, TX 78216-6999 , JIM WHITE 4614 BOHILL SAN ANTONIO, TX 78217 INTL OIL SCOUTS, MASON MAP SERV INC P O BOX 338 AUSTIN, TX 78767 BABCOCK & BROWN ENERGY, INC., 350 INTERLOCKEN BLVD STE 290 BROOMFIELD, CO 80021 ROBERT G GRAVELY 7681 S KIT CARSON DR LITTLETON, CO 80122 , DIANE SUCHOMEL 10507D W MAPLEWOOD DR LITTLETON, CO 80127 GEORGE G VAUGHT JR P O BOX 13557 DENVER, CO 80201 EVERGREEN WELL SERVICE CO., JOHN TANIGAWA 1401 17TH ST STE 1200 DENVER, CO 80202 US GEOLOGICAL SURVEY, LIBRARY BOX 25046 MS 914 DENVER, CO 80225-0046 358O C & R INDUSTRIES, INC.,, KURT SALTSGAVER 7500 W MISSISSIPPI AVE STE C4 LAKEWOOD, CO 80226-4541 , JERRY HODGDEN GEOL 408 18TH ST GOLDEN, CO 80401 NRG ASSOC, RICHARD NEHRING P O BOX 1655 COLORADO SPRINGS, CO 1655 80901- RUBICON PETROLEUM, LLC, BRUCE I CLARDY SIX PINE ROAD COLORADO SPRINGS, CO 80906 ! JOHN A LEVORSEN 200 N 3RD ST #1202 BOISE, ID 83702 TAHOMA RESOURCES, GARY PLAYER 1671 WEST 546 S CEDER CITY, UT 84720 US GEOLOGICAL SURVEY, LIBRARY 2255 N GEMINI DR FLAGSTAFF, AZ 86001-1698 MUNGER OIL INFOR SERV INC, P O BOX 45738 LOS ANGELES, CA 90045-0738 BABSON & SHEPPARD, JOHN F BERGQUIST P O BOX 8279 VIKING STN LONG BEACH, CA 90808-0279 ANTONIO MADRID P O BOX 94625 PASADENA, CA 91109 ORO NEGRO, INC., 9321 MELVIN AVE NORTHRIDGE, CA 91324-2410 US GEOLOGICAL SURVEY, KEN BIRD 345 MIDDLEFIELD RD MS 999 MENLO PARK, CA 94025 SHIELDS LIBRARY, GOVT DOCS DEPT UNIV OF CALIF DAVIS, CA 95616 ! H L WANGENHEIM 5430 SAWMILL RD SP 11 PARADISE, CA 95969-5969 ECONOMIC INSIGHT INC, SAM VAN VACTOR P O BOX 683 PORTLAND, OR 97207 US EPA REGION 10, THOR CUTLER OW-137 1200 SIXTH AVE SEATTLE, WA 98101 MARPLES BUSINESS NEWSLETTER, MICHAEL J PARKS 117 W MERCER ST STE 200 SEATTLE, WA 98119-3960 STATE PIPELINE OFFICE, LIBRARY KATE MUNSON 411 W 4TH AVE, STE 2 ANCHORAGE, AK 99501 DEPT OF REVENUE, DAN DICKINSON, DIRECTOR 550 W 7TH AVE, SUITE 500 ANCHORAGE, AK 99501 DEPT OF REVENUE, BEVERLY MARQUART 550 W 7TH AV STE 570 ANCHORAGE, AK 99501 , DUSTY RHODES 229 WHITNEY RD ANCHORAGE, AK 99501 TRUSTEES FOR ALASKA, 1026 W. 4th Ave, Ste 201 ANCHORAGE, AK 99501 DEPT OF REVENUE, OIL & GAS AUDIT DENISE HAWES 550 W 7TH AV STE 570 ANCHORAGE, AK 99501 DEPT OF ENVIRON CONSERVATION, DIV OF AIR & WATER QUALITY TOM CHAPPLE 555 CORDOVA STREET ANCHORAGE, AK 99501 GUESS & RUDD, GEORGE LYLE 510 L ST, STE 700 ANCHORAGE, AK 99501 DEPT OF REVENUE, CHUCK LOGSTON 550 W 7TH AVE, SUITE 500 ANCHORAGE, AK 99501 AURORA GAS, J. EDWARD JONES 1029 W 3RD AVE, STE 220 ANCHORAGE, AK 99501 DEPT OF ENVIRON CONSERVATION, DIV OF ENVIRONMENTAL HEALTH JANICE ADAIR 555 CORDOVA STREET ANCHORAGE, AK 99501 FOREST OIL, JIM ARLINGTON 310 K STREET STE 700 ANCHORAGE, AK 99501 YUKON PACIFIC CORP, JOHN HORN VICE CHM 1049 W 5TH AV ANCHORAGE, AK 99501-1930 3581 PRESTON GATES ELLIS LLP, LIBRARY 420 L ST STE 400 ANCHORAGE, AK 99501-1937 DEPT OF NATURAL RESOURCES, DIV OF OIL & GAS TIM RYHERD 550 W 7th AVE STE 800 ANCHORAGE, AK 99501-3510 DNR, DIV OF OIL & GAS JAMES B HAYNES NATURAL RESRCE MGR 550 W 7-rH AVE, SUITE 800 ANCHORAGE, AK 99501-3560 DEPT Of NATURAL RESOURCES, DIV Of OIL & GAS BRUCE WEBB 550 W 7TH AVE, SUITE 800 ANCHORAGE, AK 99501-3560 AK JOURNAL OF COMMERCE, OIL & INDUSTRY NEWS ROSE RAGSDALE 2000 INTL AIRPORT RD W #Al0 ANCHORAGE, AK 99502 N-I TUBULARS INC, 3301 C Street Ste 209 ANCHORAGE, AK 99503 ALASKA OIL & GAS ASSOC, JUDY BRADY 121 W FIREWEED LN STE 207 ANCHORAGE, AK 99503-2035 ARLEN EHM GEOL CONSLTNT 2420 FOXHALL DR ANCHORAGE, AK 99504-3342 BUREAU Of LAND MANAGEMENT, GREG NOBLE 6881 ABBOTT LOOP ROAD ANCHORAGE, AK 99507 UON ANCHORAGE, INST OF SOCIAL & ECON RESEARCH TERESA HULL 3211 PROVIDENCE DR ANCHORAGE, AK 99508 ALASKA DEPT OF LAW, ROBERT E MINTZ ASST ATTY GEN 1031 W 4TH AV STE 200 ANCHORAGE, AK 99501-1994 DEPT Of REVENUE, OIL & GAS AUDIT FRANK PARR 550 W 7TH AVE STE 570 ANCHORAGE, AK 99501-3540 DEPT OF NATURAL RESOURCES, DIV OF OIL & GAS JULIE HOULE 550 W 7TH AVE, SUITE 800 ANCHORAGE, AK 99501-3560 DEPT OF NATURAL RESOURCES, PUBLIC INFORMATION CTR 550 W 7TH AVE, SUITE 800 ANCHORAGE, AK 99501-3560 BRISTOL ENVIR AND ENG SERVICE, MIKE TORPY 2000 W. INT'L AIRPORT RD ~C-1 ANCHORAGE, AK 99502-1116 HDR ALASKA INC, MARK DALTON 2525 C ST STE 305 ANCHORAGE, AK 99503 ANADRILL-SCHLUMBERGER, 3940 ARCTIC BLVD ~300 ANCHORAGE, AK 99503-5711 JAMES E EASON 8611 LEEPER CIRCLE ANCI-;ORAGE, AK 99504-4209 US BUREAU OF LAND MNGMNT, ANCHORAGE DIST OFC PETER J DITTON 6881 ABBOTT LOOP ROAD ANCHORAGE, AK 99507 US BLM AK DIST OFC, GEOLOGIST ARTHUR BANET 949 EAST 36TH AVE STE 308 ANCHORAGE, AK 99508 GAFO, GREENPEACE PAMELA MILLER 125 CHRISTENSEN DR. fY2 ANCHORAGE, AK 99501-2101 DEPT OF NATURAL RESOURCES, DIV OF OIL & GAS JIM STOUFFER 550 W 7TH AVE, SUITE 800 ANCHORAGE, AK 99501-3560 DEPT Of NATURAL RESOURCES, DIV OIL & GAS WILLIAM VAN DYKE 550 W 7TH AVE, SUITE 800 ANCHORAGE, AK 99501-3560 ALASKA JOURNAL OF COMMERCE, ED BENNETT 2000 INTL AIRPORT W #Al0 ANCHORAGE, AK 99502 BAKER OIL TOOLS, ALASKA AREA MGR 4710 BUS PK BLVD STE 36 ANCHORAGE, AK 99503 ANADARKO, MARK HANLEY 3201 C STREET STE 603 ANCHORAGE, AK 99503 FINK ENVIRONMENTAL CONSULTING, INC., THOMAS FINK, PHD 6359 COLGATE DR. ANCHORAGE, AK 99504-3305 AMERICA/CANADIAN STRATIGRPH CO, RON BROCKWAY 4800 KUPREANOF ANCHORAGE, AK 99507 US BUREAU Of LAND MNGMNT, ANCHORAGE DIST OFC DICK FOLAND 6881 ABBOTT LOOP RD ANCHORAGE, AK 99507 THOMAS R MARSHALL JR 1569 BIRCHWOOD St ANCHORAGE, AK 99508 3582 VECO ALASKA INC., CHUCK O'DONNELL 949 EAST 36TH AVENUE ANCHORAGE, AK 99508 TRADING BAY ENERGY CORP, PAUL CRAIG 5432 NORTHERN LIGHTS BLVD ANCHORAGE, AK 99508 US MIN MGMT SERV, AK OCS REGIONAL DIR 949 E 36TH AV RM 110 ANCHORAGE, AK 99508-4302 US MIN MGMT SERV, RESOURCE STUDIES AK OCS REGN KIRK W SHERWOOD 949 E 36TH AV RM 603 ANCHORAGE, AK 99508-4302 US MIN MGMT SERV, RICHARD PRENTKI 949 E 36TH AV ANCHORAGE, AK 99508-4302 ! GORDON J. SEVERSON 3201 WESTMAR ClR ANCHORAGE, AK 99508-4336 US MIN MGMT SERV, RESOURCE EVAL JIM SCHERR 949 E 36TH AV RM 603 ANCHORAGE, AK 99508-4363 US MIN MGMT SERV, LIBRARY 949 E 36TH AV RM 603 ANCHORAGE, AK 99508-4363 US MIN MGMT SERV, FRANK MILLER 949 E 36TH AV STE 603 ANCHORAGE, AK 99508-4363 REGIONAL SUPRVISOR, FIELD OPERATNS, MMS ALASKA OCS REGION 949 E 36TH AV STE 308 ANCHORAGE, AK 99508-4363 , JOHN MILLER 3445 FORDHAM DR ANCHORAGE, AK 995O8-4555 USGS - ALASKA SECTION, LIBRARY 4200 UNIVERSITY DR ANCHORAGE, AK 99508-4667 CIRI, LAND DEPT P O BOX 93330 ANCHORAGE, AK 99509-3330 PHILLIPS ALASKA, LAND MANAGER JIM RUUD P.O. BOX 100360 ANCHORAGE AK 99510 ANCHORAGE TIMES, BERT TARRANT P O BOX 100040 ANCHORAGE, AK 99510-0040 PHILLIPS ALASKA, MARK MAJOR ato 1968 P O BOX 100360 ANCHORAGE, AK 99510-0360 PHILLIPS ALASKA, LAND DEPT JAMES WINEGARNER P O BOX 10036 ANCHORAGE AK 99510-0360 PHILLIPS ALASKA, STEVE BENZLER ATO 1404 P O BOX 100360 ANCHORAGE, AK 99510-0360 PHILLIPS ALASKA, LEGAL DEPT MARK P WORCESTER P O BOX 100360 ANCHORAGE, AK 99510-0360 PHILLIPS ALASKA, JOANN GRUBER ATO 712 P O BOX 100360 ANCHORAGE AK 99510-0360 PETROLEUM INFO CORP, KRISTEN NELSON P O BOX 102278 ANCHORAGE, AK 99510-2278 PHILLIPS ALASKA, KUP CENTRAL WELLS ST TSTNG WELL ENG TECH NSK 69 P O BOX 196105 ANCHORAGE, AK 99510-6105 ALYESKA PIPELINE SERV CO, PERRY A MARKLEY 1835 S BRAGAW - MS 575 ANCHORAGE AK 99512 ALYESKA PIPELINE SERV CO, LEGAL DEPT 1835 S BRAGAW ANCHORAGE, AK 99512-0099 ANCHORAGE DALLY NEWS, EDITORIAL PG EDTR MICHAEL CAREY P O BOX 149001 ANCHORAGE, AK 99514 ! DAVID W. JOHNSTON 320 MARINER DR. ANCHORAGE AK 99515 JWL ENGINEERING, JEFF LIPSCOMB 9921 MAIN TREE DR. ANCHORAGE, AK 99516-6510 NORTHERN CONSULTING GROUP, ROBERT BRITCH, P.E. 2454 TELEQUANA DR. ANCHORAGE, AK 99517 GERALD GANOPOLE CONSULT GEOL 2536 ARLINGTON ANCHORAGE AK 99517-1303 DAVID CUSATO 600 W 76TH AV #508 ANCHORAGE, AK 99518 3683 ARMAND SPIELMAN 651 HILANDER CIRCLE ANCHORAGE, AK 99518 ASRC, CONRAD BAGNE 301 ARCTIC SLOPE AV STE 300 ANCHORAGE, AK 99518 HALLIBURTON ENERGY SERV, MARK WEDMAN 6900 ARCTIC BLVD ANCHORAGE, AK 99518-2146 TESORO ALASKA COMPANY, PO BOX 196272 ANCHORAGE, AK 99519 OPSTAD & ASSOC, ERIK a OPSTAD PROF GEOL P O BOX 190754 ANCHORAGE, AK 99519 JACK O HAKKILA P O BOX 190083 ANCHORAGE, AK 99519-0083 ENSTAR NATURAL GAS CO, PRESIDENT TONY IZZO P O BOX 190288 ANCHORAGE, AK 99519-0288 MARATHON OIL CO, OPERATIONS SUPT W.C. BARRON P O BOX 196168 ANCHORAGE, AK 99519-6168 MARATHON OIL CO, LAND BROCK RIDDLE P O BOX 196168 ANCHORAGE, AK 99519-6168 UNOCAL, P O BOX 196247 ANCHORAGE, AK 99519-6247 UNOCAL, KEVIN TABLER P O BOX 196247 ANCHORAGE, AK 99519-6247 EXXONMOBIL PRODUCTION COMPANY, MARK P EVANS PO BOX 196601 ANCHORAGE, AK 99519-6601 BP EXPLORATION (ALASKA), INC., MARK BERLINGER MB 8-1 PO BOX 196612 ANCHORAGE, AK 99519-6612 BP EXPLORATION (ALASKA)INC, PETE ZSELECZKY LAND MGR P O BOX 196612 ANCHORAGE, AK 99519-6612 BP EXPLORATION (ALASKA) INC, INFO RESOURCE CTR MB 3-2 P O BOX 196612 ANCHORAGE, AK 99519-6612 BP EXPLORATION (ALASKA) INC, MR. DAVIS, ESQ P O BOX 196612 MB 13-5 ANCHORAGE, AK 99519-6612 BP EXPLORATION (ALASKA) INC, SUE MILLER P O BOX 196612 MIS LR2-3 ANCHORAGE, AK 99519-6612 AMSINALLEE CO INC, WILLIAM O VALLEE PRES PO BOX 243086 ANCHORAGE, AK 99524-3086 D A PLATT & ASSOC, 9852 LITTLE DIOMEDE CIR EAGLE RIVER, AK 99577 PINNACLE, STEVE TYLER 20231 REVERE CIRCLE EAGLE RIVER, AK 99577 L G POST O&G LAND MGMT CONSULT 10510 Constitution Circle EAGLE RIVER, AK 99577 JAMES RODERICK PO BOX 770471 EAGLE RIVER, AK 99577-0471 DEPT OF NATURAL RESOURCES, DGGS JOHN REEDER P O BOX 772805 EAGLE RIVER, AK 99577-2805 COOK INLET KEEPER, BOB SHAVELSON PO BOX 3269 HOMER, AK 99603 PHILLIPS PETROLEUM CO, ALASKA OPERATIONS MANAGER J W KONST P O DRAWER 66 KENAI, AK 99611 , RON DOLCHOK P O BOX 83 KENAI, AK 99611 DOCUMENT SERVICE CO, JOHN PARKER P O BOX 1468 KENAI, AK 99611-1468 KENAI PENINSULA BOROUGH, ECONOMIC DEVEL DISTR STaN STEADMAN P O BOX 3029 KENAI, AK 99611-3029 NANCY LORD PO BOX 558 HOMER, AK 99623 pENNY VADLA P O BOX 467 NINILCHIK, AK 99639 3584 BELOWICH, MICHAEL a BELOWICH 1125 SNOW HILL AVE WASILLA, AK 99654-5751 JAMES GIBBS P O BOX 1597 SOLDOTNA, AK 99669 PACE, SHEILA DICKSON P O BOX 2018 SOLDOTNA, AK 99669 KENAI NATL WILDLIFE REFUGE, REFUGE MGR P O BOX 2139 SOLDOTNA, AK 99669-2139 ALYESKA PIPELINE SERVICE CO, VALDEZ CORP AFFAIRS SANDY MCCLINTOCK P O BOX 300 MS/701 VALDEZ, AK 99686 VALDEZ PIONEER, P O BOX 367 VALDEZ, AK 99686 VALDEZ VANGUARD, EDITOR P O BOX 98 VALDEZ, AK 99686-0098 NICK STEPOVICH 543 2ND AVE FAIRBANKS, AK 99701 UNIV OF ALASKA FAIRBANKS, PETR DEVEL LAB DR V A KAMATH 427 DUCKERING FAIRBANKS, AK 99701 COOK AND HAUGEBERG, JAMES DIERINGER, JR. 119 NORTH CUSHMAN, STE 300 FAIRBANKS, AK 99701 RICK WAGNER P O BOX 60868 FAIRBANKS, AK 99706 C BURGLIN P O BOX 131 FAIRBANKS, AK 99707 FAIRBANKS DALLY NEWS-MINER, KATE RIPLEY P O BOX 70710 FAIRBANKS, AK 99707 DEPT OF NATURAL RESOURCES, DIV OF LAND REG MGR NORTHERN REGION 3700 AIRPORT WAY FAIRBANKS, AK 99709-4699 K&K RECYCL INC, P O BOX 58055 FAIRBANKS, AK 99711 ASRC, BILL THOMAS P O BOX 129 BARROW, AK 99723 , RICHARD FINEBERG P O BOX 416 ESTER, AK 99725 UNIV Of ALASKA FBX, PETR DEVEL LAB SHIRISH PATIL 437 DICKERING FAIRBANKS, AK 99775 UNIVERSITY OF ALASKA FBKS, PETR DEVEL LAB DR AKANNI LAWAL P O BOX 755880 FAIRBANKS, AK 99775-5880 ! SENATOR LOREN LEMAN STATE CAPITOL RM 113 JUNEAU, AK 99801-1182 DEPT OF ENVIRON CONSERV SPAR, CHRIS PACE 410 WILLOUGHBY AV STE 105 JUNEAU, AK 99801-1795 3585 9gcjg PHONE NO. (907) 279-1433 FAX NO. (907) 276.7542 Z dd ~ t£0N ~dal S~9¥d tNI£ Xl H~^I~O~ i~IS tLYQ t ~ (H)~N~$ ~ ~ lO'd ~ ALASKA OIL & GAS CONSERVATION COMMISSION 333 W. 7TH AVE, SUITE 100 ANCHORAGE, AK 99501-3539 FACSIMILE TRANSMITTAL SHEET FROM: COMPANY: DATE: FAX NUMBER: TOTAL NO. OF PAGES INCLUDING COVER: PHONE NUMBER: SENDER'S REFERENCE N-LIMBER: [] URGENT [] FOR REVIEW [] PLEASE COMlvlENT [] PLEASE REPLY [] PLEASE RECYCLE NOTES/COldlVlENTS: PHONE NO. (907) 279-1433 FAX NO. (907) 276-7542 3587 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 Re.' THE APPLICATION OF DANCO, ) INC. for an order granting integration) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) Conservation Order 391B North Cook Inlet Unit February 8, 2002 DECISION ON REMAND This is the decision on the merits in this case, which involves a petition for a Commission order of unitization under AS 31.05.110. The Commission denies the petition. PROCEDURAL HISTORY AND SUMMARY. OF PROCEEDINGS On August 30, 1996, Db, nco, Inc., and Monte Allen ("petitioners") filed a petition with the Commission asking that two oil and gas lease tracts in which they owned overriding royalty interests (referred to below as the "Danco leases") be "unitized into the North Cook Inlet Gas Unit." The two lease tracts, ADL 369100 and ADL 369101, were located outside of, but adjacent to or near, the existing North 'Cook Inlet Unit ("NCIU"). On March 7, 1997, the Commission dismissed the petition based on its conclusion that the petitioners had no property interest in the tracts sought to be included in the trait because the leases expired the day after they filed their petition. On June 20, 1997, the Commission reaffirrned that order in a Decision on Rehearing. Following Allen's appeal to superior court, which affn'med the Commission's decision, and then to the Supreme Court, the Supreme Court issued an opinion on May 12, 2000, reversing and remanding the case for a hearing before the Commission on the merits. The Court concluded that the petition was not moot as long as the Commission had the discretion to make a unitization order retroactive to the date the petition was filed, and that "the possibility of retroactivity could not properly be eliminated without 3588 recovery of substantially more oil and gas from the pool than would otherwise be recovered. 11. As to the Tyonek Deep reservoir, there has been no showing that the estimated additional cost, if any, of conducting such operations will not. exceed the value of the additional oil and gas so recovered. 12. As to the Tyonek Deep reservoir, there has been no showing that the unitization and adoption of one or more of the unitized methods of operation is for the common good. 13.None of the statutory requirements for an order requiring expansion of the North Cook Inlet Unit have been met. NOW THEREFORE IT IS ORDERED. that: 1. Pursuant to the Final Decision on Applications for Rehearing, Conservation Order 391A is superseded and replaced by this order. 2. The petition for an order of unitization is denied. 3. The Commission will address the allocation of the costs of the hearing under AS 31.05.085 in a separate order. DONE at Aneh~..o.~.' Alaska, this 8th day of February, 2002. "'- ? Cammy O~ ,~_ sli Taylor, ~2he~r Commission Daniel T. Seamount, J~., Commissioner Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission I certify that a copy of the above was hand delivered/mailed on February 8, 2002 to each of the following at their addresses of record: C.R. Kennelly, hand delivered Frederic E. Brown, mailed George Kasper, MD, mailed William B. Rozell, hand delivered Barbara Fullmer, hand delivered Daniel Helmick, mailed ~, Warren Z. Buck, mailed Jody J~.~olomb~e~pee.~.~_~Staff Assistant This Decision is the final order of the Alaska Oil and Gas Conservation Commission. Any appeal to Superior Court must be brought within 30 days from the date that this decision is mailed or otherwise distributed. Decision on Remand February 8, 2002 Page 25 of 25 3589 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, ' Suite 100 Anchorage, Alaska 99501 THE APPLICATION OF DANCO, ) INC. for an order granting integration) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit February 8, 2002 FINAL DECISION ON APPLICATIONS FOR REHEARING Following the Commission's issuance of its Decision on Remand in this case, the petitioners filed an application for rehearing, as did Dr. George Kasper, an owner or representative of an owner of a royalty interest in the Danco leases.~ The petitioners' application was accompanied by four exhibits consisting of unsigned letters or memoranda from individuals who had been witnesses or, in one case, who had submitted prefiled testimony that was not offered in evidence. The application stated that it incorporated those documents as though set forth in the text of the application. The applications for rehearing were granted by the Commission on January 3, 2002, for the limited purpose of allowing time for further consideration. The Commission has completed its consideration of the matters raised and now issues this final decision addressing those matters, along with a slightly revised Decision on Remand. For the most part, the Commission addresses here the points raised in the order they appear in the petitioners' application and exhibits. The argument raised by Dr. Kasper is similar to one of those raised by the petitioners, and both are addressed by the Commission in the same portions of this decision. ~ The record indicates the Kasper Family Parmership as the owner, but the application for hearing states that Dr. Kasper owns an individual interest. This discrepancy does not affect the Commission's consideration of the application. Dr. Kasper previously stated that the Kasper Family Parmership had "no intention of intervening or submitting its own testimony or exhibits in the matter." Nevertheless, AS 31.05.080(a) allows "a person affected by" a Commission decision to apply for reheating and does not appear to require that the person have been a party. 359O that unitization should be ordered anyway, to facilitate further exploration.48 This is beyond the Commission's authority. As pointed out elsewhere, the Commission may only include within a unit area so much of a pool or pools as has been def'med and determined to be productive. Contrary to Mr. Lappi's assertion, it is not tree that every lease must be drilled in order to show that it overlies a reservoir. Well control and seismic structural delineation can be used to demonstrate a productive area without necessarily drilling on each tract within the area. The Danco leases, however, are not within such an area. Conclusion The applications for rehearing have not identified any material errors in the Decision on Remand or the procedures in this case and have not shown any reason why the petition for an order of unitization should not be denied. Review of the applications for rehearing has found several minor respects in which the Decision on Remand should be corrected, clarified, or revised as indicated above. The Decision on Remand will be modified accordingly. The Decision on Remand is otherwise reaffirrned. IT IS SO ORDERED. DONE at Anchorage, Alaska, this 8th day of February, 2002. Cammy Oe~hsli Taylor, Chgir ~k~~~ation C ommissi on Daniel~. Seamoun ,~r., Commissioner Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission I certify fi.. was hand delivered/mailed on February 8, 2002 tO each of the following at their addresses of record: George Kasper, MD, mailed C.R. Kennelly, hand delivered Frederic E. Brown, mailed William B. Rozell, hand delivered Barbara Fullmer, hand delivered Daniel Helmick, mailed Warren Z. Buck, mailed J~~oloO~'e, Sp~'alcC~~'~'-~ Staff Assistant 48 Mr. Lappi also uses the term "development," although development by the Commissidn's definition pertains only to a known productive pool. See 20 AAC 25.990(18). FINAL DECISION ON APPLICATIONS FOR REHEARING February 8, 2002 Page 29 of 29 359 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 Re: THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit February 11, 2002 ERRATA NOTICE The Commission has found the following errors in its Final Decision on Applications for Rehearing, issued February 8, 2002, which should be corrected as noted. Affected portions are underlined. p. 11, first full paragraph: "... Arco Alaska, Inc., did not even own any interest in the NCPJ leases until after Commissioner Heusser had left the company" should read "... Arco Alaska, Inc., did not even own any interest in the NCIU gas reservoir before Commissioner Heusser had left the company." p. 18, first paragraph: "The Cook Inlet No. 1~ has a gas water contact of-4260 feet" should read "The Cook Inlet No. 1 Sand has a gas water contact of-4260 feet." p. 19, third paragraph: "... the Commission has informally used the name 'Tyonek Deep' to refer to the oil accumulation(s) discovered in the Sunfish and North Foreland sands below approximately 11,000 feet in depth" should read "... the Commission has informally used the name 'Tyonek Deep' to refer to the oil accumulations discovered in the Tyonek Formation below approximately 11,000 feet in depth." ~E at Anchorage, Alaska, this 1 lth day ofFeb, ruary, 2002. :i [::!: i-~L" Cammy Oec~li Taylor, Ch~air (J : Alaska Oil and Gas Conservation Commission ~. ';:~: i~.,~~.': "~ /,~ J Daniel T. Seamount, Jr., Commissioner · ~ i~.':. ~...,'.:,>.,. ~... ....~.~. .. ~,~~~,.._~t./.~,/ Alaska Oil and Gas Conservation Commission ,~ .' ~ ~ ' ':::r,. u.:!!' ..'.. '. ~-' ,' .:... ':?'.-', '~'~ Julie M. Heusser, Commissioner ._.. Alaska Oil and Gas Conservation Commission certify that on a cop',/ of the above of ~e ~ll~ng at ~r 3592 ALASKA OIL AND GAS CONSERVATION COMMISSION 333 WEST 7TH AVENUE, SUITE 100 ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: Barbara Fullmer Fred Brown Bart RozeH Re: Errate Notice (907) 265-6998 (907) 452-3733 (907) 463-5647 FROM: DATE: Jody Colombie Special Staff Assistant February 11, 2002 Total No. Of Pages Including Cover: 2 NOTES/COMMENTS I accidentally forgot to change the case caption on the Errata I faxed to you a few minutes ago. Please substitute the corrected version of the errata notice that I am faxing to you under this cover sheet. I am sorry for the confusion. Jody Colombie Phone No. (907) 793-1221 Fax No. (907) 276-7542 3593 ~69C NOTES/COMMENTS i accidentally forgot to change the case caption on the Errata ! faxed to you a few minutes ago. Please st~bstitute the corrected version of the errata notice that I am foxing to you under this cover sheeL I am sorry for the confusion. Jody Colombie Phone No. (907) 793-1221 Fax No. (907) 276-7542 Nd [ 0: PO NON ~0-[ [-8~ £~lOa:~l NOI NOTES/COMMENTS I accidentally forgot to change the case caption on the Errata I faxed to you a few minutes ago. Please substitute the corrected version of the errata notice that I am faxing to you trader this cover sheet. I am sorry for the confusion. Jody Colombie Phone No. (907) 793q221 Fax No. (907) 276-7542 , Nd bO:~O NO~ ~O-[[-~F~, . , ~ tO'd , 9698 NOTES/COMMENTS l accidentally forgot to 'change the case caption on the Errata I faxed to you a few minutes ago. Please substitute the corrected version of the errata notice that I am faxing to you u~der this cover sheet. i am sorry for the confusion. Jody Colombie Phone No. (907) 793-1221 Fax No. (907) 276.7542 8669q9E Nd qO:¢O [ , Ob[ ~0 (N) ON3S ~ ,,P~ , ~d 90:¢0 NON ~0-~I-837'---- · .... * , &HOd~8 NOILO~SNUS£ * , tO'd * #9 Re: STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 THE APPLICATION OF DANCO, ) INC. for an order granting integration ) of interests and unitization of the tracts ) in the existing North Cook Inlet Unit with ) state oil and gas leases ADL 369100 ) and ADL 369101. ) North Cook Inlet Unit March 8, 2002 ORDER ALLOCATING COSTS OF HEARING On February 8, 2002, the Commission issued Conservation Order 391B, denying the petition for an order of unitization. Conservation Order 391B stated: "The Commission will address the allocation of the costs of the hearing under AS 31.05.085 in a separate order." The Commission allocates the costs of the heating in the present order. The Commission incurred $7,026.~3 in out-of-pocket expenses in this proceeding since the pre-hearing conference on October 12, 2000, of which $79.98 was incurred for publication of the hearing notice, $16.00 was incurred for copying by an outside copying service, and the rest was incurred for court reporter's services and transcripts. AS 31.05.085(a) provides that in allocating costs, the commission shall consider the regulatory cost charge paid by a person under AS 31.05.093 and may consider the results, evidence of good faith, other relevant factors, and mitigating circumstances. As operators in the state, Phillips Alaska, Inc., and Phillips Petroleum Co. paid combined regulatory cost charges under AS 31.05.093 of $450,310.06 in Fiscal Year 2001 and $509,887.23 in Fiscal Year 2002. Neither of the petitioners is an operator and neither has paid regulatory cost charges. This factor tends to support weighing the allocation of hearing costs more to the petitioners than to Phillips. While negative results of a heating, e.g., denial of the petition on the merits, might not always argue for allocating all or most of the costs to a petitioner, in this case the negative results reflect the existence of a more compelling factor affecting the allocation of costs: the absence of any substantial factual basis for the petitioners' claims. The petitioners imposed significant costs and burdens on the Commission and on Phillips over an extended period of time in this case- only a small fraction of which is allocable under AS 31.05.093 -- without having evidence that could even arguably be viewed as reasonably sufficient to support compulsory unit expansion. Moreover, the petitioners repeatedly failed to review factual material that was made available to them by the Commission and by Phillips, and in this respect and others the petitioners put the Commission and Phillips to unnecessary additional expense. 3597 The Commission has determined that under these circumstances one hundred percent of the costs of the hearing should be allocated to the petitioners. AS 31.05.085(b) provides that the Commission shall provide an opportunity to any person objecting to an allocation to be heard before the allocation becomes final. A person may object to this allocation by filing an application for rehearing under AS 31.05.080(a). NOW THEREFORE IT IS ORDERED: 1. Costs of hearing in the amount of $7,026.73 are allocated to the petitioners. . This order will not become final until (a) the day after the time has expired for filing an application for reheating under AS 31.05.080(a), if no application for reheating is filed; or (b) the Commission finally disposes of any application for rehearing of this order that may be filed. 3. The petitioners shall pay to the Commission the costs allocated by this order no later than 30 days after this order becomes f'mal. DONE at Anchorage, Alaska, this 8th day of March 2002. I certify that on March 8, 2002 a copy of the above was mailed to each of the following at their addresses of record: Cammy O~}hsli Taylor, Alaska OiYand Gas Ponservation Commission Dahiel T./Seamount, ~ Commissioner Alaska Oil and Gas Conservation Commission Julie M. Heusser, Commissioner Alaska Oil and Gas Conservation Commission C.R. Kennelly Frederic E. Brown William B. Rozell Barbara Fullmer Daniel Helmick Warren Z. Buck George Kasper, MD Jody J[,~Co~mbie,~p~ciaf~f-fAssistant.. '._ ORDER ALLOCATING COSTS OF HEARING March 8, 2002 Page 2 of 2 3598 P, O1 I TRaNSaOTION REPORT ~ '--~ '---ffflaR-08-02 FRI 04:29 PH ~ SEND(H) ~ DATE START REOEIVER TX TIHE F~GE$ TYFE NOTE H~ DP x HflR-08 04:27 PH 2656998 1'06~ 3 SEND (H) OK 194 , , TOTftL 1H 6S P,qGES: 3 *~ ALASKA' 0IL AND GAS CONSERVATION COMMISSI°N 333 WEST 7TH AVENUE, SUITE 100 ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: FROM: Re: Barbara Fullmer Fred Brown Bart Rozell N'eil Kennelly (907) 265-6998 (90'7) 452-3733 (907) 463-5647 (907) 279-9353 Order Allocating Costs of Hearing DATE: Jody Colombie Special Staff Assist~mt March 8, 2002 Total No. Of Pages Including Cover: 3 NOTES/COMMENTS 3599 TRaNSaOT I ON REPORT P, O1 '-?faR-08-02 FRI 04: 33 P~ SEND (N) ~ DaTE START REOEIVER TX TIRE PAGES TYPE NOTE a~ DP ! NAR-08 04:30 PN 19074523733 1'26~ 3 SEND (Ii) OK 195 t TOTAL Ill 26S PAGES: ~K~ OIL AND GAS cONsERVATION COMMISSION 333 WEST 7TH AVENUE, SUITE 100 ' ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: Re: Barbara Fullmer Fred Brown Bart Rozell Neil Kennelly (907) 265-6998 (907) 4524733 (907) 463~5647 (907) 279-9353 Order AHocating Costs of Hearing FROM: DATE: Jody Colombie Special Staff Assistant March 8, 2002 Total No, Of Pages including Cover: 3 NOTES/COMMENTS 36OO ~?.~SKA OIL AND GAS CONSERVATION COMMISSION 333 WEST 7TH AVENUE, SUITE 100 ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: Re: Barbara Fullmer Fred Brown Bart Rozell Neil Kennelly (907) 265-6998 (907) 452-3733 (907) 463-5647 (907) 279-9353 Order AHocating Costs of Hearing FROM: DATE: Jody Colombie Special Staff Assistant March 8, 2002 Total No. Of Pages Including Cover: 3 NOTES/COMMENTS 3601 P, O1 , TRflNSflOTION REPORT , '----'RflR-08-02 FRI 04:38 Pa , SEND (M) , DflTE STflRT REOEIVER TX TIRE PAGES TYPE NOTE Re DP , HflR-08 04:37 PH 2799353 1'07~ 3 SEND ( H) OK 197 TOTAL 1H 7S PAGES: ~KA OIL ~ G~S CONSERVATION COMMISSION 333 WEST 7TH AVENUE, SUITE 100 ANCHORAGE ~L~SKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: Re: Barbara Fuilmer Fred Brown Bart Rozeli Neil Kennelly (907) 265-6998 (907) 452-3733 (907) 463-5647 007) 279-9353 Order Allocating Costs of Hearing FROM: DATE: Jody Colombie Special Staff Assistant March 8, 2002 Total No, Of Pages Including Cover: 3 NOTES/COMMENTS 3602 TRaNSaOTI ON REPORT P, O1 '---flflR-08-02 FRI 04:36 PM * SEND(M) ~ t DflTE STfiRT REOEIVER TX TIME PAGES TYPE NOTE H~ DP ~ -t MAR-08 04:34 PM 19074635647 2'06~ 3 SEND (M) OK 196 ~ i TOTAL 21'I 6S PAGES: 3 ~, ALASKA OIL AND GAS CONSERVATION- COMMISSION 333 WEST 7TH AvRNUE, SUITE 100 ANCHORAGE ALASKA 99501-3539 FACSIMILE TRANSMITTAL SHEET TO: FROM: Re: Barbara Fullmer Fred Brown. Bart Rozell Neil Kennelly (907) 265-6998 (907) 45L3733 (907) 463-5647 (907) 279-9353 Order Allocating Costs of Hearing DATE: Jody Colombie Special Staff Assistant March 8,2002 Total No. Of Pages Including Cover: 3 NOTES/COMMENTS 3603