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CO 338
Conservation Order Cover Pal~ 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 RESC.~N [] Orayscale items: [] Poor Quality Originals: [] Other: NOTES: DIGITAL DATA OVERSIZED (Scannable with large plofferlscanner) [] Diskettes, No. ~ [] Other, No/Type [] Other items OVERSIZED (Not suitable for plotter/scanner, may work with 'log' scanner) [] Logs of various kinds [] Other ' BY: ~ARIA Scanning Preparation TOTAL PAGES ~/?::~ ~ · -- Production Scanning Stage I 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 (SCANNING IS COMPLETE AT THIS POINT UNLESS SPECIAL ATTENTION IS REQUIRED ON AN INDNIDUAL PAGE BASIS DUE TO QUALITY, GRAYSCALE OR COLOR IMAGES) General Notes or Comments about this Document: 5/21/03 ConservOrdCvrPg.wpd STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 3001 Porcupine Drive Anchorage Alaska 99501-3192 Re~ THE APPLICATION OF Z-ENERGY ) INC. for an order granting an exception ) to spacing requirements of Title 20 AAC ) 25.055 to provide for the drilling of the ) North Beluga River 12-2 exploratory ) gas well. ) Conservation Order No. 338 3 37 Z-ENERGY INC. North Beluga River 12-2 Exploratory Gas Well August 19, 1994 IT APPEARING THAT: . Z-ENERGY INC. submitted an application dated May 9, 1994, requesting an exception to 20 AAC 25.055 to allow drilling the Z-ENERGY INC. North Beluga River 12-2 exploratory gas well closer than 1500 feet to a drilling unit boundary. 2. Notice of hearing was published in the Anchorage Daily News on May 11, 1994, pursuant to 20 AAC 25.540. 3. ARCO Alaska, Inc. filed a protest to the application on May 26, 1994. 4. A hearing was convened on the matter June 10, 1994 at the commission offices in Anchorage, and recessed later that day until July 12, 1994. 5. Testimony was given by Z-ENERGY INC. and ARCO Alaska, Inc. 6. The hearing reconvened on July 12, 1994, and closed later that day. FINDINGS: . Correlative rights mean the opportunity afforded, so far as it is practicable to do so, to the owner of each property in a pool to produce without waste the owner's just and equitable share of the oil or gas, or both, in the pool; being an amount, so far as can be practically determined, and so far as can be practicably obtained without waste, substantially in the proportion that the quantity of recoverable oil or gas or both under the property bears to the total recoverable oil or gas or both in the pool, and for such purposes to use the owner's just and equitable share of the reservoir energy. AS 31.05.170(2). 2. Each well permitted to be drilled on a drilling unit shall be drilled under the rules and regulations and in accordance with the spacing pattern as the commission prescribes Conservation Order 33 ~37 { Page 2 August 19, 1994 for the pool in which the well is located. Exceptions to the rules and spacing pattern may be granted where it is shown, after notice and hearing, that the unit is partly outside the pool, or for some other reason a well so located on the unit would be nonproductive, or topographical conditions are such as to make the drilling at such a location unduly burdensome. AS 31.05.100(b). . A governmental section constitutes the drilling unit for gas exploration; a well exploring for gas must be at least 1500 feet from the drilling unit boundary. 20 AAC 25.055. , The spacing exception application for the Z-ENERGY INC. North Beluga River 12-2 exploratory gas well proposes a bottom-hole location 1200 feet from the south line (FSL) and 300 feet from the east line (FEL) of Section 12, T13N, R10W, Seward Meridian. Actual surface location for the NBR 12-2 exploratory gas well is undecided at this time. , Z-ENERGY INC. has been assigned 100% working interest in State lease ADL 381224, which includes the E½ of Section 11, T13N, R10W, SM and all of Section 12, T13N, R10W, SM less U.S. Survey 3901. This lease lies adjacent to the Beluga River Unit. o The proposed bottom-hole location for the Z-ENERGY INC. well is approximately 3025 feet northwest of the closest Beluga River Unit production well (BRU 212-18), located 1799' FNL, 100' FWL, Section 18, T13N, R9W, SM. . The Burglin X33-12 well was drilled during the winter of 1976-77 to a bottom-hole location 1827' FSL, 2347' FEL, Section 12, T13N, R10W, SM; it was plugged and abandoned on January 23, 1977. , Z-ENERGY INC. stated it selected the bottom-hole location for NBR 12-2 well to maintain the 3000-foot standoff requirement of 20 AAC 25.055 and position the well more favorably on the Beluga River structure and to an inferred fault. Z-ENERGY INC. believes the fault affects the distribution of gas pay on its lease. 9. Z-ENERGY INC. portrayed lineaments on aerial photographs to support its claim of faulting. 10. ARCO Alaska Inc. stated that its interpretation of area seismic data does not support Z-ENERGY INC. claims of faulting. ARCO Alaska, Inc. did not submit its seismic data for inclusion into the public record. 11. No significant disagreement exists between Z-ENERGY INC. and ARCO Alaska, Inc. regarding Sterling "A" structural interpretation. Conservation Order 33 Page 3 .~27 { August 19, 1994 12. Based on volumetric and material balance calculations, ARCO Alaska, Inc. has determined the BRU 212-18 will drain that portion of the Beluga formation reservoir equivalent to a radius of 1690 feet. 13. ARCO Alaska, Inc. does not object to the drilling of the NBR 12-2 well, but protests the production of the well as a possible violation of its correlative rights. 14. The commission has not established pool rules for the Beluga River Unit or adjacent area. 15. A completed well means a well that has been drilled and equipped as a producible or service well. 20 AAC 25.570. CONCLUSIONS: 1. An exception to 20 AAC 25.055(a)(2) is necessary to allow drilling of the NBR 12-2 well at the proposed location. 2. The commercial limits of the undefined Beluga River accumulation common to Beluga River Unit 212-18 well are not known to extend to the Burglin X33-12 well. 3. If the commercial limits extend onto the Z-ENERGY INC. lease, then the Z-ENERGY INC. drilling unit is partially outside the undefined Beluga River accumulation. 4. Granting the spacing exception will assure Z-ENERGY INC. of its opportunity to prove whether or not commercial quantities of gas exist on a portion of its lease. o Completion of the NBR 12-2 well will preclude ARCO Alaska, Inc. from drilling a well to the same pool on its acreage closer than 3000 feet to the NBR 12-2 exception location without first obtaining its own exception to 20 AAC 25.055. o The commission must take such action as will offset any advantage which the person securing the exception may have over other producers by reason of the drilling of the well as an exception, and so that drainage from developed units to the tract with respect to which the exception is granted will be prevented or minimized, and the producer of the well drilled as an exception will be allowed to produce no more than a just and equitable share of the oil and gas in the pool. AS 31.05.100(b) NOW, THEREFORE, IT IS ORDERED: Z-ENERGY INC.'s application for an exception to 20 AAC 25.055 for the purpose of drilling the North Beluga River 12-2 exploratory gas well to a bottom-hole location 1200 feet from the south line (FSL) and 300 feet from the east line (FEL) of Section 12, T13N, R1 OW, Seward Meridian is approved under the following conditions. Conservation Order Page 4 3' 6 33¢ August 19, 1994 The NBR 12-2 exploratory gas well must be logged and tested to determine the well's potential to produce commercial quantities of hydrocarbons and to determine if communication exists with other Beluga River producing wells. . The NBR 12-2 well may not be completed until the commission takes additional action, upon petition and after notice and hearing, to (a) offset any advantage Z- ENERGY INC. may have over other owners by reason of drilling NBR 12-2 to the exception location, (b) prevent or minimize drainage from the Beluga River Unit to ADL 381224, and (c) allow affected owners to produce their just and equitable share of hydrocarbons. DONE at Anchorage, Alaska and dated August 19, 1994. David ~. J~Chirn~an Alaska'~rvation Commission Alaska Oil and Gas Conservation Commission Russell A. D~uglass, Commissi,~er Alaska Oil and Gas Conservatib'n Commission AS 31.05.080 provides that within 20 days atter receipt of written notice of the entry of an order, a person affected by it may file with the Commission an application for rehearing. A request for reheating must be received by 4:30 PM on the 23rd day following the date of the order, or next working day if a holiday or weekend, to be timely filed. The Commission shall grant or refuse the application in whole or in part within 10 days. The Commission can refuse an application by not acting on it within the 10-day period. An affected person has 30 days from the date the Commission refuses the application or mails (or otherwise distributes) an order upon rehearing, both being the final order of the Commission, to appeal the decision to Superior Court. Where a request for rehearing is denied by nonaction of the Commission, the 30 day period for appeal to Superior Court runs from the date on which the request is deemed denied (i.e., 10th day after the application for rehearing was filed). WALTER J. HICKEL, GOVERNOR ALASKA OIL AND GAS CONSERVATION COMMISSION 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 August 22, 1994 ERRATUM -- Conservation Order No. 338 To Whom It May Concern: Attached is a CORRECTED Conservation Order No. 338 for Z-ENERGY INC, North Beluga River 12-2. The number "337" was inadvertently assigned to this order which was mailed on August 19, 1994. Please replace any misnumbered copies you may have. We regret this inconvenience. Sincerely, Diana L. Fleck Executive Secretary d/jo Memorandum State of Alaska Oil and Gas Conservation Commission To: Russ Douglass-~ Fm: J. Hartz/~')~/ Re~ North Beluga River 12-2 Spacing Exception August 12, 1994 In addition to the findings and conclusions you provided on the captioned exception, you might consider several additional ones. Findings: 1. Pool rules have not been requested for the geographic area in which the proposed North Beluga River 12-2 well will be drilled. 2. Z-Energy has selected a bottom hole location predicated on structural features they interpret or infer from surface data. 3. No protest was made to Z-Energy's application to drill an exploratory gas well at the exception bottom hole location stated in their application. Conclusions: 1. The AOGCC may regulate the spacing of wells and the formation of drilling units under AS 31.05.030 and 31.05.100. 2. An exploratory gas well drilled at the location proposed by Z-Energy will not cause waste or jeopardize correlative rights. 3. An exception to 20 AAC 25.055 (a) (2) is appropriate for drilling an exploratory gas well, North Beluga River 12-2 at the location requested by Z-Energy. PRESTON GATES & ELLIS ATTORN£Y$ FACSIMILE COVER PAGE August 12, 1994 ChaLnnan David Johnston (Individual) From: Mark Wittow Alaska Oil & Gas Conservation No. of Page: 2 Comm. tlacluaiag Cover Page) (Company) 276-7542 (Tel~copy No.) 279-1433 (Confirmation No.) Client/Matter No.' 32413-00001 Client/Matter Name: Z-Energy If you do not fete}ye all of the pages, please coamot our teleoopy operator at (907) 265-4616. Thc information coulaiumd in ~is facsimile is co~trdential and may {ho bm a~mey-p~vfleg~. ~ ~orm~n is i~d o~y for ~m usm i~ m ~ in~n~d ~eip~ac, you a~ hereby notified ~at any use. disse~a, di~ibuflon or oopy~ of ~is c~umcafioa is ~gfly ~mhibi~d. If you have ~ce}ved ~ faosim~e ~ e~r. vl~ ~te~ ~fi~ us by a collect ~lephone call tn (~) 27~.{q~ and ~mtn · e o~i mm~m to us at ~e ~dtess above via ~e U,$, Po~ ~iee. ~a~ you, Copy will not be sent. Copy sent by U,S, mail, C.c.~py .~..nt by overnight mail. See attached. COMMENTS: Surm 400 420 L STRImT ANCHORAOt~, 'ALA$ICA 99501-1937 P~OSa: (907) 276-1969 FACS~: (907) 276-1365 Co~ug D'A~Ng · ~$ ~O~M, POKI'L~'D, ~TI'LE * ~~E · TACOMA · WASHINGTON, D.C. A PA~T~E~H~P ~CLUD~ A PROFE~ON~ COR~O~T~N ~UG 1~ '~4 1~:40 PRESTOM F~MCHORF~GE P. E./2 PRESTON GATES & ]ELLIS ATTORNEYS VIA FACSIMILE August 12, 1994 David $ohaston, Chairman Alaska Oil & Oas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 Z-l~nergy's Request for Spacing Exception NBR No. 12-2 'Cook Inlet, Alaska Dear Chairman Johnston: RECEIVED AIJ6 '/,?. I994 Alas~.Oil & Gas ~ns. Commission orage I would appreciate it if someone from the Commission's stag would notify mc by telephone when the Commission's decision in the above-referenced matter ,is available, i would then arrange to have Z-Energy's copy of thc decision picked up, Alternatively, a copy of the decision could be transmitted to me via facsimile at 276-1365. Tha~ you, Sincerely, PRESTON GATES & .ELLIS By: Mark H. Wittow cc: Paul Craig, Z-Energy 400 420 L STRICT ANCHORAGF., ALASY~A 99501-1937 I~ON~: (907) 276-1969 FAC.q~dlI~: (907) 276-1365 (gO,UR D'ALtiNI~, LOS ANO~LF.S , PORTLAND , I$1~TTL~. · 5POKANta , 'rnCOMA · wasml~OXOlq, D.C. A P~a'm~u, l~c~uo,~tu A P~o~esS,o~,{. C~ama~rmt~ ARCO Alaska, Inc. Legal Department Post Office Box 100360 Anchorage Alaska 99510 Telephone 907 265 6549 Rosanne M. Jacobsen Attorney August 8, 1994 Via Facsimile c~l-- Mr. David Johnston, Chairman Alaska Oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 RE: Z-Energy Spacing Exception Request ~ar Mr. Johnston: RECEIVED AUG 1 0 1994 Alaska 0il & Gas Cons. Commission Anchorage Thank you for your letter of July 26, 1994. We appreciate this opportunity to correct a misstatement concerning the Beluga River Unit's underground injection well CBRWD-I"). Exhibit 6, which is ARCO Alaska's "Application to the Alaska Oil and Gas Conservation Commission for Underground Injection of Nonhazardous Oilfield Waste," incorrectly states on page 7 that injection would occur into a partially depleted gas reservoir of the Lower Sterling Formation Zones A, B, and C. The attached Exhibit E-3, alog of the BRU 212-18 well (which does not produce from the Sterling sands), also incorrectly indicates that injection would occur below Sterling A. In fact, fluids have never been injected into Sterling A or any.formation below Sterling A in the BRWD-1. Exhibit J-2 on page 32 of the application, a log of the BRWD-1 injection well, indicates that BRWD-1 barely penetrates the top of the Sterling A sand. Pages 27, 28, and 35 convey similar information. We believe the application contains inconsistent information because it was hurriedly prepared soon after ARCO took over operatorship, of the field from Chevron in 1986. We apologize for the inconsistencies. As to the twenty-one listed files, ARCO appreciates the notification that the Commission has taken official notice of the contents of those files. Unfortunate- ly, we cannot devote the manpower to reviewing each of the files, especially ARCO Alaska, Inc. is a Subsidiary of Atlantic Richfield Company Mr. David Johnston, Chairman Alaska Oil & Gas Conservation Commission August 8, 1994 Page 2- when we do not know which specific information the Commission may use from the files. We note that the contents of the files may be old and most of the information was probably submitted by the previous operator of the field. We will, however, endeavor to provide up-to-date information on any specific items in the files, if the Commission should so desire. Very truly yours, Rosanne M. Jacobsen /pag RECEIVED AUG 1 0 1994 uu & Gas Cons. Commission Anchorag~ FAX COVER SHEET August 8, 1994 Page I of 3 FROM: Rosanne M. Jacobsen COMPANY N~: ARCO, ATO-2088 PHONE NUMBER: 9071265-6549 FAX NUMBER: 907/265-6998 TO: Mr. David Johnston COMP~ NAME: Alaska Oil & Gas Conservation Commission PHONE NUMBER: 279-i~33 FAX NUMBER: 276-7542 MESSAGE CONFIRM: 907/265-6051 · i i I t .,]iL~ 11, II~ I Illll I RECEiVeD CON'FIDE~ALITy, N_OTIC£ AUG -9 1994 Alaska Oil & Gas tons. Anchorage The docanea~s aecompaayiag this facsimile message coataia oonfideatial co,mmuaicatioas which may be subjoot to lnot~tioa u~ tho attoraey-Client privilege or the attorney work-prcduot doctrine. These dccumeuts are intended solely for tho use of the proper addressee and should not be read or relaieed by anyone ~ thaa the iatended recipient. If you have ~,~iv~ this telecopy in error, plea~ notify us i~ly by collect telephone call at the number shown above. Thank you. ARCO Alaska, inc. Legal Department Post Office Box 100360 Anchorage Alaska 99510 Telephone 9(}7 265 6549 Rosanne M. JacoDsen Attorney August 8, 1994 Via Mr. David lohnst0n, Chairman Alaska Oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 RE: Z-Enersy Spacin8 Exception Request Dear Mr. Iohnston: RECEIVED AUG -9 1994 Alaska Oil & Gas Cons. Oon~rn~ss~°" Anchorage Tlumk you for your letter of July 26, 1994. We appreciate this opportunity to correct a misstatement concerning the Beluga River Unit*s underground injection wett ("BRWD* t"). Exhibit 6, which is ARCO Alaska's "Application to the Alaska Oil and Gas Conservation Commission for Underground Inj~tion of Nonhazardous Waste," incorrectly states on page 7 that injection would occur into a partially depleted gas reservoir of the Lower Sterling Formation Zones A, B, and C, The attae, h~ Exhibit E-3, a log of the BRU 212-18 well (which does not produce from the Sterling sands), dso incon'ectly indicates ttmt injection would occur below Sterling A. In fact, fluids have never been injected into Sterling A or any formation below Sterling A in the BRWD-1. Exhibit I-2 on page 32 of the application, a log of the BRWD-I injection well, indicates that BRWD-1 barely penetrates the top of the Sterling A sand. Pages 27, 28, and 35 convey similar information. We believe the alrgtication contains inconsistent information because it was hurriedly p~ soon after ARCO took over operatorship of the field from Chevron in 1986. We apologize for the inconsistencies. AS lO the twenty-one listed files, ARCO appreciates 'the notification'that the Commission has taken official notice of the contents of those files, Unfonunate- l.y, we cannot devote the manpower to reviewing each, of the files, especially ~' d .Ld3a 9W~39 IWW NdEO: ~0 t,6, BO ~F'I~ Mr. David ~ohn.~n, Ch~rman Alas~ Oil & Gas Consetv~on Co~on August 8, 1994 Page= 2 -. when we do not know which specific it~rr~__~m the Commission may use from the Kle~. We no~e that the contents of the files may be old and most of the information was probably submitted by the previous operator of the field. We will, however, endeavor to provide u~to-daie information on any ~§c items in the fdes, if the Commission should so de. sire. Very truly yours, Rosanne M. Jacobsen tpag R£CF..Ifl AUG '9 1994 Alaska 011 0 ~:,' ~b ~,,~;~a vu~"~'~5'~'J: Anchora,qe WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 July 26, 1994 Rosanne M Jacobsen, Atty ARCO Alaska Inc P O Box 100360 Anchorage, AK 99510-0360 Re: Z-Energy Spacing Exception Request Dear Ms Jacobsen: In the course of its deliberations in the above-referenced matter, the Commission has found it helpful to refer to its public files of well records and production records relating to the Beluga River field and surrounding areas. This letter is to ensure that you are aware that the Commission takes official notice of the contents of these public well files: Beluga River Unit 212-35 Beluga River Unit 214-35 Beluga River Unit 212-25 Beluga River Unit 232-09 Beluga River Unit 232-04 Beluga River Unit 224-23 Beluga River Unit 233-27 Beluga River Unit 232-26 Beluga River Unit 14-19 Beluga River Unit BRWD-1 Beluga River Unit 244-04 Beluga River Unit 211-03 Beluga River Unit 212-24 Beluga River Unit 224-34 Beluga River Unit 241-34 Beluga River Unit 214-26 Beluga River Unit 224-13 Burglin X33-12 Beluga River Unit 212-18 Pretty Creek Unit #1 Beluga River Unit' 221-23 Data specifically referenced in the files included open hole well logs, completion information, including perforation intervals and production data. If you wish to rebut any of the material in these files, please notify the Commission no later than August 8, 1994. Such notification should include a statement of whether you wish to submit a rebuttal in writing or at an oral hearing and, if the latter, the reasons you believe a written submission would be insufficient. Chairman ~ jo/rpc~z-energy ~:~ printed on recycled paper b y (.'.',.~'.~. ALASKA OIL AND GAS CONSERVATION COMMISSION WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 July 26, 1994 Mark H Wittow Preston Gates & Ellis 420 L St Ste 400 Anchorage, AK 99501-1937 Re: Z-Energy Spacing Exception Request Dear Mr Wittow: In the course of its deliberations in the above-referenced matter, the Commission has found it helpful to refer to its public files of well records and production records relating to the Beluga River field and surrounding areas. This letter is to ensure that you are aware that the Commission takes official notice of the contents of these public well files: Beluga River Unit 212-35 Beluga River Unit 214-35 Beluga River Unit 212-25 Beluga River Unit 232-09 Beluga River Unit 232-04 Beluga River Unit 224-23 Beluga River Unit 233-27 Beluga River Unit 232-26 Beluga River Unit 14-19 Beluga River Unit BRWD-1 Beluga River Unit 244-04 Beluga River Unit 211-03 Beluga River Unit 212-24 Beluga River Unit 224-34 Beluga River Unit 241-34 Beluga River Unit 214-26 Beluga River Unit 224-13 Burglin X33-12 Beluga River Unit 212-18 Pretty Creek Unit #1 Beluga River Unit 221-23 Data specifically referenced in the files included open hole well logs, completion information, including perforation intervals and production data. If you wish to rebut any of the material in these files, please notify the Commission no later than August 8, 1994. Such notification should include a statement of whether you wish to submit a rebuttal in writing or at an oral hearing and, if the latter, the reasons you believe a written submission would be insufficient. Chairman~ ..... jo/rpc~z-energy ~J~ printed on recycled paper b y t::;, ~.'). ALASKA OIL AND GAS CONSERVATION COMMISSION WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 July 26, 1994 Paul Craig, President Z-Energy Inc 2900 Boniface Pkwy #610 Anchorage, AK 99504-3132 Re: Z-Energy Spacing Exception Request Dear Mr Craig: In the course of its deliberations in the above-referenced matter, the Commission has found it helpful to refer to its public files of well records and production records relating to the Beluga River field and surrounding areas. This letter is to ensure that you are aware that the Commission takes official notice of the contents of these public well files: Beluga River Unit 212-35 Beluga River Unit 214-35 Beluga River Unit 212-25 Beluga River Unit 232-09 Beluga River Unit 232-04 Beluga River Unit 224-23 Beluga River Unit 233-27 Beluga River Unit 232-26 Beluga River Unit 14-19 Beluga River Unit BRWD-1 Beluga River Unit 244-04 Beluga River Unit 211-03 Beluga River Unit 212-24 Beluga River Unit 224-34 Beluga River Unit 241-34 Beluga River Unit 214-26 Beluga River Unit 224-13 Burglin X33-12 Beluga River Unit 212-18 Pretty Creek Unit #1 Beluga River Unit 221-23 Data specifically referenced in the files included open hole well logs, completion information, including perforation intervals and production data. If you wish to rebut any of the material in these files, please notify the Commission no later than August 8, 1994. Such notification should include a statement of whether you wish to submit a rebuttal in writing or at an oral hearing and, if the latter, the reasons you believe a written submission David W Johnston \ -~ ~ Chairman ~ jo/rpc~z-energy ALASKA OIL AND GAS CONSERVATION COMMISSION WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 July 26, 1994 D A Grove, BRU/Kup Staff Mgr ARCO Alaska Inc P O Box 100360 Anchorage, AK 99510-0360 Re: Z-Energy Spacing Exception Request Dear Ms Grove: In the course of its deliberations in the above-referenced matter, the Commission has found it helpful to refer to its public files of well records and production records relating to the Beluga River field and surrounding areas. This letter is to ensure that you are aware that the Commission takes official notice of the contents of these public well files: Beluga River Unit 212-35 Beluga River Unit 214-35 Beluga River Unit 212-25 Beluga River Unit 232-09 Beluga River Unit 232-04 Beluga River Unit 224-23 Beluga River Unit 233-27 Beluga River Unit 232-26 Beluga River Unit 14-19 Beluga River Unit BRWD-1 Beluga River Unit 244-04 Beluga River Unit 211-03 Beluga River Unit 212-24 Beluga River Unit 224-34 Beluga River Unit 241-34 Beluga River Unit 214-26 Beluga River Unit 224-13 Burglin X33-12 Beluga River Unit 212-18 Pretty Creek Unit #1 Beluga River Unit 221-23 Data specifically referenced in the files included open hole well logs, completion information, including perforation intervals and production data. If you wish to rebut any of the material in these files, please notify the Commission no later than August 8, 1994. SUch notification should include a statement of whether you wish to submit a rebuttal in writing or at an oral hearing and, if the latter, the reasons you believe a written submission would be insufficient. David W Johnston Chairman \~ jo/rpc~z-energy ~.~ printed on recycled paper PRESTON VIA FACSIMILE Robert E. Mintz Assistant Attorney General Alaska Department of Law 1031 West Fourth Ave., Suite 200 Anchorage, Alaska 99501-1994 G AT E S & E L L I S ATTO R N E Y S July 19, 1994 Re: ARCO's July 18th Letter Concerning Z-Energy's Well Location Exception Dear Mr. Mintz: lam writing in response to the letter to you by Rosanne Jacobsen of ARCO Alaska, Inc. dated July 18, 1994. Ms. Jacobsen notes that in my closing argument to the Alaska Oil and Gas Conservation Commission on July 12, I indicated that the testimony of Kerri Thompson should be accorded little weight in light of ARCO Alaska's refusal to make the seismic data that formed the basis for her conclusions available to Z-Energy. I appreciate the opportunity that she has provided to further explain why Ms. Thompson's testimony would be an inappropriate basis for a Commission decision. In short, the decision by ARCO Alaska to present its testimony in summary form, without allowing the underlying data to be examined, renders that testimony unreliable. Ms. Thompson's testimony concerned seismic data obtained by ARCO Alaska. That seismic data was never presented to the Commission. We do not disagree that, under Alaska Rule of Evidence 703, an expert may rely on seismic data in expressing an opinion. However, by refusing to make the data available to the Commission and Z-Energy, ARCO Alaska ignored Alaska Rule of Evidence 705(a), which provides that "[t]he expert may ... be required to disclose on cross-examination, the underlying facts or data .... "If expert testimony is to be offered, the underlying facts or data relied on by the expert should be disclosed to the opposing party. Without that disclosure, there is no way to test the opinion of the expert or examine the merits of the conclusions. The disclosure requirement exists because an opinion is only as good as its assumptions. In this instance, the Commission and Z-Energy were denied the opportunity to examine the assumptions behind Ms. Thompson's opinions. ik~SkeL 0i~ & Gas Cons. Commission A PARTNERSHIP INCLUDING A PROFESSIONAL CORPORATION Anch0~'~'0~ COEUR D'ALENE · Los ANGELES · PORTLAND · SEATTLE · SPOKANE · TACOMA . WASHINGTON. D.C. SUITE 400 420 L STREET ANCHORAGE. ALASKA 99501-1937 PHONE: (907) 276-1969 FACSIMILE: (907) 276-1365 Page 2 July 19, 1994 Under Alaska administrative law, hearsay evidence may not provide a basis for an administrative agency's decision. See AS 44.62.460(d); Brown v. Northwest Airlines, 444 P.2d 529, 534-35 (Alaska 1968); see also Consolidated Edison Co. v. NLRB, 305 U.S. 197, 230 (1938) ("[m]ere uncorroborated hearsay or rumor does not constitute substantial evidence). AS 44.62.460(d) provides in relevant part that: Hearsay evidence may be used to supplement or explain direct evidence but is not sufficient by itself to support a finding unless it would be admissible over objection in a civil action. Although AS 31.05.060(b) provides that "[a]ny action by the commission that has application to a single well or single field need not comply with the provisions of AS 44.62.330 -- 44.62.630, ..." the general policy that underlies the limitation on hearsay is still worthy of consideration by the Commission. Hearsay is any "statement, other than one made by the declarant while testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted." Alaska Rule of Evidence 801(c). Ms. Thompson referred to the seismic data to prove the truth of her assertions, without making that data available for cross-examination. This type of summary testimony, offered without substantiation, has been categorized by the Alaska Supreme Court as inadmissible hearsay. See Klawock Heenya Corp. v. Dawson Construction, 778 P.2d 219, 221 (Alaska 1989). The seismic data itself may well have been admissible under the business records exception found in Alaska Rule of Evidence 803(6), but, of course, the data was not offered as evidence. Ms. Thompson's testimony certainly may be considered by the Commission. Z- Energy recognizes that as an administrative agency the Commission may consider a much wider range of evidence than is strictly allowed by the rules of evidence. The Alaska Administrative Procedure Act provides: The hearing need not be conducted according to technical rules relating to evidence and witnesses. Relevant evidence shall be admitted if it is the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs, regardless of the existence of a common law or statutory rule that makes improper the admission of evidence over objection in a civil action. AS 44.62.460(d). Additionally, as noted above, even the limitation on hearsay evidence is not strictly applicable to this proceeding as a result of the provisions of AS 31.05.060(b). My point was simply that Ms. Thompson's testimony deserved little weight, given the refusal of ARCO Alaska to provide its underlying data. Fundamental concerns of fairness and due process, as expressed in the rule disallowing hearsay as Page 3 July 19, 1994 the basis for an administrative decision, require that a party disclose the underlying data on which its expert relies, if it wishes for the testimony of that expert to be considered reliable and accorded any significant weight. Please let me know if you have any questions. Sincerely, PRESTON GATES & ELLIS By: Mark H. Wittow CC: Chairman David Johnston, AOGCC (via fax) Rosanne Jacobsen, counsel for ARCO Alaska, Inc. (via fax) Joe Dygas, BLM Mike Kotowski, DNR Michael T. Shook, Shell Western E&P Corey Woolington, Chevron USA ARCO Alaska, inc. Legal DeDar[ment Post Office Box 100360 Anchora(~e Alaska 99510 Teleohone 907 265 6549 Rosanne M. Jacobsen Attorney July 18, 1994 CONFIRMATION COPY THIS IS THE ORIGINAL, FOR YOUR RECORDS, OF A FACSIMII-~ ~k~ISSION SENT TO YOU ON _ 7// Robert E. Mintz, Esq. Attorney General's Office 1031 West 4th Avenue~ suite 200 Anchorage, Alaska 99501-1994 Re: Z-Energy's Location Exception Request Kerri Thompson's Testimony Dear Mr. Mintz: A question came up at last week's hearing about the expert testimony that Kerri Thompson gave on June 10, 1994 regarding her interpretation of ARCO Alaska seismic data. In his clos- ing argument, Mr. Whittow stated that Ms. Thompson's testimony was hearsay or was based on hearsay and should therefore be afforded lesser weight. This statement is in error. First, please note that Alaska Rule of Evidence 703 spe- cifically allows experts to offer opinion testimony based on facts or data reasonably relied upon by experts in their particular field. Second, seismic data cannot be considered to be "hearsay" because it is not a statement made by a declarant. Alaska Rule of Evidence 801. For these reasons, Ms. Thompson's testimony should be afforded full consideration by the commissiO~? Sincerely, RMJ:mdg cc: Mr. David Johnston, AOGCC Frederick H. Boness, Esq. Paul Craig, Z-Energy Joe Dygas, BLM Mike Kotowski, DNR Michael T. Shook, Shell Western E&P Corey Woolington, Chevron, U.S.A. RECEIVED JUL 2 0 1994 Alaska 0il & Gas Cons, Commission Anchorage BY FAX BY FAX BY FAX BY FAX BY FAX F: LDATA%M ARION \WP~V/J ~IlNTZ. LT R ARCO Alaska, Inc. is a Subsidiary of Atlantic Richfield Company }:ROM: O~:2BPM ~I LE~L DEPT ARCO ALASKA, INC. LEGAL DF.,P~T~~ FAX COVER $1tEET J:fly I R, 1.09~ ?ag< 1 o£ 2, P.1/~ Rosanne M. laeobsen, Esq. ARCO Alaska, Inc. Anchorage, Alaska Telephone: 907-265-6549 TO: Robert B. Mintz, Esq. Office of the Attorney General Phone: 2.69.5255 Fax: 276-3697 Frederick H. Boness, Esq. Preston, Gates & Ellis Phone: 276-1969 Fax: 276-1365 Mr. David Johnston Chairman/Commissioner' Mash Oil & Gz~ £on~cvation Commission Phone: 279-1433 Fax: 276-7542 Mr. Paul T. Craig Z-Energy in(:. Phone: 563-5686 Fax: 561-5478 Mr. Joe Dygas Bureau of Land Management Phone: 271-4403 Fax: 271-5425 Ms. Carol Lee D~artment of Natural Resources Division of Oil and Gas Phone: 762-2547 MESSAGE JUL 1 8 1994 oil & oas cons. commission Anchorage Confirmation ¢opio: will bc mailed, FAX N-lIMBER: 907-26~-6998 CONFIRMATION: 907-265-6051 C0/~IFIDE ....N?IAL/T.Y NO.T_I~ The documents aca,'ompanying this facsimile message contain confidential communications which may be ~ubject to protection under tho attorney-client privilege or the attorney work-product doctrine. These doeummg are intended sol{~ly for the use ct~ the proper addressee and should not be read or retained by anyone othm' than the intended recipient. If you have received this telecopy in error, please notify us immediately by collect teleplwne call at the number shown above. Thank you. JUL 18 '94 02:24PH AAI LEGAL DEPT ARCO Aluaku, Inc. Legal Department Anchorage Alaska ~$10 Telephone 907 26; ;~osanne M. Jacobs;on Attorney Suly l$, 1994 Robert E. Mintz, E~q. Attorney General's Office 1031 West .4=h Avenue, Suite 200 Anchorage, Alaska 99501-1994 Re: Z-Energy's Location Exception Request Kerri Thompson's Testimony Dear Mr. Mintz: A question came up at last week's hearing about the expert testimony that Kerri Thompson gave on June 10, 1994 regarding her interpretation of ARCO Alaska seismic data. In his clos- ing argument, Mr. Whittow m~ted that M~. Thomp;on'~ testimony was hearsay or.was based on hearsay and should therefore be afforded l~mmar weight. This ~tatement i~ in error. F~mt, pl~a=e not~ that Alaska Rule of ~vidence 703 spe- cifically al!ows experts to offer opinion testimony based on facts or data roauonably relied upon by experts In ~helr particular field. Second, seismic data cannot be considered %0 bO "hearsay" because it is ~u~ a statement made Dy a declarant. Alaska Rule of Evidence 801. For these reasons, Ms. Thompson'~ testimony ~hould be afforded full =onsideratlon by the commission. stncerely, .3cosen RMJ: mdg cc: Mr. David Johnston, AOGcc Frederick H. Boness, Esq. Paul Craig, Z-Energy Joe Dygas, BLM Mike Kotowsk~, DNR Michael T. Shook, Shell Western Corey W~olin~ton, Chevron, U.S.A. R£CI IVED JUL 8 1994 ~,l~ska Oil & Ga~ Cons. Commission Anchorage F; ~ATA~,M AR, { O.M ',WP',jR{~ PA{I NT'~. LTR ARCO Ale~ka, Ir1(;. iS ~ ~ubaidiaqf of A/lant{c gicht/eid Company ARCO Alaska, Inc. Post Office Box 100360 Anchorage, Alaska 99510-0360 Telephone 907 276 1215 July 11, 1994 By FAX Mr. David Johnston, Chairman Alaska Oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 9950'i Dear Mr. Johnston: .Subject: Drainage Radius Calculation for BRU 212-18 Attached is an estimate of original gas in place (GIP) and an equivalent drainage radius (req) calculation for Beluga River Unit well 212-18. The req estimate was requested by the commission during the June 10, 1994 hearing on Z-Energy's request for a location exception for NBR 12-2. The calculations are intended to show an expected magnitude of the drainage radius for BRU 212-18. Production is commingled from multiple sands in the Beluga formation's G and H intervals. The latest material balance (P/Z) analysis indicates a GIP of approximately 10.6 BSCF. From the volumetric equation and given reservoir parameters, this GIP equates to 207 acres. Assuming a cylindrical drainage pattern, req is estimated to be 1690 feet. Also attached is a copy of my resume and Kerri Thompson's resume. Please call me at (907) 263-4304 if you have any questions. Sincerely, D. A. Grove BRU/Kuparuk Staff Manager DA(? / BN:fl (084) A t ta ch men ts RECEIVED JUL 2 0 1994 Alaska 0il & Gas Cons, Commission Anchorage CC: Frederick H. Boness Paul Craig, Joe Dygas, Carol Lee, Mike Shook, Corey Woolington, Preston, Gates, and Ellis Z-Energy, Inc. Bureau of Land Management DNR, State of Alaska Shell Western E&P, Inc. Chevron U.S.A., Inc. ARCO Alaska, ~nc. is a Subsidiary of Atlan~icRichfieldCompany Estimation of Gas in Place and Drainage Radius BRU 212-18 BRU 212-18 is the northernmost well within the Beluga River Unit. The well was drilled and completed in 1975 and first produced in 1985. Commingled production is from sands in the Beluga formation's G and H intervals and has ranged from 1 to 4 MMSCFD. Gas composition is 99+% methane and the reservoir appears to be primarily a depletion drive reservoir. The following calculations are intended to show the expected magnitude of BRU 212-18 drainage radius. Estimation of original gas in place (GIP) by material balance is traditionally used for this type of reservoir. The general material balance equation reduces to the gas material balance equation: GBgi = (G - Gp) Bg 1. G : Original GIP (scf) Bgi : Initial gas FVF (rvb/scf) C-,-,-¢ = Cumulative production (scf) Bg --Gas FVF at current pressure (rvb/scf) (FVF is formation volume factor) with the following assumptions: - No water drive - No interstitial water produced - Reservoir pore volume is constant - Reservoir temperature is constant - No NGLs condense in reservoir Change in rock and interstitial water volumes are negligible - Average reservoir pressure for each cumulative production point Substituting ZT 2. Bg = 0.00504 · P and solving for P/Z: ] Pi 3. p__ Pi Gp+-- ¥- [GZ±] z± RECEIVED JUL 20 1994 Oil & Gas Cons. Commission Anchorage Given the above assumptions, P/Z vs. Gp should plot as a straight line on Cartesian coordinates with a y-intercept of (Pi/Zi) and a negative slope of (-Pi)/(ZiG). If the line is extrapolated to P - 0, then Gp - G and an original gas in place estimate is obtained. Figure 1 (P/Z vs. Gp for BRU 212-18) illustrates this technique. A linear best fit of all the data by the least squares method is' P/Z =-231 Gp + 2741 where P = average reservoir pressure (psia) at time of given Gp values Gp-- cumulative production (scf) Extrapolating to P = 0 yields G = 11.9 BSCF. The linear trend deteriorates with the last two data points. Possible reasons for the non-linear deviation in the data are a weak water drive, significant formation and/or water compressibilities, or anomalous pressure data due to the effects of commingled layers. Additional pressure data over time is required to validate the trend and its cause. The apparent flattening of the line's slope results in an optimistic estimation of gas in place. If the last two data points are not honored, a linear best fit by the least squares method is: P/Z = -304 Gp + 2797 Extrapolating to P -- 0 yields G = 9.2 BSCF. The range of material balance reserve estimates is from 9.2 to 11.9 BSCF with an average of 10.6 BSCF. The areal extent of this average reserve estimate can then be calculated from the volumetric equation with the following assumptions: G = 43,560 Aha( 1-Sw ) 4. 5.615 G = Original GIP (scf) A = Areal extent (acres) h = Pay thickness (feet) - Porosity Sw = Water saturation Bg = Gas FVF (rvb/scf) 43,560 ft2/acre 5.615 ft3/rvb Sands are homogeneous Constant values of 9, Sw, h in each sand layer Average O and Sw of all pay as input to equation Solving for A' RECEIVED JUL 20 1994 Alaska 0ii & Gas Cons. Commission Anchorage A --'" 5.615 · GBg 43,560 'h~(1-Sw) where Bg=0.00504 '-- ZiT Pi . For BRU 212-18' G = 10.6 Bscf Pi : 2428 psia Zi : 0.825 T = 560°R h = 55 ft = 0.23 Sw : 0.50 and Bg = 0.00504 (0. 825 '560) · = 0.000959 rvb/scf 2428 5.615 ·10.6 Eg· (0000959) A = = 207 43,560 ·55 · (0.23) · (1-0.50) Assuming a cylindrical shaped reservoir, an contain the estimated reserves is' A ·43,560 207 ·43,560 req = K K = 1690 acres equivalent radius required feet to RECEIVED JUL 2 0 1994 Alaska 0il & 6as Cons, Commission Anchorage . FIGURE 1. BRU 212-18 N 3000 e 2500 -~ 2000 1500 ~-~~ P/Z=-231 Gp+ 2741 500 ' P/Z---304Gp+ 2797 ~"x~ ~ 0 .... ' · , - ~ ..... ~ · · ' ~ · "' ' ~ .... ~ 0 2 4 6 8 10 12 Gp (Bscf) BRU 212-18 Material Balance Data Date Gp(mcf) Gp(bcf) P(psia) Z Gp(bcf) P/Z 10/31/75 0 0.00 2428 0.825 0.00' 2943 7/31/85 110951 0.11 2228 0.828 0.11 2691 10/31/86 669992 0.67 2136 0.830 0.67 2573 10/31/88 920406 0.92 2017 0.832 0.92 2424 5/31/90 1742696 1.74 1889 0.838 1.74 2254 4/30/91 2492985 2.49 1761 0.842 2.49 2091 3/31/92 3472018 3.47 1639 0.850 3.47 1928 3/31/93 4358580 4.36 1572 0.852 4.36 1845 3/31/94 5155161 5.16 5.16 11.88 R'ECEIYED JUL 2 0 1994 'Alaska Oil & Gas Cons. Commission Anchorage Equation References 1. Worldwide Practical Petroleum Reservoir Engineering Methgds H. C. "Slip" Slider Penwell Publishing Company, 1983 Tulsa, OK Equation 5-21 page 274 Petroleum Reservoir Engineering (Physical Properties) James W. Amyx; Daniel M. Bass, Jr.; Robert L. Whiting McGraw Hill Book Company, 1960 New York, NY Equation 8-30 page 573 2. Applied Petroleum Reservoir Engineerinq B. C. Kraft and M. F. Hawkins Prentice-Hall, Inc., 1959 Edgewood Clifts, N. J. Equation 1-6, 1-7 page 24 Slider Equation 5-12 page 270 3. Amyx, etal Equation 8-32, page 593 4. Natural Gas Engineering (Production and Storage) Donald L. Katz, Robert L. Lee MaGraw-Hill Publishing Company, 1990 Equation 10-1a page 435 Craft and Hawkins Equation 1-13 page 26 BN:fl (082) RECEIVED JUL 2 0 1994 Alaska 0il & Gas Cons. Commission Anchorage , Resume of DEBRA A. GROVE PROFESSIONAL EXPERIENCE ARCO Alaska, Inc. Beluga / Kuparuk Staff Manager, Anchorage, Alaska January, 1993- present Responsible for all aspects of Beluga River Field including operations, engineering, safety, environmental, and financial performance. Serve as an Anchorage contact for Kuparuk Operations and interface with other AAI departments, working interest owners and regulatory agencies. Perform special projects and studies for Kuparuk Field Manager. ARCO Oil & Gas Company Joint Interest District Engineer, Houston, Texas August, 1991 - December, 1992 Responsible for ARCO's offshore Gulf of Mexico CATO properties. Influenced partners to initiate development/extension drilling programs and workover/recompletion programs in the mature Grand Isle 41/43/47 and WC 66 fields. Initiated extension drilling in EC 62/64 fields. Drilling and remedial programs were very successful in developing bypassed and undeveloped oil and gas reserves. Worked closely with Conoco to reduce drilling and operating costs. Project Coordinator, Houston, Texas November, 1990- July, 1991 Coordinated a multi-discipline geoscience, land and engineering team to exploit the Austin Chalk horizontal drilling oil play. Analyzed trends and well performance. Recommended locations and drilled twelve horizontal wells. Evaluated co-owner proposals and acreage submittals. Implemented engineering, operational and strategy changes to reduce cost, improve well performance and increase the overall project value. Coordinated evaluation and prioritization of thirty onshore exploration prospects. Senior Drilling / Completions Engineer, Houston, Texas February, 1990- October, 1990 Prepared completion, workover, drilling and P&A procedures, cost estimates and regulatory permits for onshore and offshore wells. Responsible for safety and costs of operations. Became District specialist on subsurface safety valves. Developed a comprehensive guide for safety valve selection to minimize future failures. Senior Production / Facilities Engineer, Penitas, Texas July, 1988- January, 1990 Identified, evaluated, prepared procedures and supervised workovers, recompletions, well testing, stimulations, P&A's, coiled tubing cleanouts, perforating and cased hole logging in eight fields in south Texas. Designed and implemented two compression projects and several minor facility projects. Acquired regulatory permits and monitored allowables. Reservoir Engineer, Houston, Texas June, 1983- June, 1988 Performed pressure transient, Icg, well and reservoir analyses, evaluated economics, and recommended development and extension drilling, recompletions, workovers, well conversions, stimulations and fracture treatments in Wilcox, Vicksburg, Frio and Yegua fields in south Texas. Planned and initiated development of three newly discovered gas fields. Evaluated numerous exploration prospects. Evaluated producing and non-producing properties for acquisition, divestiture and farmout. Prepared reserve re_por_ts,_long_rapge plans and budgets. RECEIVED EDUCATION Texas A&M University, College Station, Texas Bachelor of Science in Petroleum Engineering in May, 1983 Grade Point Average: 3.8/4 J U L 2 0 1994 Al~ka Oil & Gas Cons, Commission Anchorage Honors: Whiting Award for Outstanding Petroleum Engineering Graduate, Petroleum Equipment Suppliers Association National Outstanding Student Award, Magna Cum Laude, Tau Beta Pi Engineering Honor Society, Phi Kappa Phi Honor Society, Houston Endowment Scholarship DEBRA A. GROVE Page 2 RECEIVED JUL 2 0 1994 Alaska Oil & Gas Cons. Commission Specific Information Regarding Expertise in Selecting Well Locations Anchorage. I have been directly responsible for the development of existing fields and nearby extension opportuni[ies throughout my career. I have evaluated and pursued numerous development, extension and exploration prospects as well as numerous producing properties and undeveloped acreage for acquisition or divestiture. My experience has covered many different aspects relating to development and extension drilling and often involved the coordination of land, geoscience, engineering, operations and marketing personnel. As a reservoir engineer, I performed research on existing wells and trends in an area and analyzed pressure transient, Icg, core, well systems and reservoir performance data to identify opportunities. I reviewed pertinent land, engineering and geologic information and selected well locations. I calculated reserves, evaluated economics and obtained funding approvals. I provided reservoir engineering support during drilling operations. I also developed strategies for developing new fields based on geologic, engineering and land issues. Below I have listed specific examples illustrating my experience in selecting well locations. Exploration/Extension Drilling and Farmout Evaluations Determined reserves and evaluated economics for numerous gas and some oil extension and exploration prospects. Coordinated the engineering evaluation of thirty exploration projects in 1991. Evaluated over twenty farmout requests for undeveloped acreage in south Texas. Made recommendations to self-develop or farmout acreage based on offset well performance, current mapping, expected reserves and economics. Gulf of Mexico, Offshore Louisiana Under my supervision, joint engineering and geoscience teams identified numerous development, extension and exploration prospects in Grand Isle 41/43/47, West Cameron 66, and East Cameron 62/64 fields. Influenced CATO partners to initiate drilling programs in these fields. Drilling programs were very successful in developing bypassed and undeveloped oil and gas reserves. Austin Chalk, Wilson and Gonzales Counties, Texas Performed reservoir studies and analyzed vertical well production trends. Worked closely with geoscience counterparts to select locations and obtain funding for a horizontal drilling program. Drilled twelve horizontal oil wells with varied varied results. Evaluated numerous acreage submittals for horizontal drilling opportunities. Tabasco Field, Hidalgo County, Texas Performed reservoir and economic analyses. Selected locations for two extension gas wells using existing maps. Obtained funding and provided reservoir engineering support during drilling and testing operations. Both wells proved to be commercial producers. Las Ovejas and Roleta Fields, Zapata County, Texas Performed reservoir and economic analyses. Selected locations for one extension and two development gas wells based on existing maps. Obtained funding and provided reservoir engineering support during drilling, testing, and fracture stimulation operations. Two wells were commercial and one was a marginal producer. Obtained approval for a 3-D seismic program to assist in optimizing development of Roleta. Evaluated six internal extension plays and one large acreage submittal including both producing and undeveloped properties. Rollem and Bright Falcon Fields, Bee County and Jackson Counties, Texas Developed an evaluation and testing program for the discovery well in each gas field. Evaluated well performance, trend information and acreage position. Developed a strategy for subsequent well locations and initiated development drilling in both fields. Drilled two successful development wells and one sidetrack. Columbus Field, Colorado County, Texas Performed a reservoir study and identified a location for an infill well. Obtained funding and drilled a successful gas well. KERRI IRENE THOMPSON 7511 Huckleberry Circle Anchorage, AK 99502 (907) 243-3987 EDUCATION: WORK EXPERIENCE: University of Washington, Seattle, Washington M.S. GEOPHYSICS---September 1989 GPA: 3.44/4.00 Honors: Fellowship, tuition and living expenses Memberships: American Geophysical Union · Society of Exploration Geophysicists Colorado School of Mines, Golden, Colorado B.S. GEOPHYSICAL ENGINEERING---May 1987 Minors: Geology and Mineral Economics ". GPA: 3.26/4.00 Honors: Amoco Scholarship, tuition 1983-1987 · Academic Dean's List · Academic Honor Roll Memberships: Society of Exploration Geophysicists ° Society 'of Student Geophysicists · Society of Women Engineers Arco Alaska, Inc.- South Alaska Exploration An ch ora ge, .Alas ka--- G eoph ys icist September 1989-Present Interpreted and mapped onshore and offshore seismic data in and around Cook Inlet Basin for prospect generation ° Planned testing for and monitored the acquisition and processing of several innovative seismic programs ° Recommended several acreage acquisitions and drilling opportunities ° Performed geological, geophysical and petrophysical well-site work on several exploratory and development wells ° Participated in geological field programs studying the Tertiary and Mesozoic geology of the Upper Cook Inlet Basin University of Washington - Geophysics Department Seattle, Washington---Research Assistant August 1987- September 1989 Areas of research were focused on but not limited to the State of Washington's seismic network ° Prime responsibility was to analyze focal mechanisms for the western Mount Rainier seismic zone and assess its tectonic significance ° Secondary responsibility was to analyze data comparing three earthquake location routines commonly used in the United States and prepare results for section of technical report submbted to the Department of Energy RE:C E IV E D JUL 2 0 1994 A)aska OiJ & Gas Cons, Commission Anchorage , ARCO Alaska, Inc. ~[ Legal Department Post Office Box 100360 Anchorage Alaska 99510 Teleohone 907 265 6549 Rosanne M. Jacobsen Attorney July 11, 1994 CONFIRMATION COPY THIS ISTHE ORIG,NAL, FORYOUR RECORDS, OF A FACSIMILE TRANSMISSION SENT TO YOU (DN ?/,//.,/?~/ , Mr. David Johnston Chairman Commissioner Alaska Oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501 BY FAX Re: Z-Energy's Request for Location Exception for NBR 12-2 Dear Commissioner Johnston: This letter addresses several points which arose during the June 10, 1994 hearing and also responds to Z-Energy's June 10 letter which was not made available to ARCO prior to the hearing. First, ARCO agrees with Z-Energy that exceptions to statewide spacing rules may be granted. However, they may only be granted under the specific circumstances set forth in AS 31.05.100(b).!! In sum, AS 31.05.100(b) authorizes the Commission to grant a location exception only where the !/ It is unlikely that AS 31.05.100 applies only to established pools, because these are typically already governed by pool rules. If the statute does only apply to established pools, then 20 AAC 25.055(a), which is authorized by AS 31.05.100, may also be restricted to established pools. This interpre- tation would leave the vast majority of the state without statewide spacing rules. Even if AS 31.05.100(b) only applies to established drilling units, it is a good model. The legislature has already deter- mined that it protects correlative rights of offset owners. There is little difference between established pools (that are nonunitized) and other acreage, as far as correlative rights are concerned. RECEIVED ARCO Alaska, Inc. is a Subsidiary of Atlantic Richfield Company JUL l 1994 l)ii & commission Mr. David Johnston July 11, 1994 Page 2 applicant can prove that a well drilled 1500 feet from a section line would be unproductive, or where topographical conditions~/ would make the drilling of a well 1500 feet from a section line unduly burdensome. Z-Energy has not met its burden of proving that an exception location is authorized by statute. To the contrary, abundant evidence was introduced at the hearing which showed that Z-Eng~gy believes that all of Section 12 may be filled with gas:~/ Petroleum Information reported on May 11, 1994, after interviewing Z-Energy, that Z-Energy' s prospect covers 955 acres in Sections 11 and 12 (Exhibit 11); Erik Opstad's map, prepared for Z-Energy and dated September 1993, shows that gas covers the vast majority of Section 12 (Exhibit 9); Z-Energy clearly stated that the X33-12 well was productive in a meeting with ARCO representatives in the fall of 1993. (Tr. at 107.) Erik Opstad's Executive Summary, prepared for Z-Energy and dated September 15, 1993, states the following regarding Burglin's X33-12 well: The conclusion drawn from these obser- vations is that the Sterling A horizon contains porous and permeable sandstone capable of producing gas at significant rates when drilled and completed. These logs were also submitted to 3 other Z-Energy does not rely upon the "topographical considerations" ground. ARCO showed that the topographical considerations are worse at the exception location than at a location 1500 feet from the section line. Assuming a straight hole is drilled, the surface location would not only be in the "crook" of the Beluga River, but it would be on the opposite side of the Beluga River from roads, pipelines, and other facilities. It remains ARCO's position, however, that none of the acreage is commercially productive. Mr. David Johnston July 11, 1994 Page 3 prominent Alaskan log analysts in a blind test for their opinion. There was unani- mous consensus with this conclusion. (Exhibit 13 at page 2) (emphasis added). The Executive Summary also states: "There are n_9o apparent structural or depositional barriers which would pressure isolate tract ADL-381224 from the greater Beluga River Unit accumulation." (Exhibit 13 at page 4) (emphasis added). No Z-Energy or ARCO maps indicate any faults which would separate a location 1500 feet from the section line from Beluga River Unit production. (Exhibits 5, 6, 8, 9, 10.) Kerri Thompson, who has reviewed and mapped the seismic data over the Beluga River Unit and Sections 11 and 12, including the 1993 seismic data, sees no faults in the "entire gas pay interval." (Tr. at 141-42.) Erik Opstad agreed with Ms. Thompson's analysis: "I don't see a lot of -- a lot going on in the main section either." (Tr. at 142.) The only evidence which could possibly support Z-Energy's position was introduced late in the day when Mr. Opstad opined that a lineament on an aerial photograph might be a fault. (Tr. at 142.) Ms. Grove and Ms..Thompson both testified that the lineament was the shoreline and was due to modern-day processes. (Tr. at 142-43.) Mr. Opstad agreed. (Tr. at 143.) Even if the lineament is a fault, Mr. Opstad has not shown where the fault would intersect the prospective horizons, and that the fault would cause a location 1500 feet from the sec- tion line to be unproductive. Indeed, Mr. Opstad's own maps (Exhibits 5 $ 9) and testimony (Tr. at 142) contradict this position.S!' , At the hearing, Mr. Opstad attempted to "explain away" his previous maps and writings. Mr. Opstad even admitted that "we haven't put any of our real interpretations out on the table." (continued...) Mr. David Johnston July 11, 1994 Page 4 In sum, Z-Energy simply has not shown that there is any loca- tion 1500 feet or more from the section line which would be unproductive, or would even be "less productive" than the exception location.~! Thus, the Commission lacks the statu- tory authority to grant the location exception request. Second, the evidence shows that the Beluga River Unit is not draining Section 12. Beluga River well No. 212-18, the closest well, is 1800 feet from Section 12. The regulations presume a 1500-foot drainage radius. 20 AAC 25.055(a) (2), (a) (4). Mr. Opstad also testified that a 1500-foot drainage radius was appropriate for this area. (Tr. at 117.) Finally, ARCO's material balance calculations indicate that the 212-18 well's drainage radius is approximately 1690 feet. (Attach- ment to ARCO's letter dated July 11, 1994.) This same evidence proves that the exception location, if successful, would drain Beluga River Unit reserves. Mr. Opstad admitted this. (Tr. at 117.) Third, ARCO does not believe that the AS 31.05.100(b) findings must be made in circumstances where correlative rights are not threatened. The intent of AS 31.05.100(b) is to protect cor- relative rights. Thus, if an exception location is requested within a unit or established drilling unit, or if a protest is not received, the Commission need not make the explicit finding that AS 31.05.100(b) is met. Even if the Commission were to find that the AS 31.05.100(b) findings must be made in all circumstances, the Commission has broad powers to prevent waste and insure the greatest ultimate recovery. AS 31.05.030. In cases where correlative rights are not threatened by an exception location and the exception location would provide the best management of the reservoir, the Commission has the power to grant the exception location. 4_/(... continued) (Tr. at 103.) Apparently, Z-Energy alters its view of the geology to match its audience. Z-Energy's repeated rationale for the location exception is that such a location would be "optimal." Everyone would like to drill wells in optimal locations. However, the statute simply doesn't allow a location exception to be granted on this basis. Z-Energy's remedy is to acquire optimal acreage. Mr. David Johnston July 11, 1994 Page 5 Fourth, Z-Energy argued that the well spacing regulation does not apply to the bottom hole location of exploration wells, because exploration wells are governed by 20 AAC 25.055(a) (2) (the exploration provision) instead of (a)(4) (development). (Exhibit 1 at page 2.) However, a well drilled immediately downdip from a producing field and designed to target common pools is not an exploration well and should be governed by (a) (4). (See Tr. at 55.) At any rate, it is unlikely that the Commission intended, by the slight differences in wording between (a)(2) and (a) (4), to allow an exploration, but not a development, exception location well to drain an offset lease. Finally, if the location exception is granted, the Commission must protect the Beluga River Unit owners' correlative rights. Below are several options: (1) As the Commission noted, one option is to not authorize Z-Energy to produce its well. (2) The Commission may prorate production from Z-Energy's well and grant ARCO a similar location exception. For example, if Z-Energy's well drains 160 acres, and only 80 acres are on Z-Energy's lease, Z-Energy should only be allowed to produce half of the reserves. This can be accomplished by prorationing Z-Energy's production,~/ but, because prorationing alone still allows Z-Energy to drain the Beluga River Unit's reserves (but at a slower rate), ARCO should be allowed to drill an offset well 300 feet from the section line. (However, as noted at the hearing, this option may not prevent waste or insure the greatest ultimate recovery.) This type of approach is common in the Lower 48 -- Oklahoma, Colorado, North Dakota, and Nebraska statutes authorize allowables of this type. See also Kramer and Martin, the Law of Poolinq and Unitization § 5.02[2]; Chevron Oil v. Oil and Gas Conservation Commission, 435 P.2d 781 (Mont. 1967); Halpin v. Corporation Commission of the State of Oklahoma, 575 P.2d 109 (Okla. 1979). Alaska statutes also seem to authorize allowables of this type. See AS 31.05.030(c) and (e)(6); AS 31.05.100(e). In addition, the definition of correlative rights includes the concept of only producing reserves on your lease. AS 31.05.170(2). But it would be advisable for the Commission to first promulgate regulations authorizing this type of allowable. Mr. David Johnston July 11, 1994 Page 6 (3) Z-Energy may produce the well under an integrated agreement. 20 AAC 25.517(b), (c). (Because the well has not yet been drilled or tested, it is difficult to determine the terms under which the well might be added to the Beluga River Unit. However, units typically do not reimburse offset well owners for the cost of drilling the well, do not reallocate past production to the offset well owners, and require reimbursement for proportionate costs of the pipeline and other facilities.) (4) Z-Energy may pursue involuntary unitization. (However, it is unlikely that an involuntary unitization would be granted. As the Commission noted, involuntary unitizations will not be granted unless four findings are made. (AS 31.05.110; Tr. at 31-33.) One of these four findings is that the unitization is reasonably necessary for secondary or tertiary recovery. No secondary recovery is needed for the Beluga River Unit because it is a gas field; thus, involuntary unitization is not authorized.) Each of these options is complex and would require much time and effort to ensure that correlative rights are protected. Protracted agency proceedings and litigation may result. By merely following the spacing rules, the Commission ensures that correlative rights are protected and waste is pre- vented.I/ In sum, Z-Energy has not proved that it is entitled to a location exception under the statute. Thus, the Commission is without statutory authority to grant it. Recall that the Commission has recently stated that the statewide spacing rules are presumptively appropriate for preventing waste, protecting correlative rights and insuring the greatest ultimate recovery. Mr. David Johnston July 11, 1994 Page 7 ARCO Alaska asks the Commission to follow its spacing rules and deny Z-Energy's request for a location exception. We appreciate your consideration. Sincerely, cc: Frederick H. Boness, Esq. Paul Craig, Z-Energy Joe Dygas, BLM Carol Lee, DNR Michael T. Shook, Shell Western E&P Corey Woolington, Chevron, U.S.A. BY FAX BY FAX BY F~X BY FAX F :~DATA~.OSY~WP\AOGCC .LTR PRESTON RNCHORRGE ID'907-258-7028- 19'94 14'59 No.015 P.01 PRESTON GATES & ELLIS A'I'TORN ~¥~ FACSIMILE COVER PAGE July 19, 1994 To: Chairman Davia ~olmston (ladividual) From' Mark Wittow Alaska Oil & Gas Conservation No. of Pages: 4 Colllm, (Including CoYer Page) (Company) 276-7542 (Telecopy No.) 279-1433 (Confirmation No,) Client/Matter No.: 32413-00001 Client/Matter Name: Z-Energy If you do not receive all of the pages, please contact our tolccopy operator at (907) 265-4616. Th~ l~fforalation cotxtaltted In tills facsimile is confidential an~l may al~ b~ altorn~y-privileged. The lnDrmallon la bxt,nded oxfly for tim it to ae lntend~ ~cipient, you am il,~by notifi~ fl~at any n~, disseminaaon, dJstrJbulion or ~pyi~ of this comnu~catioa i8 strictly pmhlblmd. If you have ~lv~ ~c f~slmiic in cmn, pl~a~ imm~ia~iy notify ua by a ~ll~t ~lopho~ call to (ffiT) 2~fi-106~, and n Copy will not be sent, x Copy sent by ILS. mail. ri Copy sent by overnight mail, COMMENTS: RECE V£D JUL 1 Anchora.qe 400 420 L STRlgET ANCHORAOE. ALASKA 99501-1937 I~tONB: (907) 27~1969 FACSIMILE: (907) 276-1365 ~O~IIR D'AT,RNE, l~g ANOEI,~g · POR~,AND, SEA~,~, SPOKANE · 'I"AEOMA. WAgglN~T~N, D,C, PRESTON RNCHORRGE ID:g07-258-7025- iiii- ATTOR, NEY.~ July 19, 1994 ELLIS 15:00 No.O13 P.02 VIA FACSIMILE Robert E. Mintz Assistant Attorney General Alaska Department of Law 1031 West Fourth Ave., Suite 200 Anchorage, Alaska 99501-1994 Re: ARCO's July 18th Letter Concerning Z-Energy's Well Location Exception Dear Mr, Mintz: I am writing in response to the letter to you by Rosanne Jacobsen of ARCO Alaska, lac. dated July 18, 1994. Ms. Jacobsen ,otes that in my closing argument to the Alaska Oil and Gas Conservation Commission on July 12., I indicated that the testimony of Kerri Thompson should be accorded little weight in light of ARCO Alaska~s refusal to make the seismic data that formed the basis for her conclusions available to Z-Energy. I appreoiate the opportunity that she has provided to further explain why Ms. Thompson's testimony would be an inappropriate basis for a Commission decision. In short, the decision by ARCO AlaSka to present its testimony in summary form, without allowing the underlying data to be examined, renders that testimony unreliable. Ms, Thompson's testimony concerned seismic data obtained by ARCO Alaska. That seismic data was never presented to the Commission. We do not disagree that, under Alaska Rule of Evidence 70;3, an expert may rely on seismic data in expressing an opinion: However, by refusing to make the data available to the Commission and Z.Energy, ARCO Alaska ignored Alaska Rule of Evidence 705(a), which provides that "[t]he expert may ... be required to disclose on cross-examination, the underlying facts or data .... "If expert testimony is to be offered, the underlying facts or data relied on by tile expert should be disclosed to tile opposing party. Without that disclosure, there is no way to test the opinion of the expert or examine the merits of the conclusions, The disclosure requirement exists because an opinion is only as good as its assumptions. In this instance, the Commission and Z-Energy were deniad the opportunity to examine the assumptions behind Ms. Thompson's opinions. RECrr. IV D JUL 19 1994 Alaska Oit & Gas uons, A PAI~I'NERStlIP INCbUD1NG A PROFESSIONAL CORI'ORA1'ION ~c~or~~ (~EHR D'AI.E~[ · EO~ ANOED~ · PO~I'LANb · S~A1'I'LB · SPOKANE · 'I'AC:OMA ~ WASIIINO~ON, D.~.~. PRE~TON ~NCHOR~GE ID:~07-258-?©28- JUL 1~~ i5:00 No.Ol$ P.O3 Page 2 July 19, 1994 Uncler Alasi(a aclministrative law, hearsay evKlence may not provicie a basis for an administrative agency's decision. See AS 44.62.460(d); Brown v. Northwest Airlines_, 444 P.2d 529, 534-35 (Alaska 1968); see also Consolidated Edison Co. v. N__LRB, 306 U.S. 197, 230 (1938) ("[m]ere uncorroborated hearsay or rumor does not constitute substantial evidence). AS 44.62.460(d) provides in relevant part that: Hearsay evidence may be used to SUl~plement or explain direct evidence but is not sufficient by itself to support a finding unless it would be admissible over objection in a civil action. Although A,.S 31.05.000(b) provides that "ia]ny action by the commission that has application to a single well or single field need not comply with the provisions of AS 44.62.330 -- 44.62.630, ..." the general policy that underlies the limitation on hearsay is still worthy of consideration by the Commission. Hearsay is any "statement, other than one macle by the declarant while testifying at the .trial or hearing, offered in evidence to prove the truth of the matter asserted." Alaska Rule of Evidence 801(c). Ms. Thompson referred to the seismic data to prove the truth of her assertions, without making that data available for cross-examination. This type of summary testimony, offered without substantiation, has been categorized by the Alaska Supreme Court as inadmissible hearsay' Sej .K!a. wock Heenya Corp.. v. Dawson Construction, 778 P.2d 219, 221 (Alaska 1989). The seismic data itself may well have been admissible under the business records exception found in Alaska Rule of Evidence 803(6), but, of course, the data was not offered as evidence. Ms. Thompson's testimony certainly may be considered by 'the Commission. Z- Energy recognizes that as an administrative agency the Commission may consider a much wider range of evidence than is strictly allowed by the rules of evidence. The AlaSka Administrative Procedure Act provides: The hearing need not be conducted according to technical rules relating tO evidence and witnesses. Relevant evidence shall be admitted if it is the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs, regardless of the existence of a common law or statutory rule that makes improper the admission of evidence over objection in a civil action. AS 44.62.460(d). Additionally, as noted'abOve, even the limitation on hearsay evidence is not strictly applicable to this proceeding as a result of th® provisions of AS 31.05.060(b). My point was simply that Ms. Thompson's testimony deserved little weight, given the refuaal of ARCO Alaska to provide its underlying data. Fundamental concerns of fairness and due process, as expressed in the rule disallowing hearsay as RECEIVED JUL ~9 1994 ~i & Gas ~,0ns. l~Ul'Itlllt$Stu' Anchorage PRESTON ANCHORAGE ID:907-258-7028- JUL 19 '94 15:01No.O13 P.04 Page 3 July 19, t994 the basis for a~ administ['ative deuision, require that a party disolose the underlying data on which its expert relies, if it wishes for the testimony of that expert to be considered reliable and accorded any significant weight. Please let me know if you have any questions. Sincerely, PRESTON GATES & ELLIS By: Mark H. Wittow Chairman David Johnston, AOGCC (via fax) Rosenne Jacobsen, counsel for ARCO Alaska, Joe Dygas, BLM Mike Kotowski, DNR Michael T, Shook, Shell Western E&P Corey Woolington, Chevron USA Inc, (via fax) RECEIVED JUL 19 1994 Alaska Oil g Gas. L;ons. L;ommisStu,, Anchorage PREBTON ANCHORAGE ID:'907-258-?028- JUL 19'94 PRESTON GATES & ELLIS AI"£URN B'i'~ FACSIMILE COVER PAGE July 19, 1994 14:45 No.O12 P,O1 To: Chairman David Johnston (Individual) From: Mark Wittow Alaska Oil & Ga,, Conservation No. of Pages: 4 Comm, (Itlduditlg Cover (Company) 276-7542 (Teleeopy No.) 270-1433 (Confirmation No,) ClienttMattcr No,: 32413-00001 Client/Matter Name: Z-Energy if you do not receive, all of the pages, please contact our tcle. c. opy operator at (907) 265-4616. 'th= information contained in this facslmlb is confidential and may {lso b~ aitorn0y-privil¢s~. Tho information is int~nd0d only for tho uso of th~ individual or ~nti~ ~ whom it is addison, If you a~ ~t ~o in~M~ r~ipiunt, ur ~ employee or agent mspomiblc for duliv~fiag it m rite ln~:~ ~i~ient, you a~ he~by notifi~ ~t ai~ use, diss~mi~tion, distribution or gopy{~ of this ~mm'unbation is strbtly pr~libited. If you hav~ r~ggiv~ tho fag~imi{~ in ur~r, pl~a~ imm~iagiy noti~ us by a m~lle~t ~lephom oall u{ (~T) 2~6-1969, and mmm · c original mensagc ~ ua at ~e ~d~S8 a~V~ Via ~ U.$. YOS~l 5~1¢~. 'l'~ag you. Copy will not be sent, Copy sent by U,S, mail, Copy sent by overnight mail, COMMENTS: RECEIVED JUL 19 19,94 Anchorage Surm 400 49.0 L STREET ANCHORAGE, ALASKA 99501-1937 P~ONu: (907) 276-1969 FACSIMILE: (907) 276,1365 COEUR D'ALENB · I,os ANGEI.,Eg · ~RTi .AND · SEA~I .~ · SPOKANE · TACOMA · WAS~INO~N. D.C. PRESTON ~NCHOR~GE ID:907-258-7028- ,. P R ~. ~'r 0 N GA'rES AT?O~tNI~YS July 19, 1994 JUL '19 '94 , (' 1~'~3 No.O12 P.02 VIA FACSIMILE Robe[t E. Mintz Assistant Attorney General Alaska Department of Law 1031 West Fourth Ava., Suite 200 Anchorage, Alaska 99501-1994 Re: ARCO's July 18th Letter Concerning Z-Energy's Well Location Exception Dear Mr, Mintz: I am writing in response to the letter to you by Rosanne Jacobsen of ARCO Alaska, Inc. dated July 18, 1994, Ms, Jacobsen notes that in my closing argument to the Alaska Oil and Gas Conservation Commission on July 12, I indicated that the testimony of Kerri Thompson should be accorded little weight in fight of ARCO Alaska's refusal to make the seismic data that formed the basis for her conclusions available to Z-Energy. I appreciate the opportunity that she has provided to further explain why Ms, Thompson's testimony would be an inappropriate basis for a Commission decision. In short, the decision by ARCO Alaska to present its testimony in summary form, without allowing the underlying data to be examined, renders that testimony unreliable. Ms. Thompson's testimony concerned seismic data obtained by ARCO Alaska, That seismic data was never presented to the Commission. We do not disagree that, under Alaska Rule of Evidence 703, an expert may rely on seismic data in expressing an opinion, However, by refusing to make the data available to the Commission and Z-Energy, ARCO Alaska ignored Alaska Rule of Evidence 705(a), which provides that "It]he expert may ,,. be required to disclose on cross-examination, the underlying facts or data .... "If expert testimony is to be offered, the underlying facts or data relied on by the expert should be disclosed to the opposing party. Without that disclosure, there is no way to test the .opinion of the expert or examine the merits of the conclusions. The disclosure requirement exists because an opinion is only as good as its assumptions. In this instance, the Commission and Z-Energy were denied the opportunity to examine the assumptions behind Ms. . Thompson's opinions. RECEIVEr, ,JUL 19 1B~4 400 420 L S'rRLUT ANCIIORAGE, ALASKA 99501-1937 PIIONE: (009) 276 1969 FACgIMII.B; (907) 2~6-136~ PRESTON ANCHORAGE ID:907-258-?028- J~L 19'9~ 14:44 No.O12 Page 2 July 19, 1994 Under Alaska administrative law, hearsay evidence may not provide a basis for an administrative agency's decision. Se_..~e AS 44.62.460(d); Brown V. Northwest Airlines_, 444 P.2d 529, 534-35 (Alaska 1968); see also. Consolidated E~ison Co._.._v., NLRB, 305 U.S. 197, 230 (1938) ("[re]ere uncorroborated hearsay or rumor does not constitute substantial evidence). AS 44.62,460(d) provides in relevant part that: Hearsay evidence may be used to supplement or explain direct evidence but is not sufficient by itself to support a finding unless it would be admissible over objection in a civil action. Although AS 31.05.060(b) pr°vides that "[a]ny action by the commission that has application to a single well or single field need not comply with the provisions of AS 44.62,330 --44.62.630, ,.." the general policy that underlies the limitation on hearsay is still worthy of consideration by the Commission. Hearsay is any "statement, otl~er than one made by tl~e declarant willie testifying at the trial or hearing, offered in evidence to prove the truth of the matter asserted," Alaska Rule of Evidence 801(c). Ms. Thompson referred to the seismic data to prove the truth of her assertions,, without making that data available for cross-examination. This type of summary testimony, offered without substantiation, has been categorized by the Alaska Supreme Court. as inadmissible hearsay. See Klawock Heenva Corp, y_....D_..a_ws.on Construction, 778 P.2d 2t9, 221 (Alaska 1989), The seismic data itself may well have been admissible under the business records exception found in Alaska Rule of Evidence 803(6), but, of course, the data was not offered as evidence. Ms. Thompson's testimony certainly may be c°nsiclered by the Commission. Energy recognizes that as an administrative agency the Commission may consider a much wider range of evidence than is stdctly allowed by the rules of evidence. The Alaska Administrative Procedure Act providem The hearing need not be condumed according to technical rules relating to evidence and witnesses, Relevant evidence shall be admitted if it is the sort of evidence on which responsible persons are accustomed to rety in the conduct of serious affairs, regardless of the existence of a common law or statutory rule that makes improper the admission of evidence over objection in a civil action. AS 44.62.460(d). Additionally, as noted above, even the limitation on hearsay evidence is not strictly applicable to this proceeding as a result of the pmvi.~ion.~ of AS .31.05.060(b), My point was simply that Ms. Thompson's testimony deserved little weight, given the refusal of ARCO Alaska to provide its underlying data. Fundamental concerns of fairness and due process, as expressed in the rule disallowing hearsay as REC£1VE ; PRE~TON ANCHORAGE ID:~07-258-'~ '~8- ' JUL 19 94 14"45 No.01'2 ?.04 Page 3 July 19, 1994 the basis for an administrative decision, require that a party disclose the unclerlylng data on which its expert relies, if it wishes for the testimony of that expert to be considered reliable and accorded any significant weight. Please let me know if you have any questions. Sincerely, PRESTON GATES & ELLIS By: Mark H, Wittow cc: Chairman David Johnston, AOGCC (via fax) Rosanne Jacobsen, counsel for ARCO Alaska, Inc. (via fax) Joe Dygas, BLM Mike Kotowski, DNR Michael T, Shook, Shell Western E&P Corey Woolington, Chevron USA RECEIVED 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ALASKA OIL AND GAS CONSERVATION COMMISSION PUBLIC HEARING JUNE 10, 1994, 9:00 O'CLOCK A.M. VOLUME I TRANSCRIPT OF PROCEEDINGS HELD AT THE ALASKA OIL AND GAS CONSERVATION COMMISSION 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA JU~ I 6 1994 /~laska u~l & Gas Cons. Commission L~chorage 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 P R 0 C E E D I N G S CHAIRMAN JOHNSTON: Good morning. I'd like to call this hearing to order. I'll note the time is approximately five after nine o'clock. The date is June 10, 1994. We are located in the offices of the Alaska Oil and Gas Conservation Commission, 3001 Porcupine Drive, Anchorage, Alaska. I'd like to begin by introducing the head table. My name is David Johnston, Chairman of the Commission. To my left is Tuckerman Babcock, and to my right is Russell Douglass, and to our far right is Laurel Evenson, who will be making a transcript of these proceedings. She is with R & R Court Reporters. At this time I'd like to request Commissioner Douglass to read into the record the notice that was provided. COMMISSIONER DOUGLASS: Notice of Public Hearing, State of Alaska, Alaska Oil and Gas Conservation Commission, regarding the application of Z-Energy Inc., for exception to 20 AAC 25.055 to allow drilling the NBR 12-2 exploration gas well. Z-Energy Incorporated, by letter dated May 9, 1994, has requested an exception to the provisions of 20 AAC 25.055(a) (4) for the drilling of an exploratory gas well adjacent to the northern boundary of the Beluga River Unit in South Central Alaska. The exception would allow Z-Energy Inc. to drill the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277'7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NBR 12-2 exploratory gas well to a bottom-hole location that is closer than 1,500 feet from a section line. The well will be drilled as a straight hole at the following location: 1,200 feet from the south line and 300 feet from the east line of Section 12, Township 13 North, Range 10 West, Seward Meridian. A person who may be harmed if the requested order is issued may file a written protest prior to 4:00 p.m., May 26, 1994 with the Alaska Oil and Gas Conservation Commission, 3001 Porcupine Drive, Anchorage, Alaska, 99501, and request a hearing on the matter. If the protest is timely filed and raises a substantial and material issue crucial to the Commission's determination, a hearing on the matter will be held at the above address at 9:00 a.m. on June 10, 1994, in conformance with 20 AAC 25.540. If a hearing is to be held, interested parties may confirm this by calling the Commission's office, 907/279-1433 after May 26, 1994. If no protest is filed, the Commission will consider the issuance of the order without a hearing. Signed Russell A. Douglass, Commissioner, Alaska 0il and Gas Conservation Commission. Published May 11, 1994. CHAIRMAN JOHNSTON: Thank you. We do have a sign-up sheet here. I'm looking down at it. I'm not sure that everybody has signed it. If we could pass that around one more time and make sure that everybody is here in attendance would sign in, please. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 As our notice indicated, these proceedings will held in accordance with our regulations governing hearings. Those are 20 AAC 25.540. Because we did have a protest to this matter, we are holding a hearing today. During the course of this hearing we will take sworn testimony and unsworn statements in our deliberations. Greater weight, of course, will be given to sworn testimony. If you wish to be considered an expert witness in this matter, we would ask that you state your qualifications before you make your testimony or statement and the Commission will rule as to whether we would consider you an expert witness in the matter before us today. The order of testimony, we'll be having the applicant make their opening remarks first, followed by the party protesting. In this particular matter we are going to allow cross examination. Those members of the audience, however, that are not directly a party to these proceedings, we will not allow you to cross examine the witness. If you do wish to ask a question of anybody testifying we would ask that you write those questions down on paper, send them to the front desk, we'll look at them, and if we think it is germane to the topic, the Commission would then ask that question. But, again, the two principals will be allowed to cross examine one another. As I indicated earlier, a written transcript will be prepared. Those people wishing a copy of that tranScript, we would ask that you contact R & R Court Reporters directly to 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 acquire that transcript. At this time I'd like to ask the individuals for the applicant that will be testifying to please stand and identify themselves. And your name? MR. WITTOW: I'm Mark Wittow, with Preston Gates & Ellis, counsel for the applicant. MR. OPSTAD: And Erik Opstad. CHAIRMAN JOHNSTON: Do either one of you wish to offer sworn testimony today. MR. WITTOW: MR. OPSTAD: MR. WITTOW: Mr. Opstad ..... Yeah, I think I will. ..... will be offering sworn testimony, and I'd like to make an introductory statement. CHAIRMAN JOHNSTON: Very good. I think we'd prefer to swear in Mr. Opstad at this time. Then we'll proceed with your statement. COMMISSIONER DOUGLASS: hand. Please raise your right (Oath administered) MR. OPSTAD: I do. COMMISSIONER DOUGLASS: Thank you. CHAIRMAN JOHNSTON: Mr. Wittow, if you'd please care to make your opening remarks. MR. WITTOW: I just have a few brief things to say. I'm here representing Z-Energy Inc., which is a small 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277.8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 company created to do exploration in the state of Alaska. They've acquired several leases in the Cook Inlet area and are preparing to drill a exploratory well on the lease in question that's the subject of the exception requirement. Erik Opstad's testimony will explain why Z-Energy wants to drill a well on that lease, and more specifically why that spacing exception is necessary in terms of where the well needs to be drilled. In a letter to Paul Craig, the president of Z-Energy, Commissioner Douglass had asked for some suggestions regarding precedence or standards that the Commission should use in considering this matter, and I've prepared a letter that I'll offer to the Commission at this time. Copies have been sent to the parties. MS. JACOBSEN: haven't gotten one yet. MR. WITTOW: give you. Do you have a copy for us? We I have one in my brief case I'll MS. JACOBSEN: Thank you. CHAIRMAN JOHNSTON: Yes, we can also make a copy, too. Why don't we mark this Exhibit 1. MR. WITTOW: Just briefly, the Commission's mandate and the standard for really evaluating the exception area, Whether the drilling in this location will prevent waste and protect correlative rights, as Mr. Opstad's testimony will 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 relate, the well is necessary to offer Z-Energy the opportunity to potentially produce hydrocarbons, and the fundamental fact that needs to be kept in mind, that this is an exploratory well in and of itself, it's almost logically impossible for it to cause waste or harm anyone else's correlative rights because the well itself is only looking for hydrocarbons; it's not designed to produce them. Denying the exception though would cause Z-Energy to have less than the best prospects for finding hydrocarbons. At this time I'd like Mr. Opstad to testify, and I'll ask him to describe his qualifications. I'm also offering a copy of his resume for the record, for purposes of establishing him as an expert. He can offer it. CHAIRMAN JOHNSTON: Very good. Mr. Opstad. From the comments of Mr. Wittow, I assume that you wish to be considered an expert witness in this matter? MR. OPSTAD: That is correct. CHAIRMAN JOHNSTON: If you'd please state your qualifications. MR. OPSTAD: Briefly, I'm an oil and gas consultant here in Alaska and I've got about 17 years' experience. I hold a BS degree in geology and an MS degree in petrology and geochemistry from the University of Iowa. I'm a licensed professional geologist in several states, including Alaska. And I've published frequently, both nationally and 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 internationally, on information evaluation techniques. I've served as an expert witness before this body, as well as arbitration panels for the purpose of unitization issues, the formulation of pool rules and certain oil and gas environmental matters. I also independently explore for -- explore for and produce oil and gas in the Lower 48 and I own portions of several oil and gas wells. CHAIRMAN JOHNSTON: Could you specifically refer to your experience and knowledge having to do with the area in and around the Beluga River? MR. OPSTAD: Right. I've been looking at the Beluga River area since Z-Energy acquired it in terms of evaluating the wells that are already drilled in that field, and reviewed the public data that's available on it. Z-Energy, as a small company, does not have access to a great deal of seismic data, which of course is available to the larger companies, but I have reviewed most of the data that is public in the area, and I have been working on it for Z-Energy for about a year and a half now. CHAIRMAN JOHNSTON: The Commission will accept you as an expert witness in this matter, Mr. Opstad. Did you wish to submit your resume as an exhibit or ..... MR. OPSTAD: Yeah. We can mark this, I guess, as Exhibit 2. CHAIRMAN JOHNSTON: Yeah, Exhibit Number 2, 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 resume of Erik Opstad. MR. OPSTAD: I guess I'd like to begin by -- we just have a few view graphs here. I'd like to begin by just briefly reviewing the background of this matter. What Z-Energy calls the North Beluga River Prospect was acquired by the shareholders in Z-Energy on January 26, 1993 by means of competitive bid in State of Alaska Sale 76. This particular tract was bid on by Z-Energy and by also ARCO Alaska, and Z-Energy prevailed in that bid in one tract. Since that time we've moved forward. The tract is more or less 995 acres. Since that time we've moved forward and divided the eastern portion of that tract into a 635-acre exploration unit. The reason that it's 635 acres rather then the normal 640 acres is that five acres is privately held, both the surface and the mineral rights -- in that five acres are privately held, and they are privately held by Paul Craig, who is a shareholder in Z-Energy Incorporation. CHAIRMAN JOHNSTON: Now when you refer to this 635-acre exploration unit is that an exploration unit -- has that been approved by the State or is it a term that Z-Energy uses? MR. OPSTAD: It's an internal term that Z-Energy is applying right now. It has not formally been approved by the State, but we certainly intend to pursue that. CHAIRMAN JOHNSTON: Thank you. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 MR. OPSTAD: For the -- although I see most everyone here is familiar with the area, let's see if I can't get this -- just a little location map here showing the Cook Inlet and the accumulations in Cook Inlet, and we'll refer to this as Exhibit 3, I believe? And you'll see here, this is the Beluga River Field that's operated by ARCO and the Pretty Creek unit, and the Z-Energy tract is right about where you see that dot right now, it's right on the oxbow and the Beluga River. It essentially incorporates part of that oxbow and then 1,000 acres to the west. We're looking at this area, right in here. Now it seems that ARCO, of course, has objected to the location on drilling this well, and one of the questions I guess we have to ask ourselves is why are we interested in doing this at all. And if we look at Exhibit 4, this is a current production history of the Beluga River Field, and this is from the State database. And you'll notice that basically production in the unit peaked somewhere in 19- -- right around 1990, and has been on decline in total since then. We've had ARCO coming in in order to, as the operator, coming in and adding a new well. You can see right here we've got a new well coming in, and it's typically what you try to do is as a field gets on in age, you want to try to add some additional wells or work over existing wells to improve production. And Z-Energy's position has been that we believe 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 11 that the Beluga River Field extends to the north onto, and adjacent to, the tract that was acquired by Z-Energy in January of 1993. We can -- Exhibit 4 is a little bit weak here. CHAIRMAN JOHNSTON: Exhibit 5. MR. OPSTAD: MR. BABCOCK: MR. OPSTAD: MR. BABCOCK: MR. OPSTAD: Exhibit 5 is it? This would be 5. I'm sorry. That was 4. All right, Exhibit 5. Exhibit 5 illustrates the historical production in the Beluga River Unit by well and also illustrates the last average rate in 1993. And you'll notice it shows the -- this also shows the Z-Energy exploration tract. That is the 635 acres outlined here in blue. A well that was drilled back in the '70s by Burglin, and then the proposed location for the North Beluga River 12-2 well. You'll notice that the two nearest offsets to this location have produced -- in this case it would be 212-18 produced 5.1 billion cubic feet of gas, an average rate last year of 52.2 million a day. The next nearest well is 24-13, it's produced 12.81 billion cubic feet of gas, and the rate running at 4.1. CHAIRMAN JOHNSTON: How far away are those two wells from your proposed location? MR. OPSTAD: This -- that well, to the border 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12 of the unit is 1,799 feet. The distance between the nearest production well and our proposed location is about 3,025 feet, which would be somewhat of a normal development well spacing. Now one thing I want to point out here is just simply trendology, if you will, and in the independent world, and I guess in geology in general once a trend is established it tends to oftentimes continue. And you'll notice that basically all these wells are lined up north/northeast, south/southwest, and pretty much extending up here towards the Z-Energy North Beluga/Beluga River Prospect. So it would be reasonable, just on the face of the well pattern and the production history to expect that that trend might very well continue. We can also look at the structure, and this is a little different, but a structural map of the area, and this is on top of the Sterling, I believe. And you can see here that the general axis of this structure runs right around through the airport and is this feature right here at Beluga, and then continues north/northeast and runs right adjacent -- there's the well that we're just talking about. That's the 212-18 well. It's right there. And then ARCO has also -- also has an injection well in that area. But this trend, the actual trend of this antiform runs right along through that well, and so not only if we're looking at a location right about here where that arrow is, not only are we essentially on trend with existing production, but we're also coming as best we can up to the most 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 13 optimistic structural position for the well within that lease block. So we're on trend and we're on structure in that area. CHAIRMAN JOHNSTON: What is the basis or what kind of data did you use or ..... MR. OPSTAD: It's not my data, it's ARCO data. CHAIRMAN JOHNSTON: This is ARCO data? MR. OPSTAD: That's right. CHAIRMAN JOHNSTON: Do you know what the basis of their data is; is it combination seismic, well control or can ..... CHAIRMAN JOHNSTON: I believe it's all well control, but they certainly have a great deal of seismic in the area, so I've mapped the area myself and just based on well control and our map, it's quite similar to that. But since ARCO was protesting I thought maybe using their data would be most appropriate. CHAIRMAN JOHNSTON: And how did you acquire this? This is out of ..... MR. OPSTAD: This is public data. CHAIRMAN JOHNSTON: ..... ARCO publication? MR. OPSTAD: Yes, this is public data, it's part of ARCO's Beluga River Application to the Oil and Gas Commission for the Underground Injection of Non-Hazardous Oil Field Wastes, submitted 1990. And in this ARCO has submitted well logs and described the geology of the area, also provided 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 14 us with some water analysis, cross sections and anti-structure map of which this is part of. CHAIRMAN JOHNSTON: Will you be submitting that as an exhibit? be Exhibit ..... MR. OPSTAD: Be most happy to. And that would MR. BABCOCK: 6. MR. OPSTAD: Exhibit 6. CHAIRMAN JOHNSTON: Number 6, and I will note that that exhibit includes the structure map. MR. OPSTAD: It does include the structure map. MS. JACOBSEN: Isn't that Exhibit 7? CHAIRMAN JOHNSTON: No. No, this would be Exhibit 6. That would include the structure map. I will lump it together as one large exhibit. If you could hand that to me? MR. OPSTAD: Sure. CHAIRMAN JOHNSTON: And I'll just note again that the title of Exhibit 6 is Application to the Alaska Oil & Gas Conservation Commission for the Underground Injection of Non-Hazardous Oil Field Waste. And I do not necessarily see a date on it. MR. OPSTAD: It has a signature page in there that ..... CHAIRMAN JOHNSTON: A signature page. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 15 MR. OPSTAD: ..... is dated 1990, I believe. Independent verification of the facts, I believe, is in there. COMMISSIONER DOUGLASS: Well, this is a structure map on top of the Sterling, if I'm not mistaken. MR. OPSTAD: I believe it is, yes. COMMISSIONER DOUGLASS: I have not reviewed it so, if I'm not mistaken, this is the structure they were proposing to inject the fluids into? It was, in fact. Okay, so there's not necessarily any indication of gas reserves in ..... MR. OPSTAD: No, ..... COMMISSIONER DOUGLASS: ..... this area where ..... MR. OPSTAD: ..... in fact, I believe -- now, the documentation is a little obscure here, but I believe that they wanted to originally propose injecting into the Sterling or what we call the Lower Sterling which is also the reservoir in the Beluga River Field. That was denied, and the actual injection is taking place in some strata which is slightly shallower. The test ..... COMMISSIONER DOUGLASS: But not gas bearing? MR. OPSTAD: Well, no, the testimony submitted by ARCO states categorically that the sands in question are partially depleted gas sands. In that regard, I suppose we could make reference to one other exhibit here. This would be 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277'7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 16 Exhibit 7. This is the production history from the 212-18 well, which is immediately adjacent to the injection well and the northernmost well in the Beluga River Field and the nearest well to the Z-Energy tract. You'll notice that basically the production well's increasing through time. It's actually doing quite well. The well was originally completed in '75 but never produced, worked over in March '84, and then placed on production in May of '85 and it's been doing quite well. MS. GRAVES: Would it be okay if we closed that curtain so we can see the overheads a little bit better? COMMISSIONER DOUGLASS: Sure. MR. BABCOCK: You bet. CHAIRMAN JOHNSTON: Sure. MR. OPSTAD: Now this well is perforated down to -- well, below 5,000 feet, if I recall correctly, which is actually more than that -- I think it might be 54, which is actually below the intended TD for the Z-Energy exploration well. All right. So the justification for the North Beluga River 12-2 location can be summarized pretty concisely here. It's on trend with other Beluga River gas field production wells, and it tends to try to covey up onto both the top of the structure as it's mapped by ARCO, and it closely -- which closely parallels how we've mapped it. So it's on-trend, it's 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 17 on-structure, and it's also selected to establish the contiguous nature of the accumulation of Z-Energy's correlative rights. We believe that the Beluga River gas field does extend to the north, that it's a reasonable field extension play, and that as things are now, without a well out there, that some of Z-Energy's gas is being produced by the Beluga River unit. The location also provides for a relatively normal development well spacing. That is it's beyond 3,000 feet. And although perhaps not optimally placed, if I had the acreage I'd move it a little bit further to the east, but certainly as far as Z-Energy is concerned, it's optimally placed for that acreage. Questions? CHAIRMAN JOHNSTON: In terms of your point number three, you do not feel that you can prove point number three by drilling a well in compliance with the statewide regulations governing spacing, in other words, the 1,500' offset? MR. OPSTAD: The nature -- perhaps. The nature, however, the Beluga River sands in particular have proven to be quite discontinuous in the field, and that can be shown reallY by looking at the variability and the production histories of the various wells involved as shown in an earlier exhibit that we might revisit. Of course some of these wells are dual completions in both the Sterling and the Beluga, but 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 18 you can see down here we've got a well that's produced 106 billion cubic feet of gas, right next to one that's only produced 35 billion, right next to one that's produced 17, just up the road from one that's done 114, another one 28. There's a lot of variability here. In our opinion, the best way to establish correlative rights is to stay up on structure, to stay on trend, and also to get relatively close to the boundary. I think we'd feel a lot less -- that parties involved would feel a lot less compelled to argue about the situation if we're talking about only a few hundred feet separating the two. Particularly given the stratigraphy in the way that it can vary, both vertically and laterally. CHAIRMAN JOHNSTON: Is your target formation the Beluga River and not the Sterling? MR. OPSTAD: Both -- both are considered targets -- both are considered targets. There has -- there is some difference of opinion as to whether or not the Sterling is a legitimate target, and I say difference of opinion among the parties in general because of the Burglin X-33 well. That well had, what I would term, as gas shows in it. That is there was gas in the mud as it was drilled. There were petrophysical indications of gas from the openhole well logs, but none of these shows were ever tested, for reasons that I don't know. The well was -- reached TD and plugged. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272'3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 19 CHAIRMAN JOHNSTON: And do you know what the objective was in that well? MR. OPSTAD: The objective in that well was Beluga also. Now, I'll interject that we believe that there are structural reasons why the bottom hole location of the Beluga -- or the Burglin X-33 well may be isolated and separated in some degree from the proposed location of Z-Energy's NBR 12-2. Any other questions? CHAIRMAN JOHNSTON: Not at this time. COMMISSIONER DOUGLASS: I have a question regarding -- you're drilling this well to not necessarily discover a new pool, you're looking for the same gas that's being developed in the Beluga River Unit? MR. OPSTAD: Absolutely correct. COMMISSIONER DOUGLASS: Okay. Well, our definition of an exploratory or oil -- exploratory gas well in this case, is to discover a new pool, but that's not your intention; is that correct? MR. OPSTAD: It's not our objective, no, sir. We believe that it's a continuous body coming up here from the southeast to the north -- or from the southwest to the northeast, and although I would argue that technically there's been no gas discovered on that -- in that 635 acres, that I would still consider it a -- perhaps an exploratory well, but 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 20 it may be more properly a field extension or delineation well. CHAIRMAN JOHNSTON: Mr. Opstad, for the record, would you establish Z-Energy's relationship to this particular matter? MR. OPSTAD: The leases -- the stockholders of Z-Energy initially acquired the lease in competitive bid and subsequently formed Z-Energy as a separate Delaware corporation, and ..... CHAIRMAN JOHNSTON: So does Z-Energy own a working interest in the lease? MR. OPSTAD: Z-Energy has -- at the conclusion of the transfer Z-Energy will own 100 percent of the working interest in the lease. CHAIRMAN JOHNSTON: But that transfer has not occurred yet; is that right? MR. OPSTAD: The transfer is in progress. CHAIRMAN JOHNSTON: So ..... MR. OPSTAD: As such, the lease is held by the individuals who are the 100 percent stockholders in Z-Energy. CHAIRMAN JOHNSTON: So have these individuals designated Z-Energy as operator? MR. OPSTAD: Yes, they have. CHAIRMAN JOHNSTON: Okay. Have we received those? COMMISSIONER DOUGLASS: Not that I'm aware of. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 21 CHAIRMAN JOHNSTON: Have you submitted your papers of operatorship to the Commission? MR. OPSTAD: No, we haven't. Those papers are going to be submitted within 30 days after the official transfer of the leases and ownership to the corporation, which is in progress. CHAIRMAN JOHNSTON: So at this juncture then Z-Energy is not an official operator of this ..... MR. OPSTAD: That's correct. CHAIRMAN JOHNSTON: I'd like to take a five-minute break at this juncture. (Off record - 9:43 a.m.) (On record - 9:48 a.m.) CHAIRMAN JOHNSTON: I'd like to go back on record, please. We have just taken a short hiatus to allow the Commission to confer with one another. We are somewhat troubled by the standing of Z-Energy in this matter. I'd like to ask Mr. Opstad to share his thoughts on why he feels that Z-Energy does have standing before us and the fact that Z-Energy currently is not -- does not have a working interest in the lease, nor are they properly designated operator. MR. OPSTAD: Okay. Briefly, Z-Energy is owned 100 percent by the -- in the same proportion as the individuals who acquired the lease in question in Sale 76. Those individuals have designated Z-Energy as their representative in 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 22 all matters concerning that lease, and are moving forward to officially transfer the lease and appoint -- formally appoint Z-Energy as the operator. We have a letter which Mark here will submit which may speak to that. MR. WITTOW: Well, if I might jump in briefly. What I have is a partially drafted, really, in response to the objection raised by ARCO about the lack of verification. I have a letter from Paul Craig, president of Z-Energy, just stating that he's individually acquainted with the facts and verifies them. I would also, I guess, state for the record that to the extent there's any question about the identity of the applicant versus the leaseholder, we would be glad to provide the Commission with a letter from the principals who own the lease, stating that Z-Energy is authorized to represent them, and they have been acting -- Z-Energy has been acting on their behalf in all matters related to the lease. And my understanding is the designation of who the operator is is bound up with a variety of approvals they're gaining in terms of marketing the prospectus for the drilling of the well. CHAIRMAN JOHNSTON: We would certainly appreciate any letter that you would provide us that would indicate that Z-Energy is representing the owners. In addition, I think, at the conclusion of testimony today, the Commission will hold the hearing in recess and not make any decision in this matter until we have a properly designated 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 23 operatorship filed by the owners designating Z-Energy as proper operator of the proposed well. MR. WITTOW: Understood. CHAIRMAN JOHNSTON: At this time we will proceed with the testimony and allow you to put on additional evidence supporting your application. MR. WITTOW: That concludes our portion of the case. MR. BABCOCK: I have two questions. Mr. Opstad, you should probably get the microphone. I think You mentioned that you suspect that some of the gas, the Beluga River Prospect, as you described it to us, is -- maybe being produced from the Beluga River Unit wells. What do you base that assumption on or belief? MR. OPSTAD: The Beluga -- it's not only my belief but also in previous testimony that's been presented before the Commission in the case of Burglin, et al, previously back in the '80s. Several witnesses testified that because the Beluga River Field was essentially a depletion dry type reservoir that in theory if the sands were relatively continuous, as is the case at Sterling, that one well in -- anywhere in the volume could effectively deplete the entire volume. So if those statements were correct, and in fact we do have some continuous sands that go from across the artificial boundary or the manmade boundary that is the Beluga River Unit, 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 24 then it is quite possible that gas being produced in the Beluga side and gas on our side could migrate to the other side as pressure dropped. So we -- if it's a continuous body, it would be reasonable to assume that any of the Beluga River wells currently on production could in fact be producing some of the gas that was outside Beluga River Unit. That may be to a lesser degree true with the Beluga River formation itself because I think all of the geologists will agree that those sands have demonstrated a certain amount of discontinuity, they're difficult to map and fully understand. So I would think that that statement would apply more to the Sterling than it would necessarily to the Beluga Formation. MR. BABCOCK: And why did you testify that, in your opinion, the optimum spot to drill this exploratory well or delineation well would be further to the east? MR. OPSTAD: That's really based on ARCO's map, and my mapping also, suggests that the crest of the structure, the rollover, if you will, that forms the Beluga River trap tends to be a little bit further to the east and actually on -- within the Beluga River Unit. And one always tries to optimize your structural position as much as possible, and that's why we joke about drilling bubbles or highs in the exploration business, because that generally gives you the best chance for a successful well. MR. BABCOCK: Do you have any opinion about 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 25 what the drainage radius is in the Beluga for these northern wells? MR. OPSTAD: Well, typically a 640-acre is defined as an average sort of drainage area for a gas well, and that's the typical exploration unit. A 3,000' offset is the requirement for a gas well, one of the Commission's requirements, and so I think that the answer to the question is that it's that type of range, but in fact one could argue that it's greater in the case of the Beluga River Field. But if we use 3,000 feet then the nearest well to the Z-Energy acreage boundary is 1,799 -- the nearest Beluga River production well is 1,799. So if we assume that the 3,000' spacing requirement is reasonable then that would imply that the gas is being drained by the Beluga River Unit from Z-Energy acreage if that gas is there -- if there is gas there. MR. BABCOCK: No further questions, Mr. Chairman. COMMISSIONER DOUGLASS: I have a couple. Going back to that radius of drainage you showed us a production curve that goes back over 25 years. Have you made any attempts to verify that assumption that a 3,000' radius is appropriate, utilizing some of that data regarding the Sterling or the Beluga? MR. OPSTAD: We haven't made any real extensive analysis of the Beluga River Field. Obviously that's not our 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 interest, I think ARCO probably has. Certainly the fact that they have drilled some additional wells, certainly -- perhaps I guess the last one was in 1990, but -- and given the discontinuous nature of some of the formations as in the Beluga, I would say that there very well may be additional in-field opportunities within that are less than the current spacing within the field. That would make sense to me. The Sterling you can map correlatively using the well logs over a pretty wide area, and you can convince yourselves, at least at the 3,000' spacing or the current spacing of the wells that the Sterling appears to be fairly continuous between those wells. Of course you can always have structural interruptions, but the stratigraphy seems to be quite correlative. So I think that the Sterling -- in the Sterling case one could say that spacing is adequate. In the case of the Beluga Formation, my gut feeling is that the productivity of the field and the reserve recovery would be improved by a shorter well spacing. COMMISSIONER DOUGLASS: about the Burglin well ..... MR. OPSTAD: Yes. COMMISSIONER DOUGLASS: I can't remember when, but ..... MR. OPSTAD: You testified earlier ..... that was drilled. '77, I believe. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 27 gas shows ..... COMMISSIONER DOUGLASS: ..... there were some MR. OPSTAD: Yes, uh-huh. COMMISSIONER DOUGLASS: ..... in that well. Were those gas shows as you described them, were they in the Sterling or the Beluga? MR. OPSTAD: There were gas shows both in the Sterling and the Beluga. The Beluga had a gas kick that reduced the mud weight by several pounds. It was quite a strong kick. The Sterling exhibited shows throughout the section, and if one looks at the open hole well logs closely, you find, again, indications from both the resistivity electric logs, also the acoustic logs, and also the nuclear porosity logs of gas in those sections. I think the question really is, in the Burglin case, whether or not that gas was commercial or not. And since the operator chose not to test any of those shows, it's really just speculation at this point. COMMISSIONER DOUGLASS: Did you find any of those Sterling sands correlatable with the wells in the Beluga River Unit? MR. OPSTAD: Oh, yes, sir. Yes, quite correlatable, yeah. You can -- between Burglin well and the nearest Beluga River well, the Sterling section is virtually an overlay in terms of the stratigraphy. COMMISSIONER DOUGLASS: So in cross-section you 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 28 could show ..... MR. OPSTAD: Certainly. COMMISSIONER DOUGLASS: those Sterling sands? MR. OPSTAD: Indeed you could. COMMISSIONER DOUGLASS: Thank you. I have. ..... continuity of That's all CHAIRMAN JOHNSTON: Mr. Opstad, earlier you mentioned, in previous testimony before the Commission, specifically Burglin, et al. Do you know specifically what conservation order resulted from that testimony? MR. OPSTAD: There were several of the -- I don't recall the specifics of the conservation order, but the thrust of Burglin's effort was to, I believe, either get the lease incorporated into the Beluga River Unit or receive some sort of extension since it had expired, I believe, by the time we'd actually applied for a hearing. CHAIRMAN JOHNSTON: For the benefit of the audience I suspect that testimony was offered in either Conservation Order Number 149 or 150. You also indicated that you had done some of your own mapping. MR. OPSTAD: Yes, that's correct. CHAIRMAN JOHNSTON: Do you have any objections to sharing the results of that mapping with the Commission? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 29 MR. OPSTAD: No, I can provide a map. Okay, this would be Exhibit 8. And this is just well control, and it uses a minimum rates of curvature technique, and picks that are all made on top of the Sterling A interval, which picks may not be identical to what ARCO selects, but pretty close. And basically you can see here that the -- in this case we've got the axis of the structure really coming right along the wells and right up the south eastern arm of the Beluga River oxbow here. CHAIRMAN JOHNSTON: And this map is just based upon structure -- or excuse me, well control? MR. OPSTAD: Yeah, primarily. CHAIRMAN JOHNSTON: Any seismic data? MR. OPSTAD: No seismic data, no. CHAIRMAN JOHNSTON: Has Z-Energy acquired any of its own seismic data? MR. OPSTAD: No, we have not. CHAIRMAN JOHNSTON: Earlier Mr. Wittow made a statement that this particular well is an exploratory, that it is only looking for hydrocarbons and it is not producing. In the event that you discover hydrocarbons in this well, assuming it's allowed to be drilled, would you have plans to produce the well? MR. OPSTAD: Certainly if an exploratory well can be converted into a developmental well in a cost-effective 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 30 manner that's a desirable thing to do because it allows you to use the well bore without having to incur the cost of drilling a separate development well. So, yes, we would intend to use that well bore as a production well, and it's partly the reason why we've kept the spacing beyond 3,000 feet as required by the normal spacing requirements for a developmental gas well. CHAIRMAN JOHNSTON: From adjacent wells. MR. OPSTAD: Yes, sir. CHAIRMAN JOHNSTON: Are you aware of our requirement in regulation 20 AAC 25.517, Plan for Pool Development and Operation, Integration of Interests? MR. OPSTAD: Yes. CHAIRMAN JOHNSTON: Essentially before regular production was allowed from a particular well you would have to submit a Plan of Development and Operation, and among the things that that plan would establish was your approach to preventing waste; 2., the protection of correlative rights for owners of each property in the pool and; 3., the maximum recovery -- ultimate recovery of oil and gas that is prudent. With regard to point number 2 in that requirement, the protection of correlative rights for owners of each property in the pool, how would you propose that that would be achieved? MR. OPSTAD: Certainly I think that the best way to do that would be to work with the operator of the Beluga River Unit and Beluga River Working Interest Owners to 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 31 incorporate these reserves -- Z-Energy reserves into the Beluga River Unit. That would insure that the correlative rights of all the parties were properly addressed. It would also allow the -- any gas produced from that area to utilize the existing facilities within -- production facilities within the Beluga River Unit which, in my opinion, would in fact then prevent waste in the sense of having to construct redundant facilities and gas handling equipment. CHAIRMAN JOHNSTON: So it would be your hope to voluntarily negotiate an expansion of the Beluga River Unit? MR. OPSTAD: That is correct. CHAIRMAN JOHNSTON: And if you were not able to comes to terms with ARCO over the expansion of the unit what would you do? MR. OPSTAD: That would be up to the -- it would be up to the Z-Energy board of directors and owners as to what they would do at that point. We -- I suspect that we might come back to the Commission and pursue an avenue of forced unitization at that point, you know, if there were sufficient and compelling evidence to suggest that that would be in the best interests of the state and both the parties. CHAIRMAN JOHNSTON: In such an event if you were to petition the Commission for a forced expansion of the Beluga River Unit are you aware of the four findings that the Commission would have to render before we could force integrate 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 32 the interests of the adjacent property owners? MR. OPSTAD: No, I'm not. Perhaps you could ..... CHAIRMAN JOHNSTON: I would direct your attention specifically to Statute AS 31.05.10. Under that there are four findings that we would have to make. I can read those findings if you would wish. But basically: 1. The unitized management operation for the development of a pool -- a portion of the pool is reasonably necessary in order to effectively carry on pressure control, pressure maintenance or re-pressuring operations, cycling operations, waterflood operations or any combination of these or any other form or 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. And point 3. The estimated additional cost, if any, of conducting such operations will not exceed the value of any additional oil and gas so recovered. And point 4. The unitization and adoption of one or more of the unitized method of operations is for the common good -- and then it goes on, that we shall make a finding to 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 33 that effect and make an order creating the unit, or presumably expanding the unit. The point is I think it is important for Z-Energy to understand that given those findings there is no certainty that even if the Commission was to receive a petition for a forced expansion of the unit, that we would be able to so order it. MR. OPSTAD: Yeah, we're certainly aware that there are a number of requirements that would have to be met and that clearly we'd have to be in the general best interest of the state and presumably the parties involved. In the event that such a petition failed and were not granted, I think that the company is prepared to move forward with, you know, the construction and marketing of the gas as an independent operation. CHAIRMAN JOHNSTON: Of course that would create its own can of worms, again, in terms of ..... MR. OPSTAD: Indeed it would. CHAIRMAN JOHNSTON: ..... protecting the correlative rights of adjacent property owners if you were to propose an independent standalone development. But that is a bridge that may or may not be crossed quite some months from now. So we'll worry about those arguments at that time. Anything further ..... MR. BABCOCK: I do have another question. If you could put Exhibit 8 back up there. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 34 MR. OPSTAD: MR. BABCOCK: MR. OPSTAD: MR. BABCOCK: Which was? That's the structure map. Little structure map, okay. I realize that the owners -- well, I should ask first, there's no ARCO ownership in the north Beluga prospect? MR. OPSTAD: MR. BABCOCK: No, sir. So the ownership of these two geographical areas, that may or may not share a pool, are different? MR. OPSTAD: Yes. MR. BABCOCK: However, you would like -- Z-Energy would like to establish whether or not there's gas that's part of these pools under your property. MR. OPSTAD: Yes. MR. BABCOCK: In order to do that is that -- where you are proposing drilling the well is that the optimum place to drill the well in order to demonstrate that? In other words, what I'm getting at is if the well were drilled here would that be a better place to drill the well to establish whether or not there was gas there? MR. OPSTAD: No, it would not. It might be a -- perhaps a better place, given the trend you have here in general with all these wells kind of stacked along the crest of this little rollover. It might be better to drill out here 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 35 just for development purposes, but in terms of proving whether or not there's actually gas on this lease, this area down in here, this little corner, is high on structure as one can get, and I believe that that is the optimum place to determine whether or not gas extends onto the lease. If we don't have gas in here, in this area, then it's unlikely that there's a great deal of gas in the area. This Beluga River well, the Burglin well, had -- like I said, had shows in it and it's always possible that there might be some other type of accumulation down in this area that could be evaluated in the future, but in terms of gas which would be contiguous and part of the same basic pool as exists in these other wells, I would say that that continues to be the optimal location. MR. BABCOCK: MR. OPSTAD: For demonstrating? For demonstrating, yes. CHAIRMAN JOHNSTON: Out of curiosity, has Z-Energy acquired any of the other necessary permits for this well to go forward? MR. OPSTAD: No. We're in the process of putting together the drilling permits and we're going to look at getting the permits for fluid injection disposal, coastal -- we, of course, have got to put in a oil spill contingency permit or application. Again, all that is in progress, but one thing that has been a bit of a fly in the ointment is the exact 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 2¸0 21 22 23 24 25 36 -- determining exactly where the surface is going to be here. There -- of course this area right over here is owned by the state, and ..... CHAIRMAN JOHNSTON: Which are was that? MR. OPSTAD: That's where the well is actually located. That area right there, the surface is state. This surface area is owned by CIRI. We're in discussions with CIRI to utilize the old Burglin X-33 pad, which would be optimal because it's already constructed, there would be no additional environmental impact. It's particularly well-suited for a oil facilities location of it would be required in the future. It's also immediately adjacent to the five acres that we own, in control through Paul Craig's acquisition. So when there are buildings on that location it will allow us to use those for ..... CHAIRMAN JOHNSTON: You would propose to directionally drill from the old well pad location to ..... MR. OPSTAD: Yes. If we're ..... CHAIRMAN JOHNSTON: ..... this bottom hole location? MR. OPSTAD: If we're successful in negotiating terms with CIRI. We also have considered using our own surface to drill from, which is immediately adjacent to the edge of the river here. That poses some setback difficulties in terms of its proximity to the river, but in discussions with DNR, we 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 37 believe we may be able to work around those because there's certainly no indication of oil at the depths or at the location that we're intending to drill. And so the environmental hazard is quite minimal. Those are all things that are underway as we speak. CHAIRMAN JOHNSTON: So you would be then definitely permitting this as a gas well -- . .... MR. OPSTAD: Absolutely. CHAIRMAN JOHNSTON: ..... gas exploratory. MR. OPSTAD: Right. CHAIRMAN JOHNSTON: And what would be your estimated spud date? MR. OPSTAD: The estimated spud date at present is in the fall, around the first of September, and that assumes that we can move quickly through some of these issues and get the surface location situation clarified, and be able to move forward briskly with the remaining permitting requirements. CHAIRMAN JOHNSTON: In terms of your critical path on this potential well do you see this hearing and the decision coming out of it as being on that critical path or controlling that critical path or some of these other permits that are necessary, more compelling at this juncture? MR. OPSTAD: They tend to blend. Typically the other permits require that the bottom hole location be established as part of that process, and of course until we 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 38 have some closure on this issue, it makes it a bit difficult to move forward with those other permits. CHAIRMAN JOHNSTON: Any other questions? No other question. Okay, thank you. At this time the Commission has no further questions of the applicant, although we will reserve the right to call you back and ask additional questions if we have the need to, as these proceedings go along. At this time I think it would be appropriate to take a short, 10-minute break. Let's stretch our legs, and we'll come back and ask the party protesting the issuance of the spacing exception to address the Commission. Thank you. MS. JACOBSEN: I do have a couple questions for Mr. Opstad. I don't know when the best time is to do that, perhaps after the break. CHAIRMAN JOHNSTON: Let's do that after the break. (Off record - 10:19 a.m.) (On record - 10:35 a.m.) CHAIRMAN JOHNSTON: I'd like to reconvene. The time is approximately 25 to 11:00. We had just concluded hearing from the applicant. At this time I would like the parties protesting this spacing exception to please stand and identify themselves. MS. JACOBSEN: I'm Rosie Jacobsen. I'm counsel for ARCO Alaska. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 39 MS. GROVE: And I'm Debbie Grove. I'm the staff manager of the Beluga River Unit. CHAIRMAN JOHNSTON: And do either one of you wish to be considered to -- or offer sworn testimony? MS. GROVE: I do. CHAIRMAN JOHNSTON: Okay. Please swear her in. (Oath administered) MS. GROVE: Yes, I do. CHAIRMAN JOHNSTON: If you would please care to make your opening remarks, and I note that you had earlier, before the break, indicated that you do have questions of Z-Energy. It would be our preference to have ARCO make their opening statement, at the conclusion of which we will allow opportunity for both sides to have a period of cross examination. But at this juncture we'd like to hear just from the applicant right now without going into the cross examination stage. MS. JACOBSEN: Okay. CHAIRMAN JOHNSTON: We just had a request from a member of the audience that in the back of the room they're having a difficult time hearing us all speak, so if we can kind of keep that in mind and maybe even have the person testifying turn around and direct themselves to the audience, I think that will come across a little bit better. MS. JACOBSEN: This way? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 40 CHAIRMAN JOHNSTON: Yeah. You certainly could sit off to the side there. That would be fine. MS. JACOBSEN: This is the microphone? CHAIRMAN JOHNSTON: Yes. COURT REPORTER: you put that on, please? MS. JACOBSEN: but I will. You're softspoken, so would Okay. I don't think I will be, CHAIRMAN JOHNSTON: Thank you. Please proceed. MS. JACOBSEN: Ail right. My name is Rosanne Jacobsen. I am an attorney for ARCO Alaska Inc., the operator of the Beluga River Unit. On behalf of the Beluga River Unit Owners, ARCO protests Z-Energy's request for a location exception. I'd like to make it clear that the Beluga River Unit would not oppose Z-Energy's drilling of a well 1,500 feet from the section line. Z-Energy is certainly entitled to produce the hydrocarbons which underlie its leases. But Z-Energy is not entitled to drain the Beluga River Unit leases. The Commission can assure that the Beluga River Unit's correlative rights will not be affected by simply requiring Z-Energy to drill 1,500 feet away from the section line. ARCO will present testimony in three different areas -- two or three different areas today. I will start out with a discussion of the legal standards and precedence which the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 41 Commission requested. Debbie Grove, staff manager of the Beluga River Unit will discuss the technical issues. And so I'll start out with the legal standards. CHAIRMAN JOHNSTON: Thank you. MS. JACOBSEN: First, because there are no Beluga River Unit pool rules, 20 AAC 25.055(a) applies, and I don't think that Z-Energy disputes this. Thus, no gas pool may be open to the well bore closer than 1,500 feet to any section line. As you know, Z-Energy wants to drill 300 feet from the section line, which is 300 feet from the Beluga River Unit boundary. Second, the Commission has noted in the past that statewide spacing rules are presumptively appropriate for preventing waste, protecting correlative rights and ensuring the greatest ultimate recovery. One of the reasons for this, as noted by Kramer and Martin in the law of pooling and unitization, that's Section 5.02(1), is that when oil and gas commissions consistently follow their rules, there is little or not litigation, because everybody knows what's expected of them, and they operate that way. Thus, Z-Energy must overcome the presumption that the statewide rules are appropriate and should be used. Third, under Alaska Statute 31.05.100(b), Z-Energy is only entitled to a location exception if it can prove three things -- or one of the three things. One is if the unit is 810 N STREET 277'0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 42 outside the pool, and I assume that that means the drilling unit. The second reason for an exception location would be that a well at a legal location would be unproductive, or if topographical conditions are such as to make the drilling at a legal location unduly burdensome. As Z-Energy has not proved that it is entitled to an exception under the statute, only three reasons for exception locations are permissible under the statute, and Z-Energy hasn't shown one of those three reasons, thus the Commission has no legal basis for granting the exception location. If Z-Energy believes it is being drained, its remedy is to drill an offset well, but this well cannot drain Beluga River Unit reserves. We're 1,800 feet off the line. They need to at least stay 1,500 feet off. If Z-Energy -- or if the Commission believes that Z- Energy can prove one of the three allowable reasons for an exception location, then the Commission must protect the correlative rights of nearby lessees by three things. And this is also an Alaska Statute 31.05.100(b). The Commission must offset any advantage which Z-Energy may get, and it -- and they can protect the Beluga River Unit's correlative rights by offsetting any advantage which Z-Energy may get, and by preventing or minimizing drainage from Beluga River Unit leases, and by preventing Z-Energy from producing more than a just and equitable share of the hydrocarbons. Thus, the Beluga 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 43 River Unit does not need to show that it will be harmed by the exception location. The Commission must assume that the Beluga River Unit is harmed and must take appropriate action. If the Commission would like, we can submit different options for how we could be protected. And I don't know if you'd like that now or maybe you'd like us to submit it in writing. The Commission brought up the need for an integrated agreement if the well should be produced. We'd like to note that the easiest way to protect correlative rights is by just requiring Z-Energy to stay 1,500 feet off the lease. That's what the spacing requirements are for. Finally, I'd just like to note that, now, the well hasn't been drilled yet, so we don't know if it would be appropriate to include it in the Beluga River Unit, and I think that Z-Energy should know that the way that companies typically operate, and by letting an offset lease into a unit is they typically don't reimburse that person for the cost of drilling the wells. We wouldn't reallocate any past production, and then most likely the cost of Beluga River Unit facilities would be reallocated back to that operator. That's the way we typically do business. So that's all I've got. no ..... I'd like to -- if there's MR. BABCOCK: I have one question. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 44 CHAIRMAN JOHNSTON: A few questions. Go ahead. MR. BABCOCK: My question is presuming there's a distinction between an exploratory or delineation in the production well, do you see any harm to correlative rights if a exploration well is drilled but production is not allowed from it? MS. JACOBSEN: No. If -- I think that Z-Energy should know that up front, if the Commission won't allow Z-Energy to produce from that well. But certainly our rights aren't harmed by the mere drilling of a well. I don't think mud could go 1,500 feet and damage our reservoir. But it seems likely, and Z-Energy has said -- or Mr. Opstad has said that they would like to produce this well, and if they do produce, being 300 feet off our line, they're going to drain us, and that's how we're harmed. MR. BABCOCK: All right. I appreciate your answer. My question is derived from my understanding that those are two different questions the Commission would have to consider, so the actual production from the wells is different issue than granting the exception for drilling an exploratory well, in my mind. MS. JACOBSEN: I understand the distinction, but like I said, I think if we were -- you know, if the table was reversed and ARCO was wanting to drill 300 feet off Mr. Craig's lease, I think we'd want to know if we could 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 NEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 45 produce that well. We probably wouldn't spend the money if we knew we couldn't produce it. So I understand what you're saying but practically speaking it would be nice to know what options or what limitations the Commission would put on a well that was drilled so close to the lease line. MR. BABCOCK: That was my only question. CHAIRMAN JOHNSTON: I have -- actually I have a very similar question to that, so this my be plowing over similar ground, but in terms of you said you would have no objections if the well was drilled 1,500 feet from the section line. But can you envision that that might create some difficulty for individuals trying to prove productive acreage on their lease if in fact the structure does not extend 1,500 feet into the lease? MS. JACOBSEN: that more in detail, but ..... I think Ms. Grove will address CHAIRMAN JOHNSTON: This is not specifically related to the Beluga River situation; it's just a general overall problem that I believe the Commission faces in decisions of this nature, that if the applicant wishing to drill this well really, truly believes that this is an optimal location and that he cannot prove productive acreage if he stays in compliance with the spacing exceptions, that he in fact has to drill closer to the spacing exception. It creates difficulty for them in terms of, you know, complying with 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 46 statewide rules, and that they really do have to come forward and request a spacing exception. So I think in this particular case Z-Energy is, I think, caught between a rock and a hard spot, perhaps, and that if they were to propose drilling a well in compliance with statewide regs, it may be for naught. MS. JACOBSEN: Well, to address your concern about what the Commission should generally do, and if a lessee believes that a legal location would not be productive, I think the statute gives the Commission the right to issue exception locations, and that's one of the three reasons; it's the second reason given. But the applicant has to put forth some evidence that they don't think that a location 1,500 feet off the line is going to be productive, and I haven't seen that from Mr. Opstad today, and in fact Ms. Grove will put forth some testimony which may indicate that Mr. Opstad may have a hard time -- well, they've just put forth some differing interpretations in the recent past, and Ms. Grove will go into that. So in answer to your question, I think the statute does provide for those kind of exceptions, but the applicant has the burden of showing that that's the case. CHAIRMAN JOHNSTON: Okay, very good. That's kind of the point I wanted to establish. Thank you. At this time no further questions. MS. GROVE: I'd like to be certified as an 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 47 expert witness. CHAIRMAN JOHNSTON: Okay, if you'd please state your qualifications. MS. GROVE: Okay. I'm currently the staff manager of the Beluga River and Kuparuk Fields. I received a bachelor of science degree in petroleum engineering from Texas A & M. I've been employed by ARCo for 11 years. Over the course of my career I've held a number of engineering and operations assignments in the Lower 48, the Gulf of Mexico and Alaska. I've been responsible for the operations of the Beluga River Unit for the last year and a half. My testimony today will cover the technical issues surrounding Z-Energy's request for a location exception, and I ask that you certify me as an expert on matters relating to the Beluga River Unit. CHAIRMAN JOHNSTON: Thank you. (Pause) The Commission will accept you as an expert witness in this matter. Please proceed. MS. GROVE: Okay. I'd like to begin by saying that ARCO does not think that Z-Energy's acreage contains commercial hydrocarbon, and also that we would not oppose Z-Energy's drilling of a well with a legal location, 1,500 feet from the section lines. We are protesting the proposed location due to its proximity to the Beluga River Unit. If successful, Z-Energy's well would drain reserves from the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 48 Beluga River Unit. During my testimony today I will review information regarding the proposed location that Z-Energy provided to ARCO and this Commission, and a petroleum information report in order to show that there are legal locations 1,500 feet from the section lines that are comparable to the exception location. I will also discuss the issues of drainage, waste and protection of the correlative rights of the Beluga River Owners. I'd like to introduce this map as an exhibit. This is a structure map on top of the Sterling A sand. This map was provided to ARCO by Mr. Paul Craig of Z-Energy when we met last October to discuss the issue relating to this lease. The map was prepared by Mr. Opstad. CHAIRMAN JOHNSTON: Are you submitting that as an exhibit? MS. GROVE: Yes, I am. CHAIRMAN JOHNSTON: Okay, that will be Exhibit Number 9 then, and it's Lower Sterling Formation Structure, and ..... MS. GROVE: Top of the A Interval. CHAIRMAN JOHNSTON: ..... probably very similarly compares to their Exhibit Number 8; would that be correct? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 49 MS. GROVE: It does -- we did note some differences on the interpretation. I don't know why the interpretation is different, I can't speak to that. This map is similar to ARCO's interpretation. There hasn't been any new data since this map was prepared in September 1993. So I can't speak to why it's slightly different now than the map that Mr. Opstad presented earlier today. MR. OPSTAD: I can interject, if you want me to. CHAIRMAN JOHNSTON: Yes, you'll have an opportunity to ..... COMMISSIONER DOUGLASS: I was going to say, as I recall, it was the bottom of that interval was the map he was presenting ..... MS. GROVE: Okay. COMMISSIONER DOUGLASS: ..... as his exhibit, if that's correct. MS. GROVE: There's several things. This is the outline of the Beluga River Unit. The yellow dot represents the proposed location; orange dot is our closest well, Beluga River 212-18. And I'd like to point out that there's a fluid contact right here on the north side of Z-Energy's lease. And, as you can see, all of Section 12, the majority of the east half of Section 11, as well as some open acreage here, are all above the fluid contact. It appears that 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 50 if this is the prospect, there's plenty of opportunity, plenty of space for Z-Energy to back-up, get 15 feet (sic) from the lease lines. There's very little structural advantage by moving the well east. Now if you wanted to get up structure you're going to crowd lease line and move it this way. But we think there's plenty of good locations, are comparable locations that they could drill without needing the exception. CHAIRMAN JOHNSTON: Given the situation with the Burglin well, I can't make out the number 33-127 MS. GROVE: Uh-huh (affirmative). CHAIRMAN JOHNSTON: Which I believe is -- the status is plugged and abandoned as a dry hole. MS. GROVE: That's correct. CHAIRMAN JOHNSTON: Would it make sense for Z-Energy to drill at a location that would essentially be duplicating the location of the Burglin well? MS. GROVE: Based on our discussions with Z-Energy last September, Mr. Opstad and Mr. Craig, the interpretation is that the entire lease is productive and that this well was productive and it just wasn't tested to establish production. We don't agree with that interpretation, but that was what was presented to us, that this entire area was productive. So it doesn't appear to be much advantage in moving over here, and they don't gain a lot of structure. Our 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 ,L 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 51 map shows the same thing. CHAIRMAN JOHNSTON: Yeah, I'm still somewhat troubled by that, even though, you know, they may have indicated that the entire section is productive they still have the problem with a dry hole, and I don't see any advantage to Z-Energy in duplicating at that location specifically. Especially if they are trying to entice potential investors to support their efforts. It wouldn't make sense to me as an investor to put money into a well that is immediately adjacent to a dry hole. MS. GROVE: Okay, so are we saying that -- are you saying that this is the only productive area in the lease which is ..... CHAIRMAN JOHNSTON: Well, no, I'm not saying that. All I'm saying is that logically to me I would not want to be drilling another well in the close proximity to a dry hole unless I have some knowledge about the condition of that dry hole as not being properly drilled. MS. GROVE: That was a case that we had -- the discussion that we had with Z-Energy last fall, and their contingent was that that well was productive. CHAIRMAN JOHNSTON: The other problem I see, I think if we go back to some of the earlier Conservation Orders Numbers 149 and 150, and it's been quite some time since I've looked at these orders, but it seems to me that the gist of 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 52 that was an attempt on Burglin's part to expand the Beluga River Unit to include his acreage, and I think the outcome of that by the Commission at that time was that they had not submitted sufficient evidence to warrant an expansion, that it was -- it was ordered that if you wish to prove that you have productive interval you have to show it by drilling a well. MS. GROVE: Right. CHAIRMAN JOHNSTON: So I would think given that the -- that subsequent people purchasing this property would be looking at a location logically some place between the dry hole and productive hole. MS. GROVE: I think you'll need to establish what the intent of the well is, because if the entire block is the prospect -- the exploration prospect that is assumed to be productive or potentially productive, granting an exception because someone would like to be updip doesn't seem like a valid reason. You know, it ..... MR. WITTOW: Point of order? Well, just an objection, I guess, to the nature of the -- Ms. Grove's testimony. She's been offered as an expert, as the manager of the Beluga River Unit. I don't have a problem with that but she's offering what I would call expert testimony in the area of exploration geology. I don't think she's established as an expert in that area, and I would object to her being considered an expert in where to drill a well a lease that hasn't been 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 53 drilled. MS. GROVE: Can I speak to that? CHAIRMAN JOHNSTON: Well, I would also note, too, that I don't necessarily believe that we could consider you an expert witness relative to the interpretation of the Z-Energy map. Certainly your own map, I believe, we could expect you as an expert in that regard, and I think ..... MS. GROVE: Okay. We can introduce our map if ..... CHAIRMAN JOHNSTON: Okay. My colleague just brought up an interesting point. Why don't you respond to Mr. Wittow's comments. MS. GROVE: Okay. I have been involved throughout my career in explorations, lease sales in the Gulf of Mexico, exploration drilling, providing the engineering support for exploration drilling. I've been directly responsible for selecting locations. So I feel that I am qualified as an expert in those areas. That's part of my job. MR. WITTOW: Selecting exploration locations? MS. GROVE: I have ..... MR. BABCOCK: Excuse me. Mr. Wittow, ..... MS. GROVE: ..... in the past. MR. BABCOCK: ..... please. (Pause - Commissioners confer in whispered tones) CHAIRMAN JOHNSTON: Would you be willing to 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 54 submit a resume ..... MS. GROVE: CHAIRMAN JOHNSTON: claims of expertise in this ..... MS. GROVE: Sure. CHAIRMAN JOHNSTON: targets and this sort of thing? Uh-huh (affirmative), sure. ..... supporting your ..... area of exploration MS. GROVE: Uh-huh (affirmative). CHAIRMAN JOHNSTON: Our presumption will be that you will have expertise along these lines, that you can talk about this. But, again, I don't think we would feel comfortable considering you an expert witness relative to an interpretation of a Z-Energy map. MS. GROVE: Would it be helpful if I presented ARCO's map? CHAIRMAN JOHNSTON: We would certainly feel a little bit more comfortable, considering your testimony in an expert's manner with an ARCO interpretation. MS. GROVE: Okay. MS. JACOBSEN: Excuse me. MR. BABCOCK: Excuse me. Can I add one thing? You should come up to the microphone so the microphone can pick up your statements. And did the microphone pick up Mr. Wittow's statements? COURT REPORTER: No. MR. BABCOCK: No. If you wish to raise a point 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 55 of order, you need to come forward. CHAIRMAN JOHNSTON: Stake out a microphone. We have several here. MS. JACOBSEN: I'd just like to point out that ARCO didn't have much notice of what Mr. Opstad would be presenting today, so we're not prepared -- necessarily prepared to answer all the things that came up. So if this is something that the Commission would like further evidence on, after Debbie concludes her testimony, we'd like to have the record left open or maybe ask to continue the hearing so that we could present more information if you need it. CHAIRMAN JOHNSTON: Well, certainly the record will remain open until we clearly establish Z-Energy's standing before the Commission with the proper designation of operatorship, and as I understand it, that's probably at least 30 days away. So I think there will be plenty of opportunity to address issues. MS. JACOBSEN: Thank you. MS. GROVE: I'd also like to clarify, I think it was a point that Mr. Douglass made earlier is that is this an exploration well or a development well; it's targeting common pools, and I'm definitely qualified on a development well to pick a location, and I'll submit that to you. This is ARCO's Beluga River map to a different scale. An outline of the unit is shown in green; the well locations 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 56 are the same, they're yellow and the orange dot; interpretations are fairly similar of these two maps. CHAIRMAN JOHNSTON: Why don't we mark that Exhibit Number 10, and what is the -- I can't see the title on it. MS. GROVE: It's the Beluga -- the Top of the A Zone. And ..... that tell you? CHAIRMAN JOHNSTON: And specifically what does MS. GROVE: What does the map tell you? CHAIRMAN JOHNSTON: In terms of your protest of the spacing exception. MS. GROVE: Okay. The specific issue is that Z-Energy could move to a legal location to the west and stay -- get a comparable location structurally. There's not a structural advantage to moving 300 feet from the lease line. They could back this well up and maintain the same structural position. I'd also like to point out one other thing on this map. This is the Beluga River, the outline of the Beluga River. It wasn't clear if this was definitely going to be a deviated well or a straight hole, but this, from an operational perspective, this is a more costly -- this is drilled on the east side of the river. It's more costly and more difficult to drill and produce because existing pipelines and roads are all on the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 57 west side of the river at this point. CHAIRMAN JOHNSTON: That would be true if it was a straight hole and not directionally. MS. GROVE: Right. Right. And I don't feel that that was -- that wasn't clear that it was definitely going to be a directional well. CHAIRMAN JOHNSTON: I think their testimony indicated that at this time they did not necessarily know where the surface location was. Potentially it could be the old existing pad. I assume it's 33-12. MS. GROVE: Right. CHAIRMAN JOHNSTON: Or conversely it could be on the other side of the river on the ..... MS. GROVE: A general comment would be that there's not topographical reasons; in fact there's disadvantaged topographically to be on this side of the river than on the west side of the river. Okay. I'd like to introduce a page from the May llth Petroleum Information, Alaska Report. We have permission from Petroleum Information to Xerox this. CHAIRMAN JOHNSTON: We'll call this Exhibit 11, and it's an article for Petroleum Information, Alaska Report, dated 5/11/94, page 3. MS. GROVE: This article, just as a general discussion of Z-Energy's plans, and it quotes Z-Energy's 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 58 president Mr. Paul Craig regarding the proposed well. And the article states that the north Beluga River Prospect covers some 955 acres in Sections 11 and Sections 12, and on our map this would be located here. On the Z-Energy map, this is Section 12 and Section 11, and I used this information to show that the entire lease -- the same interpretation that Z-Energy had presented to us last fall was still current. It's just about 955 acres, it's the entire block, and if the prospect is that big there's no reason to be crowding the corner, and this was as recent as May 11. I'd like to take a couple minutes here to comment on some of your earlier questions. Mr. Babcock had a question regarding drainage of the 212-18 well, you know, why are we draining. We are almost 1,800 feet off the lease line, so presumptively we're not draining. But in addition to that we have done a material balance analysis of that well. Based on initial pressure and current pressure and the cumulative that's been produced to date, and the well is not draining, it's less than 1,700 feet. MR. BABCOCK: Thank you. CHAIRMAN JOHNSTON: Would you be willing to submit that information to us? MS. GROVE: Uh-huh (affirmative). CHAIRMAN JOHNSTON: If we could request that then, I'd appreciate that if you'd send it in after we take a 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 59 break. today. next day or two. MS. GROVE: Okay. I don't have it with me CHAIRMAN JOHNSTON: No, but, you know, in the MS. GROVE: Yeah. CHAIRMAN JOHNSTON: As I said, we will not be closing this hearing today, we'll just take a break and potentially reconvene once we have the operatorship. MS. GROVE: And will we have the opportunity at that time, there were some comments regarding the Burglin well, the 33-12 well, regarding mud shows on the -- gas shows on the mud log that, based on my recollection, are not correct. They were not mud log shows in the Sterling sand, there were mud log shows in the Beluga interval across from some of the coals, which is typical for what we see in the Beluga River Unit. The coal seams will flow gas while drilling and give you a mud cut, and I'd like to confirm that, but I'm fairly confident that that is the case with that well, and just is a clarification. One other clarification on the lease Sale 76 ..... CHAIRMAN JOHNSTON: If I might ..... MS. GROVE: Oh, go ahead. CHAIRMAN JOHNSTON: ..... interject here. And what would -- if you were to show us what would that be establishing? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 60 MS. GROVE: It's mainly just to make the record straight, or correct that I think maybe there's several issues here. Maybe I'm getting them a little mixed, that ..... CHAIRMAN JOHNSTON: Well, if you're to provide information on 33- -- Burglin 33-12, what would you be trying to establish? MS. GROVE: I guess basically that the -- there isn't a reason -- we don't think that there's a reason to be snuggling up to that lease line, and maybe it's not necessary if the record isn't correct. It may not be pertinent to hear. CHAIRMAN JOHNSTON: In other words, you would -- I guess I'm still confused as to what -- if you were to provide us with ARCO's analysis of the 33-12 well, would you be confirming that it was a dry hole or would you be suggesting that it is productive? MS. GROVE: No, we would be -- I mean that was my basic premise when I started, was that we don't think any of the lease is productive, and we don't -- we don't think it will make a difference exactly where they drill the well, however, we have an obligation to protect the correlative rights of our unit owners. CHAIRMAN JOHNSTON: Let's assume that you are correct in your interpretation, and that in fact the Z-Energy acreage is non-productive. Would you then have an objection to them drilling this well? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 NEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 61 MS. GROVE: No. It's not the drilling of the well; it's the production of the well, and I will discuss some drainage issues later. There were some comments made that ARCO did bid on this tract in lease Sale 76, and we did. We bid about $10,000. That was the lease sale that we spent a total of $60 million in, and we actually didn't -- I don't know why we bid on the lease. I assume that it was peripheral acreage. Shell and Chevron, the other owners in the Beluga River Unit did not big on the lease, but those were just some points of clarification, and I'd just like to move on to the correlative rights in drainage issue. The Commission shouldn't allow Z-Energy to drill at the exception location because the correlative rights of the Beluga River Unit Owners would not be protected. And I might clarify that it's the production from that location. A productive well located 300 feet from the Beluga River Unit would drain Beluga River reserves. The 1,500' spacing requirement of the State equates to a drainage area of slightly over 160 acres, and a 300' drainage radius equates to only 6.5 acres. Since the proposed well is only 300 feet from the Beluga River Unit, this means that in order to not drain Beluga River reserves, the well can only drain 6.5 acres. This is clearly not enough to justify a commercial well. I have a schematic illustrating the concept. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 62 CHAIRMAN JOHNSTON: We'll mark your schematic Exhibit Number 12, and I would refer to it as a drainage area schematic. MS. GROVE: The section lines are shown in the heavy, dark line. The 1,500' radius is the outer circle, the proposed well is the inner-dark dot, and a 300' radius, the six acres, is the stippled circle in the center. It's not reasonable to say that that well, if productive, would only drain 6.5 acres. It wouldn't be a commercial well, if that were the case. So the expected case is that the well would drain reserves from our unit. CHAIRMAN JOHNSTON: Do you feel that if the Commission was to grant this spacing exception and allow the drilling of this well, do you think that that would be a presumption then that they would also be allowed to produce the well? MS. GROVE: I don't make that presumption. I wouldn't invest ARCO's dollars under that presumption. I've seen it in other states where that didn't turn out the case, but that's not my decision to make. CHAIRMAN JOHNSTON: So ARCO would, at least, acknowledge that there is -- that if this was your well, you would not be coming to us with the presumption that if we were to grant the spacing exception you would ever be allowed to produce it? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 63 MS. GROVE: Right. CHAIRMAN JOHNSTON: Okay. MS. GROVE: In addition to drainage of reserves from the Beluga River Unit, drilling at the exception location would result in economic and physical waste. As I stated earlier, if a well were drilled 300 feet off the lease line and put on production, Beluga River reserves would be drained and we might need to drill an offset 300 feet off the lease line to protect our reserves. First, we don't think a well in the north part of the field would be economic, so we don't want to drill a well there. Having to drill an unnecessary well just to protect from drainage is waste. Even if a well were economic to drill in that area, the well would have to be drilled at a less than optimum location in order to protect against drainage. In other words, off the structure, being less than optimum. Having a location that's not optimum is wasteful because fewer reserves would be recovered. Second, a protection well would be too close to Z-Energy's well for optimum recovery of reserves. If the Beluga River Unit drilled 300 feet off of our lease line, the two wells would only be 600 feet apart. As you know, it's preferable to space wells greater than 600 feet so that a larger area can be developed. This is the basis for the State's spacing requirement of 3,000 feet between wells. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORT'ERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 64 Finally, the proposed location would not effectively drain Z-Energy's lease. Since the proposed well is located in the corner of the section, the well would have to have a drainage radius of four to 5,000 feet to effectively drain the rest of the lease, and that's not practical. It's more reasonable for a well that's more centrally located on a tract to drain that tract than one that's off in a corner. And the best way for the Commission to protect the correlative rights is to honor the State's spacing rules and have a 1,500' distance from the lease lines -- section lines. If the Commission does feel that an exception is warranted and grants the commission, the Beluga River Unit would want to see an extended production test of sufficient duration to accurately access the productivity of the well. Log analysis in the Beluga River Field is difficult, and a production test is the only way to assess productivity. We would also want to see a continuous directional survey as required by 20 AAC 25.050, either A-3 or E. Even if the 300' distance is a hard line, and I'm not sure if that's the case, if 300' is a hard line, the well would be very close to our unit and there's potential for the well to either end up less than 300 feet or even cross over onto our lease line. And in conclusion, I want to reiterate that we would not oppose Z-Energy's drilling of a well at a legal location. From a technical perspective Z-Energy could drill a well at a 810 N STREET 277-0572 OR 277-0573 FAX 274'8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 65 legal location 1,500 feet from the section lines would be at least comparable to the proposed location. It's clear that a productive well 300 feet from the lease line would drain reserves from the Beluga River Unit and would result in waste. This Commission has the obligation to protect the correlative rights of the Beluga River Unit and the open state lease to the north. Both of these duties can be accomplished by requiring Z-Energy to drill 1,500 feet from the section lines. Any questions? CHAIRMAN JOHNSTON: Yeah. In terms -- you made repeated reference to the fact that if productive acreage was encountered that you would end up draining Beluga River acreage and that you feel the Commission needs to protect your correlative rights. Cannot the Commission protect your correlative rights at a later stage if it is determined that there is productive interval there; would that not be the appropriate time to move to protect your correlative rights? And I notice your attorney raising her hands. So presumably she wants to jump in there. MS. JACOBSEN: Can I answer that one? CHAIRMAN JOHNSTON: If you'd please move up and use the microphone, maybe just hold it up so you get picked up on the mikes here. MS. JACOBSEN: Thanks. The Commission seems to be drawing a distinction between just drilling a well and 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 66 producing the well, and I think -- I didn't see a distinction really laid out in the statute. The statute says if the applicant can show one of the three exceptions -- or one of the three acceptable reasons for getting an exception, the Commission must protect ARCO's correlative rights. And so the two are linked, it's in the same section of the statute, it's one sentence right after the other. And the other thing I'd like to point out is that if ARCO were drilling a well at an exception location, we would absolutely expect to be able to produce that well. We wouldn't be drilling a well just for the theoretical exercise or proving up some acreage. So I think ..... MS. GROVE: We'd want to know that up front. MS. JACOBSEN: Yeah, we'd want to know that up front. MR. BABCOCK: From the Commission's perspective when -- I've only been serving just over a year now, so my institutional memory is not as lengthy as my colleagues, but it seems to me that exception locations are very rarely requested where there are subsequent objections to them, and the operators requesting the exceptions have a high level of confidence that they're going to be able to produce if they find a commercially viable production there, and the Commission hasn't addressed this distinction in the past. And this is a instance where I think you're getting some sense from the 810 N STREET 277'0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 67 Commission that when there is an issue at stake about whether or not future production would jeopardize adjacent property owners' correlative rights, that the Commission does indeed see a distinction between the authorization to drill the well and the authorization to produce the well, absent integration of interests of one our three methods outlined in our statutes. So I think it's important for the Commission to establish at this stage that a -- if we were to grant this exception that that does not guarantee that production, absent an integration of interests or some other resolution to protect adjacent property owners' correlative rights, and to insure that maximum recovery takes place and there's no waste, either of the hydrocarbon or resources used to recover the hydrocarbon. We have to go forward knowing that distinction exists for us, and I don't know that in the past this has come up. And so your comment is appropriate. But in this situation, at least in my reading of the statute, I'm drawing a distinction. If in your testimony, Ms. Jacobsen, was that there's no -- that ARCO doesn't object if it is just an exploratory well; your objection comes in when it turns into possible production. MS. JACOBSEN: That's correct. MR. BABCOCK: And as long as Z-Energy, if they understand that that's at least this Commissioner's perspective, I want to lay that on the table before things -- I 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 68 want to be fair to all the parties concerned and not mislead anybody as to where I'm headed with my review of this. MS. JACOBSEN: I guess -- well, excuse me. MR. BABCOCK: I wanted to follow up on one statement that Ms. Grove made, which was that ARCO doesn't plan on drilling any wells to the north, northeast of 212-18. MS. GROVE: Not at this time. MR. BABCOCK: And so your view would be that if production were allowed from a Z-Energy well, in order to preserve your access to the hydrocarbons underlaying your lease, or the unit that you operate on behalf of the other owners, you'd be forced to drill a well, you think, would be a -- you may be forced to drill a well that ..... MS. GROVE: That would be one option. MR. BABCOCK: ..... would be wasteful. MS. GROVE: Uh-huh (affirmative). MR. BABCOCK: Okay. ~ MS. GROVE: We would hope that there would be other means, but that that would be a sure way to protect our reserves. CHAIRMAN JOHNSTON: Anything further? MR. BABCOCK: No other questions. CHAIRMAN JOHNSTON: Ms. Jacobsen, you were earlier referring to, and have referred to our statute AS 31.05.100, in terms of three things that the Commission 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 69 would have to find in order to justify the establishment of or an exception to the spacing requirements, but as I read it, it seems like we can establish -- that addresses the criteria for establishing drilling units or units for each pool. You know, I guess where I'm slightly troubled by that is don't we have to first discover a pool in order to establish the spacing units? I mean how do we establish this? Right now we don't know for certain that there is any productive interval underlying the Z-Energy lease, and if Z-Energy wishes to drill a well to their acreage, should they not be entitled to that even though it might be crowding a section line, shouldn't they be able to show that there is productive acreage, at least on that portion of their lease? Now, being allowed to produce it is a different thing, but to prove to the world that they have productive acreage should -- are they not entitled to do that? Whereas if you enforce the setbacks, that may not put them on the structure, and therefore you're precluding the opportunity for a lessee to show that they do have produCtive acreage, at least on part of their lease if you're to rigidly enforce the spacing exception. I guess I'm somewhat troubled by that as to how a lessee would be able to show if they, in all cases, have to setback from the lease 1,500 feet. Wouldn't ARCO have a difficult time at some times showing that there is productive interval under their acreage if the Commission rigidly enforced 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 70 this 1,500 feet? MS. JACOBSEN: We wouldn't want to drill a well just for the theoretical exercise of saying, yeah, we've got hydrocarbons under our lease. We drill wells to produce them. And also I'm not sure about your regulations. You started out by saying that the statute only applies perhaps when a pool has been discovered, but your statewide spacing rules, your regulations clearly apply statewide. MS. GROVE: I think there's an issue here of economics somewhere here in that how big of an area would be -- you know, is reasonable for -- to establish commercial production. You asked the question, would ARCO -- you know, would there be cases where we might need to drill within 1,500 feet. And generally if the area is that small, we wouldn't be drilling a well. CHAIRMAN JOHNSTON: ARCO may not drill the well, ..... MS. GROVE: Right. CHAIRMAN JOHNSTON: ..... but I do draw the distinction between what ARCO would choose to do and what some other lessee would choose to do. Another lessee may look at that and say, gee, I do have productive interval that does extend up into my lease, say 1,400 feet, therefore I want to drill to that location to verify that I do have productive interval within 1,400 feet onto my lease. But if the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 71 Commission does not allow that, how does the lessee then prove that he does have productive -- see, that's some of the troubling issues that I see before us today is do we by rigidly enforcing 1,500' setback, do we preclude the opportunity for a lessee to show the world that they do have productive interval on their lease, although admittedly it may be small, it is still productive, and it may be meaningful to that lessee. Mr. Wittow, I was not necessarily ignoring you, but I wanted to finish this line of questioning. Did you have a point of order at this point or a question of the applicant? Because you will be allowed the opportunity to cross examine. MR. WITTOW: I can wait. I had a point that was -- it was just responsive right to your question on the point. If you want me to wait until we speak again, I'll be glad to. CHAIRMAN JOHNSTON: Why don't we do that. COMMISSIONER DOUGLASS: My turn? CHAIRMAN JOHNSTON: Certainly. COMMISSIONER DOUGLASS: You spoke about drainage radiuses and the possibilities. Has ARCO or can ARCO provide any information regarding say an effective or what they would term a maximum effective drainage radius for their Beluga River/Sterling zones an Beluga zones, would there be some information regarding that somewhere? MS. GROVE: We actually have some work in 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 72 progress to determine what the drainage areas are, and what we're using the information for is to try to identify the end fill locations; how much have various wells drained. There's a number of factors that go into that, but it's not always a simple calculation. You know, you've got your hydrocarbon parameters, your geologic -- you know, aerial extent thicknesses, and there probably isn't a -- we eventually will get to an average drainage area, but they are different or they appear to be different. COMMISSIONER DOUGLASS: Well, what you're saying is each well, they have their own maximum effective drainage radiuses based on some of those factors; thickness, porosity, ..... MS. GROVE: Right. Sand quality. COMMISSIONER DOUGLASS: ..... amount of reserves, ..... MS. GROVE: What the ..... COMMISSIONER DOUGLASS: ..... what it costs to drill the well to get there. MS. GROVE: Right. COMMISSIONER DOUGLASS: Et cetera. MS. GROVE: Uh-huh (affirmative). And I specifically looked, you know, at the 212-18 because it's the closest well, and I believe the number was 1,623 feet. It was less than 1,700 feet was the effective drainage radius for that 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 73 well. COMMISSIONER DOUGLASS: At the current time. MS. GROVE: Well, no, that's ..... COMMISSIONER DOUGLASS: Or you feel that ..... MS. GROVE: That's theoretically what -- how far it's draining. Normally it won't go further, it will just pull the pressure down in that area. MR. BABCOCK: Excuse me. I just want to know a factual matter. Earlier you testified it was less than 1,800 feet and now you said less than 1,700 feet. Which number would you like us to use? MS. GROVE: 1,700 feet is fine. MR. BABCOCK: Okay. COMMISSIONER DOUGLASS: I remember you saying it was less than 1,800 feet from the -- or approximately 1,800 feet from the lease line up there, but that your effective drainage radius was just shy of 1,700 was my understanding. 'Cause I noticed there's some of your Beluga River wells are quite a bit closer together. That doesn't necessary mean they're producing from the same pool and draining comparable areas. So ..... MS. GROVE: That's correct. COMMISSIONER DOUGLASS: ..... I was just ..... MS. GROVE: We've got some wells that are just producing from Sterling, some Beluga, some from both, and so 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 74 from this map -- and I don't have the details of ..... COMMISSIONER DOUGLASS: Which is which? MS. GROVE: Yeah. COMMISSIONER DOUGLASS: That would be helpful to me to see something technical regarding an effective or average, you say, but a typical drainage radius for the Sterling and Beluga zones, if that information is available. MS. GROVE: Yeah, that's not something we're going to have in the next couple weeks, it's a process that actually we've had an engineer and a log analyst, geologist, all working on for about probably eight months, and we're not through yet. I'll see what we can come up with along that line. COMMISSIONER DOUGLASS: Another thing I've noticed on these maps. Both of them are the top -- or the Z-Energy map has the Top of the Interval A, and yours say Top of A-Zone. Are those the -- are you essentially picking the same top here, it's just a matter of interpretation, let's say or -- 'cause I noticed -- what I'm getting to is the fact that your 3,700' contour goes about through the Burglin where as theirs is the 3,600' contour, so there is a significant ..... MS. GROVE: Okay. MR. OPSTAD: Perhaps I should address this, it's our map. Is that acceptable? COMMISSIONER DOUGLASS: Well, it's sort of both 810 N STREET 277'0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 75 maps, so I was wondering ..... MS. GROVE: On that particular well we couldn't understand the top that Mr. Craig picked. MR. OPSTAD: It was a data entry. It's a real early version and quite ..... MR. BABCOCK: Mr. Opstad, you should come up to the microphone if the Chairman's going to allow you to testify at this time. MR. OPSTAD: Fine. I'll just interject. That was an early map and there was simply a data entry error in the computer mapping L-rhythm, and it's an old version. The versions that you hear -- see submitted today are, I think, a lot closer to the ARCO map. I don't think we disagree very much on the basic structural tops, and I suspect our picks are pretty close. Without actually holding up a typed log and comparing it, you know, we might pick the top of the coal as a marker, they might pick the base. You know, it just depends on what the convention is. There's no real set ..... COMMISSIONER DOUGLASS: I guess would expect a 100' difference in your picks or would it be closer in the five to 15' range? MR. OPSTAD: I'd expect it in the five to 15' range mostly. COMMISSIONER DOUGLASS: So they'd be pretty close then, and not like this, a 100' off? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 76 clarification. MR. OPSTAD: No, that's an error. CHAIRMAN JOHNSTON: Good. Thank you for that CHAIRMAN JOHNSTON: Ms. Grove, your map there is intending to show structure only, and it does not imply any productive interval; is that correct? MS. GROVE: That's correct. CHAIRMAN JOHNSTON: In terms of picking the optimal location then, to my eye it's -- you show the -- that you could move that well further to the west and still be in the same, basically, part of the structure as what they're currently proposed? MS. GROVE: Uh-huh (affirmative). CHAIRMAN JOHNSTON: But if you were to move that well to the south you'd be moving up structure. MS. GROVE: That is correct. CHAIRMAN JOHNSTON: So presumably, again, to my eye, that potentially might make more sense if I was picking it to move higher up on structure. MS. GROVE: If there weren't spacing rules. I mean the basic concept if I wanted to drill a well, I'd drill it right here, on the very top of the structure, so ..... CHAIRMAN JOHNSTON: But obviously ..... MS. GROVE: So what you're saying is valid. CHAIRMAN JOHNSTON: But, again, if I was in the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 77 position of trying to develop my acreage and I was picking location, I might want to move further up structure. MS. GROVE: Right. CHAIRMAN JOHNSTON: So therefore I might come to the Commission and ask for a spacing exception for a well that would be within 1,500 feet of the southern lease line and not necessarily the eastern lease line. MS. GROVE: I agree. CHAIRMAN JOHNSTON: If I was trying to move up structure. MS. GROVE: I agree. CHAIRMAN JOHNSTON: The point that I guess I'd like to make is that, you know, that is your structural interpretation. Z-Energy may have another structural interpretation. They may feel that they have moved up structure by this surface location. I don't know. But, again, it's just -- it comes back full circle in terms of what right does a lessee have to drill to their acreage to verify that there is productive interval, does he have that right even though his interpretation may suggest that there is not extensive productive interval, but it may just nip the corner, but to him it's very real. Does he not have the right to verify that by drilling a well to that location to prove that there is productive interval. MS. GROVE: Are you making the distinction 810 N STREET 277'0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277'7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 78 between drilling and producing? CHAIRMAN JOHNSTON: I certainly am. MS. GROVE: Okay, I would agree with you. CHAIRMAN JOHNSTON: That you think that they would have the right to drill to prove but not necessarily to produce. That the right to produce would only occur once the correlative rights of all adjacent property owners were adequately protected. MS. GROVE: Right. I would like to say that it's difficult if the method is not established up front. I mean you like to know what the rules are so you can play by them, and ..... MR. BABCOCK: Mr. Chairman, would it be your -- would your question have the same force if Z-Energy's proposed well did in fact meet the statewide spacing exceptions? In other words, would there be any need or requirement to integrate interests that is implied by your question if the well itself met the statewide spacing exceptions? So if the well were 1,500 feet back and not within 3,000 feet of another well would Z-Energy, before producing that well, -- first of all, they wouldn't have to get a spacing exception to drill the well with a proper permit. If they want to produce it, even if it's from the same pool, it wouldn't necessarily mean that we'd have to integrate interests. CHAIRMAN JOHNSTON: No, I think the presumption 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 79 there is that the statewide drilling units that are established in regulation provide adequate protection for the correlative rights of adjacent property owners, although I have to put a caution on that, that while the statewide regulations presume that, certainly geologic evidence, if it was submitted to the contrary that would in fact show that there was a larger drainage radius, could be used for us to again move forward to protect correlative rights of the adjacent property owners. But then the presumption, of course, would be on the -- you know, that there is a larger -- or you would have to prove, I should say, that there is a larger drainage radius than what would be ordinarily considered a -- you know, the presumptive drainage radius around a gas well. MR. BABCOCK: Following up on that question, this one is directed to Ms. Jacobsen. Do you see anything -- do you read our statutes or regulations in any way that would compel us, once we grant a spacing exception, to allow production to take place from Z-Energy's well without integrating interests? MS. JACOBSEN: I haven't researched that, so I don't know. The only thing I could say is that it would be a lot easier just to make them drill 1,500 off. That's why you've got statewide rules. But I don't know the answer to your question. MR. BABCOCK: Well, I wouldn't say we have 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTN AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 80 statewide rules to make it easier, but otherwise I agree with yOU. CHAIRMAN JOHNSTON: MR. BABCOCK: No. Any further questions? I'd like to direct that same question to Z-Energy as well when it's appropriate. CHAIRMAN JOHNSTON: Do you have any further questions? I think at this juncture we don't have any further questions of ARCO. I do note that it's approximately a quarter to 12, and it may be appropriate, if there's no objections, to break for the lunch hour and then reconvene, at which time we can come back and we will allow cross examination of both parties. Out of curiosity, is there any other members of the audience that are wishing to make a statement or testimony before the Commission in this matter? So it's essentially between Z-Energy and ARCO. After the lunch hour we'll allow cross examination. Yes, Mr. Wittow. MR. WITTOW: Point of order. Will we given the opportunity to be given some sort of closing statement after all the cross examination? CHAIRMAN JOHNSTON: I believe that would be appropriate, although, again, I think depending on the -- on how long the questions and answers go, we may have to limit the length of the closing statements. We would like to finish up 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 81 at a reasonable time this afternoon. MR. WITTOW: On the part of Z-Energy, I think our cross will be fairly brief. CHAIRMAN JOHNSTON: reconvene say at quarter after one. and a half for lunch. Thank you. (Off record - 11:45 a.m.) (On record - 1:17 p.m.) Okay. Why don't we That will give us an hour CHAIRMAN JOHNSTON: I'd like to reconvene this I'll note the time is approximately quarter after hearing. one. We have just taken a recess for the lunch hour and we had just concluded with the testimony of the protesting party in this matter, ARCO Alaska, and at this juncture we would like to go into cross examination by each party, and we'll have the applicant going first, followed by ARCO Alaska. So I presume, Mr. Wittow, that you'll be doing the cross examination? MR. WITTOW: Actually we have a very brief cross examination, and Mr. Opstad will be doing it. CHAIRMAN JOHNSTON: Very good. Why don't we get the two parties up around the table here, and if we could utilize the -- take advantage of the mikes so we get a clean record. And if the two attorneys wish to answer questions, please come up and use the microphones. Thank you. Please proceed. MR. OPSTAD: Ms. Grove, I notice -- the one 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 82 thing that I notice here on the maps here is that we have the basic structural element or the basic form of this thing. It's approximately the same and we'll conclude that we both see it pretty similarly. The one thing I do notice is that I've got a fault drawn in there a little bit on this earlier version, and MS. GROVE: Which ..... MR. OPSTAD: ..... I don't see -- oh, let's try this one right here. I'll indicate the one that's kind of running north -- northeast/southwest in the southernmost area, and we see here a well designated, 14-19, which is basically indicated as a dry hole. And then we have these other wells in here that are all -- all have gas in them. I guess I'd like to ask you if you think that there are any -- other than just the general antiformal shape of this area, is there anything else that might control the distribution of hydrocarbons in the area? MS. GROVE: No. Go ahead. MS. JACOBSEN: Excuse me. I'm not sure that this is relevant, and I also don't think we need to give away any proprietary geologic ..... MR. OPSTAD: I think it's ..... MS. JACOBSEN: ..... interpretation. MR. OPSTAD: ..... quite relevant, as you'll see in a moment. 810 N STREET 277-0572 OR 277'0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 83 Probably ..... MR. BABCOCK: Excuse me, Mr. Opstad. CHAIRMAN JOHNSTON: Yeah, let us ..... MR. BABCOCK: I might suggest, Mr. Chairman, that for purposes of cross examination if one side has an objection and makes a point and asks you to determine -- the Commission to determine whether the question is relevant and then you, as the Chairman, can ask them each to state their point about why they think it's relevant or not, and then render a decision rather than have any argument back and forth about whether a question is pertinent. CHAIRMAN JOHNSTON: I think that's a admirable suggestion. It would certainly lend a little order to the meeting, and I think it's always been our finding that things proceed better if we maintain control and not allow the parties to duke it out too much. So would you like to address the concern about confidential data? MS. JACOBSEN: Is the Commission assuming that the question is relevant? MR. BABCOCK: Her objection was that the question is not relevant, and she -- Ms. Jacobsen ..... MS. JACOBSEN: That was it. MR. BABCOCK: ..... stated why she thought it was not relevant, and Mr. Opstad or Mr. Wittow would say why they think it is relevant and then you would rule whether it's 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 84 relevant or not. CHAIRMAN JOHNSTON: Okay, we'll have to consult with one another then because I will not render a decision without consulting my colleagues as to whether we feel that information is relative. So please bear with. MR. WITTOW: Point of order. Can I speak to the issue of whether or not it's relevant, since that's the objection that's been made? CHAIRMAN JOHNSTON: Okay, I will allow that. MR. WITTOW: I guess just briefly we presented evidence based on our geology as to why we're drilling the well -- why we need to drill the well where we need to drill it. It was ARCO's decision to attack essentially the geologic analysis and present their very own incomplete analysis in questioning why we chose to drill the well. They're the ones who basically put their own geology in evidence as to the proper location of the well. If ARCO wants to withdraw their objection as to where the well should best be located, that's fine, but if they want to attack where the well should be located, I think they're entitled to find out the complete basis for their objection as opposed to having them present incomplete information. MS. JACOBSEN: Well, I'd just like to say that Z-Energy has the burden of proving why it can have an exception location. ARCO is not required to put forth its evidence, why 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 85 Z-Energy is entitled to a statutory exception. MR. WITTOW: I don't disagree with that, but ARCO has chosen to present incomplete geologic evidence. MS. JACOBSEN: Well, we might say that Z-Energy has also chosen to put forth incomplete geologic evidence. CHAIRMAN JOHNSTON: Okay, both parties have had an opportunity to comment. Now if you'd allow the Commission to render a decision, please. (Pause - Commission confers in whispered tones) CHAIRMAN JOHNSTON: I'd like to first observe that relative to relevance of questions it's -- I think it's the Commissions sense that generally our sense is to allow much latitude in what we believe is relevant or what is not. We don't necessarily know exactly where Mr. Opstad is going with his line of questioning, and we like him to rephrase that question again. In terms of confidential information, it would certainly be the prerogative of the individual being examined to claim confidentiality, and we would not necessarily expect either party to divulge in this hearing any confidential information. So, Mr. Opstad, would you restate your question. MR. OPSTAD: Perhaps I will. I think that in the earlier portion of this discussion Ms. Grove made reference to the fact that anywhere in that area, that is the Z-Energy 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277'8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 86 lease, might equally and adequately address the issue as to whether or not there was gas -- commercial gas in the lease as down here in the proposed location, and I will submit that a thousand acres is a pretty good chunk of territory. Although it may not be the 255 square miles that encompasses Prudhoe Bay or the entirety of the Beluga River Unit, but a lot can happen in a thousand acres or so. It may be that you could have several different types of plays in that thousand acres. We might, in fact, have something related to a simple structural rollover trap, or we might have traps related to faults. We might have an oil leg under some down dip under gas. There are a lot of things that could happen. The particular target that Z-Energy has -- wishes to address is the continuation of the northern extension of the Beluga River accumulation. We believe that a good part of the definition of where the container for the Beluga River gas field is relates to other structural considerations above and beyond the simple little antiforms that we've -- for our own internal reasons, portrayed here, both ARCO and Z-Energy. I believe that the ARCO staff here is alluding to the fact that some of that might be considered proprietary, and well it may be, because it speaks to the general interpretation of the Cook Inlet basin and the structural regimes in that basin as a whole. But you'll see that I put a fault on here and you might 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 87 well ask where in the world did I come up with that thing, and what relevance is it. I've talked about trends, and I believe that that fault has something to do with the confining of the gas accumulation at Beluga River Field, and as partly witnessed by the fact that we have a dry hole here and you can show gas down below where there ought to be gas in this one over here, so something is going on. How do we know that there might be that feature there? Well, fortunately, I guess you could say that most of these faults are pretty young, and they turn up amazingly well in photographs, a lot cheaper than seismic and does a very good job. So when we ..... CHAIRMAN JOHNSTON: Are you introducing this as an exhibit for us? MR. OPSTAD: I can if -- I will. It speaks to my cross question. CHAIRMAN JOHNSTON: Are you going to be asking a question here or ..... MR. OPSTAD: My question is that really relates to the fact that I believe that there are many other things that control the distribution of gas in the area other than perhaps what we've just addressed here. The selection of our bottom hole location incorporates those other considerations into our selection, and that the -- I believe that if we're going to contest that adequately, we're going to have to 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 88 introduce some more information, and I was curious whether or not ARCO had say acquired any additional data recently, perhaps since we'd own the lease, with regard to the subsurface there that might bear on this. MS. GROVE: I'm still not clear. Is that your question? That's a different question than what you asked at first. MR. OPSTAD: No, it's basically my question. Your contending that that location is not optimal really and that the location we proposed and that anywhere in here would speak to that. I'm saying that there are faulting -- structural considerations which make that location a bit of a different animal than just out there generally, and I'm wondering if you have any evidence to support what you have said previously, and that's that you could drill anywhere in that acreage and get essentially equivalent results. MS. GROVE: I guess my response to that would be that maybe this is something that ARCO needs to leave the room and you could share your interpretation with the Commissioners on why -- what are those factors that come into play, because we don't see shallow faults. This is our map. MR. OPSTAD: Well, I'll be happy -- I could talk to them with you in the room, it's all right with me. You can argue with what I present. CHAIRMAN JOHNSTON: Well, ..... 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 89 somewhere. MR. OPSTAD: I'm not sure that we're getting CHAIRMAN JOHNSTON: Yeah, Mr. Opstad, if I might redirect the attention to both parties that this is a cross examination or the opportunity for cross examination. You will have the opportunity to summarize and make additional statements at the end. MR. OPSTAD: Okay, I'll just leave this ..... CHAIRMAN JOHNSTON: If we could just have questions ..... MR. OPSTAD: ..... aside and move right along. CHAIRMAN JOHNSTON: ..... and response, we would certainly appreciate that. MR. OPSTAD: Do you believe that there are any other structural considerations that control the distribution of gas in the Beluga River Field ..... MS. GROVE: No. MR. OPSTAD: ..... other than what you've shown? MS. GROVE: No. MR. OPSTAD: Okay. The second question I have is -- relates to your comments regarding -- I believe you made mention that ARCO is doing some in-field drilling or is considering doing in-field drilling largely because the radius of drainage is perhaps not sufficient for the individual wells, 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 90 and we had something like 2,000 feet or 17 -- I can't remember what the exact dimension was that you had mentioned, but the rates of drainage around the wells was something less than 3,000 feet; is that correct? MS. GROVE: What I said was that we were evaluating, this is an ongoing process to evaluate drainage within the unit. I specifically addressed Beluga River Unit 212-18, ..... MR. OPSTAD: Right. MS. GROVE: ..... of having a drainage radius of less than 1,700 feet, and I will provide the Commissioners the basis for that. MR. OPSTAD: Fine. I guess my question is if the drainage radiuses are approximately what you said they are, and I don't dispute that, then -- and we look the production history of these wells which are all quite different and some of them are, as you say, Beluga completions and some are Sterling and some are both. It's almost as if some of these wells are, if the radiuses are short, acting almost like individual, little accumulations, because they're not necessarily affecting one another; is that what you were saying? Small drainage ..... MS. GROVE: No. MR. OPSTAD: ..... and so you're infilling between them? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 91 MS. GROVE: No. At this point we haven't completed the evaluation to know that, to be able to say that's the case or not. MR. OPSTAD: But ARCO ..... MS. GROVE: I haven't said we will infill, I said we're evaluating ..... MR. OPSTAD: But ARCO has infilled in 1990 (indiscernible) 214-26. So that's an infill which I -- presumably you drilled to improve -- to bring in additional recovery, add rec to the whole thing. MS. GROVE: Both additional recovery and rate. MR. OPSTAD: And rate, fine. So I guess my point is we've got wells drilled on section lines, we've got a lot of them, as a matter of fact within the field here, so it seems that ARCO's within the field putting wells on section lines immediately adjacent to the section lines, and presumably you're looking for geologic reasons to optimize structural position and so forth, I would assume. MS. GROVE: Right. And in the wells that we have that are less than 1,500 feet, the sections line we have filed for the exceptions and the Commission has ruled that there's no problem with protecting correlative rights, and that's all we're asking. MR. OPSTAD: So really what we're dealing here then is even though some of these wells may be not draining in 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 92 big enough areas so that you're going to go back in and infill, they're acting kind of almost like small reservoirs on their own, are they not, in limited areas? MS. GROVE: I can't say that. MR. OPSTAD: But they might've. MS. GROVE: You can say that. MR. OPSTAD: Okay, we'd say they might be. So, in fact what we've got here, we've got a collection of wells which may be in the same geologic pool. They may -- some of the Belugas may be drilling one sand, another well adjacent may be drilling another sand, it's pretty reasonable. So we've got a unit here, and are we putting these together as a unit to utilize common facilities to prevent waste and optimize the development. Is that the ..... MS. GROVE: Sure. MR. OPSTAD: ..... reason for having a unit? MS. GROVE: Sure. MR. OPSTAD: That's all I have. CHAIRMAN JOHNSTON: Are there questions of eeeee MS. GROVE: Yes. Rosie's going to ask. CHAIRMAN JOHNSTON: Oh, okay. MS. JACOBSEN: I've got a few questions, too. MR. OPSTAD: Sure. You said that you'd prefer to deviate the well. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 93 MR. OPSTAD: Uh-huh (affirmative). MS. JACOBSEN: I just wondered, since your notice didn't really say that, what's your proposed surface location? MR. OPSTAD: The proposed surface location would likely be immediately adjacent to the X-33 well, within a hundred feet or so to utilize the existing pad and avoid any additional environmental disturbance and so forth. MS. JACOBSEN: Okay. And I guess the bottom hole location would be as you said in your notes? MR. OPSTAD: Yeah, correct. MS. JACOBSEN: And what would your true vertical depth be then if your proposed ..... MR. OPSTAD: Subsea would be the same as we forecasted, -52 was the ..... MS. JACOBSEN: Okay. And we are unclear as to what Mr. Craig's interest is in the five-acre lot. Does he have mineral rights or ..... MR. OPSTAD: Yes. MS. JACOBSEN: ..... surface rights? MR. OPSTAD: Both. MS. JACOBSEN: Does anybody else have a mineral interest ..... MR. OPSTAD: No. CHAIRMAN JOHNSTON: ..... that you're aware of? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 94 How much do you think ..... CHAIRMAN JOHNSTON: When you refer to anybody else would you be a little bit more specific? MS. JACOBSEN: plot. MR. OPSTAD: I was thinking in the five-acre It's solely owned by Paul Craig, the mineral rights and surface rights. CHAIRMAN JOHNSTON: I understand your question. MS. JACOBSEN: like this is going to cost? MR. OPSTAD: How much do you think a well Well, let's see, on -- I believe that on 214-26 ARCO AFE dented about 3.5 million. you spent about 5.2. MS. JACOBSEN: MR. OPSTAD: MS. JACOBSEN: cost? MR. OPSTAD: MS. JACOBSEN: MR. OPSTAD: I believe So what do you think ..... I shouldn't expect ..... ..... your well is going to ..... it to cost as much as ..... That's somewhere ..... ..... your original -- it should not cost as much as your original AFE. CHAIRMAN JOHNSTON: I guess I'm somewhat confused by this line of questioning. I mean before you made a point about the relevance and I'm not sure what the relevance of cost has to do with this particular issue. If you would 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 95 explain that. MS. JACOBSEN: My next question is would you spend that much money to drill a well if you didn't think you could produce it? MR. OPSTAD: I don't think anybody drills wells unless they have a reasonable expectation of being able to produce reserves that they encounter, that they prove up. Now whether it's done with that particular well bore or it requires another one is a matter of overall economics. You can't determine that until you have an idea of what your reserves are. I see ARCO, BP, a lot of companies, myself included, abandon P and A (ph) -- a discovery well because it's particular unsuited to serve as a development well. MS. JACOBSEN: Sure. But if you drilled a well and you tested it and you thought you had commercial reserves would you produce it -- would you want to? MR. OPSTAD: If the well could be converted from an exploration mode to discovery well -- or do development well. A lot of times in an exploration well you won't even run casing. MS. JACOBSEN: How are you planning to drill this well; will you run casing? MR. OPSTAD: I think that if we wanted to look at the question of whether our pressure continuity and depletion and those issues, I would certainly recommend running 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 96 casing. MS. JACOBSEN: So then is there anything else that you think -- how else would a exploration well differ from a development well? MR. OPSTAD: How else would an exploration well ..... MS. JACOBSEN: You mentioned casing. What else could prevent you from producing from an exploration well? MR. OPSTAD: Perhaps the profile. One might not wish to run perhaps a vertical well, you might want to run a higher angle well to optimize the flow rate, reduce coning. There are all sorts of related ..... CHAIRMAN JOHNSTON: If I ..... MR. OPSTAD: ..... geologic reasons ..... CHAIRMAN JOHNSTON: ..... might interject here. I guess ..... MR. OPSTAD: I don't follow your point. CHAIRMAN JOHNSTON: Excuse me. Are you asking Mr. Opstad to address the technical merits or the legal implications? MS. JACOBSEN: Oh, technical. MR. OPSTAD: Perhaps you could be more specific. MS. JACOBSEN: Well, you just said that you would want to produce that well if you could convert an 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 97 exploration well to a development well, so I was ..... MR. OPSTAD: Yes. MS. JACOBSEN: ..... wondering what would prevent you from doing that -- how you'd do it differently. MR. OPSTAD: Well, an exploration well becomes a development well if one encounters hydrocarbons that you believe could be produced in paying quantities. It has an opportunity at that point to be a development well. And at that point if the opportunity exists, then one can proceed with the evaluating the other technical issues that would be on the table as to whether or not we are particularly suited from an injury or a geologic standpoint to serve as a development well. MS. JACOBSEN: Okay. And are you planning -- if you see any shows are you planning on testing the well? MR. OPSTAD: Indeed. CHAIRMAN JOHNSTON: What kind of tests are you envisioning? MR. OPSTAD: I think that because of the cost of development over on that side of the Inlet and doing business over there in general, we'll run casing on just about anything that looks like it may have merit, and then conduct a normal flow test. CHAIRMAN JOHNSTON: I would like to ask ARCO a question at this point. If they were to drill this well and test it woUld you see that the testing of the well, would that 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 98 violate your correlative rights? MS. JACOBSEN: I guess it would depend on -- I need ..... CHAIRMAN JOHNSTON: I mean earlier you suggested that one of the criteria that you would like to see is that they conduct a long-term test. Would a long-term test tend to violate your correlative rights? MS. GROVE: I think we could probably find some way to establish a volume on that schematic I showed -- you know, a 6-1/2-acre drainage area, and there's some amount of production that that well could produce and not drain our lease, and we can't say what that volume is until the well is drilled and there's a log. way to do that. MR. OPSTAD: But potentially there would be a I would guess -- and interjecting here, that some of the initial pressure testing might be very -- might offer considerable insight as to whether or not the -- any gas in that acreage was correlative or contiguous with and in communication with being produced in the field. CHAIRMAN JOHNSTON: And once you acquired that information would you have difficulty sharing it with ARCO? MR. OPSTAD: Oh, no, of course not. I can't see any reason why that would be a problem. CHAIRMAN JOHNSTON: And presumably ARCO would be quite interested in that data. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 99 MS. GROVE: Sure. CHAIRMAN JOHNSTON: Please continue. MS. JACOBSEN: I guess if they were going to do a long test, like months or -- then we might ..... MR. OPSTAD: Personally I can't see how that would really gain that much information. You know, a limited production test with some (indiscernible) testing and hang off some gauges and get that kind of data, that would provide us, I think, all the sufficient information. CHAIRMAN JOHNSTON: But it appears that both parties would conceivably benefit by testing the well. MS. JACOBSEN: Sure, as long as ..... CHAIRMAN JOHNSTON: If productive ..... MS. JACOBSEN: ..... we aren't drained. CHAIRMAN JOHNSTON: ..... interval is encountered certainly the next step would be to test to determine if there is sufficient resource there to justify integration of interests, et cetera, et cetera. MS. JACOBSEN: Yes. Okay. So where do you think the gas fluid contact is? Maybe you could pull out your map and show us. MR. OPSTAD: Gas fluid contact. I don't believe we have a gas fluid contact on our map. MS. JACOBSEN: So does that mean it could be way down dip, past your lease? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 100 don't think so. MR. OPSTAD: In which direction? MS. JACOBSEN: North. MR. OPSTAD: Conceivably, but I don't -- I MS. JACOBSEN: And you mentioned earlier that you thought that the Burglin well had a gas show. Do you think that's a productive well -- could be productive? MR. OPSTAD: I don't know. It was not tested. MS. JACOBSEN: What's your expert opinion? MR. OPSTAD: I don't know, it wasn't tested. I wasn't there. MS. JACOBSEN: Yet you say that the gas fluid contact could very well be north of your lease, so that would indicate that you ..... MR. OPSTAD: No, no, no. I did not say that. MS. JACOBSEN: Oh, excuse me. MR. OPSTAD: I said that I didn't think so. MS. JACOBSEN: Okay. In your best guess where would you draw gas fluid contact? MR. OPSTAD: I don't make guesses. I have no evidence to suggest that -- I have no data really at this point to draw definitive gas-water contact in there. MS. JACOBSEN: But you certainly ..... MR. OPSTAD: Go ahead. MS. JACOBSEN: But you think that -- so no part 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 101 of your lease could be productive. MR. OPSTAD: No, I didn't say that either. I said that the well -- the one well that has been drilled up there was not tested; it did have gas shows in it. CHAIRMAN JOHNSTON: And your evidence of gas shows come from what? MR. OPSTAD: Large inflect of C2, C3s and C -- 1-C2s and C3s in the well bore which resulted in the significant reduction in mud weight as shown on the mud log. MS. JACOBSEN: But ..... MR. OPSTAD: As being one example. MS. JACOBSEN: Is this your map, the one on the left? on that map? MR. OPSTAD: Yes. MS. JACOBSEN: Is there gas fluid contact drawn MR. OPSTAD: No, there's one that has -- it's dashed in there, I believe, with a little question mark, and I think that shows what might be anticipated if the -- one believed the neutron density and the sonic relationships in X-33. MS. JACOBSEN: But you felt good about it at one point in time to actually draft it on a map. MR. OPSTAD: I felt good enough about it to actually throw it in there as a point of discussion with ARCO. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 102 MS. JACOBSEN: Well, is this a map that you prepared for ARCO or a map that you prepared for Z-Energy? MR. OPSTAD: It's a map that we used to discuss the area with ARCO. CHAIRMAN JOHNSTON: For what purpose? MR. OPSTAD: For the purpose, the meeting was to discuss whether or not there was some merit in essentially including acreage in the Beluga River Unit or perhaps seeking some sort of joint exploration effort on the tract. CHAIRMAN JOHNSTON: And what was the ..... MR. OPSTAD: ARCO rejected those initiatives. CHAIRMAN JOHNSTON: And would ARCO confirm that? MS. JACOBSEN: I'm sorry. CHAIRMAN JOHNSTON: Would you restate your -- I just asked for what purpose was the map drawn for, and apparently there was some dialogue between ARCO and Z-Energy. MR. OPSTAD: Right. The thrust of the meeting was to inquire as to whether or not there was interest in incorporating the Beluga River Unit in the first place, or entering into some sort of cooperative exploration of the tract in the area. MR. BABCOCK: Mr. Opstad, if I interpret what you've just said correctly, the line that's drawn on your map of the Beluga River Gas Field, Top Interval A, Lower Sterling 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 103 Format Formation Structure, of the fluid contact you do not feel confident now saying that that is where the line should be, and you do not feel confident predicting or estimating where the line is? That's what I heard you answer, Mr. Opstad. MR. OPSTAD: In the X-33 well there's no clear- cut -- there's no clear-cut gas-water contact. There are some shows which, if you -- you know, if you wanted to go out on a limb and say, well, this might mean -- this might be interpreted as a gas-water contact, then it would be somewhere here at the base of the Beluga River -- I'm sorry, somewhere near the base of the Sterling Formation at that location for the Sterling. MR. BABCOCK: But today you would not -- what would be your comfort level in sustaining that map? MR. OPSTAD: I would say one needs to drill an exploration well and find out. CHAIRMAN JOHNSTON: But the evidence submitted on that map was not convincing to ARCO to invest money in your lease and enter into some sort of agreement with you on the development of that lease? MR. OPSTAD: That's right. The discussions we had were very preliminary in nature. As ARCO said, they haven't put any of their proprietary data on the table, we haven't put any of our real interpretations out on the table, and we've had some very general discussions utilizing some of 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 104 the public data that was out there, and I don't think there is enough information about the northern end there to make any sort of definitive statements as to where fluid contacts may or may not be. CHAIRMAN JOHNSTON: I was curious again as to where you were taking the questions regarding ..... MR. OPSTAD: Sure. CHAIRMAN JOHNSTON: ..... the fluid contact. MS. JACOBSEN: Well, the statute says that there's only three permissible reasons that an exception location can be granted, and one of those ..... MR. WITTOW: I'm going to object here because I think -- I was going to make this point later, but I think harping on Section 100 is -- I'm going to say Section 100 is irrelevant to this. If ARCO wants ..... MS. JACOBSEN: Pardon me? MR. WITTOW: ..... to present testimony on this, Section 100 deals with the establishment of drilling units. We're not trying to -- or excuse me, the establishment of drilling units for pools. It's our position this well isn't covered by Section 100, at which time there's a pool discovered on the lease, we'll be glad to talk about it in terms of Section 100 then. If ARCO wants to present its case that way, that's fine. MS. JACOBSEN: We had no notice that they were 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 105 going to rely on this. CHAIRMAN JOHNSTON: Well, ..... MR. WITTOW: Rely on what? We're drilling a well on a lease that hasn't been explored, I guess. It's a very simple point. CHAIRMAN JOHNSTON: I think the Commission understands what you're trying to say, Mr. Wittow. I personally would find it helpful to have ARCO go ahead and make their points as to what three things they feel is necessary for us to do. Just because they make those points does not necessarily mean that the Commission is going to consider what they say as valid or applying to this particular case. We have not made any decision in this regard. But I think we would find it helpful to have ARCO go ahead and develop their line of thinking here relative to 100. MR. BABCOCK: Mr. Chairman, I would also add though that your objection is noted. MS. JACOBSEN: Well, I would just like to read from Section 100, and because this was new to me, I would ask that since the record is still open we will be submitting our argument -- our counter-arguments to this. It says, under B, it says, exception to the rules a spacing pattern may be granted where it is shown, after notice and hearing, that the unit is partly outside the pool, or for some other reason a well so located on a unit would be non-productive. And that's 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 106 where I'm getting at. CHAIRMAN JOHNSTON: You see that Z-Energy may have other opportunities on their lease that would be productive? MS. JACOBSEN: That's where I'm going with my line of questioning. I know that you've got a question about whether the Burglin well is productive, but we need to know what Z-Energy things about that because they're the applicant. MR. OPSTAD: If we thought that it was the best location we would be drilling right next door to it or be re-entering it. MS. JACOBSEN: Well, everybody wants to get updip but by being updip you're going to drain us. MR. OPSTAD: Not necessarily. Although you apparently don't want to discuss the issue, suppose that we're talking about an entirely different structural container. MS. GROVE: Can I make a comment? CHAIRMAN JOHNSTON: Well, ..... MS. GROVE: Relating to the meeting we had in the fall and we met with ..... MR. OPSTAD: It's a long time ago. MR. BABCOCK: Excuse me. Can you pick up Ms. Grove? COURT REPORTER: Yes. MR. OPSTAD: Sure, go ahead. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 107 MS. GROVE: We met with Z-Energy just as Mr. Opstad said, and there was a lot of discussions that Z-Energy felt that this lease was productive and felt that they should be included in the unit or at least joint development, and we did show Z-Energy proprietary data at that time. We showed ..... MR. OPSTAD: I disagree with that. Well, ..... MS. GROVE: We showed ..... MR. OPSTAD: It was public -- it was a ARCO rendition of data which is published. MS. GROVE: Can I finish my statement? MR. OPSTAD: Sorry. MS. GROVE: We did show log analysis which showed the basis, but it's really not -- I don't see our interpretation as being relevant. I see that Z-Energy wants to drill their well there. What do they think about Burglin's 33-12 well? And in the meeting that we had it was very clear -- it was very clearly communicated that they thought the well was productive, the Sterling ACNs (ph) were productive, and I'm hearing something different than that now. MR. OPSTAD: I think that Ms. Grove's recollections with regard to discussions are accurate in general. We did discuss the X-33 well, I think that we made mention of the fact that there were gas shows in there, and we will find that drilling updip from gas shows in wells, there's 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272'3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 108 a time honored technique in exploration. If you have indications of something you want to improve on that if you can. Certainly to ascertain whether or not the acreage is going to be a commercially viable entity, you want to optimize the position of your exploratory well, and that is, in fact, the purpose of drilling where we're drilling. I certainly don't dispute the fact that there is some question as to the productivity or commerciality of the X-33 well. It was, after all, P & A'd by another operator. But I might also point out that there's nothing conclusive -- there was no conclusive testing done at that well at all. And so that remains somewhat of an open issue at this point as to whether or not there was any gas there at all. MS. JACOBSEN: Can ~we take a minute? CHAIRMAN JOHNSTON: You're requesting a recess? MS. JACOBSEN: A very brief one so I can step back away and ..... CHAIRMAN JOHNSTON: That would be fine. We'll take just a five-minute recess. MS. JACOBSEN: Thank you. (Off record - 1:58 p.m.) (On record - 2:00 p.m.) CHAIRMAN JOHNSTON: MS. JACOBSEN: Yes. CHAIRMAN JOHNSTON: Is ARCO ready to proceed? If you would remind the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 109 Commission where you were in your testimony in cross examination? MS. JACOBSEN: Yes. What I was trying to do was establish -- well, understand whether Z-Energy thought that any portion of that lease would be productive based on a 100(b), which we believe applies, which says that they must prove that a legal location would not be productive in order to get a spacing exception. CHAIRMAN JOHNSTON: I guess I'm somewhat troubled by your line of thinking here, Ms. Jacobsen, in that I'm not sure that we impose that same criteria on ARCO or BP or Exxon -- maybe not Exxon but Chevron and some of the other operators when they routinely come forward for a spacing exception. MS. JACOBSEN: I believe there's a big difference, and the difference would be that we're not trying to snuggle up onto somebody else's lease, that we're within a unit that there's no correlative rights ..... CHAIRMAN JOHNSTON: At no point do I see in our statutes anything about snuggling up against somebody else's lease. What I see is language that talks about the establishment of a drilling unit and certain criteria for exceptions to the drilling unit. Now the title of the statute is Establishment of Drilling Unit for Pools, and Mark Wittow was making the point here, which I believe is well taken, that 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 110 this really guides the establishment of drilling units and known pools. And I'm somewhat troubled by the line of thinking that it routinely applies to all spacing exceptions, because what that will do is it will take us down the road where ARCO Alaska will now have to prove that every time they come forward with a spacing exception for say a Point McIntyre Field or wherever, that an alternative location is -- cannot be drilled because by some sort of non-productiveness. MS. JACOBSEN: Well, where correlative rights are affected -- I think your procedure takes care of that because whenever we ask for an exception location we give you an application, notice is given out if correlative rights are affected anybody can protest, and correlative rights aren't affected in 99% -- 100% maybe even of the exception locations that we ask for. This is a very different case. And I guess I would go on to say that 20 AAC 25.055, the title is Drilling Units and Well Spacing, and I would think that if you're claiming that -- or you believe that 31.05.100(b) doesn't apply to exploration wells, then I'm not sure that your regulation does either. And the regulation is even based on 31.05.100. So I'm concerned. What you're saying is there's no statewide rules, there's just rules for developed units, and that doesn't make any sense to me. In addition, I'd like to point out that Z-Energy's request for a spacing exception noted that it was asking for an 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 111 exception under 25.05.5(a) (4), which is the production section, not the exploration section, so that is -- again, I'm confused. I'm not sure what Z-Energy's after. CHAIRMAN JOHNSTON: Again, you know, I think my line of questioning here is I'm intrigued by your interpretation of 100, and I'm primarily intrigued because potentially the -- you know, if we adhere to our line of reasoning, then potentially the Commission has erred in establishing spacing exceptions throughout its history. MS. JACOBSEN: I'm sorry. I don't understand. CHAIRMAN JOHNSTON: Well, because, what I see, exceptions to the rules may be granted where it is shown that the unit is partly outside the pool and for some other reasons so located on the unit would be non-productive, et cetera. I don't see any criteria here that anybody has to step forward and make an objection before we make those findings. The findings have to be made, according to paragraph B, in all cases, I would suggest. And that it has nothing to do with somebody stepping forward and making an objection. I don't see anything here. If a party objects we have to we have to make these findings. MS. JACOBSEN: But the Commission is also charged with preventing waste and insuring the greatest ultimate recovery, and we wouldn't propose a well at an exception location if we didn't think it was best management of 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 112 that reservoir. CHAIRMAN JOHNSTON: That's true, but, again, I have to emphasize, I do not see that triggering these findings is mandated on an objection by a party. MR. BABCOCK: I concur with that, Mr. Chairman, but I'd point out that, number two, I believe in the spacing exception requested. I've seen -- I'm satisfied that number 2 is addressed by the request itself which identifies the locations, the one you find to be most productive. And so non-productive doesn't have to mean, in my mind, that they'd be no -- from drilling from a location that did not require a spacing exception, that that would give you -- render no production, but that it's not as productive as another spot that you are requesting an exception for. So I think that although the language has not been parroted in the applications or in our decisions, I think the effect is the same. At least insofar as number 2, and I haven't seen occasion for number 3, but I have also seen number 1, where a exception is requested because the location may in fact end up in another pool. So I think our procedures do cover those, too. CHAIRMAN JOHNSTON: Yeah, I'm just concerned to the point that potentially we would actually have to make those specific findings in all spacing exception cases and not imply it; we would actually have to find it in a document and have evidence submitted to us that would document that. I'm not 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 113 sure if we've been that -- we've taken that approach in the past. So it's an interesting interpretation, and that's one of the reasons why we asked in our letter to both parties to help give us some guidance in this because we saw that it did open up a can of worms potentially for other spacing exceptions. So we are intrigued. MS. JACOBSEN: We could have presented that a little better if we'd know what they were relying on. Okay, I've only got a couple more questions. I think what I'd like to do, and since we believe that 100(b) -- or since we believe 100(b) is applicable, I would like to introduce an exhibit -- we've already got this exhibit, right, did we introduce the whole package? MS. GROVE: No, it was just the map. MS. JACOBSEN: Okay. Debbie previously introduced Z-Energy's map that was part of Skip Bilharz's ..... MS. GROVE: This map on the wall. MS. JACOBSEN: This map on the wall was part of a letter package that Z-Energy gave to Skip Bilharz, and that started the ..... CHAIRMAN JOHNSTON: So we will entitle this Exhibit Number 13, I believe, and it's a packet of information with a cover letter to Mr. Bilharz, dated September 16, 1993, signed by Paul Craig. MS. JACOBSEN: I'm sorry, I only brought one 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 114 copy. Maybe we can ..... MR. OPSTAD: That's all right. When we have an opportunity we can get it. MS. JACOBSEN: We can break to copy it, I guess, if everybody wants to look at a copy. CHAIRMAN JOHNSTON: Okay, and your point that you wish to make with this exhibit? MS. JACOBSEN: Well, I'd just like to ask Mr. Opstad two questions. First of all, do you -- perhaps I can share this with you. MR. OPSTAD: Yeah, that would be nice, right. Go ahead. share this copy. MS. JACOBSEN: Okay. I'm sorry we have to MR. OPSTAD: No, that's fine. Go ahead. MS. JACOBSEN: I was just going to ask you, and I believe this is your letter? MR. OPSTAD: Uh-huh (affirmative). MS. JACOBSEN: To Paul Craig. MR. OPSTAD: Sure. MS. JACOBSEN: And would you mind reading the first sentence, please? MR. OPSTAD: Okay. We've completed a preliminary review of the tract in question, which is adjacent to the northern end of the Beluga River Field, and I'm pleased 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 115 to report that the tract holds substantial gas reserves in the Sterling A sand horizon. MS. JACOBSEN: So at least as of September 15, you believed that the tract held significant reserves? MR. OPSTAD: Yes. MS. JACOBSEN: Is that still your opinion? MR. OPSTAD: I believe that the tract holds significant reserves, yes. MS. JACOBSEN: Okay, just one other thing. On page 2, the paragraph that I've got outlined there, it looks like you're stating that the Burglin well is capable of producing gas. MR. OPSTAD: No. It says that the conclusion drawn from the observations that is -- looking at the Burglin well in general is that the Sterling A horizon contains porous and permeable sandstone capable of producing gas at significant rates when drilled and completed. MS. JACOBSEN: Very good. MS. GROVE: Go on. MS. JACOBSEN: What does it say after that? MS. GROVE: (Indiscernible) MS. JACOBSEN: Oh, Okay. Maybe you could just read the last two sentences, too, please in that paragraph. MS. JACOBSEN: Okay. The logs were submitted to three other prominent log analysts for their opinion, and 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 116 the general consensus was -- there was a unanimous consensus that -- with this conclusion. MS. JACOBSEN: Okay. Thank you. So this will just go to my point that Mr. Opstad believes at this point that Let me just ask there may be -- well, that's my next question. it. MR. OPSTAD: There you go. MS. JACOBSEN: So is there any location 1,500 feet away from the section line that you think would be productive? MR. OPSTAD: I think that there are -- the area that we have selected is a -- is the best location for a well in terms of maximum production. MS. JACOBSEN: Okay, that's not the question though. MR. OPSTAD: I'm not saying that there may be other locations potentially that would be productive, however, as I said earlier, there can be numerous -- there are different kinds of plays within a given tract. This -- that may speak to one potential play, there may be other plays. I think that one could argue that the location that you selected is better positioned structurally to test the theory of a northern extension of the main Beluga Field reservoir. MS. JACOBSEN: So ..... MR. OPSTAD: That does not mean that there 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 117 might not be other fault traps, other structural closures which could also be productive within that 1,000-acre tract. MS. JACOBSEN: So in answer to my question are you saying that there may be locations 1,500 feet away from the section line that would be productive? different ..... MR. OPSTAD: MS. JACOBSEN: MR. OPSTAD: There may be, but they may also be That's okay, and ..... ..... traps and accumulations. And we are choosing to pursue the structural trap that is most likely to represent a northern extension of the main Beluga River accumulation. MS. JACOBSEN: Can you show us the projected drainage radius of your well? MR. OPSTAD: Well, I think that we can just assume that the Commission's rules are reasonable. MS. JACOBSEN: So ..... MR. OPSTAD: So you're probably talking about, what, 1,500 feet per radius maybe? Spacing is 3,000 feet and you want to space them such that there's not significant interference among the wells, and one would logically assume that they're looking at 1,500 feet. MS. JACOBSEN: So that means that the radius would extend 1,200 feet out of the Beluga River Unit? MR. OPSTAD: Uh-huh (affirmative). 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 118 MS. JACOBSEN: So you've deliberately positioned a well to drain the Beluga River Unit. MR. WITTOW: Objection. I'll withdraw my objection. MR. OPSTAD: We've deliberately placed the well in such as way as to optimize structural position. MS. JACOBSEN: That's all. That's all my questions. CHAIRMAN JOHNSTON: No further questions. MR. WITTOW: Can I ask a redirect question? CHAIRMAN JOHNSTON: We'll allow a brief redirect, and the same courtesy to the protestor. MR. WITTOW: I guess this is a response to several questions. Mr. OpStad, ..... MR. BABCOCK: I think you should probably, Mr. Wittow, come closer to the mike. CHAIRMAN JOHNSTON: Yes, please. MR. WITTOW: Just to clarify, is it your understanding that Z-Energy can produce hydrocarbons from this well without further application to the Commission and/or negotiations with the owners of the Beluga River Unit? MR. OPSTAD: No, absolutely not. We're fully aware of the fact that we have to come before the Commission again. MR. WITTOW: That's it. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 119 CHAIRMAN JOHNSTON: I would like to say that there's no firm requirement that you have to come before the Commission again. Voluntary efforts at integrating interests are always preferable, so assuming the Commission were to approve the spacing exception, and assuming that you were to drill this well, and assuming that productive interval was encountered, then the next criteria that Z-Energy would have to undertake is to submit a plan of development that would, among other things, provide for the protection of correlative rights of adjacent property owners. And that can be something that is voluntarily achieved, or it is something that potentially could be ordered by the Commission upon proper petition. But as I indicated earlier, even though you were to make that petition to the Commission, there are four findings that the Commission would have to find before we could compel forced unitization or a forced integration of interests. So there is no certainty in my mind that we could make those findings. So I think Z-Energy has to be aware of the uncertainty associated with any sort of petition that would approach -- or that would require forced" unitization. MR. OPSTAD: I think that the principals in Z-Energy are fully aware of that, and that we'd like to be here in the future. CHAIRMAN JOHNSTON: Does the applicant have any redirect? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 120 MS. JACOBSEN: No, thank you. CHAIRMAN JOHNSTON: I just had a couple of questions, again, primarily of ARCO. I think the comment was made earlier that if this was just an exploratory well that it was designed to test whether there was productive interval, there was no objection to this. The only objection comes is if the well is actually produced and it actually drains ARCO property. Is that fair or did we miss something? MS. JACOBSEN: That's correct. That's correct. MS. GROVE: I think it's definitely fair because there's other places in the state where operators have drilled -- we call them a disposable well, they have no intention of producing a well, to evaluate the pays. CHAIRMAN JOHNSTON: Well, if Z-Energy then does not have an expectation that they will be around to produce this well, ..... MS. JACOBSEN: But they do. CHAIRMAN JOHNSTON: ..... unless there's an integration of interests, is there any serious objection to drilling of the well then by ARCO? I mean you suggested that Z-Energy has an expectation that they will be allowed to produce the well if there is productive interval. MS. JACOBSEN: Yes. MS. GROVE: Yes. CHAIRMAN JOHNSTON: Mr. Opstad, does Z-Energy 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 121 have that expectation? If you were to drill this well and find productive interval do you have an expectation that you'd be allowed to produce it? MR. OPSTAD: Oh, I think that that's fair to say, certainly. Assuming that the well itself that we were successfully completed to the extent that we were able to run casing and production tubing and the well proved adequate to serve as a productive -- or producer, that, yes, I think we would have reasonable expectations that we would be allowed to hook up and sell gas. CHAIRMAN JOHNSTON: And your expectation to produce hinges on what? MR. OPSTAD: Really on our ability to discover gas in paying quantities and, of course, ultimately reach some sort of accommodation with the other offset (indiscernible) owners, recognizing fully ..... CHAIRMAN JOHNSTON: An integration of interests. MR. OPSTAD: ..... that we would be in fact draining some of their acreage. CHAIRMAN JOHNSTON: So your expectation hinges on the fact that there will ultimately be some form of integration of interests? MR. OPSTAD: Yes, it would. MR. BABCOCK: Mr. Chairman, it seems to me 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 122 20 AAC 25.517 would insist on that in any case. CHAIRMAN JOHNSTON: Yes. Well, clearly I think my line of questioning was again to emphasize the expectations of each party, and I think if all parties go into this up front, understanding what the expectations are is one thing, and I think that's helpful to have that understanding. But quite clearly our regulations and statutes would require an integration of interests. And one would think that there would certainly be a potential benefit for ARCO if Z-Energy did drill this well an discover substantial reserves. MS. GROVE: Absolutely. CHAIRMAN JOHNSTON: There would be a benefit to ARCO, assuming that there's a proper integration and your interests are protected. So when we get to this point of saying shall we drill a well at some other distance, you know, that would comply to statewide spacing rules, the benefit to ARCO may disaPpear then because you might not see the -- there may -- that might affect your desire to become involved in this agreement. But on the other hand, if your interests are adequately protected, I'm not sure where the concern is from ARCO's perspective. MS. JACOBSEN: Yeah, I can address that. I guess our concern would be -- and if we're unable to come to an integrated agreement, and as I mentioned earlier, there's big financial commitments that need to be made, and we may not be 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 123 able to reach an agreement, and if that's the case, Z-Energy will have drove its well and spent three to $5 million with the expectation of producing it and they're going to come to the Commission asking to be able to produce their well. We just think that this -- the reason we've got statewide spacing rules is to protect people's interests and to get us out of a situation like this. If they're not allowed to produce their well, they're going to be unhappy. There's going to -- there may be litigation. There's going to be perhaps years of troublesome things over this, and you can prevent that by sticking with your statewide rules, and that's why we're here today. CHAIRMAN JOHNSTON: I appreciate the comments that you're making, and the Commission will take it to heart in its deliberation. Again, it's -- the whole issue has been perhaps, as you can glean from some of the questions, troubling for the Commission to address this. We've never really had a protest very similar to this, and most all spacing exceptions in the state go through with hardly a yawn from anybody out there. But this is a unique circumstance here, and the Commission does endeavor to -- you know, wants to insure that it does the proper thing. We see that on one hand, you know, a lessee has the right to drill to its acreage and prove productiveness. On the other hand, that lessee does not have the right to drain other parties, and that's where I see the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 124 Commission becoming involved more than anything. Let me ask you, if -- would ARCO be precluded from drilling -- if Z-Energy was to receive this spacing exception and drill the well would that preclude ARCO the opportunity to drill a well on its acreage to the northern extension in compliance with statewide regs? MS. JACOBSEN: You mean ..... CHAIRMAN JOHNSTON: In other words, the placement of this well could be such that it would preclude your opportunity to drill a well in compliance with statewide regs with -- realizing that there's an onset of 3,000 feet. MS. JACOBSEN: Yes, that is true. MS. GROVE: Or it would at least dictate and limit the place where we could put our well. MR. BABCOCK: Without a spacing exception. CHAIRMAN JOHNSTON: Without a spacing exception. MR. BABCOCK: But you testified that you don't have any plans on drilling wells to the north or ..... MS. GROVE: Not at this time ..... MS. JACOBSEN: We may be forced to though, to protect our acreage, though we would rather not. CHAIRMAN JOHNSTON: Well, ..... MS. JACOBSEN: But we might have to. CHAIRMAN JOHNSTON: ..... and, again, in terms 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 125 of drilling unnecessary wells that is waste, so in terms of you being forced to, I'm not sure that the Commission would necessarily allow a second well to be drilled in close proximity. We may insist on a agreement or mandate an agreement to insure that the protection of correlative rights is achieved, short of drilling a well. But, again, we aren't intending to get ahead of ourselves here because we have not rendered a decision in this matter, and quite honestly at this juncture we don't know whether Z-Energy has standing in this matter anyway since there is no proper operatorship before us. Earlier the representative of the Department of Natural Resources, Carol Lee, brought to our attention a matter that I think we just need to clarify. Mr. Opstad, on the overhead map, if you would show us precisely the Paul Craig property that we've all been talking about on -- maybe this map up here? MR. WITTOW: It's actually best shown on the map that's attached to the letter of Paul Craig of, I think, May 9, to the Commission, on the plat map, which I can pull out. MR. BABCOCK: We've got copies. MR. WITTOW: Yeah, there you go. (Pause - Commissioners confer in whispered tones) CHAIRMAN JOHNSTON: I think there was a point of confusion. I think there was some thought that the 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 126 Paul Craig acreage was to the east of the river and not to the west? MR. OPSTAD: No, it's to the west and immediately ..... CHAIRMAN JOHNSTON: Right. MR. OPSTAD: ..... adjacent to the ..... CHAIRMAN JOHNSTON: And immediately south of the Burglin? MR. OPSTAD: Immediately to the east of the Burglin drill pad. It adjoins the Burglin drill pad to the east. ARCO REPRESENTATIVE: Is it US Survey 39017 MR. OPSTAD: Yes, it is. CHAIRMAN JOHNSTON: It looks like it's right on the southern lease line. We've got it plotted differently on our map. We've got it up here a little ways, which I think is closer to where Burglin is. MR. OPSTAD: Oh, that's another one. Actually there -- to dig into this a little bit, CIRI has issued a number of quitclaim deeds along the river, and unless you really dive into the matter in the Kenai Courthouse and land records, you'll find it somewhat difficult to track down the who, what, where° MR. BABCOCK: Well, that will, of course, have to be tracked down before we ever allow production from ..... 810 N STREET 277'0572 OR 277'0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277'8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272'3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 127 might add. MR. OPSTAD: There are surface rights only, I MR. BABCOCK: Except for Paul Craig's. MR. OPSTAD: Except for Paul Craig. MR. BABCOCK: Well, we hope before we take action that Z-Energy clears up the paper trail for the ..... MR. OPSTAD: MR. BABCOCK: MR. OPSTAD: It will be ..... owners and the application. ..... cleared up as soon as the president gets back from his fishing trip. CHAIRMAN JOHNSTON: I believe we still have a few more questions for the parties. COMMISSIONER DOUGLASS: I need to clarify something. I'm trying to draw a conclusion here. I want to make sure I'm going in the right direction. Ms. Jacobsen had asked you regarding your location as to whether or not a well 1,500 -- that would meet the spacing requirements in 055 would be productive, and your response was that possibly in a different play, but that the play you're looking at, that's the optimum because you're looking to prove extension of the pool that is currently being produced in the Beluga River Unit. MR. OPSTAD: Yes. COMMISSIONER DOUGLASS: My conclusion from that is you've gotten pretty close, and now you're saying that by not moving out another 1,200 feet to the west and 500 feet to 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 128 the east, which A squared plus B squared, C squared get that distance, you would not enter into that trend. MR. OPSTAD: That's right. COMMISSIONER DOUGLASS: So by that conclusion, that would mean that any resource you had would be limited to that small 1,200 by 300 section of that lease for that play; is that correct? MR. OPSTAD: If the general interpretation is correct, yeah, that's right, you'd be -- on that particular play you'd be limited to a -- the -- kind of the southeastern half of that area. COMMISSIONER DOUGLASS: So essentially if under this -- I'm using this -- your 1,500 drainage radius, Drainage Area Schematic, that essentially -- that may very well be into the ARCO acreage, but on the other side it would not project more than 1,200 feet because outside that 1,200 feet you -- my conclusion was that there's no gas in this play. So essentially any reserves that you found in there from this, more than likely by an areal percentage, they would be more -- essentially more than 50% of it would be on ARCO acreage. MR. OPSTAD: I think it would be about evenly split. That's right, that location would be about even up. COMMISSIONER DOUGLASS: But then all in all amount of gas there would be severely limited, at least under Z-Energy's tract. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277'7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 129 MR. OPSTAD: Well, it would be limited by a line which runs probably not too -- a line that runs northeast/southwest approximately through the Burglin well. COMMISSIONER DOUGLASS: The Burglin well would lie outside that 1,500 feet radius, would it not? MR. OPSTAD: Sure, right, ..... COMMISSIONER DOUGLASS: And that's -- . .... MR. OPSTAD: ..... we've just ..... COMMISSIONER DOUGLASS: ..... we've just already concluded that it would not be productive. MR. OPSTAD: It's about 1,600 feet, I think, somewhere in there ..... MS. GROVE: (Indiscernible) MR. OPSTAD: A little bit more? MS. GROVE: The surface is 15 (indiscernible) south line and (indiscernible). MR. OPSTAD: Yeah. MS. JACOBSEN: It's over 2,000 from the east line. MR. OPSTAD: yeah. That's probably more or less approximately where your western limit in this particular little play would be. COMMISSIONER DOUGLASS: Well, then -- in actuality then gas would extend beyond 1,500' is what you're saying? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 130 MR. OPSTAD: Yes. COMMISSIONER DOUGLASS: I guess now I'm really confused, 'cause I'd drawn the conclusion that gas would not be -- extend beyond 1,500 feet. MR. OPSTAD: Let me just put it up here. Just watch the light here. I think what we're saying basically is that we've got an area here on the northern part of the field that is likely to be productive in probably the Beluga, and that area up here to the north probably has a boundary right over here where the Beluga -- or where the Burglin well is. That would be kind of a boundary to the northwest, and as I said before, there may be other plays out in here which are different, but we're not really addressing that with this location. MR. BABCOCK: Commissioner Douglass, I have a question that was spawned by your ..... faulting. MR. OPSTAD: MR. BABCOCK: Basically we're talking about ..... line of questioning. COMMISSIONER DOUGLASS: Go ahead. MR. BABCOCK: Why do you feel it would be unproductive to drill your exploratory well 300 feet to the north and 1,200 feet to the west, which would give you a 1,500' setback from the south and east section line and also then allow you to explore your own lease further to the north and to 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 131 the west? MR. OPSTAD: So if I'm interpreting this, are you suggesting the location would be right over here somewhere? Are you saying ..... MR. BABCOCK: No, it would still be 300 feet to the north. MR. OPSTAD: Oh, here. MR. BABCOCK: 300 feet -- that's south. 300 feet to the north of where the yellow dot is. MR. OPSTAD: Oh, I see. MR. BABCOCK: And 1,200 feet to the west, which would be then 1,500 feet from your eastern section line and 1,500 feet from your southern section line, and then you would then have explored a circumference of 1,500 feet. As your well -- as for pose, it's 1,200 feet from the southern line and 300 feet from the ..... MR. OPSTAD: Uh-huh (affirmative). MR. BABCOCK: What I'm just trying to get at is why not choose to put the well at 1,500 feet from the south and from the east? MR. OPSTAD: Well, we feel we've got some structural elements in there that we want to avoid, that we need to get up on this axis and to the east as much as we can to avoid other structural elements and to gain as much height on the axis of this general land form as we can. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 132 MR. BABCOCK: That would lead me to ..... COMMISSIONER DOUGLASS: By height, what are you talking about, do you mean as far as on the -- up ..... MR. OPSTAD: Just coming up on the axis of the anticline. structure? COMMISSIONER DOUGLASS: ..... high on the MR. OPSTAD: High on structure, that's correct. COMMISSIONER DOUGLASS: In that case why aren't you moving further south towards the 3,500' contour? I mean ..... MR. OPSTAD: You mean why aren't we (indiscernible) shooting it right in there? COMMISSIONER DOUGLASS: Yes. MR. OPSTAD: Yeah, there's an argument that could be made for doing exactly that because that would fit both our criteria of avoiding a structural feature that would tend to separate the Burglin X-33 location from where we're proposing, but it also would close on the 212-18 well to the extent that we might have some difficulty getting Commission approval to use it as a routine development well. Personally, I think to maintain the 3,000' separation is prudent. MR. BABCOCK: Now what structural impediment are you talking about that persuades you not to put the well 600 feet to the west and 300 feet to the north? 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 133 MR. OPSTAD: Well, we interpret some faults in there that isolate the X-33 location from the location that we've selected, which gets back to my original question back to ARCO as to their interpretation, their big fault and small faults and there are a lot of things that go on that are not necessarily portrayed, I think, by either party on these wells because we can err on these maps because we consider them to be somewhat proprietary. Certainly I believe that's the case for ARCO. MR. BABCOCK: So you believe by going -- if I understand what you're testifying to, you believe going 1,200 feet to the west and 300 feet to the north would not allow you to -- even though it would be within 1,200 feet of where you're planning -- where you're proposing to drill this well, that it would not demonstrate whether or not there was gas in commercial quantities where your proposed well is? MR. OPSTAD: That's right. You know, it may be -- sometimes it's hard for people to understand that you can be off by five feet. If you're on the wrong side of a fault you're -- it could change a very good well and end up from being a good, productive well to a dry hole, as much as a few feet in the wrong direction you can do that. So when you pick a location you try to pick something that fits all of the potential criteria you might have, and the whole idea is to optimize your position -- optimizing, including consideration 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 134 of all the factors that make -- that may be present for both a geologic and perhaps even engineering and production standpoint. MR. BABCOCK: So you don't hold out much hope then that drilling the well at the location that you've proposed is going to tell you much about the rest of your lease to the north and west? MR. OPSTAD: Well, every time you drill a hole it tells you more about the area. I think that -- are you asking do I expect the ..... MR. BABCOCK: Well, I guess ..... MR. OPSTAD: ..... gas encountered at that location -- the proposed location to be indicative of the entire lease? No, I ..... MR. BABCOCK: No, I'm not ..... MR. OPSTAD: ..... don't want to say that. MR. BABCOCK: I'm not talking about the entire lease, I'm talking about 1,200 feet away to the west. In other words, if you're saying that drilling a well 1,200 feet to the west is not going to tell you about 1,200 feet to the east it would ..... MR. OPSTAD: Right. MR. BABCOCK: ..... be drilling a well 1,200 feet to the east is not going to tell you about land 1,200 feet to the west. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 135 MR. OPSTAD: It all involves risk factors. I'm most comfortable with drilling the well where it's been selected. As you move back to the west and to the north, you are impinging on a -- on a structural feature which we would prefer to avoid. Not knowing precisely where that structural feature is in the subsurface leads us to stay as far away from it as practical. And that leads us to the proposed bottom hole location. CHAIRMAN JOHNSTON: What exactly is the structural feature that you're ..... MR. OPSTAD: Faulting. CHAIRMAN JOHNSTON: MR. OPSTAD: Yes. CHAIRMAN JOHNSTON: So you see a fault ..... ..... in that location? And your evidence for the fault is what? MR. OPSTAD: The evidence that we have is primarily satellite and air photo imagery. CHAIRMAN JOHNSTON: So you're looking at surface lineaments? MR. OPSTAD: Uh-huh (affirmative). Well, you can also get on the ground, walk up and stand on the fault surface and one's higher then the other. with a Brunton, or you can walk along it. you can see stream offsets, ..... MR. BABCOCK: You can measure it It's quite evident Would you say that fault's 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272'3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 136 running then southeast/northwest or ..... MR. OPSTAD: Southwest/northeast. CHAIRMAN JOHNSTON: So, if I might summarize just quickly, if the Commission was to disallow this spacing exception and you were left with drilling a well in compliance with statewide spacing rules, that would put you at a location on the wrong side of this fault. MR. OPSTAD: Potentially, yes. CHAIRMAN JOHNSTON: Do you have evidence that you can submit that would verify the location of this fault and the -- or that would verify your statement? MR. OPSTAD: We can submit an exhibit which would -- yes. CHAIRMAN JOHNSTON: Was that the air photo exhibit that you ..... MR. OPSTAD: Yeah, uh-huh. CHAIRMAN JOHNSTON: Would you care to submit that at this time? MR. OPSTAD: I can present it now, but I'll have to get you another good copy, if that's ..... CHAIRMAN JOHNSTON: Okay. And perhaps on that you could ..... would, please. MR. OPSTAD: Annotate ..... CHAIRMAN JOHNSTON: ..... annotate, if you 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 137 to submit that? tones) MR. OPSTAD: We certainly could. CHAIRMAN JOHNSTON: And when would you be able MR. OPSTAD: Next week. CHAIRMAN JOHNSTON: Okay. (Pause - Mr. Opstad and Mr. Wittow confer in whispered MR. OPSTAD: Oh, I suppose that's -- probably. I guess I'd also like to ask ARCO in the same regard, since we've gotten into the structural side of this thing. I suppose I can enter this as an exhibit, but ARCO requested of DNR, and obtained, a permit last winter to shoot seismic over the area. It's MLUP/CI 93-017, Moquawkie Area. And I believe -- of course we've owned this lease, and I believe they shot seismic over it, and that might very well speak to some of these issues itself if the Commission desires further clarification. CHAIRMAN JOHNSTON: When was that seismic data shot? lease. MR. OPSTAD: Last winter, after we acquired the CHAIRMAN JOHNSTON: And has copies of that seismic data been provided to the Department of Natural Resources? MR. OPSTAD: I don't know. CHAIRMAN JOHNSTON: I assume it was obtained 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 138 under a miscellaneous land use permit? MR. OPSTAD: I can submit this as an exhibit, if you'd like to properly label it. MS. JACOBSEN: I'd like to take a look at it. MR. OPSTAD: Sure. (Off record comments) CHAIRMAN JOHNSTON: And what is this? MR. OPSTAD: That's the area that the permit was applied and granted for, and I have to assume that since roads are rather usually routes for size of acquisition that the theory has been shot. MR. BABCOCK: Well, I certainly would be interested in any evidence from any party that would demonstrate whether or not how reasonable the anticipation that that fault is there. MS. JACOBSEN: So where -- Kerri is ARCO's geophysicist, Kerri Thompson, and where did you say this particular ..... MR. BABCOCK: Kerri should probably come up to the mike and identify yourself and tell us whether or not you wish to be sworn in and whether or not you wish to be considered an expert witness. MS. THOMPSON: Okay. My name is Kerri Thompson. I am the ARCO geophysicist who works on onshore Cook Inlet areas, so that includes the Beluga River 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 139 area, and I was in charge of the programs that I believe Erik is referring to. And we shot two seismic programs, and one was the Moquawkie area ..... MR. BABCOCK: Do you wish to be sworn in as a witness or just testify? MS. THOMPSON: Oh, sure. MS. JACOBSEN: Be sworn in. MS. THOMPSON: I can be sworn in. COMMISSIONER DOUGLASS: Please raise your right hand. (Oath administered) MS. THOMPSON: Yes, I do. CHAIRMAN JOHNSTON: And in terms of your expert qualifications, I assume you wish to be considered an expert relative to the seismic exploration program that was permitted, and I believe you stated your qualifications in that aspect. MR. BABCOCK: If you could submit a resume for our records later, that will be fine. MS. THOMPSON: Okay. CHAIRMAN JOHNSTON: ~But in terms of just your qualifications relative to the information obtained under the MLUP I assume this is -- well, it's a geophysical exploration permit -- yes, MLUP/CI 93-017, and by the way, we will mark that as Exhibit Number 14, it's dated January 4, 1994. MR. BABCOCK: No problem. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 140 CHAIRMAN JOHNSTON: We'll consider you an expert relative to this matter. MS. THOMPSON: We shot two programs. Neither one of the programs we shot in '94 were over the Beluga River Unit. There was one to the south in the Moquawkie area and one to the north in the Susitna Flats area, and based on my geophysical interpretation of this area, I do not see any faulting in that area, ..... MR. BABCOCK: MS. THOMPSON: well. MR. BABCOCK: when you say "that area"? MS. THOMPSON: Would you ..... ..... based on prior data as CHAIRMAN JOHNSTON: I see ..... What area are you referring to The Burglin lease -- well, ..... MS. GROVE: Section 12. MS. THOMPSON: Section 12 and Section 11, the area in question here where Erik has interpreted the fault. CHAIRMAN JOHNSTON: Was seismic data shot over there? MS. THOMPSON: Not with the programs that Erik was referring to, but ..... CHAIRMAN JOHNSTON: Right. MS. THOMPSON: ..... but we do have older data of the Beluga River. 810 N STREET 277-0572 OR 277'0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 141 shot then? CHAIRMAN JOHNSTON: Were were these programs MS. THOMPSON: The ..... CHAIRMAN JOHNSTON: This one looks more like around the Tyonek area. MR. BABCOCK: MS. GROVE: It's right there. South -- Tyonek is south. CHAIRMAN JOHNSTON: Oh, okay. MR. OPSTAD: Right over the area. But the area, I guess, would be whether the lines actually ran over there, and it did not ..... MS. THOMPSON: Right. They did not go over the leases in question. But we do have older data. CHAIRMAN JOHNSTON: Yeah, I will note that there's no seismic lines shown on this, just a general area map. MS. THOMPSON: And I don't have the program maps with me, but they were not pertaining to this area. MR. BABCOCK: And based on other seismic data that you have or ancient vintage, you said what about it? MS. THOMPSON: It's not necessarily more ancient vintage. We did shoot in '93 some seismic data over the Beluga River area. So also fairly new acquisition there, too. And I do not have any faults map in the entire gas pay interval from the top of the Sterling to the base of the Beluga 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 142 over the Section 12 and 11 area. MR. OPSTAD: I guess I agree with Kerri in a sense in that ..... MR. BABCOCK: Erik, you should probably move closer. MR. OPSTAD: I said I have to agree that we're probably talking about similar things, but I don't see a lot of -- a lot going on in the main section either, but we do see on both the satellite and air photographs some very strong indications that can be in fact confirmed by field ground work running along here, that's a very, very strong lineament, since I'm going to submit this as a exhibit, I'll show Kerri this here, and you'll notice this ..... MR. BABCOCK: This is the photo you were referring to earlier? CHAIRMAN JOHNSTON: Yes, this is one example. You'll notice a very strong lineament here. This is up, this is down, and the Beluga River is ensized in that tract. You get on the ground, you'll see that the fairly compelling evidence that there is a fault. You'll notice that all of the pads are strung out immediately on the upthrown side of the fault, mapping this out as a little bit of a tilted fault block with a roll in it. MS. THOMPSON: This is basically the shoreline. MR. OPSTAD: Actually the shoreline is way out 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 143 here. MS. THOMPSON: But ..... MS. GROVE: This is tidal flats. MS. THOMPSON: ..... this is tidal flats. MR. OPSTAD: Yeah, that's right. MS. THOMPSON: This is the high tide line. MR. OPSTAD: Well, this is way out here, this is high tide out here. MS. GROVE: This is the tree line. MS. THOMPSON: That's the tree line. MR. OPSTAD: It's a very strong lineament, and these are all ensized in here, and all of your stuff is strung out right along it. MS. THOMPSON: That's due to modern day processes. MR. OPSTAD: Agree. Agreed. MR. BABCOCK: Excuse me. I have a question. Does anything on that photo support your contention that there is a fault between where you want to drill the well and the question I had about drilling it ..... MR. OPSTAD: Yeah, I can make some arguments to that effect in the submittal, yeah. MR. BABCOCK: And is any of your testimony, Ms. Thompson, related to the fact that you do not see any evidence that there is a fault between ..... 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 144 MR. OPSTAD: It's a difference of interpretation. These are given methods. MS. THOMPSON: Well, I ..... MR. BABCOCK: Please wait, Mr. Opstad. I'm just asking questions. I'm just trying to get answers and then any comment. Were you testifying that you see no evidence of a fault between where the well is proposed and where I suggested it might be drilled in order to avoid the need for a spacing exception? MS. THOMPSON: That's correct. MR. BABCOCK: And does the photo -- or is it different evidence that you're referring to that justifies your testimony that there may be a fault there? MR. OPSTAD: I'm saying that there is, on the basis of -- there's actually a series of photographs that go through there that when you composite gives you some lineaments that run several different ways that lend one to believe that there well could be a fault there, and also the fact that the river -- the oxbow there in the river seems to be ensized following said lineament which is a pretty typical thing. We also see offsets of the stream drainages which are cited by other workers in the Cook Inlet basin as being evidence of faults, particularly right-hand -- strike -- slip faulting. And then I also made mention of the fact that the old seismic that Kerri is referring to may not, although I haven't seen it, 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 145 may not have been of particularly high resolution, making the detection of some faults, particularly in very thick sand sequences, somewhat difficult. MR. BABCOCK: Well, I'm not suggesting in my questions that unless there's absolute evidence of a fault that you should be forced to drill a well where you think it would be on the wrong side of some structure. I'm just asking to get as much information as I can, since I'm charged with making one-third of a decision. MS. JACOBSEN: I'd just like to say we'd be happy to show the Commission our seismic, if you're interested in following -- pursuing that up, we would be happy to share it with you folks. MR. BABCOCK: Well, I think one of the things you -- when, if that's otherwise confidential information, ..... MS. JACOBSEN: MR. BABCOCK: Yes. ..... all parties to the proceeding will have access to any information you wish to submit. That's how we treated confidential information during the Niakuk proceedings. So you may want to consider that. MS. JACOBSEN: I think I would. CHAIRMAN JOHNSTON: Any other questions? MR. BABCOCK: Not unless -- if there's any more information to throw my way, but I don't have any more 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272'3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 146 questions. CHAIRMAN JOHNSTON: So you will be submitting an annotated air photo that supports your contention that faulting does exist and that -- compelling you to drill on the wrong side of the fault would be adverse to your interests? MR. OPSTAD: With a little clarification I will put together a composite of a series of -- or photographs that will demonstrate that there is -- that reasonable evidence to show that there are lineaments which are coincident with other topographic features in the area which might be construed to represent faulting in the area, and as such it would be reasonable for us to avoid those, particularly if we felt they might represent some sort of boundary to the gas accumulation in the Beluga River Field. CHAIRMAN JOHNSTON: I would like to mark those air photos. Do you envision that it's going to be one photo or a series of photos? MR. OPSTAD: It will probably be four photographs, but I'll probably just kind of cut and past them together as I compile them so they'll be easy to ..... CHAIRMAN JOHNSTON: That's fine. We'll mark that Exhibit Number 15. And can we also get you to provide a copy of that photo to the ARCO protesting party? MR. OPSTAD: I'm sure we can come up with a copy of it, yes. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 147 questions? CHAIRMAN JOHNSTON: Thank you. Any other COMMISSIONER DOUGLASS: Nothing. CHAIRMAN JOHNSTON: Any more questions? MR. BABCOCK: I have one more question for Ms. Thompson. Did you personally review seismic information on the two leases in question? MS. THOMPSON: Yes, I have. MR. BABCOCK: Thank you. CHAIRMAN JOHNSTON: I believe we had earlier said we would allow the opportunity for closing remarks. MR. WITTOW: I will be very brief. CHAIRMAN JOHNSTON: Do both parties wish to make closing remarks? MS. JACOBSEN: Brief. CHAIRMAN JOHNSTON: Okay. Why don't we go ahead and allow the applicant to proceed with your closing remarks. MR. WITTOW: Just a few, brief points. I guess one is -- I think it's clear that the well that's being -- for which the exception is being sought is being drilled into acreage that is untested in the sense that the lease is an untested lease, it's not part of an existing unit, the lessee hasn't drilled a well on it and whether it's termed a delineation well or an exploratory well, it's clearly not a 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 148 development well. I don't intend, I guess, for the Commission to get completely caught up in whether Section 100 of AS 31.05.100 applies, but that section does seem directed towards establishing drilling units for pools, and we're not seeking to establish a drilling unit per se here, we're simply seeking a well spacing exception under the regulations of the Commission. The exceptions to well spacing regulations, they're an essential part of the regulations. I think it's been decided in cases all over the country that you cannot have well spacing regulations without providing for exceptions that protect the correlative rights of the owners of mineral interests, and I cited those cases in my letter. I won't go over them here other than to say that I don't think there can be any serious dispute that the opportunity to have an exception to a well spacing rule is an essential part of a conservation statute, and there's plenty of precedence for granting exceptions in situations where it's necessary to allow a lessee to -- the opportunity to develop the oil or gas on its lease. And just using ARCO's Exhibit 12, the well radius, if when you acquire a lease You don't acquire simply the oil that might be in the center of the lease, you acquire it to the boundaries, and if your oil is all in one corner of the lease, it's essentially a confiscation of property to not be allowed the opportunity to drill a well and discover and produce that oil under the rules 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 149 that are in place. And at this stage Z-Energy is simply seeking the opportunity to discover whether or not there are commercial hydrocarbons in a portion of its lease. I would -- I guess I found, or I would urge the Commission to find ARCO's testimony as presented by its expert witness not credible in that the witness both offered testimony that ARCO believes that the structure or that the lease owned by Z-Energy is completely dry on the one hand, and on the other hand if Z-Energy is allowed to drill this well it's somehow going to drain the Beluga River Unit. It can't work both ways. Either there's gas on the lease or there isn't, and I just -- I found ARCO's testimony confusing in that regard, and I still don't know really what their position is, whether the lease is dry or not. And on the other hand I don't think anyone can really know until the well is drilled, and that's really what's at issue here. I think that's all I need to say. CHAIRMAN JOHNSTON: Thank you very much. Ms. Jacobsen. MS. JACOBSEN: Well, I'd just like to say that Z-Energy hasn't shown one of the three acceptable statutory reasons for an exception location. Mr. Opstad admitted that other locations might be productive, but hasn't prove that a well 1,500 feet away from both lease lines would not be productive. At the very end of today we got some testimony 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 150 that there's some faults on the surface. Mr. Opstad noted that he didn't think that those faults would affect the productive interval, but the Commission can receive more evidence on that later. But I would say that Z-Energy has not presented any statutorily accepted reasons for an exception location, so I would submit that the Commission simply doesn't have authority under the statute to grant it. We don't object to Z-Energy drilling a well. They've got a right to drill a well to test the reserves on their acreage, and we think the well will be dry, based on our current interpretations. But if it is productive, and we're wrong and the well is productive, the well will drain us. And so we do object to them producing the well. And Z-Energy has testified that it wants to produce this well. And I'm unaware of any instance in Alaska where the Commission is prevented a party from producing a well, that they've already expended the money to drill. As I've said before, the purpose of spacing rules is to avoid situations like this where one party tries to drill close to a developed unit. Where spacing rules are followed in other states, there's no litigation. The parties know what's expected of them, and correlative rights are automatically protected. We just ask that the Commission avoid the problem by 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272'3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 151 following its statewide rules. time. Thank you. CHAIRMAN JOHNSTON: Any other ..... COMMISSIONER DOUGLASS: No comments at this CHAIRMAN JOHNSTON: Any comments? MR. BABCOCK: What is your intent, Mr. Chairman, for leaving the record open or ..... CHAIRMAN JOHNSTON: Well, definitely we -- as we indicated earlier, that no decision is going to be rendered in this case until we clearly have established Z-Energy's right to be before us by following a proper designation of operatorship for the matter. It's my understanding that they will have that within 30 days to us. Is that correct, Mr. Opstad? MR. OPSTAD: That's my understanding. Dr. Craig's out fishing at the moment and I'll have to confer with him to ascertain the precise timing, but my current understanding is that we'll have the documentation requested in hand within 30 days. MR. WITTOW: I might add that within 30 days if there's not a letter -- if the documentation isn't available from Z-Energy, we certainly can have the application essentially adopted by the holders or the leaseholders of record, the individuals who are the actual leaseholders. MR. BABCOCK: Then I would ask whether ARCO 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 NEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 152 intends to enter any objection to the proceeding based on the status of Z-Energy's application. MS. JACOBSEN: Well, I'm comfortable with the way the Commission has decided to handle this. I mean I don't think Z-Energy has shown standing yet, so since we were all here and prepared to present testimony today, I'm happy with the way things have gone. I'd have to think though about whether this exception location can be transferred to other folks, and I'll have to think about it, so I'm not sure at this point. CHAIRMAN JOHNSTON: Well, ..... MR. OPSTAD: And we would be happy to revisit it again, if you choose. MR. BABCOCK: Well, I don't like to spin wheels, so I'd like to know if within 30 days if Z-Energy is declared the operator by the owners or if the owners themselves say that this application represents them, I'd rather not go through the ..... MS. JACOBSEN: I think that will be fine. I don't think we'll object to that. MR. BABCOCK: Okay. CHAIRMAN JOHNSTON: Then with that, I would like to hold the hearing record open 30 days. COMMISSIONER DOUGLASS: Recess for 30 days. CHAIRMAN JOHNSTON: Yes, a recess for 30 days. 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 153 That will allow Z-Energy ample opportunity to submit that designation of operatorship to the Commission, at which point the Commission -- let's see, do we have a date on that, what 30 days would be? See, it's the 10th now, so what would be a good day. COMMISSIONER DOUGLASS: Say keep it open till -- the 10th is a Sunday, so maybe the 12th? CHAIRMAN JOHNSTON: July 12. Is that suitable for all parties? At which time the Commission will reconvene and bring the hearing to close, assuming that we have no further questions of both parties. COMMISSIONER DOUGLASS: At 9:00? CHAIRMAN JOHNSTON: Yeah, we'll reconvene at 9:00 on -- what July 12th? COMMISSIONER DOUGLASS: July 12. CHAIRMAN JOHNSTON: At the Commission offices here on Porcupine Drive. MS. JACOBSEN: Does that mean the record is still open? CHAIRMAN JOHNSTON: The record is still open, that's correct. It will not be closed until July 12. Conceivably on July 12 we'll close it at that time unless we fell the need to further extend for unforseen reasons. MS. JACOBSEN: Thank you. MR. BABCOCK: Mr. Chairman, would it be your 810 N STREET 277-0572 OR 277-0573 FAX 274'8982 R 8, R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272'3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 154 intent to allow other parties that have not come forward yet to submit data or testimony or are we going to confine the next meeting to hearing those parties who have come forward? CHAIRMAN JOHNSTON: Well, I think we should confine it to the two principals unless there is compelling evidence to suggest that it would be appropriate to open it to another party. But at this juncture I think clearly the public has had an opportunity to be here and be heard. The two principals are Z-Energy and ARCO. We have received comments from the Department of Natural Resources in a letter form, and also BLM. They commented -- I don't think we could fairly characterize it as an objection, but a statement of concern about the petition of Z-Energy, but they did not choose to testify before us today. MR. BABCOCK: Well, I would concur with that approach. CHAIRMAN JOHNSTON: And so I would suggest that on July 12 that the two principals would be the only ones allowed to speak unless somebody can show compelling need to approach the Commission for some reason. So is there any questions from either party? Are there any member of the audience wishing to make any statement before we recess at this time? COMMISSIONER DOUGLASS: Just a reminder. The transcript for this portion of the hearing can be available in 810 N STREET 277-0572 OR 277-0573 FAX 274'8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 155 a week. CHAIRMAN JOHNSTON: And anybody wishing ..... COM]4ISSIONER DOUGLASS: And, again, if you contact R & R Court Reporters you can get a copy and use it for whatever purposes you'd like. Just a reminder. CHAIRMAN JOHNSTON: Anything else? Well, then why don't we recess until 9:00 a.m. on July 12, 1994. And thank you for coming. (Off record - 3:08 p.m.) (PROCEEDINGS TO BE CONTINUED) * * * * * 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 CERTIFICATE UNITED STATES OF AMERICA) ) ss STATE OF ALASKA ) I, Laurel L. Kehler-Evenson, Notary Public in and for the State of Alaska, residing at Anchorage, Alaska, and reporter for R & R Court Reporters, Inc., do hereby certify: THAT the annexed and foregoing Public Hearing of the Alaska Oil and Gas Conservation Commission, Volume I, was taken before me on the 10th day of June 1994, commencing at the hour of 9:00 o'clock a.m., at the offices of the Alaska Oil and Gas Conservation Commission, 3001 Porcupine Drive, Anchorage, Alaska, pursuant to Notice; THAT this Transcript, as heretofore annexed, is a true and correct transcription of the testimony given at said Public Hearing, taken by me and thereafter transcribed by me; THAT the original of the Transcript has been lodged with the Alaska Oil and Gas Conservation Commission, 3001 Porcupine Drive, Anchorage, Alaska; THAT I am not a relative, employee or attorney of any of the parties, nor am I financially interested in this action. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my seal this 15th day of June 1994. Notary Public in and for Alaska My commission expires: 10/20/94 RECEIVED JUN 1 6 1994 . Aisska ¢o~i & Gas Cons. Commission Anchorage 810 N STREET 277-0572 OR 277-0573 FAX 274-8982 R & R COURT REPORTERS 509 WEST THIRD AVENUE 277-8543 1007 WEST THIRD AVENUE 277-7515 ANCHORAGE, ALASKA 99501 1135 WEST EIGHTH AVENUE 272-3022 ALASKA OIL AND GAS CONSERVATION COMMISSION Z-ENERGY NBR-12-2 SPACING EXCEPTION PUBLIC HEARING -JUNE 10~ 1994 NAME & COMPANY (PLEASE PRINT) SIGN IN PLEASE Do You Plan to Testify? Yes No ,4- k.T-- .1- 'J 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 ALASKA OIL AND GAS CONSERVATION COMMISSION PUBLIC HEARING JULY 12, 1994, 9:00 O'CLOCK A.M. VOLUME II TRANSCRIPT OF PROCEEDINGS HELD AT THE ALASKA OIL AND GAS CONSERVATION COMMISSION 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA RECEIVED JUL 1 9 1994 Oil & Gas Cons. Commission Anchorage R & R COURT REPORTERS 810 N STREET 1007' WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 EXHIBITS VOLUME II 16 - Letter from Preston Gates & Ellis, 7/5/94, to AOGCC Re: Z-Energy's Request for Spacing Exception 04 17 - Letter from ARCO Alaska, Inc., 7/11/94, to AOGCC Re: Drainage Radius Calculation for BRU 212-18 40 18 - Faxed letter from ARCO Alaska, Inc. Legal Department, 7/11/94, Re: Z-Energy's Request for Location Exception for NBR 12-2 41 19 - Major fault systems bounding the Shelikof trough and the Cook Inlet basin 10 20 - Figure 5, structure sections based on geophysical profiles across the Beluga basin and adjacent areas 11 21 - Bill Valley's Base Map on offset drainages 12 22 - AOGCC Generalized Stratigraphic Column, 4/91 19 23 - Exploration Drilling Unit 20 AAC 25.055(2) diagram 23 24 - Mudlog from Burglin Well X-33-12 30 R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 P R O C E E D I N G S ACTING CHAIRMAN DOUGLASS: We'll call this meeting to order. I apologize, you notice Dave Johnston, our chairman, is not here, but he's on teleconference. He's at home with a broken leg, so we'll get by without him, at least being here physically, but he is here mentally. Right, Dave? COMMISSIONER JOHNSTON: Good morning, one and all. Did that come through? ACTING CHAIRMAN DOUGLASS: Yes. COMMISSIONER JOHNSTON: Okay, very good. ACTING CHAIRMAN DOUGLASS: Yes, it did. Are you picking him up, Laurel? COURT REPORTER: Yes, he's coming in fine. ACTING CHAIRMAN DOUGLASS: This is the reconvening of our Z-Energy hearing. It is approximately 9:02 a.m. on July 12, 1994. And we have received some information since we last were here on June 10. I think we've submitted the aerial photograph as Exhibit 15, but we'll need to introduce the additional written testimony that we've received from ARCO and Z-Energy as exhibits. So that will be one of the agenda items, and then we'll move forward with final testimony and decide whether or not we're going to file post-hearing briefs and where we go from here. So if you don't have anything, Tuckerman, I will ..... MR. BABCOCK: Just to enter these written ..... R & R COURT REPORTERS 810 N STREET 1007' WEST THIRD AVENUE 277- 0572/F ax 274 - 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 2¸3 24 25 ACTING CHAIRMAN DOUGLASS: ARCO and Z-Energy introduce them ..... if that's okay. I was going to let COMMISSIONER BABCOCK: Ail right. ACTING CHAIRMAN DOUGLASS: ..... in their turn, COMMISSIONER BABCOCK: Sure. ACTING CHAIRMAN DOUGLASS: And so we'll call Z-Energy to go ahead and start their portion, please. MR. WITTOW: I guess I'll pull the chair around here. I'm Mark Wittow, with Preston Gates & Ellis, and I represent Z-Energy. I'd like to make a short opening statement and then Erik Opstad will present testimony on some of the issues that have come up before the Commission. Before I start I'd like to just mention that Dr. Paul Craig, the president of Z-Energy, is here today and he's available, if necessary, to answer questions, but is not, at this point, going to testify. Z-Energy has made the required showing that an exception to the spacing rules is necessary to protect its correlative rights. I guess as a preliminary matter I'd ask that the letter, I think it's dated July 5 that I sent to the Commission concerning the status of Z-Energy, be entered into the formal record of the hearing. COMMISSIONER BABCOCK: Exhibit 16. Ail right. That will be MR. WITTOW: Z-Energy's correlative rights R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274-8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 entitle it to produce oil and gas from its lease and also entitle it to drill in a location where it has the most likelihood of discovering oil and gas on its lease, and the authority for -- behind those statements is contained in my June 10 letter to the Commission, which is already part of the record. Not granting a spacing exception in the circumstance amounts to a taking of nearly 80% -- or over 80% of Z-Energy's oil and gas space. And, as I mentioned, the spacing rules are merely a presumption, and allowing exceptions to the spacing rules are an inherent necessity in order to not have the spacing rules and an unconstitutional taking of property. It's our position that if the spacing exception is not granted in this case the greater part of Z-Energy's lease will have been effectively taken away from it. We've made the showing that the exception is necessary by putting on expert testimony regarding our geologic interpretation of the lease, and the reasons for picking the drilling location that we've picked and the reasons that we believe the Beluga River gas pool extend only partially onto the Z-Energy lease and does not cover all of it. Z-Energy is willing to spend over $2 million to drill a well to determine whether or not gas exists on its lease, and it deserves the chance to place it's well in a location where it believes it has the most likelihood of discovering gas. Not allowing it to do so would be both wasteful and wOuld disregard R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 6 its correlative rights. ARCO has raised an objection to the well spacing exception and I believe that ARCO's objections are without merit and they're not credible for three reasons: First, and I guess as a primary reason, ARCO has repeatedly stated that it believes there's no gas on the Z-Energy lease. That testimony is not credible, and in light of their objection to the spacing exception if there were no gas on the lease there would be -- ARCO can't be concerned about its correlative rights and at the same time argue that there's no gas on the lease. And it also doesn't make sense in terms of ARCO's bid on the lease, the same lease sale that Z-Energy discovered it -- excuse me, where Z-Energy acquired the lease, but ARCO still maintains that there's no gas on the lease. ARCO has offered what we believe is flawed and incomplete expert testimony regarding the nature of the geology of the lease. They have testified that they conducted a seismic shoot in 1993. We don't know if it was across this lease and whether it occurred after the lease was acquired, but they have not offered any data regarding that seismic shoot to the Commission or made it available for us to examine first-hand. So what we're getting is basically an unexamined opinion about what it might say without getting to see the actual data. ARCO has also offered what we believe is a flawed and incomplete legal analysis, and they've provided the Commission R & R COURT REPORTERS 810 N STREET 1007 NEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 with an incomplete statement of what the guiding law is. One issue is whether Section 31.05.100(b) applies regarding drilling units. As I've testif -- as I've stated, this section really doesn't make sense when applied to a well that's been drilled into an exploratory location as this is. No well has been drilled into the Beluga River pool on this lease. Z-Energy has not drilled a well on its lease. It does not yet know absolutely what's there. If it may be -- if 100(b) is applied, Z-Energy has presented expert testimony that it qualifies for an exception because its drilling unit lies partially outside the pool. The first exception applies, and I think that's sort of the end of the matter. The rest of 100(b) really doesn't make sense in the context of an exploratory well, but it's clear that the Commission has the authority to grant the exception to Z-Energy under 100(b), that Z-Energy has established that it satisfies one of the exceptions of Section 100(b), which just, again, to, I guess, quote it exactly, is that it's shown that its drilling unit is -- which in this case is the section that's partially outside the pool, or in this case the Beluga River pool. That's the reason for requesting a spacing exception. ARCO has also stated that it would be impossible for Z-Energy to satisfy the criteria of Section 110 regarding unitization because this is a gas-filled and primary -- and some sort of secondary or tertiary recovery as required in. I R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 8 think that -- I'd just like to call the Commission's attention to that statement in ARCO's letter and say that it's flat wrong. There's no requirement in ll0(b) that secondary or tertiary recovery is necessary. It's basically some form of joint effort calculated to substantially increase the ultimate recovery of oil and gas as required, and that is not synonymous with secondary or tertiary recovery, and I think ARCO is misleading the Commission in implying that it's impossible for the situation to qualify for a forced unitization situation. Whether it will or won't, I think we -- it's too early to tell, but it's clearly -- the unitization statute is clearly broader than ARCO has explained it in its letter to the Commission. Z-Energy, frankly, needs to drill the well to answer the questions that have come up, and it needs to drill it in a location where it's most likely to discover oil and gas -- excuse me, gas, not oil in this case. Erik Opstad will testify now, and he will, I think, explain in more detail why Z-Energy needs to locate its well this close to the section line as the well spacing exception would provide for, and will also respond to some of the factual inaccuracies in ARCO's letter, and I'd like Mr. Opstad to testify at this time. MR. OPSTAD: I think it might be appropriate if we put the overhead projector back up. COURT REPORTER: Would you mind wearing the R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 mike on your lapel? You've got plenty of wire here for you to move around. (Pause) MR. OPSTAD: Sure. ACTING CHAIRMAN DOUGLASS: Just a reminder at this point, Erik, that we have recognized you as an expert witness and you have been sworn in. MR. OPSTAD: That's correct, and I'm still under oath, I gather. Well, I'd like to begin, I guess, with where we left off during our last session, with Exhibit 15, which is a composite aerial photograph of the Beluga River Field, which is there. We have some additional copy here, sort of. But before we get into discussing this particular exhibit which relates to faulting in the Beluga River Field, I thought it might be appropriate if we just revisited the issue of faulting in the area in more of a general sense. And I'm going to shOw a couple of maps that are taken from a Report of Investigations 90-1, by the Department of Natural Resources, Division of Geologic and Geophysical Surveys, and written by a fellow by the name of R.D. Merritt. And he -- I'm not going to submit this as an exhibit, the whole report, but there are sections and photographs here, figures that he used that I'll submit. First of all, we just want to look at generally what's going on in the area, and here we can see a -- just the Susitna R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 10 area, Cook Inlet area, outlined the shoreline here in blue a little bit and then highlighted some of the major fault zones through the area in yellow. And you'll notice that this Bruin Bay fault zone, which is a quite large one, runs right adjacent to the Beluga River Field, which is in this area. So just in general there are -- we can see that there are some fairly significant fault zones moving in and around and through the area. ACTING CHAIRMAN DOUGLASS: Erik, excuse me for a second. Do you wish to submit this as an exhibit? MR. OPSTAD: Sure we can introduce that as an Exhibit 17. ACTING CHAIRMAN DOUGLASS: 17, yeah. MR. OPSTAD: If you would. Further ..... COMMISSIONER BABCOCK: It will be Exhibit 19. MR. OPSTAD: Okay, fine. COMMISSIONER BABCOCK: That's the way I'm doing it. But one of the things I'd like -- rather this is just an exhibit but I would like to have it described, the page. If you're not going to submit the whole report, what page is it taken from or ..... MR. OPSTAD: Yeah, I can do that for you. Can we do that later? COMMISSIONER BABCOCK: No, ..... MR. OPSTAD: Right now? R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 05 72/Fax 274-8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 do it now. COMMISSIONER BABCOCK: MR. OPSTAD: Okay. COMMISSIONER BABCOCK: submit them as a package. MR. OPSTAD: on page 13. It's probably better to 11 Unless you want to This is Figure 8 from the report COMMISSIONER BABCOCK: And who is the author of And it's this report? MR. OPSTAD: This is R.D. Merritt. Report of Investigations 90-1. Looking at this (Exhibit 20) in just a little more detail here is -- this if Figure 5 from the same report, and you'll notice that here the author has a couple of -- drawn a couple of cross sections right in the vicinity of the Beluga River Gas Field, this little crook here in the Beluga River is where the gas field is, and you can see that Section CC-1 is just to the south, and AA-1 is somewhat to the west. But all I really want to -- the point I really want to make here is just that if you look at these sections here, A to A prime, we see a lot of faulting going on in here with some grabens and horse blocks and a fairly complicated situation. That's -- in this case these faults would be kind of running parallel to the Yentna River, northwest/southeast. If we look at the Section CC prime, again we see a series of grabens and horse blocks and a R & R COURT REPORTERS 810 N STREET 1007 ~/EST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 12 pretty well busted up area. And in this case these faults are running sort of northeast/southwest. So a fairly, fairly complicated area in terms of faulting. Now on page 13 the author makes the point that he says that faults are clearly visible as surface lineaments, crossing the Susitna Flats in that they display dextral strike slip movement or a right lateral drag as evidenced by offset stream drainages. Well, what does that mean. Well, it really means if you're going to take your two hands and put them together and then move the bottom one, that's sort of a right-hand slip, and what happens if we look at some of the drainages. Let' see what we have here, let's turn it around. This will be Exhibit 20? COMMISSIONER BABCOCK: 21 now. MR. OPSTAD: 21. And what this is is a map of the Beluga River area, and ..... COMMISSIONER BABCOCK: Is this from the same report? MR. OPSTAD: No, this is not from the same report. This is put out by Alaska Map Service, Bill Valley's Base Map that many of us in the industry use as a reference, and I've just kind of doodled this up a little bit to show you what the authors mean about offset drainages and how you interpret these things. Here's a look at the Chuitna River here, and you'll notice R & R COURT REPORTERS 810 N STREET 1007 NEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 13 that we come down and then make a 90-degree turn on this fault, which is moving right lateral movement, come down again, another right-hand turn, down again, another right-hand turn, down again. Here's the Beluga River, same thing. And these are all examples where the faults are offsetting the stream drainages, and this is a widely recognized observation by many authors that work in the area. And it's a handy way to map some of the large faults. It also, I think in the previous hearing we had some discussion about faults being modern day processes and, as you see of course, that we're offsetting stream drainages today, and that's because these faults are literally moving as we speak. And so, frankly, they don't really get much more modern than today. And we find that many of the features that we look at, bluff and cliff forming elements, drainage offsets and so forth, are in fact the faults expressing themselves in modern day processes. So now with this setting, you'll see -- let me outline again, this is the Beluga River Unit and you can see how I've interpreted some faults in here based on the stream offsets and how they align with one another. And actually if you step back and look at the -- some of these large faults on regional maps, satellite imagery and so forth, you can follow some of these guys for 50, 60 miles without any trouble at all, just your average every day lay person have no trouble following these. So the point I'm trying to make is that there's a lot of R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274 - 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 14 structure going on in the area, and in some of ARCO's testimony they seem to imply that there's nothing but a little structural closure that's controlling the distribution of gas pools within the Beluga River Unit, and I think that if you buy the work that's been done by other people in this cartoon, you can see that it would probably be reasonable to assume that there are in fact other elements at work which could possibly control the distribution of gas pools within the Beluga River Unit. With that I'd like to make reference to our Exhibit 15, which is -- I'm going to try to project this. I've got a mylar and I don't know whether it's going to work or not. We'll give it a go. Probably not going to work. Pretty weak. Yeah, pretty weak. Perhaps we can hold up -- I'll hold up the actual photograph as well. If you don't mind we can refer to that one. What I've done here is this is a composite, low altitude air photograph of the Beluga River Unit, or at least the northern end of it. And you can see a very strong surface lineament which I think at one time we were just referring to as a shoreline, perhaps. I think there's a little confusion there. The shoreline you can actually see down here in the lower left-hand corner. And we did refer to this as somewhat of a modern day processes. I'm perfectly willing to stipulate to that. It most certainly is, and as I said, most of these faults are moving as we speak, so it certainly is modern. You'll notice that this oxbow in the Beluga River Unit is R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274 - 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 15 incised in that lineament which is typically -- by incised I just mean that it's -- it's entrenched in that lineament which is really quite typical of faults. Faults are weaknesses, rivers get into them, they tend to follow them. That's why we see offsets in the drainage and where they cross in the major faults in the Susitna area -- flats area and Beluga River area. And so this -- this sharp lineament, we're interpreting as a fault, and to be consistent with the regional trend it would probably be a fault that would dip somewhere to the east and have a dip of, oh, 60, 70 degrees. Now of course this thing is at this location on the surface and it would dip away and be further located a little bit further to the east by the time it intersected the top of the Sterling. And I think that in some of the maps that I submitted I have a fault that's mapped in there approximately -- or approximating this lineament. I've also got another lineament and interpreting it partly as a fault. I think from the back of the room you can probably see this trend, cutting across here, and I don't know whether we can really see it on this -- it's pretty difficult to see on the overhead. But, again, in this case we've interpreted that as a possible fault. Again, you see the Beluga River oxbow, the other arm of it, the -- which would be the western arm of it is incised in that fault. So we see that as -- let me move this around this way -- yeah. So what we're suggesting is that if you look at the view R & R COURT REPORTERS 810 N STREET 1007' WEST THI'RD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 16 graph we're suggesting that this lineament is a fault with Beluga River incised in it and represents the upper edge of a bit of a tilted fault block, and you can see this as the -- I believe that's the 212-18 pad location, and here we have the 224-13 pad. This is the 212-24 pad. So all of ARCO's wells are just lined up along the upper edge of this thing. We also interpret another -- perhaps a fault. I'm not really certain, but there seems to be something going on here, and we certainly see that this western limb of the Beluga River has been incised at that location for quite some time. These -- this particular oxbow hasn't moved for thousands of years, and you can see the progression of the oxbow, oh, through time moving steadily to the south, trapped between these two lineaments. So I come around to the point that despite ARCO's testimony that there are no faults and no intervening structure in the area, the visual evidence that one can acquire simply by reading the literature, looking at a few air photographs and interpreting topographic maps is quite to the contrary. One of the reasons that Z-Energy wants to drill over here in the middle of the oxbow is to perhaps stay away from that lineament which might be a fault. It might be some sort of barrier, we don't know, but prudent exploration -- a prudent explorationist would not want to put his bottom hole location in a area where it might possibly be cut by a fault of putting him on a less R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 17 than advantageous area to evaluate the potential reservoir. And this sort of brings us around to ..... COMMISSIONER BABCOCK: Mr. Opstad. MR. OPSTAD: Yes. COMMISSIONER BABCOCK: Where is the Burglin well on this map? MR. OPSTAD: The Burglin well would be right here, right to the west of the western limb of the oxbow. So basically it's situated virtually on top of the lineament that I'm referring to. And since that would also logically dip to the -- dip to the east, you'd very quickly, of course, penetrate that and you'd be on the western side of that fault by the time you intercepted the top of the Sterling. Now this brings us back to one of the other points that Ms. Jacobsen raises in her letter which hasn't been submitted yet, I gather, or has it? Has Ms. Jacobsen's letter been submitted as an exhibit yet? ACTING CHAIRMAN DOUGLASS: We're going ..... MR. OPSTAD: You're going to, okay, fine. Then we'll ..... the Commission. exhibit. COMMISSIONER BABCOCK: It has been submitted to We haven't officially entered it as an MR. OPSTAD: Okay. But we can refer to it. COMMISSIONER BABCOCK: Uh-huh (affirmative), R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 18 just refer to it by the date of the letter. MR. OPSTAD: Fine. And it's Ms. Jacobsen's letter of July 11, 1994, to Mr. Dave Johnston, Chairman of the Commission. And in this letter Ms. Jacobsen makes a couple of points. One is some discussion about the structure and the faulting which I think I've already addressed here. And another general category of points that she makes revolves around a memo that I wrote for Z-Energy back in the fall of 1983 (sic), and Ms. Jacobsen quotes that in a number of places. But in that memo I talk about -- as a matter of fact the only thing I really address in the memo at all is the Sterling A, and essentially making the argument that the Sterling A at -- in the X-33 well had a lot of characteristics that were in common, that is stratigraphic reservoir -- or formational characteristics and perhaps petrophysical or log characteristics that were similar to the 212-18 well, some 3,000 feet to the east. And I suggested that those characteristics were, in the X-33 well, were fairly similar, and ARCO in a previous -- some previous testimony relative to their injection well application -- it's immediately adjacent to this well, called that particular zone a partially depleted gas reservoir in the lower Sterling Formations A, B, and C. So given the fact that the petrophysical responses and the general characteristics of the formations were quite similar between the two locations, we concluded that there was likely R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 19 to be gas in the Sterling A on the Z-Energy lease and that it would have some considerable areal extent. However, the thing that Ms. Jacobsen failed to address, for a number of reasons I imagine, is the fact that the Beluga River Field, of course, produces not just from the Sterling Formation but also from the Beluga River Formation. And in fact this stratigraphic column, which I'll submit as Exhibit -- would that be 22? In fact this is the Alaska Oil & Gas Conservation Commission's Generalized Stratigraphic Cross Section, April 1981. I want to note -- want everybody to note that this is modified slightly, that it shows the Hemlock as a lower member of the Tyonek which has become common practice recently. But you see these little wiggly lines here, these are unconformities that exist between the Sterling Formation and the Beluga Formation and those are erosional events, time hiatuses, if you will. But basically what it does, it suggests that the Sterling Formation, the Beluga Formation are different events, not only are they different in terms of their stratigraphic and depositional environments but they're clearly separated by time hiatus. So you can't just arm wave and say whatever is true for the Sterling is also true for the Beluga, it just doesn't work that way. One of the reasons that Z-Energy is interested in drilling next to the section boundary to the east is that we want to optimize the probability of being able to evaluate the Beluga R &R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 20 River Formation as well as Sterling Formation. Now why would it make a difference? Well, if we look at the X-33 well, in fact the Beluga River Formation doesn't have a great deal of obvious gas in it. It has some small stringers, it has some -- at least one fairly significant gas show, but it's not overwhelming. If you look at the 212-18 well, in fact that well is perforated solely in the Beluga and down to a depth of something like 5,400 feet, plus or minus a little bit. So -- and yet the difference between the top of the Beluga Formation and 212-18 and X-33 is less than 300 feet. So we have a very large Beluga hydrocarbon column in 212-18, which is, of course, on trend with many other Beluga producers within the Beluga River Field, and yet a few thousand feet to the west in the X-33 well, which is only -- less than 300 feet structurally lower, we have very Beluga gas. So you can't really explain that just on the basis of a structural closure control. In fact you have to come up with some sort of intervening event other than structural closure to account for that difference. Now it can be perhaps stratigraphic changes, it could structural or faulting changes, it could be a variety of different things. We don't know. And that's one of the reasons why we want to drill a well and try to gather more information to provide us additional data with which to interpret our lease and events in part of the northern Beluga River Field. R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 21 Quite simply, all we're trying to do is stay on trend and stay on structure where we believe that we have the greatest probability and likelihood of encountering a complete hydrocarbon column. ACTING CHAIRMAN DOUGLASS: on, ..... interruption. Erik, before you go MR. OPSTAD: Sure. ACTING CHAIRMAN DOUGLASS: ..... just a quick What's the orientation on this aerial photograph, what's north, let's say? MR. OPSTAD: so that's about right, yeah. directly to the south. It's flown parallel to the coast, The oxbow is tear-dropped ACTING CHAIRMAN DOUGLASS: Okay. COMMISSIONER BABCOCK: Mr. Opstad, could you provide hard copies of Exhibits 19, 20, 21 and 22? MR. OPSTAD: I certainly can. I think I'll just pass the view graPhs over to you, and these make actually very good Xerox copies. COMMISSIONER BABCOCK: This wasn't entered as an exhibit. MR. OPSTAD: MR. WITTOW: exhibit, I think. MR. OPSTAD: Okay. That was part of an earlier Okay. Now ..... R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 22 COMMISSIONER BABCOCK: I need ..... MR. OPSTAD: You need one other? COMMISSIONER BABCOCK: Two more exhibits. ACTING CHAIRMAN DOUGLASS: Figure 8, the cross sections. Oh, you've got that one. COMMISSIONER BABCOCK: I've got the big one. I need the more detailed one, Figure 5. ACTING CHAIRMAN DOUGLASS: The overall. I don't think that's Figure 5. MR. OPSTAD: Oh. COMMISSIONER BABCOCK: Right, that's Figure 5. MR. OPSTAD: This is just to carry this thought just a little bit further and go back to 20 AAC 25.0552, which this is just a little cad drawing of a typical section, and if -- the way the statute reads, of course, you have to have a 1,500 setback, and if you do that from all corners you end up with this little box in the center, which if you run the calculation amounts to only 18.65% of the total area. So in the total area you've got 27,878,400 square feet or 640 acres, but if you follow the 20 A -- AAC, that's a misprint there, AAC 25.0552, we're really limited to only 18.65% of the total or 5,198,400 square feet. Now of course in our opinion that's pretty silly because -- which goes to Mark Wittow's original comment about confiscation. It's our interpretation, really it's never the R & R COURT REPORTERS 810 N STREET 1007' WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 23 intent of the regulations to exclude this area, simply that if we got close to the border that we would offer our intentions to the offset owners and then proceed accordingly. One other point that ..... COMMISSIONER BABCOCK: Did you wish to enter that as an exhibit? MR. OPSTAD: Yes, I can enter this as Exhibit ..... ACTING CHAIRMAN DOUGLASS: 23. COMMISSIONER BABCOCK: 23. MR. OPSTAD: ..... 23. The last point in Ms. Jacobsen's letter I'd like to address is one concerning the material balance calculations that she submitted. Frankly, I haven't seen a copy of those -- of that calCUlation. I assume that they were submitted with her letter; is that correct? MS. JACOBSEN: We sent two letters on July 11. ACTING CHAIRMAN DOUGLASS: Yeah, that was another July 11 letter. MR. OPSTAD: Okay. MR. WITTOW: We haven't the received July 11 letter (indiscernible - away from microphone). MR. OPSTAD: Right. MR. WITTOW: Could I have a copy? I haven't seen it. MS. JACOBSEN: Yes, I think I have an extra R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274 - 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 24 copy that I can give to you. MR. OPSTAD: I think now that everybody has copies, I hope we can proceed. Well, as I mentioned, I haven't had a chance to review the calculations or the basis for those calculations, but I don't think it's ..... MR. WITTOW: MR. OPSTAD: It didn't arrive. I don't think that that's going to really have any bearing on what I'm going to say here. The ARCO sites that they've calculated a drainage radius for the well, I assume this is the 212-18 well, which is the closest well to the Z-Energy acreage, and determined that that drainage radius for material balance is 16 -- 1,690 feet. I guess I can't dispute that without reviewing their calculations and how they approach the problem, but I can say that the interesting thing about material balance calculations and drainage radiuses is just theory. It's a way to get back into the volume, but it doesn't tell you anything about what that volume may look like. In fact, the Beluga River Formation, that's all this refers to, by the way, is the Beluga River Formation. It doesn't talk about the Sterling at all. But I guess that's because the Sterling hasn't been completed in that well, nor does it really address the issue about you have multiple sands and so you're really taking an average of multiple sands. And these are -- Beluga River's are channels, R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 25 and channels aren't circles, they don't have a radius to them really, they're like channels. We've all been fishing, we know what channels look like. So the point I'm trying to make is that you can't conclude, as ARCO has, that they're not draining Section 12, which is Z-Energy acreage. The only way you could possible draw that conclusion is that if you introduced some rational geologic elements into this type of model, and that hasn't been done. So I just want to point out that the conclusion here that they haven't shown us the Beluga River Unit as not draining Section 12 is technically flawed. So I guess just to wrap-up, I'd like to sort of review what we've seen -- what ARCO's position might be technically and what ours has been. In general, ARCO has failed really to address the interformational characteristics and production behaviors, the differences between the Sterling Formation and the Beluga River Formation. They've cited a memo that I did in '93 and some maps several times that really only refer to the Sterling, and largely ignored reference to the Beluga River Formation which constitutes a significant portion of the production from the Beluga River Field, and is in fact one of our principal targets for the north Beluga River 12-2 location, which is the subject of this hearing. The material balance business I've already discussed, and R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 found that flawed because it doesn't address any geometric issues. ARCO's claim that their simple structural closure that defines the extent of the various pools that compromise the Beluga River accumulation, but -- and in doing so has chosen to ignore a wealth of other evidence that suggests that there are other elements, perhaps, structural and stratigraphic which control gas distribution throughout the area. Some of these things are drainage patterns, surface lineaments, radical differences in the pay distributions from well to well within the Beluga River Field itself, significant differences in well performance. ARCO has the seismic data to acknowledge this over the area, but it has failed to submit any of this to support their arguments. In fact, if we look at the exhibits that have been submitted over the course of the hearing, ARCO's relied mostly on Z-Energy exhibits and, frankly, they haven't really submitted or they've only submitted very limited original work on their part. It's a good tactic but I would have thought that from a large company they would have been able to provide something more substantive. ARCO has argued that the State of Alaska regulations only allow the lease holder to explore for gas on slightly more than 18% of each governmental section. And I've seen this when gas has been discovered on an adjacent tract. Somehow this doesn't R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274 - 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 27 really seem logical to me as a outside observer or an inside player, and if that were the case that, as Mark Wittow said, would amount to confiscation of a significant portion of the lease, and furthermore it would seem to me that we should only be -- if that were the case we should only be paying fees for 18% of the acreage instead of the entire 640. ARCO seems to claim that even if gas is discovered by the north Beluga River well 12-2 that Z-Energy may not be entitled to integrate its acreage into the Beluga River Unit, even though the well would be producing gas from both Z-Energy and unit acreage from common pools. We -- you know, we think quite differently. We think that in that type of case that the intent of the regulations is to prevent waste, unnecessary construction of facilities, pipelines, environmental disruption and so forth, and that in fact the intent of the regulation is to encourage, if not force the parties under those types of circumstances to combine and integrate their interests so as to best serve the interests of not only the property holders but also the State of Alaska. And I think that pretty much concludes what I have to say. I'd be happy to answer any questions. ACTING CHAIRMAN DOUGLASS: Any questions? COMMISSIONER BABCOCK: I have one question about the reliance you would place on seismic data. If you had it available to analyze do you suspect that that seismic would R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 28 demonstrate to you whether or not in fact a fault existed that would confirm or fail to confirm your fear that drilling 300 feet and 1,200 feet from where you're proposing, which would fall within the spacing regulations, would fall on the right side of a fault or not? MR. OPSTAD: I think the best way to answer that is to refer back to some conversations that Kerri Thompson and I had in the last hearing, and they were very brief, but we were discussing that, and I asked Kerri if given the vintage of some of the seismic in the area if she found it difficult to see some faults, and she agreed that that was a problem. Now ARCO has some -- they claim to have seismic that was shot in 1993, and that could be technically qUite goOd. We don't know unless we actually looked at it. But we're also facing the problem that, as I mentioned earlier, these are strike slip faults. COMMISSIONER BABCOCK: Excuse me. Since you're under oath, you just testified that Kerri Thompson said that the seismic -- the vintage of the seismic data led her to agree with you that it caused a problem in making the testimony that she did? MR. OPSTAD: Yeah, that was previous testimony. We had a brief conversation to that effect, as I recall. I don't have the transcript to review in front of me, but I believe that was her response. Even if it were not, I can say R & R COURT REPORTERS 810 N STREET 1007 NEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 29 myself that older seismic is difficult to interpret in the Cook Inlet Basin, as a general rule. Also, getting back to the nature of the faults, a lot of these faults are strike slip faults, and a strike slip fault can move a reflector, of course, on strike, and without significant dip component you're not juxtaposing anything, you don't have any contrast in your reflectors. So if you look at something in terms of a time slice, it's very difficult to see them because you're moving a reflector along on strike and not displacing it. So it would -- in my opinion it would be difficult to, if not impossible, to resolve a strike slip fault in this type of environment where you have very large sand piles, very large clastic sections and oftentimes not the best reflectors in the world to see. So in my opinion the presence of -- or the availability of seismic might provide some additional insight, but on the other hand it might not. COMMISSIONER BABCOCK: Thank you. The other question, and forgive me if I'm a little ignorant about this, but if I understand your testimony the Burglin well, you believe, had gas shows in the Sterling but not in the Beluga or was it not tested or there was no evidence collected about the Beluga interval? MR. OPSTAD: The Beluga -- first of all, none of the gas -- there was no testing done in X-33 at all. We do have shows in the -- gas shows in the Beluga section of X-33. R & R COURT REPORTERS 810 N STREET 1007 NEST THI'RD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 If I can perhaps provide an example of that in just a moment. (Pause) COMMISSIONER BABCOCK: Well, I'm confused. I thought earlier today you testified that there were shows in the Sterling but not in the Beluga. MR. OPSTAD: The shows in the Beluga are very limited. This is -- we identify this as Exhibit ..... COMMISSIONER BABCOCK: This wasn't in that other document ..... MR. OPSTAD: No. COMMISSIONER BABCOCK: ..... submitted? MR. OPSTAD: No, no. This is ..... COMMISSIONER BABCOCK: That's Exhibit 24 then. MR. OPSTAD: ..... Exhibit 24, this is a section of the mud log from X-33, and what we're seeing is a big gash at about 4,800 feet or thereabout, 4,850. It's off scale so it's over 10,000 units, which is basically 100% gas. We see the mud weight here was cut from 10.4 to 8.3 pounds per gallon, and it's difficult to see. Let me get it in focus. There we go. And ..... COMMISSIONER BABCOCK: And who prepared this log? 30 MR. OPSTAD: Huh? COMMISSIONER BABCOCK: Who prepared this log? MR. OPSTAD: This was the original mud log from R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 31 a mud logging company, and that's Petrotech Geologic Well Site Services. And this is public record here at the Commission. It's a standard mud log. So it also has no change in chloride, so this isn't a bunch of big influx of gassy water or anything like that; this is a pretty significant gas show, and you can see we've not only got Cls, but C2s and C3s there. But unlike the 12-18 well that has a rather extensive Beluga River pay section, the X-33 well had relatively few shows. We have this one that's on this particular exhibit, and then there are several other smaller ones underneath coals further up the section. But nothing like the 212-18 well which, according to the state records, has perforated from 4,960 down to 5,480 feet. So they were pretty extensive -- a pretty extensive gas section there. And this is all in the Beluga Formation. So we're just seeing differences between what the gross interval net pay section looks like in 212-18, which is on trend with the rest of the Beluga River production wells, and nearby to where Z-Energy wants to drill its well. And the old Burglin next to X-33 well which one could interpret either as being perhaps on the backside of a fault at that location and depth or perhaps subject to some sort of stratigraphic -- lateral stratigraphic variation which has restricted the occurrence of Beluga River Formation gas at that location. ACTING CHAIRMAN DOUGLASS: I have a question R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 05 72/F ax 274 - 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 32 regarding your statement on your strike slip faults, as you've characterized these, and that your displacement is essentially horizontal as opposed to vertical. Do you ..... MR. OPSTAD: Yes, that's correct. ACTING CHAIRMAN DOUGLASS: ..... what kind of -- if there is vertical displacement what magnitude would you characterize ..... MR. OPSTAD: It's really ..... ACTING CHAIRMAN DOUGLASS: ..... at all? MR. OPSTAD: It's really going to vary very significantly, place to place. The types of displacement that we see -- horizontal displacement that we see on some of these faults can be on the order of several miles. ACTING CHAIRMAN DOUGLASS: That's horizontal, correct? MR. OPSTAD: That's horizontal, whereas the vertical displacement is going to be on -- probably on the order of perhaps several thousand feet. So it's that sort of -- sort of relationship. Some of them may not have -- or may have very little dip component and be almost exclusively horizontal. ACTING CHAIRMAN DOUGLASS: Zero to a thousand feet? MR. OPSTAD: like to turn it back over to Mark. Uh-huh (affirmative). I guess I'd Do you have ..... R & R COURT REPORTERS 810 N STREET 1007 NEST THIRD AVENUE 277- 0572/Fax 274-8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 33 ACTING CHAIRMAN DOUGLASS: Yes, I conclude. MR. OPSTAD: ..... anything? ACTING CHAIRMAN DOUGLASS: Dave, would you have any questions at this point? COMMISSIONER JOHNSTON: Yeah, just one or two. Erik, just so I'm clear on this, why is it that you believe that you could not properly evaluate your lease if you were compelled to move your well to a location that would comply with statewide spacing rules? MR. OPSTAD: Because the play consists of two separate formations, the Sterling and the Beluga, and we feel that in order to properly evaluate the lease we need to pick a location where the optimal location for evaluating both of the formations simultaneously, and simply to reduce cost. We feel that there is significant -- we feel there is sufficient evidence to suggest that the Beluga River Formation is -- has a more complete pay section as one moves to the east, and so we've selected a location as far to the east as we can to provide the optimal location for evaluating what we feel is going to be the best and most complete pay section for the Beluga Formation. COMMISSIONER JOHNSTON: So you feel that your current location is more on top of the structure? MR. OPSTAD: That's correct, it's more -- the current location is on trend with other Beluga producing wells, R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274 - 8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 34 whereas the area in the center of the lease, the area where we have a 1,500 setback, is situated geologically in such a way as to probably preclude any real major accumulation in the Beluga River Formation. We don't understand why there's a difference between the 212-18 location in the Beluga and what we see in the X-33 well -- Burglin's X-33 well. But certainly we hope that by drilling the 12-2 location that we'll be provided with some additional information that will help us resolve some of those questions. COMMISSIONER JOHNSTON: And then you feel that being compelled to drill off to the -- despite their vie with statewide spacing would force you off the top of the ..... MR. OPSTAD: That's correct, it forces us off the top of the structure down-flank and move us toward an area where we have reason to believe that the Beluga River Formation is charged to a lesser degree than it might otherwise be to the east. COMMISSIONER JOHNSTON: You know, earlier -- this is a question I believe Mark Wittow raised. He indicated that if the Commission was to deny the drilling of this well at this location then that can possibly be construed as a taking. Did I understand that correct? MR. WITTOW: That was my point, that's correct. The purpose -- the reason there are exceptions to the spacing rules is so that in situations like this where drilling in the R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 35 center of the lease is not necessarily optimum for discovery of oil or gas, the lessee has the ability to essentially produce hydrocarbons from all of its lease, and sometimes leasing exceptions are necessary, and I think there have been a number of court decisions that have held that the reason spacing rules can exist is only in the presence of exceptions for situations like this where the lessee may have to drill closer to the section line in order to determine whether or not there's a hydrocarbon play. And I guess the net result of that is if you don't allow a spacing exception in a situation like this you're essentially taking part of the value or all of the value of the lease. The lease is 600 -- or the lease is actually more than 640 acres, but the lease goes out to the boundary, there's no -- there's no in between area where Z-Energy doesn't own. So not allowing them to drill into this part of the lease would constitute a taking of the lease. COMMISSIONER JOHNSTON: Mark, you must be further away from the telephone. MR. WITTOW: Yeah, and I realize I'm talking into the microphone like it's connected to the telephone. COMMISSIONER JOHNSTON: You came in quite broken on this end. But as a follow-up to that question, if you believe that denial of your location, that would require an exception to statewide rules could be construed as a taking then what purpose do you see in establishing the statewide R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 36 rules that require particular offset? MR. WITTOW: Well, the statewide rules, I think, are there to create a -- the presumption is that you should drill essentially in the center of a lease in the absence of some reason not to, to prevent, obviously, these kinds of situation from coming up. When there is a situation, there's a need to deal with the effects on the rights of people who are across the lease boundary, we don't deny that, and we've -- I guess Z-Energy has maintained all along that they're not going to drill their well and start producing gas as fast as possible and try and drain the Beluga River Unit, that's not what's going on here; they're simply trying to figure out if there's hydro- -- if there's gas on their lease. So the presumption is that you don't have to come in and get specific approval and notify all the adjacent owners if you're going to drill essentially in the center of your lease. Once you move beyond that you get into this kind of a context. That's -- so the fact that there are spacing rules, I think, is consistent with what I've said. COMMISSIONER JOHNSTON: So you see the statewide spacing rules as not necessarily a vehicle to permit drilling but more of a vehicle to those adjacent property owners on notice a well may possibly be drilled that may require an integration of interests if there are commercial quantities of hydrocarbons in it? R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 37 MR. WITTOW: I think the answer to that is yes. And I guess that I just want to emphasize that the definition of correlative rights -- you know, ARCO's referred over and over again to their correlative rights. Z-Energy's correlative rights are at stake here, too, and those include as defined in the Commission's statutes the ability to produce their equitable share of oil and gas from their entire lease, not just the part that's in the center of the lease. So I think in order to protect their correlative rights it's essentially the same thing as not to prevent taking of their property from occurring is the same as protecting their correlative rights; those are synonymous. COMMISSIONER JOHNSTON: Then I guess one last question. Have we established -- it was somewhat confusing for me initially because the conversations came over a little bit broken up here. Have we clearly established Z-Energy's standing in this matter now? MR. WITTOW: As far as I -- I see no reason that it's not clearly established. They have -- they are the assignee of the full working interest in the lease in question, and so I think they have full standing. COMMISSIONER JOHNSTON: Well, now Z-Energy is the owner of record? MR. WITTOW: Z-Energy is owner of record. COMMISSIONER JOHNSTON: And as owner you will R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 be the operator? MR. WITTOW: 38 Yes, they are -- they will be the operator. There's no operator agreement with anyone other than Z-Energy, and they will be the operator. ACTING CHAIRMAN DOUGLASS: And was that assignment offered into as an exhibit or as evidence? MR. WITTOW: Yes, it was attached -- I forget the exhibit number, but it's with my July 5 letter. COMMISSIONER BABCOCK: COMMISSIONER JOHNSTON: have no further questions then. Exhibit 16. Okay, very good. I MR. WITTOW: Okay. There's no reason -- I assume you want to continue with your testimony from ARCO, and I will, obviously, want to say something after that. COMMISSIONER BABCOCK: I did have one more question that's directed both to you and to ARCO. If -- without conceding anything, but if the Commission were to grant the exception what stipulations would you think the Commission would be wise to include in the order to protect the correlative rights of both Z-Energy and the neighboring owners? MR. WITTOW: I think it would be appropriate prior to production to basically require either an integration of interests or proceeding for forced unitization. ARCO has also raised the possibility of proration with an offset well, and that's certainly an option. I don't think it's one that R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 39 makes much sense, but the Commission could retain all three potential options, and I think it makes sense to come back and look at that question once a well has been drilled and there's been a determination of what hydrocarbons may or may not exist in the area. But I certainly think the Commission in the absence of a voluntary agreement would want to re-examine the question and it would not be -- Z-Energy does not expect, and I think under the statute, cannot expect to produce from this well without the Commission taking further action in the absence of an agreement among Z-Energy and ARCO, Chevron and Shell who own the Beluga River Unit. So I think it's -- your statutes already give you the stipulation which you need, which is essentially production requires either integration of interests on a voluntary basis or else another proceeding before the Commission to determine what's the fairest way to protect everybody's rights. COMMISSIONER BABCOCK: All right. Thank you. MS. JACOBSEN: Do I (indiscernible - away from microphone) Mr. Johnston? ACTING CHAIRMAN DOUGLASS: Did you have any further testimony? MS. JACOBSEN: We don't have any testimony. I've got a short statement. ACTING CHAIRMAN DOUGLASS: I think maybe we should get these two exhibits entered that you had and whatever R & R COURT REPORTERS 810 N STREET 1007' WEST THIRD AVENUE 277- 0572/Fax 274-8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 40 statement you want to make, and then we'll go into the cross, if that's all right with you. MS. JACOBSEN: Okay. Well, my statement was just more of a closing statement. ACTING CHAIRMAN DOUGLASS: Okay, well then we can save that till the end. COMMISSIONER BABCOCK: Ms. Jacobsen, you should probably come up so we can record this conversation. MS. JACOBSEN: Do you have only one microphone? COMMISSIONER BABCOCK: Yes. If you'll just slide over close to that one, I think it will pick you up. MS. JACOBSEN: Okey-doke. COMMISSIONER BABCOCK: Are we through with this thing? Maybe not. MS. JACOBSEN: As far as I'm concerned. COMMISSIONER BABCOCK: Okay. MS. JACOBSEN: So you just wanted me to introduce the two letters? ACTING CHAIRMAN DOUGLASS: Yeah, if we could get that out of the way and then we'll move on to questions. MS. JACOBSEN: Yes. We've got two letters. I believe they've already been designated ..... ACTING CHAIRMAN DOUGLASS: Yeah, we put them down as Exhibits 17 and 18, and those were two July 11 letters, R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 41 one signed, I think, by you, and one signed by Debbie Grove. MS. JACOBSEN: Good, okay. Do I need to -- it looks like Exhibit 17 is ARCO's July 11, 1994 letter to the Commission signed by Debbie Grove, and that had to do with the drainage radius ..... ACTING CHAIRMAN DOUGLASS: And the resumes. MS. JACOBSEN: And the resumes, yes. And Exhibit 18 is my letter to the Commission dated July 11, 1994, which is essentially the -- what I -- it's essentially what I would say, I guess, if at this point were I to read this letter. It's a summary of ARCO's position. So I don't really see any need to read on through this. I think the letter speaks for itself. ACTING CHAIRMAN DOUGLASS: Fine. MS. JACOBSEN: If that's okay with you folks. COMMISSIONER BABCOCK: Do you have a point of order, Mr. Wittow? MR. WITTOW: Yes, I guess I will just place a tentative objection to the drainage radius calculation letter in the absence of Ms. Grove herself testifying. We haven't had a chance to look at it, and I don't know that we have any questions or objections at this point, but I guess I'd like 10 minutes to look at it and determine whether we want to call Ms. Grove to respond to questions that we might have about what's in the letter. R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MS. JACOBSEN: That's fine. ACTING CHAIRMAN DOUGLASS: 42 If that's all right then maybe we could take a 15-minute break and come back. MS. JACOBSEN: Well, should we ..... ACTING CHAIRMAN DOUGLASS: Or do you want to go ahead and ..... COMMISSIONER BABCOCK: Mr. Acting Chairman, and at the end of ARCO's testimony. that all right, and then take the break and come back. finish ..... questions. Why don't we do that, Is You can MS. JACOBSEN: Okay. COMMISSIONER BABCOCK: And ask Mr. Opstad Then when that's finished we'll take a short break and come back and let Z-Energy make their final comment and let ARCO make their final comment. MS. JACOBSEN: Sounds good. I'm not going to give any testimony at this time because the letter that we just introduced would -- summarizes our position, and I would just be rehashing old ground if I were to repeat it. COMMISSIONER BABCOCK: I would note that ARCO did address my question in their letter. Do you have any additional comments to add to what we ought to include in our order ..... MS. JACOBSEN: No. COMMISSIONER BABCOCK: ..... if we were to R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 43 grant an exception? MS. JACOBSEN: We agree with your and Mr. Wittow's position. ACTING CHAIRMAN DOUGLASS: So you're going to go ahead and ask your questions now. MS. JACOBSEN: Yes. I guess I was just wondering, Mr. Opstad, you showed a bunch of -- you gave a lot of generalized discussion about faults but you didn't actually show us on your map where the fault would intersect the prospective horizon. I was wondering if you could do that. MR. OPSTAD: No, I can't, 'cause I don't have any three dimensional component to the fault. Where would I get that information? All I can do is perhaps draw some general assumption that it -- if that were a fault, if those are faults then they might have dips which are similar to other faults in the area which would be anywhere from 90 to 60 to 45 degrees, and we really can't say. Perhaps you could provide that on the basis of your seismic. MS. JACOBSEN: I guess I'd like to point out at this time that Z-Energy has the burden of showing why you need an exception location. ARCO doesn't have to ..... MR. OPSTAD: invent data, I'm sorry. MS. JACOBSEN: I can't invent data. I can't Well, I guess my next question is then why, if you can't put a fault on a map then why would R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 44 that fault necessitate that you drill at the exception location? MR. OPSTAD: I put a fault right there on the surface. MS. JACOBSEN: Where does -- but you can't, where does the fault intersect at the prospective horizon? MR. OPSTAD: I'm afraid I -- that's speculation. You have to know what the dip is. MS. JACOBSEN: So why does that information ..... MR. OPSTAD: You can say ..... MS. JACOBSEN: Why does that information then necessitate that you drill at the exception location if you can't even draw on your structure map? MR. OPSTAD: All I say is that I'm assuming it's vertical or it's dipping to the east and I don't want to drill on the west side of it. I want to drill on the east side of it which necessitates the NBR 12-2 location rather than the 1,500' setback. MS. JACOBSEN: So you could -- see, I'm having trouble here. I don't know where the fault -- well, I just don't believe you've demonstrated that the fault, if it exists ..... MR. OPSTAD: Well, we've perfectly demonstrated it on the available information. You can provide additional R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 45 information or we can speculate, but I'm afraid that's the information, and based on what we have we can't go any further than this. (Pause) location yet? MS. JACOBSEN: Have you folks picked a surface MR. OPSTAD: No. MS. JACOBSEN: That's all the questions I had. ACTING CHAIRMAN DOUGLASS: All right. MR. WITTOW: I've got one redirect question. ACTING CHAIRMAN DOUGLASS: Mr. Wittow. MR. WITTOW: Mr. Opstad, is it your opinion after looking at the geologic data that the unit is located -- the drilling unit, in this case the section, Section 12, is it located partially outside the Beluga River Unit pool? MR. OPSTAD: Yes, one of them at least. MS. JACOBSEN: Can you show it on a map? Can you show it ..... MR. WITTOW: Excuse me. MS. JACOBSEN: ..... on your (indiscernible) map? redirect? MR. WITTOW: Excuse me. COMMISSIONER BABCOCK: Do you have any more MR. WITTOW: No. R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 46 COMMISSIONER BABCOCK: Referring to Exhibit 15 -- may I ask a question? You were going -- Exhibit 15, the Burglin well appears to be -- has been drilled on the same side of the general fault that you've drawn on this aerial photograph as the well you're now proposing to drill? MR. OPSTAD: That's basically a straight well, and we -- we're interpreting some dip to the east on that feature. So as you go down to the top of the Sterling, which would be the first productive horizon that would likely be encountered, that fault of course moves to the east, that surface, so that the Burglin well would actually be located on the western side of that fault at depth. ACTING CHAIRMAN DOUGLASS: So if I could just clarify there, going to Rosanne's questions and your response, that you are assuming or maybe not assuming but taking the worst case scenario that that fault is dipping to the east and therefore to keep from penetrating that fault and ending up on the west'side of that fault, you're proposing an easterly location or bottom hole location in hopes of not encountering that worst case scenario. Is that ..... MR. OPSTAD: Precisely correct. ACTING CHAIRMAN DOUGLASS: ..... essentially what you're looking at? MR. OPSTAD: Precisely. ACTING CHAIRMAN DOUGLASS: Okay. R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 COMMISSIONER BABCOCK: questions of Mr. Opstad? MS. JACOBSEN: No. for ARCO. 47 Do you have any further COMMISSIONER BABCOCK: I have one more question Do you feel any certainty to be gained by submitting the seismic information or do you agree with Mr. Opstad that it would still leave room for debate to whether or not there is faulting that would justify his surface fault on the map and his instinct? MS. JACOBSEN: I guess it would -- well, first of all I'd like to point out that the site for it -- Kerri Thompson testified that she saw no faults in Section 11 and 12 and that she has 1993 data over the Beluga River Unit, and that's on the transcript at page 141. Like I said last time, I'd be happy to provide the Commission with any and all of our seismic data. Of course it's our proprietary data and we'd prefer not to show that to Z-Energy. They can shoot their own seismic certainly if they feel that it would bolster their position. COMMISSIONER BABCOCK: Right. Well, given that Z-Energy testified that it would not -- it might not be definitive, I don't see any need at this time to require ARCO to submit that information. MS. JACOBSEN: Well, I would guess it might not be definitive. I would say the seismic would give you your R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 48 best view of what the subsurface geology shows. That's 1993 data, it's good data. And so nothing is ever definitive certainly, but the seismic data would give you your by far the best view of what was going on subsurface absent a well bore at the specific location. ACTING CHAIRMAN DOUGLASS: But there would still be quite a bit of interpretive leeway, let's say, in regard to -- I mean two different people would not necessarily come up with the same answer from the same seismic data. MS. JACOBSEN: I don't think you could ever say that. It would depend on -- I mean you could never say no. Two people would never look at the same seismic data and come up with different interpretations, but depending on the area, I -- well, I would say you could duplicate interpretations, and depending on the area. Kerri's not here today to testify to that, so I'm not sure how to go any further. COMMISSIONER BABCOCK: That answered my question. Thank you. ACTING CHAIRMAN DOUGLASS: Dave, would you have anything to add? COMMISSIONER JOHNSTON: No. I was having a somewhat difficult time following that exchange. It sounds like ARCO was suggesting that we look at their seismic data? COMMISSIONER BABCOCK: No, not exactly. They were just suggesting -- reiterating their testimony at the R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 previous hearing. COMMISSIONER JOHNSTON: 49 Right, okay. Yeah, I just want to be clear on that. If ARCO wants to submit seismic data we could certainly look at that but we could not exclude Z-Energy from that session. COMMISSIONER BABCOCK: My line of questioning, Mr. chairman, was just designed to see whether or not requiring ARCO to submit that ..... COMMISSIONER JOHNSTON: COMMISSIONER BABCOCK: Right. ..... information would lead us to both parties arguing that that would be definitive, and since it's not, I would not move to do that. ACTING CHAIRMAN DOUGLASS: Well, if there's nothing further, shall we take 15-minute break, allow Z-Energy to take a look at Ms. Grove's calculations, and then we'll come back and hear what they have or whatever questions they have there and any closing statements then. COMMISSIONER JOHNSTON: I certainly think that would be appropriate. ACTING CHAIRMAN DOUGLASS: Great. Let's see, it's about 10:30 right now, so about 10:457 COMMISSIONER BABCOCK: We'll just put you on hold. COMMISSIONER JOHNSTON: Okay. ACTING CHAIRMAN DOUGLASS: I'll put you on hold R & R COURT REPORTERS 810 N STREET 1007' WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 and we'll go back to your office. COMMISSIONER JOHNSTON: 50 (Off record - 10:26 a.m.) (On record - 10:45 a.m.) ACTING CHAIRMAN DOUGLASS: Very good. I guess we're all here. We'll go back on record now and reconvene this hearing. Unless there's any further questions from ARCO or Z-Energy -- Mark? MR. WITTOW: Z-Energy has had the opportunity to examine the letter of Ms. Grove, and I guess there's one thing in the letter that I would like to ask Mr. Opstad a brief question about to clarify Z-Energy's interpretation of the statement that's in the letter. ACTING CHAIRMAN DOUGLASS: Proceed. MR. WITTOW: Mr. Opstad, you've reviewed the letter from Debra Grove to the Commission. It's dated July 11, containing drainage radius calculations for BRU 212-18. The letter contains a statement at the end that states that "Assuming a cylindrical shaped reservoir, an equivalent radius required to contain the estimated reserves is..." and then provides a formula calculation. In your opinion, is it fair to assume that this is a cylindrical shaped reservoir? MR. OPSTAD: No. MR. WITTOW: And if that assumption is not correct, in your opinion, is there any danger that production R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCIJORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 51 from this well or other wells, for that matter, in the Beluga River Unit have the potential to drain Z-Energy's lease? MR. OPSTAD: Yes, there's a potential area. It would, of course, depend on the -- these are primarily channels, and so it would depend on the orientation of the channel and so forth, but there is the potential that the well could drain gas from Z-Energy's lease. MR. WITTOW: No further questions. COMMISSIONER BABCOCK: Any questions from ARCO? MS. JACOBSEN: No, thank you. ACTING CHAIRMAN DOUGLASS: I have a couple of quick questions for Erik regarding the fault which would be on Exhibit 15, and this is the fault that essentially passes through the Burglin location, essentially, and based on if I'm reading this right, your assumption that it dips there to the east then the Burglin well -- based on that assumption the Burglin well would have penetrated that fault, possibly very near the surface. Can you tell me if you've looked for that, and if so what kind of -- I mean in the well logs, et cetera, for the Burglin well, what kind of conclusions or evidence may be available regarding the existence of that fault? MR. OPSTAD: Yeah, the way we have this drawn out one would have to conclude that the well did penetrate the -- would have penetrated the fault very, very near the surface. Those are all, quote, tertiary (ph) surface gravels, they're R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 52 unconsolidated, very little differentiation. It would be virtually impossible to see the fault in that type of depositional environment. ACTING CHAIRMAN DOUGLASS: So that's probably not a good evidentiary thing then? MR. OPSTAD: No, I'm afraid it wouldn't really offer any help. ACTING CHAIRMAN DOUGLASS: You would not be able to find it or did you even look for it or ..... MR. OPSTAD: Yeah, we did look. We did look for it and we -- if there were a lot of well control we might be able to unravel that even at that shallow depth and in that particular depth environment, but with only one point, no seismic data and the nature of the sediments, no, it would be very difficult to draw any sort of conclusive opinion on whether you could actually see the fault on the logs in the well bore. ACTING CHAIRMAN DOUGLASS: I don't have any further questions. Tuckerman? COMMISSIONER BABCOCK: No, no further questions. I'd just recommend leaving the record open briefly in case there's any further comment from either party. ACTING CHAIRMAN DOUGLASS: Dave, would you haVe anything further? COMMISSIONER JOHNSTON: No, I don't have any R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274-8982 272 - 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 further questions. ACTING CHAIRMAN DOUGLASS: Mark, do you have something? MR. WITTOW: don't know if Rosanne ..... 53 Do we want to -- I have a closing statement, and I ACTING CHAIRMAN DOUGLASS: Okay, before we get to the closing statements I was wondering if there was a motion or someone wanted to make a motion to make the following post-hearing briefs or a discussion on how long we'd like to keep the record open, if there's some reason to get the transcript or whatever so we can close this out. MR. WITTOW: I guess the only comment Z-Energy would like to make is just that we're entrusted to try to get a decision as fast as possible. We're more than willing to submit post-hearing materials but I guess I don't know what else the Commission is looking for. COMMISSIONER BABCOCK: We haven't requested any. ACTING CHAIRMAN DOUGLASS: No, we're just looking for a recommendation. If I hear you right the recommendation is not to file post-hearing briefs. MR. WITTOW: We would be satisfied with leaving the record in the state it is. ACTING CHAIRMAN DOUGLASS: Okay. Any comments from ARCO? R & R COURT REPORTERS 810 N STREET 1007 NEST THIRD AVENUE 277- 0572/Fax 274-8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 54 MS. JACOBSEN: We don't need the record to stay open. (Indiscernible - away from microphone) ACTING CHAIRMAN DOUGLASS: All right. Then we'll go into closing statements and we'll close it out. Mark, you're going first. MR. WITTOW: This will be brief. As I noted at the beginning, Z-Energy is willing to spend over $2 million to drill a well on its lease, but in order to protect its correlative rights -- in other words, to insure that it has the most chance of producing oil and gas or gas from its lease, it does require a spacing exception, and through the testimony of Erik Opstad, Z-Energy has shown that an exception is necessary and that testimony really consists of information on both the faulting in the area and also the differences between the X-33 exploratory well and the Beluga River Unit well 212-18. Based on that information it's Z-Energy's belief that it needs a spacing exception in order to have a reasonable likelihood of discovering commercial quantities of gas. ARCO's evidence in opposition to the evidence offered by Mr. Opstad is not credible. The testimony was not supported by directly relevant evidence such as seismic data which was available to ARCO and as a matter of administrative law the testimony of Kerri Thompson can't be relied upon by the Commission to reach its decision in the absence of ARCO submitting the seismic data for examination by Z-Energy and the R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274- 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 55 Commission. I think Ms. Thompson can't testify about data that other people can't see and expect to have the data carry any weight in an administrative proceeding. If Z-Energy can't drill on the most prospective part of its lease, ARCO and the Commission will essentially have taken the large part of the value of Z-Energy's lease without compensating it, and ARCO will have achieved in a Commission proceeding what it couldn't do in a lease sale, which is to acquire the lease in effect without having successfully bid for it. Strictly applied, the spacing exception limits Z-Energy to less than 20% of the area of its lease, and that's why the exceptions are available under both the regulations and statute. The exception is consistent with AS 31.05.100(b). This drilling unit lies partially outside the Beluga River pool, as the testimony of Erik Opstad showed. It's consistent with the Commission's overriding mandate to protect correlative rights. Z-Energy is more than willing to work with the adjacent leaseholders, ARCO, Chevron, and Shell, to protect everyone's correlative rights, and it will continue to do so, but it needs to have the ability to drill where it thinks hydrocarbons are most likely to be found in order to protect its own correlative rights. That's all. ACTING CHAIRMAN DOUGLASS: Thank you. R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/Fax 274 - 8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Ms. Jacobsen. 56 MS. JACOBSEN: I guess the first thing I'd like to say is now that Z-Energy has raised the issue that Kerri Thompson's testimony should be stricken, maybe we do need the record to be kept open. Mr. Wittow said as a matter of administrative law that her testimony should be stricken because she couldn't -- because we did not supply the seismic data. I haven't seen any authority -- we -- it's an important point to us. We ..... MR. WITTOW: If I can just respond to that briefly. I don't think we need to keep the record ..... COMMISSIONER BABCOCK: If you'd wait until she's through with her concluding statements, you can both throw whatever barbs you feel warranted. MS. JACOBSEN: Also regarding the drainage radius, I'd just like to point out that Mr. Opstad testified last time at the transcript, page 117, that a 1,500 drainage radius was reasonable in this area, and this shows that their well if successful will drain the Beluga River Unit. Regarding the taking argument, the regulation does not prohibit Z-Energy from producing all of the reserves on its lease; it just prohibits Z-Energy from locating that well so that it produces reserves from adjacent leaseholders. So I don't think there's any taking at all. The regulation just shows where the well may be placed, it doesn't say that you R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 57 cannot produce reserves up to your lease line. Also just a small point. If an exception location is granted, we'd also want to see a standard logging suite, density neutron and sonic log and RFT pressures and production tests at all prospective intervals. In sum, Z-Energy has the burden of showing that an exception location is required. They've shown a lot of theories about regional faults but they refuse to put any faults on a structure map at the prospective horizon. They haven't shown that the fault, if it exists, even intersects the perspective horizon. They haven't shown why the fault necessitates an exception location. They haven't shown why 300 feet is required as opposed to 400 feet or 500 feet. Z-Energy's previous mapping and statements indicate that gas fills Section 11 and 12. And last time Mr. Opstad admitted that there are some -- that there may be some locations 1,500 from the section line which may be productive. That's also at the transcript on page 117. In sum, we just don't believe that Z-Energy has met its burden of proof. Thank you. COMMISSIONER BABCOCK: Thank you. ACTING CHAIRMAN DOUGLASS: Do we want to get into the -- I mean I didn't hear Mark saying that ..... MR. WITTOW: If I could just clarify. I think what I said was ..... ACTING CHAIRMAN DOUGLASS: ..... the testimony R & R COURT REPORTERS 810 N STREET 100'? WEST TH~'RD AVENUE 277-0572/Fax 274-8982 272-7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 58 could be stricken. MR. WITTOW: ..... under standard rules of administrative law, which I don't think are really worthy of further discussion, hearsay evidence is not generally accepted as reliable for the basis for a decision of an administrative agency. I don't think the point needs to be developed any more. The Commission is aware of what Ms. Thompson said and can give it whatever weight it decides it needs to give it, and I certainly didn't ask that the testimony be stricken. MS. JACOBSEN: Well, I would argue it's not hearsay. It was her own expert testimony after reviewing the seismic data. And if there's a question in the Commission's mind as to the weight that you're going to afford Ms. Thompson's testimony, then maybe we do need to do some briefing on that. MR. WITTOW: I would say, I guess, just in response, ARCO has made its decision not to submit that evidence to the parties in the case, and it's -- we ask for it repeatedly, both at the first hearing and now, and it's too late. COMMISSIONER JOHNSTON: Z-Energy can shoot its own seismic data. This seismic data is proprietary data. MR. WITTOW: No dispute with that. COMMISSIONER BABCOCK: I don't see any reason to leave the record open. R & R COURT REPORTERS 810 N STREET 1007 WEST THIRD AVENUE 277- 0572/F ax 274-8982 272- 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 59 ACTING CHAIRMAN DOUGLASS: I don't either at this point unless that's what everybody wants. COMMISSIONER BABCOCK: I don't. ACTING CHAIRMAN DOUGLASS: We've had testimony and they're not saying it should be stricken, it's just a matter of weight, I guess, and we'll just have to deliberate on that unless there's something further that ARCO or Z-Energy would wish to put forward. COMMISSIONER BABCOCK: I move we adjourn. COMMISSIONER JOHNSTON: Do I get a second, Dave? COMMISSIONER JOHNSTON: ACTING CHAIRMAN DOUGLASS: this and close the record as of now. (Off record - 11:02 a.m.) (END OF PROCEEDINGS) · , ~ , · · Yeah, I concur. Then we'll adjourn R & R COURT REPORTERS 810 N STREET 1007' WEST TH~'RD AVENUE 277- 0572/Fax 274- 8982 272 o 7515 ANCHORAGE, ALASKA 99501 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 CERTIFICATE UNITED STATES OF AMERICA) ) ss STATE OF ALASKA ) I, Laurel L. Kehler-Evenson, Notary Public in and for the State of Alaska, residing at Anchorage, Alaska, and reporter for R & R Court Reporters, Inc., do hereby certify: THAT the annexed and foregoing Public Hearing of the Alaska Oil and Gas Conservation Commission, Volume II, was taken before me on the 12th day of July 1994, commencing at the hour of 9:00 o'clock a.m., at the offices of the Alaska Oil and Gas Conservation Commission, 3001 Porcupine Drive, Anchorage, Alaska, pursuant to Notice; THAT this Transcript, as heretofore annexed, is a true and correct transcription of the testimony given at said Public Hearing, taken by me and thereafter transcribed by me; THAT the original of the Transcript has been lodged with the Alaska Oil and Gas Conservation Commission, 3001 Porcupine Drive, Anchorage, Alaska; THAT I am not a relative, employee or attorney of any of the parties, nor am I financially interested in this action. IN WITNESS WHEREOF, I have hereunto set my hand and affixed my seal this 18th day of July 1994. o ary Public in and for Alaska My commission expires: 10/20/94 R & R COURT REPORTERS 810 N STREET 1007 WEST TH[RD AVENUE 277- 0572/Fax 274-8982 272- 7515 ANCHORAGE, ALASKA 99501 PRESTON GATES & ELLIS ATTORNEYS June 10, 1994 Russ Douglass, Commissioner Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 Z-Energy's Request for Spacing Exception NBR No. 12-2 Cook Inlet, Alaska Dear Commissioner Douglass: I am writing on behalf of our client Z-Energy, Inc., to respond to the question contained in your letter of June 1, 1994, in which you requested testimony concerning "any legal standards or approriate precedents that the commission should consider prior to rendering a decision in this matter." This letter responds to that request. The commission is generally charged with promoting the conservation of oil and gas and the prevention of waste. AS 31.05.030(b), As 31.05.030(e)(3), AS 31.05.095. The commission also is charged, in statutory provisions not directly relevant to the location of an exploratory well, "to protect and enforce the correlative rights of lessees in a pool" (AS 31.05.100(a) and "to insure a greater ultimate recovery of oil and gas" (AS 31.05.110). The protection of correlative rights is a Primary function of oil and gas conservation statutes. The commission's statutes define correlative rights as ... the opportunity afforded, so far as it is practicable to do so, to the owner of each property in a pool or property in a pool to produce without waste the owner's just and equitable share of the oil or gas, or both, in a pool ... substantially in the proportion that the quantity of recoverable oil or gas, or both under the property bears to the total recoverable oil or gas or both in the pool AS 31.05.170(2). Under its guiding statutes, the commission has adopted regulations that establish certain rules for the spacing of wells and provide it with the discretion to issue exceptions to those SUITE 400 420 L STREET ANCHORAGE, ALASKA 99501-1937 PHONE: (907) 276-1969 FACSIMILE: (907) 276-1365 COEUR D'ALENE · LOS ANGELES ° PORTLAND ° SEATTLE ° SPOKANE · TACOMA · WASHINGTON, D.C. A PARTNERSHIP INCLUDING A PROFESSIONAL CORPORATION requirements. The exception provision is a fundamental aspect of the spacing provisions -- without it, the spacing requirements could, in situations such as this, result in an unconsitutional confiscation of property. See, e.g., Imperial American Resources Fund v. Railroad Commission of Texas, 557 S.W.2d 280, 286 (Tex. 1977) (citing cases); Chevron Oil Co. v. Oil and Gas Conservation Com'n, 435 P.2d 781, 783 (Mont. 1967); see also State v. Jarmon, 25 S.W.2d 936 (Tex. Civ. App. 1930). Contested exceptions to the spacing regulation should be granted when "the exceptions are necessary to prevent waste or confiscation of property." Imperial American, 557 S.W.2d at 286. As a leading treatise states with regard to well spacing exceptions, "[g]enerally, an exception location may be approved when it is necessary to prevent waste or to prevent inequity or loss of property rights .... "B. Kramer & P. Martin, Pooling and Unitization § 5.02[s] at 5-58 (1992). Such circumstances include "the structural necessity of a bottom-hole location near a property line for the owner to have the opportunity to produce a fair share of the oil or gas on the property." Id. at 5-63. In Texaco, Inc. v. Railroad Commission of Texas, 716 S.W.2d 138 (Tex. Civ. App. 1986), the commission approved and the court upheld TXO's contested exception application to allow drilling closer to the boundary line. In upholding the exception, the court noted that "[t]o complete a profitable well (one which would cover drilling costs), TXO would need to drill closer to the Section Nine boundary line than the ordinary spacing rules would allow .... " Id. at 140. Z-Energy is seeking permission to drill an exploratory gas well. By definition, it is testing an area whose potential to produce gas is uncertain. To prevent waste and protect its correlative rights, Z-Energy should have the ability to drill a well in the location on its lease where it believes it is most likely to encounter gas. If Z-Energy encounters gas, the commission subsequently may consider how the discovery is related to the adjacent Beluga River Unit. But until a well is drilled, and drilled into the most prospective part of the lease, the existence of any gas on the Z-Energy lease cannot be determined. Denying Z-Energy's request for a spacing exemption would have the effect of causing waste and failing to protect its correlative rights. Denying the exception would force Z-Energy to drill in a location whose potential for the discovery of gas is reduced and would reduce Z- Energy's ability to produce any gas on its lease. Given the exploratory nature of its well, Z- Energy is unaware of any possible valid objection that may be made by the owners of operators of the adjacent Beluga River Unit. By definition, an exploratory gas well located outside the unit boundaries cannot cause waste or interfere with the correlative rights of those parties. Z-Energy also notes that the commission's well spacing regulation appears to impose no limit on the bottomhole, as opposed to surface, location of an exploratory well. Compare 20 AAC 25.055(a)(2) ("the surface location for a well exploring for gas must be at least 1500 feet from the drilling unit boundary') with 20 AAC 25.055(a)(4) ("where gas has been discovered [no] gas pool [may] be opened to the well bore closer than 1,500 feet to any section line ..."). Nonetheless, Z-Energy seeks an exception to ensure that any potential question concerning its bottomhole location is settled and to enable it to place the surface of the well in the most economical permitted location. Page 3 June 10, 1994 CC: Please let me know if you have any further questions. Sincerely, PRESTON GATES & ELLIS By: ': .,,, ~ 7/' Mark H. Wittow Commissioner Johnston Commissioner Babcock J. Patrick Foley Joe Dygas Mike Kotowski Mike Shook Corey Woolington E. A. OPSTAD & ASSOCIATES Geoscience · Engineering. Project Management 3500 Taiga Ddve (99516) P.O. Box 190754 Anchorage, Alaska 99519-0754 Telephone/Fax* (907) 345-6346 Vita Erik A. Opstad, as. MS l[Summaryof Skills & Experience · Geologic and engineering consultant with 17+ years experience spanning a wide spectrum of petroleum, mininG, and environmental projects. ,, · Extensive project management experience including: supervision of field operations, basic research, property valuation, contract and agreement negotiation, budget administration, joint venture relations, and coordination of related legal support. Experienced in writing applications and obtaining vadous permits including: drilling, flare, sundry, operations, potable water supply, waste water injection, solid waste landfill, fuel bum, fire safety, right-of-way easements and access, land use, communications licensing, and facilities operations. Extensive experience in resource related litigation. Served as an Expert Witness on ownership equity issues before arbitration panels and for Unitization, P, ool Rules, and environmental issues before various state commissions. Presented landowner positions in public hearings. Supported responses to IRS audits. Negotiated farm-in, Unit operating and land use agreements. Designed and supervised construction of facilities including:' gravel pads, roads, potable water supply and septic systems, flowlines and manifolding, product pipelines, emergency shut-down safety systems, comDuter~zed metedng systems. gas separation and dehydr3tion facilities, test loops, fire safety, microwave telecommunication systems, solid waste disposa~ ceils and site security Design and supervised various exploration and development programs oil, gas. anal minerals. Evaluations have included: seismic surveys, aedal and satellite image analysis, exploration and development drilling, magnetic and gravimetdc surveys, soil and stream geochemical surveys, surface drainage and ground water evaluations, Conducted environmental assessments at spi'l~ sites an(: served as (~uality assurance officer for clean-up operations. Familiar with a number of computer operating systems and platforms. Experienced with all major software categories including: word processing, spreadsheets, presentation graphics, CAD, project management, re~atior~al data base, electronic data transfer, and numerous specialized technical engineering ape~ications, suct~ as seismic processing, well log analysis. well test evaluations and reservoir simulation. ~Project Summary - E. A. Opstad & Associates (1986 - Present) Weller 1-1 Develop geologic and engineering aspects of Bounde Creek prospect in northem Califomia. Advise investment group on participation. Monitor ddlling and serve as on-site representative at casing election point. Design completion plan and step-by-step operational proceedures for well. Advise owners on testing objectives and procedures. (1994) Hanson #7 Ddlling Proiect Negotiate data trade with off-settling operator. Evaluate newly acquired seismic and well control data to evaluate prospect dsks and select bottomhole location. Calculate net present value of dsk weighted Monte Cado reserves. Coordinate partner relations and represent owners dudng ddlling operation. Provide oversight on well testing and completion. Monitor well performance. (1993/94-) West McAurthur River Evaluation Evaluate data from West McAurthur River Unit #2 for investors. Calculate net pay and forecast probable production rates. Advise group on medts of additional investment opportunities offered by the operator. (1993) NORM Disposal Develop technique to remediate NORM contaminated sites. Acquire necessary equipment. Write project plan, quality assurance procedures, sample analysis program, and health and safety plan. Develop budget. Coordinate ADEC compliance. Serve as Project Manager and on-site operations coordinator. Wdte report and coordinate formal site closure. Coordinate material transportation and disposal. (1993) Property Evaluation Evaluate certain Cook Inlet oil and gas interests for client. Write engineering and geologic summary reports. Run reservoir simulation and reserve forecast. Support integration of interests and correlative rights negociations with offsetting Unit. Represent lease owners before Alaska Oil and Ga~ Conservation Commission. (1993) Hanson #6 Ddllinq Proiect Evaluate Hanson #6 drilling project for investment group. Negotiate farm-in, operating and participation agreements with operator. Coordinate project for investment group. (1993) Bankruptcy Property Evaluation Evaluate value of certain resource interests held by debtor in the Cook Inlet and various areas of the North Slope in conjunction with bankruptcy proceedings. Determine net present value of assets and assign fair market value to property. Consult on asset acquisition. (1993) West Fork Field Reservoir Study Evaluate West Fork reservoir for Client. Build and run Monte Carlo simulation to determine volumetric gas reserves. Compare and contrast with early depletion trends. Evaluate future development requirements. Evaluate discovery well production problems. Specify workover and recompilation program options. Generate detailed report with recommendations. (1992) Funny River IRS Audit Provide technical support for Client responding to IRS audit related to certain land and resource holdings. (1992) West Fork Telecommunication System Wdte specifications for West Fork field microwave telecommunication system. Analyze proposed microwave path for topographic clearance. Issue equipment purchase orders and construction contracts. Secure FCC license. Supervise tower construction and equipment installation. (1992) Tract Interest Inteqration Negotiate interest integration of federal tract with private landholder interests. Assist with finalization and execution of agreement with BLM and US Fish and Wildlife Service. (1992) Endicott Reservoir Evaluation Evaluate effectiveness of formation evaluation services provided by several vendors in the Endicott field, Alaska. Write and publish report. (1992) Stormy Lake East Review Evaluate target, proposed budget and drilling operations plan for Stormy Lake East oil and gas prospect. (1992) West Fork Pool Rules Formulate general requirements for Pool Rules in the West Fork gas field. Work with State to structure field rules. Act as Expert Witness at formal Pool Rule Headng before Alaska Oil and Gas Conservation Commission. Secure Conservation Order 300. (1992) WF 2-21 Drillinq Develop operations plan, submit and secure Permit to Drill, ADEC Flare Permit, ADEC and AOGCC annular injection permits. Design and implement dual gravel-pack completion. Specify wellhead and heat string design. Develop drilling fluid program. Implement two-stage cement program. Design casing program and acquire tubulars. Develop drilling contract and blanket service agreement. Develop wireline and MWD specifications. Design coring program. Drill and complete well, test and place on production. (1992) West Fork Potable Water Supply System Develop specifications for West Fork field potable water supply system. Design well, flow requirements, and surface flowlines. Locate well and supervise construction. Run flow and bacteria tests. Review lab results and disinfect well. Manifold, run lines and commission system for field with rig supply riser. Supervise application and secure require state permits. (1992) West McArthur River Review Provide technical review of the West McArthur River discovery for Client under royalty and land use agreement. (1992) Exploration - Alpen,qlow #1 Assist with farm-in and unit operating agreement negotiations for North Slope exploration project. Provide on-site representation for Client during critical operational phases. Work with WIO team on post-well review and follow-up project plan for future drilling. (1992) West Fork Production Facilities Design facility layout and basic component systems including separation, gas dehydration, metering and test loops, odorization, manifolding and flowlines, well heat string system, emergency shut down, fire safety, ventilation systems, and buildings. Select contractors and suppliers. Supervise component construction. Supervise on-site construction. Specify weld X-ray program and Q.C. procedures. Secure State of Alaska Fire Marshal approvals. Secure ADEC fuel bum permit. Commission system. (1991/92) TESORO Site 65 Served as Quality Assurance Officer for spill clean-up evaluation at TESORO Site 65. (1991) West Fork Well 1-21 Design and run acid wash job to remove gelled HEC polymer in West Fork well 1-21; increase flow rate 40%. Evaluate P/z, water cut trends and production logs. Recommend well workover due to poor cement bond. (1991) Exploration - Sa,q Delta Prospect Evaluate Client farm-in on Sag Delta S.W. exploration prospect. Review and reinterpret seismic and geologic models of play and prospect. Summarize ddlling and prospect geologic dsks. Advise client that the prospect did not meet our cdteda for participation based on available data and our dsk weighted return on investment forecast. (1991) [ Dryhole drilled by BP Exploration in 1993 ] Prudhoe Bay Horizontal Well Applications Review and analyze Measurement While Ddlling techniques for horizontal wells in the Prudhoe Bay field, Alaska. Generate report and publish results. (1991) Sa.q Delta North Equity Redetermination Provide technical representation for Client in Sag Delta North equity redetermination. Reevaluate case, write position report and negotiate settlement. Increase Client equity by approximately 20 percent. (1990) Exploration - Formation Evaluation Provide evaluation support for a series of exploration efforts including: Pipeline State, Aurora, Belcher, Klondike, Popcorn, Burger, Crackerjack, Astosch, Narvaq, Rockflower, Malguk, Diamond, Sequoia and others. Provide support for development wells at Prudhoe Bay, Endicott, Kuparuk, Point Mclntyre, Granite Point and Trading Bay. (1987-1992) Barrow Gas Field Development Develop logging, coring, testing programs for 2 delineation wells (NSB 5 & 6) for gas field discovered by 1987 exploration program. Secure required federal, state, and borough permits. Support drilling, testing and completion activities. Evaluate discovery reserves and forecast decline profile. Submit final report. (1988) Barrow Gas Field Well Stimulation Assist in design of foam fracture treatment to simulate production from several wells in the South Barrow Gas Field. Run jobs and monitor well clean-up. (1987) Barrow Gas Field Development & Exploration Develop drilling, logging, codng, testing, completion programs for 2 Barrow Gas Field development wells (NSB 1 & 2) and 2 area exploration wells (NSB 3 & 4). Secure required federal, state, and borough permits. Assist with barge and rollagon transport of materials from Deadhorse. Analyze regional aedal photographs and layout environmentally acceptable path for ice roads and ice pad locations; obtain necessary permits. Supervise various ddlling operation phases. Drilled two successful development wells, one successful exploration well, one dryhole. (1987) Prudhoe Bay Eauitv Support Provided technical support to major oil company Legal Department on matters related to certain equity ownership issues in the Prudhoe Bay Unit. (1987) Barrow Gas Field Supply & Demand Evaluate deliverability of Barrow Gas field and community demand. Determine immediate requirements for production expansion. Propose in-fill ddlling and step-out exploration program. (1986) 1 summary of Pre.~ious,Employment BP Exploration, Inc, P.O. Box 196612 Anchorage, Alaska 99519-6612 (907) 561-5111 Senior Geoloqist 4/82 - 8/86: Involved in wide ranging activities which supported the exploration and development of hydrocarbon resources in Alaska. Prudhoe Bay Reservoir Surveillance Group; evaluated water encroachment and formation damage, designed well remediation plans, and developed reservoir models. Special Projects; served as expert witness in legal proceedings related to certain reserve ownership issues. Prepared and presented testimony before Arbitration Board, supervised exhibit preparation and coordinated case preparation with legal staff. Operations & Planning Group; selected well locations, defined logging and perforation requirements, made stimulation recommendations. Supervised computer data base operations, developed reservoir models. Resident Geologist/Prudhoe Bay; geoscience field operations supervisor; served as company representative and field sign-off for vadous contractor services. IRT Corporation, Nuclear System Division 3030 Callan Road, San Diego, California 92121 (619) 450-4343 Manaqer: Directed a nationwide business which conducted field surveys, well logging, mapping and resource evaluation for the mining and utility industries. (11/80- 12/81) Supervised 6 engineers and geologists plus support staff. Responsible for marketing, business profit/loss and administrative functions. SOHIO Petroleum Company 100 Pine Street San Francisco, California 94111 (Office Closed 1985) Consultant: Directed reservoir characterization studies of Prudhoe Bay supporting preliminary equity determinations. Setup a research and elemental analysis laboratory in Anchorage. Designed and implemented a computerized system for describing and evaluating reservoir. o Supervised project staff, analyzed data for client, generated various interim and final reports. Union Carbide Corporation - Hagen Clark Mining Embarcadero Corporation Joint Venture cio Union Carbide Corporation, Metals Division Grand Junction, CO (Office Closed 1984) Joint Venture Consultant: Operations supervisor for a sedes of joint venture exploration programs for base metals. (5/77- 1/79) Responsible for technical research, analysis of various remote sensing data sets, regional mapping, development of exploration models, execution of surveys, prospect drilling, and coordination of air support. Coordinated claim staking and lease acquisition program. Provided liaison with state and federal agencies. o Supervised a 15 man field crew. University of Iowa Department of Geology Iowa City, Iowa 52240 (319) 335-3500 Instructor Petroloq¥ & Geochemistry Lab: Taught the experimental aspects of thermal dynamics and applied geochemistry. (1976) Department of the Army U.S. Army Corps of Engineers Rock Island District Clock Tower Building Rock Island, Illinois 61201 Geoloqist G.S. 1350: Operations geologist, Rock Island District. (1975) Conducted general geologic and soil mapping, monitored observation wells, directed hydrologic studies and integrated study results into various civil engineering projects. University of Iowa University of Iowa EDUCATION Master of Science Degree, Petrology and Geochemistry. (1978) Bachelor of Science Degree, Geology. (1974) PROFESSIONAL AFFILIATIONS Alaska Geological Society Alaska Well Logging Society Petroleum Club of Anchorage Society of Petroleum Engineers Society of Professional Well Log Analysts American Institute of Professional Geologists American Association of Petroleum Geologists CERTIFICATIONS & LICENSES Use and control of radiation sources (NRC #04-18497-01) Use of explosives, surface (W-5565) Registered Geologist, Alaska (AA183) Licensed Pilot (138444496) U.S. Passport (B055944) Z-ENERGY INC. TRACT LOCATION MAP Creek River North Cook Inlot / Unit U ,,It ~nson River ~We~t Z-Energy EXHIBIT 1~66 L ' k ./~Jenuep oI pal!dLaoO -- _LISIHX~ out ,~8lau~-z ese8 ~:~eG e~iset¥ $o a~.el9 0l, o~ 9~ © Og A~O.LSIH NOl£O~OO~d $¥© ~N~q ~tA[~ Yen]~8 T i4 N {? 6 ~c I 18. !6 F,: !uCq q:LutA*S i-~ V:A Iki:(}ASPIROD/JC! iON rol. oil.: V~c~[ BELUGA RIVER UNIT APPLICATION TO THE ALASKA OIL AND GAS CONSERVATION COMMISSION FOR UNDERGROUND INJECTION OF NONHAZARDOUS OILFIELD WASTE BELUGA RIVER UNIT INJECTION WELL APPLICATION TABLE OF CONTENTS Section/Regulatory Cite A. 20 AAC 25.252(a) B. 20 AAC 25.252(c)(1) C. 20 AAC 25.252(c)(2) D. 20 AAC 25.252(c)(3) E. 20 AAC 25.252(c)(4) F. 20 AAC 25.252(c)(5) G. 20 AAC 25.252(c)(6) H. 20 AAC 25.252(c)(7) I. 20 AAC 25.252(c)(8) J. 20 AAC 25.252(c)(9) K. 20 AAC 25.252(c)(10) L. 20 AAC 25.252(c)(11) M. 20 AAC 25.252(c)(d) N. 20 AAC 25.252(h) Subject ,.Page Area Injection Order 1 Plat 2 Operators/Surface Owners 5 Affidavit 6 Geological Information 7 Well Logs 12 Casing Information 13 Injection Fluid 15 Injection Pressure 20 Fracture Information 21 Formation Fluid 33 Aquifier Exemption 34 Mechanical Integrity 37 Wells Within Area 38 RWH/2 SECTION A 20 AAC 25.252 (a) LETTER OF APPLICATION FOR PERMIT ARCO Alaska, Inc. (AAI), is requesting an injection permit for Well BRWD-! in the Beluga River Gas Field. AAI took over operation of this field from Chevron USA Incorporated on October 1, 1986. BRWD-1 was completed on May 26, 1986, and is used for the disposal of fluids that are brought to the surface in connection with conventional oil and gas operations and commingled with non- hazardous waste fluids from facilities which are an integral part of production and operation. The well is a Class II well, as described in Article 12 of the Signed Memorandum of Agreement between the U. S. Environmental Protection Agency (EPA) and Alaska Oil and Gas Commission. This well was previously operated under U.S. EPA UIC Permit AK-2D0001-I. -1- SECTION B PLAT 20 AAC 25.252(c)(1) Attachment B-1 is a regional plat showing the location of the BRU Attachment B-2 is a plat showing the BRU unit, 1/4 mile radius area of review for well BRWD-1 and all wells within the area of review. -2- IIII · % % $ F ,I REGIONAL LOCATION MAP , COOK INLET AREA Attachment , 16 MILE P~OPOS~D fH~Ect;c~ LINED W~TE ~S~ ~S WELL Wi WATER WAT[R W~ j ' ~' '141 Attachment B-2 -4- SECTION C 20 AAC 25.252(e)(2) The surface owners and operators within the area extending 1/4 mile from the well bore: ARCO Alaska, Inc. Chevron, USA, Inc. 6001 Bollinger Canyon Road San Ramon, California 94583 Shell Western E & P, Inc. P. O. Box 527 Houston, Texas 77001 State of Alaska Department of Natural Resources Division of Land and Water Management P. O. Box 7034 Anchorage, Alaska 99510 Cook Inlet Region, Inc. 2525 "C" Street P. O. Drawer 4-N Anchorage, Alaska 99509 Attention: Roy Hundorf RWH/2 -5- SECTION D Affidavit 20 AAC 25.252(c)(3) Affidavit of Roderick W. Hoffman STATE OF ALASKA THIRD JUDICIAL DISTRICT I, Roderick W. Hoffman, declare and affirm as follows: 1. I am over 19 years of age. I am employed by ARCO Alaska, Inc. as a Senior Environmental Coordinator. I have personal knowledge of the matters set forth in this affidavit. 2. On ~'C ~o,~ot~ ,~ , 1987, the surface owners/operators listed in Section C were provided a copy of this permit application. DATED at Anchorage, Alaska this day of Roderiek W. Hoffman Subscribed and affirm ed t, , before me at Anchorage, Alaska on Notary Public in and for th State of Alaska My commission expires: ~. ~'~ RWH/2 -6- SECTION E Geological Information 20 AAC 25.252(c)(4) Waste water & drilling fluid has been injected into aquifers of the Sterling FM in Beluga River Field (BRF). By U.S. EPA UIC permit AK-2D0001-J, aquifers below 3,050 MD are exempted for an area equivalent to a 1 mile radius around injection well BRWD-1 (see Section L). There are no plans to inject fluids below 3525 MD, a depth equivalent to top of the gas productive zone at BRF. Depth to top of the injection zone varies from 2500 to 3100 feet vertical subsea across the field limits. Average injection zone thickness is 470 feet of which 60 percent is composed of sandstone. The injection zone is a partially depleted gas reservoir of the Lower Sterling Formation Zones A, B, and C. The three zones are approximately 500' thick and, thus, the base of the C Zone varies in depth between 3,500' and 4,000'. The reservoir sands contained in Zones A, B, and C have average porosities over the field of 34%. Individual sand units are commonly 10'-35' in thickness and throughout the productive section are interbedded with claystone, shale, siltsone, and many coal beds. Over the field limits, the Sterling Fm consists of interbedded sandstone, siltstone, claystone and coal beds. Gas sand reservoirs are present in the lower portion of the formation and are commercially produced at the field. The Lower Sterling sandstones are fine to coarse grained, sub-angular to sub-round, with poor to moderate sorting. Petrographic analysis shows them to contain more than 50% rock fragments which are predominantly of volcanic origin. Other grains consist of quartz, chert, feldspar, and minor amounts of silt. The sands contain little discernable detrital or authigenic matrix. Beluga formation reservoir sands are contained within Zones D through I, and have average porosities of 24%. The lessor porosities of these sands compared to those of the Lower Sterling formation reflect their greater silt and clay content and greater depth of burial. Beluga sands are generally 3'-15' in thickness and highly discontinuous. Confinement of waste fluids is achieved by the many laterally continuous claystone and coal beds in the Sterling Fm. These beds range in thickness from 1 to 40 feet and are light to dark gray in color and firm to hard. Recent sidewall core analyses from several samples taken in BRWD-1 show permeabilities range from less than 1 md to 4.9 md, essentially impermeable. In addition, at least $ separate gas-water contacts, defined by wells on the northeast plunge of the anticline, testify to the impermeable nature and ability to seal of the elaystone and coal beds. Aeeompanying Section E are: Attachment E-l, showing the structural configuration of the Beluga River area at the Top Sterling A horizon; Attachment E-2, a structural/ stratigraphie cross-section through the loeation proposed for injection which shows the Sterling Zone gas-water contacts; and Attachment E-3, an electric log of the Lower Sterling on which the injection zones and eonfining layers are identified. -8- · i I I I · I i I i , I I i · I I i · , , I · ' . ) . i i !. .I 1 1 I I I ! i I I I I I . I I I I I4 Attachment 411~# 233-27 &e - 104' CHEVRON U.S.A. - BELUGA RIVER UNIT' 224-i$ LOCATION FOR WASTE FLUID INJECTION 212-I8 ~LUGA RIVER FIELD (eel iN~i I - ~6~li STNUCTUR[ SECTION R-R' O~FMMTION OF STEA'LING G, wCi IM~ 253-27 TO lng ~. ti INO~X MAP zo~, e INJECTION R£$ERVOIt~ CONFINING SHALE l COAl. , I Attachment SECTION F Well Logs 20 AAC 25.252(c)(5) AIl logs have been submitted as required by 20 AAC 25.071 (a) and (b). -12- SECTION G Casing Information 20 AAC 25.252(c)($) The well is cased as shown in Attachment G-1. API casing specifications were included on the drilling permit application. Casing is cemented in accordance with 20 AAC 25.252(b) and tested in accordance with 20 AAC 25.030(g) when completed. -13- WELLBORE SCHEMATIC 9 5/8"- ,47#,43.5#,40#, BTC Cmrd at 2000' Injection String 2 7/8" - 6.5# N-80 8RD EUE 1 15.g0 .75 - 2.32 WKM T~ Hanger U-EN 6'x71/16' 2 3133.77 4.80 3.25 2.3~ BOT CL I. ecat~ wi 4 seal units , , · 3 3133.77 - 5.~ 325 _BOT 1.-B (perm] /- packer 4 3109.07 .78 5.0C!3.92 4' 8RD EUE x 4 1/2' 8RD EUI XO ~ ~ ~, ,, 5 3139.85 5.30 4.5C 3.92 BOT Millout Ex =, ,,, =~ 6 3145.15 .75 5.0C 2.44 4 1/2'BRD EU! x 2 7/8"8RD El XO , , _ 7 3145.90 1.02 3.0( 2.20 Otis XN nipple 3146.92 Tubing Tail 7" -, 29#, P-110 BTC Cmt'd at 3554' PERFORATED TUBING CONVEYED (BAKER) 12 SPF .51' 19.5 gram, 9"penetration ~ 3554' ' TD.3560' . . _ Attachment G-I BRWD- 1 TUBING DETAIL Location: T13N R10E Sec. 13 SM. Completed' 5/86 KB.- 88.0 GL. 70J -i4- ATTACHMENT H Injection Fluid 20 AAC 25.252(c)(7) 1, Injection Rates The average injection rate will be dependent on the daily volume of produced water and whether or not any drilling/completion fluids need to be injected. Initial daily average will be less than 1,000 BBLS per day because very little formation water is produced, water production is expected to increase but it should not average more than 3,000 BBLS per day. Drilling/completion fluids will be injected on a periodical basis as drilling and/or remedial work dictates and these fluids, along with produced water or fresh water used to dilute the drilling/completion fluid, will not average over 3,000 BBLS per day. The maximum injection rate will be held at or below 5,000 BBLS per day by mechanical means. Physical and Chemical Characteristics of the Injection Fluid: a) Produced Water (Average weight 8.4 ppg): Currently water produced within the Beluga Field averages less than 5,000 PPM total dissolved solids (TDS) with typical properties as shown on the water analytical report on BRU 212-24 (Attachment H-l). b) Reserve pit fluids analysis is shown in Attachment H-2. These fluids contain drilling mud. Normally a lightly treaded Chrom-Free Lignosulfonate with 3% KCI is used within the Beluga River Field. The undiluted mud has an average weight 10.0-12.0 ppg; diluted 2 to 1 the average weight is 8.8-9.55 ppg. This mud is similar to type 1 mud approved by the EPA for NPDES General permits. The general properties and composition is; -15- Material Percent Pounds Pounds by Weight per Barrel per Gallon Fresh Water 80-90 350 8.33 Benoni te 3-4 12-18 0.30-0.40 Barite 12-24 45-100 1.07-2.38 Potassium Chloride (KCI) 0-5.2 11-22 0.26-0.52 Polyanionic Cellulose 0-0.7 0-3 0-0.07 Pottassium Hydroxide 0-0.1 0-0.5 0-0.01 Caustic Soda 0-1.1 0.5 0-0.11 Acrylic Polymer 0-0.5 0-2.0 0-0.05 (Bentonite Extender) Sodium Nitrate 0-0.02 0-0.1 0-0.002 Lime 0.5 0-20.0 0-0.5 Caustic Soda 0-1.1 0-5.0 0-0.11 Soda Ash/ 0-0.5 0-2.0 0-0.05 Sodium Bicarbonite Lost Circulation Material 0-2.5 0-10.5 0-0.25 Total 100.0 420-504 10.0-12.0 c) Completion fluid: Normally a 3% KCI and saturated NaC1 brine with the properties (undiluted 10.0 ppg, diluted 2 to 1 - 9.9 ppg): Material Fresh Water Potassium Chloride (KCI) Sodium Chloride (NaCI) XC Polymer (Xanthumgum biopolymer Percent Pounds Pounds by Weight per Barrel per Gallon 83.3 350 8.33 3.0 12 0.30 13.3 57 1.35 0.4 1 0.02 Total 100.0 420 10.00 -16- The drilling/completion fluids proposed for injection are not defined as hazardous by the Resource Conservation and Recovery Act (Re: 40 CFR 261.4(b)(5)). -17- Anchorage, Alaska 99518 (~o7) 562-2343 5633 B Street WATER ANALYSIS REPORT OPERATOR WELL NO. FIELD COUNTY STATE Cb. evrc~ f U.S.A. DATE 8-28-85 LOCATION LAB NO. 9991-1 __ FORMATION INTERVAL SAMPLE FROM 212-18 REMARKS & CONCLUSIONS: TOI',~., SOLT]~: 4465 1~/1 Cations mgll S~l,.,m ............. 881 Potassium ........... 13 Calcium ............. 2.3 Magnesium .......... 4,5 Total Cations ......... 38.31 0.33 0.11 O.37__ Anions mgll Sulfate .............. 1 Chloride ............. 19 Carbonate ........... 0 Bicarbonate ......... __2350 Hydroxide ........... 0 Total Anions .......... 0.54 0 _ Total dissolved solids, mgll .......... 2079 NsC1 equivalent, mgll .............. '~555 Obsen, ed pH ....................... 7.8 Specific resistance O sa° F.: Observed .......... 4.0 Calculated ......... 4.2 ohm.metal ohm.metal Sample aboye described WATER ANALYSIS PATTERN Scale MEQ per Unit Ha Cl M~ Fe Cl Na HCO' Ca SO' Mg CO' Fe Cl HCO SO' CO' (Hi vmlue in above °,m/hi includes Ne. K. aM NOT/~ MO/I - MIIl~flml ~f film Me~I - Milldam . . Attachment H-L File No. : 10307 PETROLEUM TESTING SERVICE Geochemical Water Analysis Report Date : January 1986 Sampling Date : November 1985 Sampled By : Lab No. : 10307 Analyst : ED Company : Chevron USA (Alask~ Well No. : 232-9 Field ~ Beluga River Zone : Source : Mud Pit Water Radical Concentration Milligrams per liter Milliequivalents per liter Reacting V~ Percent CALC~JM SODIUM POTASSIUM MAGNESIUM BARIUM IRON CHLORIDE BICARBONATE CARBONATE HYDROXIDE BORON SULPHATE SILICON Ca Na K Mg Ba Fe Cl HCO3 CO3 OH B SO4 si 1064.00 53.09 .69 86334.00 3755.53 49.16 434.00 11.10 .15 < .50 0.00 0.00 4.05 .06 .00 · 24 .01 .00 132816.00 3746.74 49.30 0.00 0.00 0.00 39.10 1.30 .02 767.00 45.10 .59 < .10 0.00 0.00 308.00 6.41 .08 20.10 0.00 0.00 Total 221786.47 7619.35 100.00 Resistivity @77F Specific Gravity Total Dissolved Solids Comments: .04933 1.1264 12.08 222,200 mg/L Attachment H-2 -19.-_ . ....... SECTION I Injection Pressure 20 AAC 25.252(c)(8) Average and Maximum Injection Pressures: The average injection pressure will be 500-700 psi surface (2,370-2,570 psi at a depth of 3,600') based on an injection rate of 2 BPM of a 10.0 ppg fluid. The maximum surface injection pressure will be limited to the working pressure of the casing head which is 3000 psi. SECTION J Fracture Information 20 AAC 25.252(c)(9) From time to time it will be necessary to fracture the injection interval to move accumulated solids or solids bearing fluid through the perforations into the injection strata. The fracturing will be confined to the injection zone. Approximately 117' of claystone separates the perforated intervals from the top of the exempted zone. Because of the ductile nature of these claystone stringers, they should serve as effective barriers to vertical migration of any hydraulic fracture. Well logs indicate there are several coal layers present above the injection interval. Coals are also known to be good barriers to fracture propagation. Previous injection testing has demonstrated that with water or oilfield brines at expected viscosities and requested pumprates, a fracture cannot be propagated in the subject formation (see Attachment J-l). The only time it will be necessary to fracture the well will be to move soilds and/or highly viscous fluids through and away from the perforations. Since any fracture will be unpropped, once injection ceases, the induced fracture will close. Sufficient time will be available between occasional periods of high viscosity fluid injection to allow fracture closure. As an additional demonstration that vertical fractures will not enable fluids to reach non-exempt fresh water strata, a worst case scenario, without benefit of the claystone stringers, was analyzed. The worst case scenario assumes that an undiluted drilling mud is injected under the conditions present in BRWD-1. To model the interval, we assume a homogeneous reservoir of 24000 (300' x 80 md) md- ft of capacity (see Attachment J-2). Further assume a vertically unconstrained "penny type fracture" 300' in height with a wing length (Xf) of 150'. Given a worst case mud viscosity of 100 cp and a P (FBHP- P) of 2000 psi the dimensionless pressure is given by ?D -- 1,4I.'Z. (:{ 15,~.Z( b,P-_ . Zo~-- - I. -21- Entering the Gringarten type curve for a well with an infinite conductivity vertical fracture, for an infinite reservoir a tD value of 0.85 is read. Substituting this into the formula for dimensionless time: ~ t --: ,O00Z~W BO t: s. s,,o (js t (hrs) can be calculated. When using this type curve to model injection, t is the amount of time that fluid of 100 ep viscosity must be pumped at 3000 BPD and 2000 psi pressure differential before the fracture area is extended out of the exempted interval (280' above the top perforation). In this case, it is 6.2 days. This would be approximately six times the volume and 2-3 times the viscosity of any mud we would expect to inject at any time. It is doubtful that fluids of this viscosity will ever be pumped in the well. Usual viscosities will be close to 1 cp. -22- .-(herren Chevron U.S,-,. Inc. P.O. 8ox 107839. Anchorage. AK 99510 · Phone (907) 786-6600 June 4, 1986 Injectivit! Test of BRWD-I Mr. Robert $. Burd Director~ Water Division U.S. Environmental Protection Agency Region 10 1Z00 Sixth Avenue Seattle, WA Mr. Burd: I .M~ injectivity test was performed at the Beluga River Unit Water Disposal Well BRWD-1 as required in the Modification to the Beluga River Field Class II Permit and Aquifer Exemption (AK-ZD0001-i). The restrictions concerning pressure and injection rate stated in the permit were met. A maximum surface injection pressure of 985 PSI was not to be exceededl This pressure was calculated using the following equation: ( 0.733 -.433 Sc3)d where S9 = Specific Gravity = 1.0 d = shallowest depth of perforation =3Z86' Injection rate was not to exceed 5000 B/D as stated in the permit. The injectivity test was performed on May ZS, 1986. During this test, a radioactive tracer survey was run to determine flow rates thrdUgh existing perforations and to verify injection fluids were only exiting the approved perforations (see attached test results and tracer log). As the test results indicate, an injection 'rate of 5040 B/D was reached at an injection pressure of'600 PSL A plot of Rate vs. PreSsure showed the formation did" not fracture, at this rate or pressure (see attached). .. Also enclosed are the' required geOphysical log requests: (1) caliper log, (Z) electric log, (3) porosity log, and the (4) CET log (cement evaluation tool) used to evaluate the bonding of the ?" casing. Also included is EPA form 75Z0-10, the 'well · completion report. If there .~re any further questions please contact G. R. Molesworth at (907) 786- 6600. GRM:cbw Attachments Sincerely, J. L, Weaver · -24- .INJECTIVITY TEST BRWD-1 May ZS~ 1986 Sur[ace Pressure PSI Rate Bbl/Minute Rate Bbl/Day ZOO 300 4OO 500 600 1.0 2..0 Z.4 3.0 3.5 1440 Z880 3456 43Z0 5040 -25- , EPA Charon U.S.A. Inc. P.O. Box 10783) L~ ~ ANO O~NE UNE ON SE~ ~l -- ~ ACRE6 " ~. WASHIN6TON. D~ 2C~aBO ' % I F~,m A,e~re~d C~.~PLETION REPORT FOR BRINE DISPOSAL, H~DROCARBON STORAOE, OR ENHANCED RECOVERY WELL i , I 1 i I I I I I I' I I I _ F i 1'. I-I"! ~ ! ! J-, !-!* I I I I I I _ I I I I I I ; t"t'~ I i i - I ..... l I ' .L_I._L__ I I I I I I Cook Inlet Region, Incorporated 2525 "C" Street ?.0. Box 93330 ..... Anehora_ee. AX 99509-333 0 STATE ~ COUNTY . P~e~n Nuue~M Alaska~Kenat Peninsula Borough ' AK 2O0001-I SURFACE LO~ON DESCaI~ON NE ,4o~ SE '~or NE ,~sE~o, 13 ' ~sme 13N.. WE~ AC~V~ ~PE OF PERMIT ~ 9ri~ Oi~l ~ I~uel Estimet~ Frm~url Pre~ ~ En~ ~ ~ ~M of Ini~i~ Zone ~ ~ ~0( · --~ ..... I u."=u= F~ " ~ ~ , 200 I ~000 3502I 32~ ~a~ ~ Maxmmum ,J_ ~0o , ~838' LII. NI~ I Weft Num~, Name ~ Inj~i~ ~ Ste.rTtnR .... Plrm~bd~ ~ Inj~ion Za Average 112 ~D ,,m m m , m ~ m, Av,era)e c~"'.T ................ -0a ..... .... s.', m,C''' 'mm~,,~,. mi m , m m , , ,Ill m , , s Ty~s of Iniec~m~ Fluid (Cheat ~ ~ w.,~ ~ m,.~ w.,~ ~ ;,.h w..~ 5-21-56 , , 9~m H'4 ,,7' .... 2q n~ P-llO ~ ~_~6' . 700 .. INJE~ON ]'ONE S~MU~N . .., ,,.,, .,, , i ,. ,i ~ .~ i. .I I II I II II I I I I I iii i II II I I III I I I I I II I I I I I I I II I I I I I I~1 I . ~ _ ~ _ I _ II . II ~mpletemm~hmentl A -- E !i~ ~ the r~. CNL/LD~/GR/Caltper . BHC_..~entc/GR :R~IVDLICCLIflR _ . ~d{naettye tracer ;{devall Samele~, I ~.51&* ' 96' 3.517' - 96' 3,~8~, "~,~gm' ', 3.516' ' 1.900' 1,9~3'' 50' .... 3.520' ' 3:250i 3.~92' ' 1,600' CERTIFICATION I certify under the penally of/aw that I have personally examined and am familiar with the information submitted in this document and all attachments and that based on my inquiry of those individuals immediately responsible for obtaining the information, I believe that the information/$ true, accurate, and complete. I em aware that there are s/.enificant penalties for submitting fa/se/nformation, including the Possibility of fine and imprisonment. (Ref. 40 CFR 144.32~ .1. I.. 1,Tearer Area Operattona Superintendent EPA ...... . ........ i , -27- /$. -28- ". '~___~ ~. .:r-I ~ Well Head Services · - P.O. BOX 190515 , ANCHORAGE, ALASKA 99519-0515 ¢_. TELEPHONE (907) 349-4668 oo RO. BOX 470 KENAI, ALASKA 99611.0470 TELEPHONE (907) 283-3822 MECHANICAL INTEGRITY TEST BELUGA RIVER DISPOSAL WELL BRWD-1 A mechanical integrity test was performed on BRWD-1 on May 26, 1985 as was required in the Modification to the Beluga River Field Class II Permit and Aquifer Exemption (AK-2 D0001ol). The test was performed on the 7" Casing/2-7~8" tubing annulus. A pressure of 1500 PSI was held on this annulus for ~.0 minutes. Alaska Oil and Gas Conmservation Committee engineer Bob Foster witnessed this test and gave his approval Attached for your information is the pressure chart for the test. If there are any further question concerning the mechanical integrity test, please contact G. R. Molesworth at (907) 786-6638 or V. IV. Angell at (907) 786-6633. GRM..cbw Attachment -30- IIIUB OS .--.r-~',---- -31- · '%~'. . , ~ ! . ! . . ,l~__ ' I ' ~ ~ ~ ~ I -"~'~- ' ~ ~--~'~t .... ' ...................... ~-~ - - t ....... ; ......... ~ ..... ~ ................. : .......... :?'.i_ :.' '. , ~'~--~'. ~ '. ' ' ' - '- , .... _.: ......................... ............. : : . ~' i ' ' ~ I i ~ ~ ~ :. . . ' ~ - s _.. ~ : I ~ ~ ~ i · ' .... : . .... : ............ :;}_~. ~~-- -; :- -;-- ~"~','~':'~'~2'-: -' : [ ~~ - ' f~.~, -Z: .:~-'~C.:~:~':... '~ .' .............. ~ ~ i - ' ' '--~ ' 3300 ~~~~_~ ~ - ~ ~ ......... ~ ', , ~ . ' : _ . . .__~__' , : ~ _~ ' _~=: ..........._ ~ -- ..... _~:-~-~ ...... ~.. . .. t-~- · I ~~- ~ r._ "~-'~-'-L ........ :.__: .... :.___z._ ~_~ ....... l~J~ ; : ~ __i ...... = ---:~ ..... : ~ .................................... ~~% ~*a~i~ ' t ' '. ~oo "~ " -~ ~ : : : : . , ', ,- I ~ · ~ " ~1 .. ~[~~r ~ ' . · I '!; ; ' '1' ...... ' ' " ......... ' ' CP e8.~ FILE 7 ~I-HAY-86 10~38 DATA ACQUIRED ~l-HAY-86 09~56 Run 2 i i ~-0,0 . t00,00 0,0 50,000 -t00.q, , , ~0 0.0 , 50,000 ~00,00..". ........"' SECTION K Formation Fluid 20 AAC 25.252(c)(10) A water analysis for the Sterling Formation is included as Attachment [~-1. Note that methane concentrations of 2000-5000 ppm are present beginning at approximately 2500' vertical depth in the 212-18 drilling mud log. Similar indications have been noted above the A Zone producing interval in virtually all other Beluga River Unit wells. This fact combined with log analysis and formation fluid samples which indicate that chloride concentrations are greater than 2000 ppm suggest these underground sources of drinking water (USDW) do not contain water, which is potable without treatment. -33- SECTION L Aquifer Exemption 20 AAC 25.252(d) The aquifer within 1 mile radius of the well bore of well BRWD-1 is exempt per U.S. EPA UIC Permit #AK-2D0001-I. The letter and permit modification exempting this aquifer is provided as Attachment L-1. As noted in Section K, this USDW would not have been potable without treatment. -34- REPLY TO A?TN O1:~ ~/S 409 IJ.S. ENVIRONMENTAL PROTECTIO" AGt.,~CY REGION 10 1200 SIXTH AVENUE SEATTLE, WASHINGTON 981'01 MAY 0 $1986 ,.1. L. Weaver Area Operations Superintendent Chevron U.S.A., Zncorporated P. O. Box 107839 Anchorage, Alaska 99510 RE: Modification to Beluga River Field Class II Permit and Aquifer Exemption Dear Mr. Weaver: Enclosed ts the modtfted Permtt (AK-2DO001-I) for the Beluga River Field. The modification authorizes the aqutfer exemption deeper than 3,030 feet and an injection interval from 3,060 to 3,521 feet. These modifications are made tn accordance with 40 CFR 144.39. Also, enclosed are copies of the Statement of Basis and the Response to Comments. The permit remains tn effect unU1 either the State of Alaska ts granted primary enforcement responsibility for the UIC program and has taken final action on the state permit application, or the permit has been otherwise modified, revoked and reissued, or terminated in accordance with 40 CFR 144.39-144.41. Sincerely, Robert S. Burd Director, Water Division Enclosure cc: C. V. Chatterton Alaska 0tl and Gas Conservation Commission Attachment -35- Permtt No. AK-2DOOOI- AUTHORIZATION TO [N,.1ECT UNDER THE UNOERGROUNO INJECTI:ON CONTROL PROGRAM In compliance with provisions of the Safe Drinking Hater Act, as amended, (42 U.S.C. 300f-300J-9, commonly known as SDHA) and attendant regulations Incorporated by the U.S. Environmental Protection Agency under Tttle 40 of the Code of Federal Regulations, Chevron U.S.A. Incorporated P.O. Box 10783g Anchorage, Alaska 99510 Is authorized to construct the Class II Hell, BRHO-1, located tn the NE quarter of Sectton 13, Township 13N, Range lOH In Alaska and to Inject such production and drtlltng flutds Into the Sterltng Formation, tn accordance with conditions set forth heretn. Issuance of this permit also constitutes an exemption for aquifers deeper than 3,030 feet and described by an area wtthtn a one mile radius of the Injection well bore. The exemption applies to Class II wells only and ts made under the authority of 40 CFR 144.7 and the criteria of 40 CFR 146.4 All conditions set forth herein refer to Title 40 Parts 124, 144, 146, and 147 of the Code of Federal Regulations and are regulations that are in effect on the date that tht s permit ts effective. Attachments are referenced to the Underground Injection Control Permit Application (EPA Form 7520-6). This permit and the authorization to Inject are Issued for the operating life of the well but shall be reviewed at least every ftve years. This permit modification and aquifer exemption shall become effective on June 4, 1986, In accordance with 40 CFR 124.15. Signed this 5th day of Hay, 1986. Robert S. Burd Director, Hater Division Environmental Protection Agency Regton I0 This page ts a modification of the permit title page signed September 16, 1985. SECTION M Mechanical Integrity 20 AAC 25.252(d) A mechanical integrity test was performed on BRWD-1 on May 26, 1986, as was required by Alaska Oil and Gas Conservation Committee Regulation 20 AAC 25.252(d). The test was performed on the 7" casing/2-7/8" tubing annulus. A pressure of 1500 PSI was held on this annulus for 20 minutes. Alaska Oil and Gas Conservation Committee engineer Bob Foster witnessed this test and gave his approval. Attached for your information is the pressure chart for the test. (Attachment M-I) Casing annulus pressure is monitored whenever the well is used for injection. -37- SECTION N Wells Within Area 20 AAC 25.252(h) Wells within the area of review are shown on the plat (Attachment B-2) and is limited to BRU 212-18 and BRU 212-18 Pad water well. To the best of ARCO Alaska Inc.'s knowledge BRU 212-18 was constructed according to applicable requirements of 20 AAC 25.030 and therefor prevents the movement of fluid into freshwater sources. BRU 212-18 Pad Water well is 145' ft. deep and does not penetrate the confining zone. Information on BRU 212-18 is as follows: Beluga River Unit ~212-18 Operator: Lease: Location: Chevron, U.S.A., Inc. -, ADL58820 Area: West Side of Cook Inlet Type: Gas Producer Partners: ARCO Alaska, Inc. Shell Western E & P, Inc. API No.: 50-283-20049 1799' South and 100' East from NW corner Section 18, T13N, R9W, Seward Meridian Drilled by: Kenai Drilling Company of Alaska, Rig #1 Date Commenced Drilling: Rig Released: Date of Initial Production: September 1, 1975 October 15, 1975 December 1984 Shut In from 10/15/75 to 12/84 *(Well bore schematic of BRU 212-18 is provided as Attachment N-1.) Elevation: Ground Level 72.5' above mean sea level, KB to GL 19.5', KB Elevation 92' above mean sea level Total Depth (TD): 7000' Plugs: 5880' and 5580' Effective Depth: 5580' Casing: 30" Conductor driven to 54' 20" Set at 411' and cemented to surface 10-3/4" Set at 3376' and cemented to surface 7" Set at 6505' and cemented to 2375' Perforations: Beluga D Beluga E Beluga G Beluga H Beluga I Drill Stem Tests: 1) 5897'-5968 2) 5737'-5856' 3) 5461'-5480 4) 5133'-5238' 5) 4960'-5028' Logs: Schlmberger Dual Induction Log Borehole Sonic Compensated Neutron Formation Density Proximity Log Microlog Continuous Dipmeter GO International Gamma Ray- Neutron Cement Bond Log 4168'-4190' 4276'-4287' 4960'-4972' 5035'-5055' 5175'-5200 5227'-5238' 5367'-5392' 5521'-5532' 5747'-5754' 5778'-5782' 5799'-5804' 5830'-5834' 5853'-5856' 5897'-5912' Dep.th 412'-7000' 412'-6992' 411'-7000' 411'-7000' 3372'-6992' 3376'-7000' 3350'-6407' 3350'-6406' 4196'-4216' 4526'-4540' 4980'-5028' 5133'-5160' 5207'-5218' 5461'-5480' 5746'-5737' 5767'-5774' 5787'-5792' 5807'-5814' 5837'-5842' 5946'-5968' Runs Scale 2H--5H 2"-5" 5** 5** 5" 5" 5** -39- Well: BRU 212-18 Pad Water Well Type: Water Well Drilled 7/7/75 by Kraxberger Drilling Depth: 145' Producing Zone: 130'-145' Casing: 6" to 145' Note-.This well does not pass through the zone of influence. No existing Class II injection wells are in area of review as of 1/85. -40- · · p ~ '~' N~PLi 22 JT~. 2~"~ ~Jl ltd ,.,~o 'ruszxo I ~ll30.3.9t BELUGA RIVER 212 CASING 81 TUBING DETAI SECTION Attachment N-I Z-Energy Exhibit 1.2 0.8 0.6 0.4 0.2 BELUGA RIVER UNIT WELL BRU 212-18 PRODUCTION HISTORY BRU 212-4 6 was originally completed 10/75, but ne~er produced. The 'well was worked-over during March 1984 and .'first placed on production 'du~ing May ! 9.85. Production Year Well State of Alaska Data Compiled to January 1, 1994 BEI I I I I I,IORTH I~LIJ~ J RIVER PROSi~CT J I T i 224-23 232-26 133-271 I 214 241-~_~ 224-34 Bel ugo River Un it Boundary R lOW l Rgw I I I I I I I I I I I I T " 1 ~2N 1 I I Z-ENERGY INC. LOWER STERL lNG STRUCTURE Top Interval "A'l Date:03/24/94 Version: 1.1 I~eth:Nlin. Curv. Iterations: 1000 i ~ SCALE: I Inch: 6,000 Feet BXHIB IT Alaska Report 5-11-94 Section I Alaska Rig Count Posts Small Loss U.S. Tally Drops to 719 Anchorage Independent Plans Stepout from Cook Inlet Field THEREAI~ 10 rotary rigs (eight onshore and two offshore) at work in Alaska, accord- ing to Hughes Christensen's May 6 survey, a loss of one from the week before. That's two rigs better than the month-ago tally and one above the count for last year's comparable week. Due mostly to a I O-rig drop in Oklahoma, the U.S. rig count on May6 fell to719, reported I-I ugh~s Christensen. That's a decline of 11 from theweek before, but 102 (16.5 percent) better than the 617-rig tally recorded in the corresponding week of 1993. The 95 rigs reported at work in Oklahoma represent the lowest level of employment in the state since mid-September 1993. Week-to-week declines were noted in seven states in all. The West Virginia tally was down four, to six, and Louisiana's count fell by three, to 133. Elsewhere, two-rig declines were reported in Colorado (19) and Mississippi (8), and the count in North Dakota (6) was down one. Seven states posted'gains, led by Arkansas and Ohio, where three- unit increases brought the counts in both states to nine. New Mexico's working rig count improved by two from a week ago, to 27, and one-rig gains were reported in Alabama (9), Kentucky (2), Montana (6) and Wyoming (31). ANCHORAGE INDEPENDENT Z- Energy has plans to drill a ~tepout from south-central Alaska's Beluga River field this sum- mer on the company's North Bel- uga River Prospect about 32 miles northwest of Anchorage. Z-Energy has appli~ with the state for a spacing exception loca- tion for its 12-2 North Beluga River, an exploratory venture that will evalu- ate the gas potential of the Beluga and Sterling sands. It will be drilled in eithersection 11-13n- 1 Ow, Seward Meridian, or adjacent section 12- 13n-lOw. The North Beluga River Pros- peet covers some 955 acres in sec- tions 11 and 12, and is on leases acquired by Z-Energy at the Janu- ary 1993 state Sale 76 (Cook Inlet). The Z-Energy venture is within half a mile north of Beluga and Sterling production in the Arco Alaska-operated Beluga River field, which has produced over 455 bil- lion cuft of gas, according to the company. "We hope to establish additional production im mediately to the north of the currently developed area," said Z-Energy president Paul Craig. (Hitkel signs fastr billt into laM, tontinued ffSom Page 1) Legislative findings in thc bill state that a best interest finding "is a policy decision involving facts unique to each proposed disposal, and complex issues the analysis and resolution ofwhich are most appro- priately le~t to the expertise of the agency making the determination." The findings also contain this pro- vision: "speculation concerning fu- ture development activities that will be subject to independent permit- ting requirements is not necessary at the time a decision is made to dispose of state land or an interest in state land," although "this Act is not intended...to limit the scope of an administrative review so as to omit issues or disregard concerns that otherwise must be addressed under the provisions of applicable statutes and regularions;...consider- ation of a disposal as a phase of a development project is not intended to artifically divide or segment a proposed development project to avoid thorough review ofthe project or to avoid consideration of poten- tial ~uture environmental, sociologi- cal, or economic effects, but rather is intended to allow for consider- ation of those issues when sufRcient data are available upon which to make reasoned decisions.' Among the more heavily drilled states, no week-to-week changes were noted in California (32), Kansas (31) or Texas (276). Z-ENERGY SPACING EXCEPTION REQUEST DRAINAGE AREA SCHEMATIC LU Z-ENERGY LEASE ADL-381224 Location 0~ BAacdr ~sS = > 1200' SECT ' . o . u4: I~PM KUPFtL~ PETROLEL~ ENGINEERING Z-ENERGY INC. Sepmmber 16, 199:3 Harrgl L. ~, ARCO ~ P.O. Box 100360 Anch~e, AZ 99~10 RECEIVED Please find attached an Exe,~ttve Summary of a geo/o~ analysis pertaining to u'act ADL,-381224 on t~e nm'them boundary of the B~/uga P/vm' Unit ('BR~. Aim attach~ is a letmr from legal counse/for your r~ew. It would be a plenum to lmve the opl~z~n/ty to d/scuss th/s ~ with you. Thank you for yom' ~view of these documenu. Sin ~ . · President :. ~,. p~./jvw Enclosurea: l~nluton l~ttgr Beluga River Unit SEP 2" !~.°3 OPERATIONS 2g00 itON~AC~ PARKWAY, 11610 ANCIiORAGE, AK gg504-31~2 ,- RECEIVED SEP 21 1~3 SKIP BILHAFITZ TENONS: g07.563-5686 FAX,: 907-562-74[9 5F_P >'3 '~B 04:~0PM KUPRRUK PETROLEUM ENGINEERING BANKS'~N & McCOLLUM .ION T, GwtNI CJ4illTOl)klill J. HW, AIsH(Y P. Paul L. Craig, President Z-Energy, Inc. 2900 Boniface Parkway, No. 610 Anchorage, AK 99504-3132 Re: Beluga River Lease our File No. Z-2991-01 Dear ~r. Craig: This law firm has been retained by Z-Energy, Inc. ~:o review issues rela~ed ~o Beluga River Unit. We have reviewed ~e Execu=ive Report dated September 1S, 1993, by Erik A. Opstad. After our review of t~uis report, and our conversation with you and Hr. Ops=ad, we recommend you commence nego~iations with the Uni~ Opera=or, ARCO Alaska, Inc., ~o resolve~Lcainage issues priva=ely prior to =akingany remedies you may have before the AOGCC. In the even= your negoCia=ions do not prove frui=~ul, we will be glad =o assist you in takingany appropriate legal remedy you may have available. Very ~ruly yours, BANKSTON & M¢COLLUM, P.C. Willl w~m/mm \nm~ct i ~q~crai ud~l. Ltr .b~J-' ~ '~ W4:~W~M KU~R~UK PETROLL~ EHGIh~ERIHG ., O?ST,~D AND ASSOCIA'II~S P.O. I~OX [90756 ANCHORAGE, Ak,~IG~ ~9~19 O~e ~d ~n~n~ ~7/~1.5.6346 Dr. Paul Craig 3300 Providence Drive Suite 302 Anclqorage, Alaska 99508 Septeml~er 15, 1993 Subject: BELUGA RIVER LEASE ADL 381224 Dear Paul: We have completed the preliminary-~eview of your lease (ADL-381224) which is immediately adjacent to tine northern end of the Beluga River Unit and I am pleased to report that the tract holcls substantial gas reserves in the Steding A sand hodzon~. A mom~ compreh~'-~-~ report on ou'E~7-fi~clings 'will' follow, however, as you requested, an Executive Summary of ~e pertinent observations is attached. I'll be availal~le to discuss these observations and recommenclations related to · e Beluga tract tlqrough Friday, but I plan to De on travel in the Lower-48 next weeK. If your schedule won't accommoclate a meeting, please feel free to call me in We evening at home so ~at I can answer any immediate questions you mig~ have I~efore leaving towrl. Sincerely, E. A. OPSTAD & ASSOCIATES Oil as Consultant ~~ (1) 04:EOPH KUPP~JK PETROLEt~ ~NGIt~'~IHG P.4/1S EXECUTIVE SUMMARY TRACT ADL-$81224 BELUGA RIVER AREA ALASKA E. A. Opstad & Associates INTRODUCTION The objective of the study was to develop a preliminary evaluation of an exploration tract located on the wasmm .side of the northern Cook Inlet immediately north- northwest of, and adjacent to, the Beluga River Gas Field Unit. The information is intended to support business planning-functions and the development of a comprehensive exploitation plan for the tract. The review of tract ADL-381224 was substantially aided by eighteen wells wl~ich comprise the Beluga River Gas Field and the Alaska Energy Development (Burglin) BW X33-12 well which was directionaJly drilled o_n the [ease to a 13ottomhole location 1827' north of the Beluga River Unit boundary in' Section 12, T13N, R10W, S.M. (Figure 1). This abbreviated report is issued to aceluaint the lease owners, and their designates, with information concerning this lease that may 13e time sensitive. LOCAL SETTING The Beluga lease is located on the northwestern edge of the Cook Inlet immediately north-northwest of, and adjacent to, the Beluga River Gas Field Unit. Structurally the tract is located on the northern plunge of a slightly asymmetrical anticline and adjacent to faults which together form the Beluga River gas field trap (Figure 1). The Beluga River field produces gas from the "lower" Sterling and Beluga Formations which are part of the Kenai Group (Figure 2). The Sterling Formation is the principal gas reservoir for the Cook Inlet and holds over 75 percent of the basin's known gas re~ervas. The formation is a product of a meandering continental fluvial system that pmcluced ceame-gmin channel deposits with fine-grain interfluve sediments consi~ng of meted siitstone, shale and thin coal beds. The net sand to gross interval ratio for the Sterling is nearly always greater than 0.5 and is commonly exceeds 0.75 with sand porosity of more than 30 percent and good permeability Which. provides an excellent gas reservoir. The Sterling caps the Miocene Age Beluga Formation which in turn sits unconformably on the Tyonek Formation. The Beluga is entirely continental in origin consisting primarily of flood plain shales with minor interl~edded coals which are cut by thin channel sandstone. 1 of 4 SEP 23 '93 04:20PM KUPARLJK PETROLEUM EHGIHEERIHG . P.5/12 STRATIGRAPHIC & PETROPHYSICAL ISSUES Given the weal control available for the area, U~is study initially focused on ~letermining stratigrapht¢ correlations for 9 zones (A-I) in eighteen Beluga River wells as a prelucie to general mapping and the development of 3-dimensional models ancl simulations. This exercise identified the Alaska Energy Development (Burglin) BW X33-12 well which was drilled on the lease to a ~ottomhole 1,827 feet from the Beluga River Unit I~oundary. Review of the opanhole wireline logs from this well immediately identified gas in the Sterling "Au horizon dominated by a 65 foot thick sand roughly 35 feet al=ova the Sterling "B" marker. Attachment A is the opentmle Dual Induction-Laterlog over the interval showing .the Deep Induction exceeding the averaged Laterlog-8 with a reading of :~.25 Ohm-M"/M, clearly indicating the presence of hydrocarbon. Standard petmphyslcal methods provide an estimated water saturation (Sw) of :!:52 percent with a corresponding hydrocarbon saturation (1-Sw) of i-48 percent. __ Inspection of the Borehole Compensated Sonic (BHC) response over the same interval reveals interval transit times that exceed 150 ps/ff, dearly indicating that the hydrocarbon is gas (Attachment B). The presence of gas is confirmed by the Compensated Neuron-Formation Density logs. Attachment C shows a deflection of the Compensated Neutron Log (CNL) toward the Formation Density Log (FDC) decreasing ~e separation between the two curves from ~0 porosity units to only :L,8 porosity units. In this casa, the FDC-CNL cross-over typical of gas sands does not occur, I~ut Sterling Iithologic effects, along with one other influence discussed later, suppress this classic response. However, if the logs are normalized in the water leg to empirically eliminate the Iithologic influence, a :b20 porosity unit crossover is observed. Lastly, consideration of the Dual Induction invasion profile, SP response, and porosity logs indicate ttmt the sandstone has good perm~ab~ity and ~ percent average porosity. The conclusion drawn from these observations is that the Sterling A horizon contains porous and permeable sandstone capa~cing gas at significant rates w.hen ddlled and completed. These logs were also sul~mittecl to 3 other prominent Alaskan log analysts in a I~lind test for their opinion. There was unanimous consensus with this conclusion. As previously noted, there is another factor which could contribute to suppression of FDC-CNL cross-over and BHC gas response. In cases where sands have been on produ~an for several decades, then relogged following' penetration by new wells, suppression of the "gas effect" is often observed. In such cases, reservoir pressure has often declined considerably. Since new wells are typically drilled with mud weighted for the normally pressured conditions, the-borel~ole fluids are greatly over-balanced relative to long.produced intervals. This pressure differential aggravates the invasion of drilling mud filtrate into the Iow pressure gas sands. Since porosity logs (BHC; CNL, and FDC) are relatively shallow reading clevices, filtrate invasion, which pushes gas back away from the I~omhole, tends to suppress gas responses. Observing similar behavior in BW X33-12 leads to the consideration of drainage by the adjacent Beluga River Gas Field. 2of4 5EP E3 'gB 04:E1PM KUPARUK PETROLEUM EM~IMEERIMG P.6/13 DRAINAGE Pool Rules for the Beluga River Unit have not bean established uncler 20 AAC 25.520 in response t= a motion by the commission, or request of an affected party. As a consequence, no specific rules have been established to protect correlative rights, nor, has technical data bean presented by the field owners which defines the extent of the Beluga River field's various gas bearing horizons. The field is. generally operated under the provisions of AAC 25.055. Fortunately, the sa'ucturat and stratigraphic relationships in the field area are comparatively uncomplicated and realistically portrayed by available data. Looking at the openl~ole logs from BW X33-12, BRU 212-18 and BRU 224-13 by way of example, there is a direct I~iangular correlation between the basal "A" sands. The Beluga River Unit has been producing from cormlatable Sterling A sands throughout the field area for nearly 30 years. 'A' sand water saturation in BW X33-12 is equivalent to that in BRU 212-18 (Attachment D). Structural mapping the lower Sterling and general isopach relationships give no indication of intervening depositional or structural barriers whic.~ would isolate ADL-381224 from the greater Beluga River gas accumulation. The ama is also crossed with seismic lines, of various vintages, which further illuminate these intraformational relationships. Production depletion of the Starling A sands in the area is well documented by the production logging program in BRU 224-13, one of 3 wells which immediately offset ADL-381224. Attachmem E compares BRU 224-13 openhole logs run during October 1974, with cased hole clara obtained in Marct~ 1981. The c;3mparison of the log suites graphically Illustrates area depletion over the intervening 6'~ years. Even though this well is 4.258 feat from the lease boundary, average depletion for the reservoir stands at approximately 40% based on pressure data submitted to the State of Alaska by the field operator. As a consequence, the drainage boundary for the Beluga River field es a whole has reached what can be reasonably inferred to be the physical reservoir limit, including, based on available data, ADL-381224. 3of4 ~ ~4 '_~ ~j?:4_r=¢~ ~ ~< ~_~L~. ~NGINEE~IHG ' I .' freer ADL-381224 l~as gas ,atumteO porous a~ci sable san~ in the Sterling A hodz~n whlcl~ dimctty -,,ofrelate ~ ga~ bemrin~ Stealing A sans in immediately adjacent Beluga River Unit well~ ~at are on I · Them are no apparent stmcl~ral or depasitionel I~amers whir..,h would pressure isolate traot A~L-38.I224 from tl~e greater Beluga RI ~er Unit a~oumulation. · gi~nifi0an~ depleti ~n of the Staffing A ttortzon Ilas ~Ccur[ed during nearly 30 years of Beluga River ~oductien as documented by l~lssure histeffes and differential well log profiles. · Assuming the a~mge pressure decline for the IIRU as a wllole, tMe ~lrainage boundary for %Me ' itefling A sands has roughed what r. an bm reasonably infen'ed to be the physical fir its of ~e Beluga River reservoir. · Sterling a gas ~e~ves en tra~t ADL-38"I224 have been drained, and continue be 0rained, t~y B! [U production. R~COMM , Drainage Issut ara always sensitive and be~t dis~.Issed privately wll~t otl'~r involved delian ns. As o~r ~ ~n Bel~a River Unit, ARCO Alas~ ln~ (~1) ~oul0 i~ed ~ available d~ ~l~S ~at BRU pmdu~on is dra~ing ~m ADL-3Sl~4. ~1 s~d ~m g~en m~na~le and o~r sugg~ns as t~ ~ ~e ~em m~t De ~m drainage a~ ~e ¢o~l~ve inte~ integm~d t~o ~a Unit. ~ ~s~ions ~ nat fruitful, or be~me pro~c~d, a be .filed ~ ~a AOGCC as an ~e~d pa~ m~e~ng ~e ~ Pool R~ for ~e Beluga Riv~ Un~ aio~ wRh ~e fo~d ad~l~d ~nage i~uem, and 0ivan the ~ ~at smn~a~t appli~ by ~e AOGGC in~ pure,ion of ~lmaVe ~gh~ am not spa~fi~liy define, last ~el sh~ be ob~ined to advise t~e ~em en ~e ma~em of I~ ~i~ 2. In the p~ition / Oil t 4of4 /' c=~ .:-_~ ,q'~ ',5:24 ~07 ~E;5 13~0 PiClGE.007 SEP ~3 '93 04:71PM KUPPRUK PETRO~ EMGIMI~ERIHG P. ?/13 eeikco I~l~.r i ! I ,, ! I ! 224-~ I ! fl. I ,, I I ! ! 2: ~2-24 klalel~iw~' £. A. OPSTAD & A$SOC JATES I l I LOWER STERL lNG FORMAT ION STRUCTURE Top tntervot "A" Be I ugo River Gos F i e I d I:mte:$e~t.93 version: 1.0 U~th:U;n. Curv. Iteration: 1~0 1 ' ' II $CJ,~: 1 Ivd~e 6,OOOfeet SEP 2B '9B 04:22PM KL~P~UK PETROLEUM EHGINEERIMG P. 8/1B Sy~lenl $ ~4r$~st I.,iTh4)ll)¢~ ~ F,'ol'l'l'14tJo fl · · ..~.;' . .:..;.;..', ~ · ,.,.. ,. '-..'..:I,.,' c~ I~¢: I ....... .. ,. ......... ..I I ~ I~uvium '.'-","-'" "-~ (3 IGc i a i q\~..41~. I. ' · ',:, 16,'", '",' "~ I,-.;:', ::,~ ,,! ,: :'..-.:.-:. ::' '.'.:: ....'.. (..'.:,. :.-:...-. :;: :. .: ..... t.-,-; Slerling C.~ '" .... ''.% '~ :~.: .: s ~.... ".'C 0'-- 0 i: :-.':~'-.'-.:-~: I1,000' ~ I ;.'..': :': :; '.; -:%. ::, ,~. ~,..'~: ',).~.. ~:- >. ., .......... 0:: ': :.". %::.'.'L' X'.'.'. Belmg~ Fro. LLJ ............ C~- Z i. ,**- · · .......... c~ '"--""%""--"-':i . Chuima Mom- - I.- -..: ...:._. -_ ,.-.~ Idid. Ground Shoal Mem. ---'-----'-=-"-= ,, zGoo'- saaB' _ i _~ :--::---:---:~_ .,.'.."' I:~:' ~.'::.,-.~:":;?: 11r 3oo'- ~4oo' '"" av I' :~'"'--~ '.4.me...---. I . _ - ........... --'-; : : --','-'-'-, Ida IMm,ia ~ "~ ~ o'- .soo ]'-'_'.'.-'"'j'?' ~ ,~_,._ -_- - :_ -_- _ _ _ :-_ _:. ILO0.. I--'--- --I f~ .-__' ..... _ _ _ _ .... -_-_-_- o I :-'..'..~ ~-:-'--.-'. ::.-'~:1 I o'- text' 4~ ..-;.-e...-.~..'~.....i ~' [ o'- stoa' O~ ~ -.-' :._--.-,.-.; ,- ............. LEGEND Conglomerate Sand~ope Siltsfone Mudstone/$hale Cool Volcanics REFERENCES AI..,,4:,SJ~ OIL ANO GAS CONSE. RVATION COMMISSION GENERALIZED S'TRATIG R,a~HIC COLUMN Cook Inlet Basin, Alaska ! " 3SOO $?OD 3100 'J~lO 40l)0 4100 ........ I w w w N "[;fin // COMPANY ALASKA £t~l'gGY I~XPI..C~ATIOH INC, WELL 91,/ X z'z-12 FIELD i~ I LO£A1 gAIE, ALASKA OIL, BHC/C; D.r. U Dm · . o f; !! 4o00 iCOMPANY__ RLASKA [I~Lrl:tGY ~eXPLOI~ATI0}~ INC. · [FIELD 1500' t'SL L 20~;0' tEL GL ...... a FJ~¢ ~ ! , J~ EL LI~ :, ! 1.41 ~1 [pCA~ DJ:, rDCICN~ IGR ',,,fid y' ! Ld I ! o_ W ~ , 17S9' S L rliqY$.C:O~ldEA, eric rOC/CNL/G~i P~L. HOT · I .. I ' I ° L~C Analysis i '~" ' i DEPT. OF NATURAL RESOURCES DIVISION OF OIL AND GAS WALTER J. HICKEL, GOVERNOr PO. 8OX ~07034 ANCHORAGE. ALASKA 99510-71:)3z, Pt..lONE: (907) 762-2553 January 4, 1994 Mike Verheoks ARCO Alaska Inc. P.O. Box 100360 Anchorage Alaska 99510-0360 RE'. Geophysical Exploration Permit Moquawkie - Susitna MLUP/CI 93-017 AK9310-04OG Dear Mr. Verheoks: The Division of Oil and Gas hereby approves your permit application of October 21, 1993, to conduct, geophy~;r~! ~1~o+;~- ~+o+~ of.~Aa~ka lands ;- the general area., Moquawkie and Susitna prospects.' This permit, designated MLUP/CI 93-017 grants authorization to ARCO Alaska Inc. to conduct seismic surveys utilizing shallow hole explosives, above ground explosives (poulter) and marine airguns as energy sources. The shallow hole explosive progr2m will take place above the mean and ordinary high waters marks. The tech-;que includes drilling 25 to 50 foot deep holes every 165 feet using track mounted and helicopter portable drills. A 10 to 20 lb. charge of Ammonia Nitrate will be detonated in each hole. A mini-hole version will most likely be used in the mud fiats. A typical mini-hole pattern consists of 16 holes, five feet deep, loaded with 1/2 lb. charges. The above ground explosive (poulter) technique would take place above the mean and ordinary high water marks. A typical poulter pattern would consist of ten, five lb. charges, elevated six feet off .the ground. The marine and some transition work will utilize airguns operated near 2000 psi. The total volume of the array will vary between 1200 ci and 3800 ci depending on water depths. .. To meet your requested time frame the effective date of this permit is from January 1, 1994 to June 1, 1994. This permit is subject to the stipulations set forth in Attachment (1), Attachment (2), Attachment (3), and the following stipulations: 1. The permit does not authorize activity on Original Mental Health Trust Grant Lands acquired under Section 202 of the Enabling Act. 2. Use of above ground explosive techniques (poulter) is prohibited east of the little Susitna River. MLUP/CI 93-017 Page 2 . . . . . . . 10. Shot holes will be backfilled with mud and cuttings. Blowouts will be backfilled and the area leveled up. Chsining maps, or other acceptable maps showing the location of the landing zones and blowouts will be included in the completion report. Prior to completion, copies of the map will be provided on request. Rehabilitation, if required, shall be completed to the satisfaction of DNR and in full consideration of technical guidance provided by the Division of Agriculture, Plant Material Center. ARCO Alaska Inc. Bond I.D. Number U-630618 can be used, in addition to the existing uses, to pay claims made by third parties for damages resulting from the exercise of rights under AS 38.05.125 and AS 38.05.130, or other rights to surface entry that may exist due to State ownership of the subsurface estate. Additional bonding may be required under AS 38.05.130. Approval of this permits does not constitute the specific approval required under Attachment (2) Stipulation 10 for surface entry over the objection of the surface interest holder. The permittee shall defend, indemnify and hold the State of Alaska harmless from and against any and all claims, damages, suits, losses, liabilities and expenses for injury to or death of persons and d~mage to or loss of property arising out of or in connection with the entry on and use of State lands authorized under this approval by the permittee, its contractors, subcontractors and their employees. The Division of Oil and Gas, Permit and Compliance Unit shall be notified at 762-2555 if, during the conduct of operations, state resources are damaged or a land use conflict occurs. The permittee shall immediately notify the Department of Environmental Conservation (DEC) of any unauthorized discharge, leak, or spill of hydrocarbons or toxic or hazardous substances. Notification shall be made to the Department of Environmental Conservation Mat-Su Area Office during normal working hours at 376-5038 for incidents occurring in the Mat-Su Borough, and at the Kenai Area Office at 262-5210 during normal working hours for incidents occurring in the Kenai Peninsula Borough. To notify DEC of incidents in either area outside of normal working hours call 1-800-478-9300. The permittee shall immediately notify the Department of Natural Resources (by phone) of any unauthorized discharges of oil to water, any discharge of hazardous substances other than oil, and any discharge of oil greater than 55 gallons solely to land and outside an impermeable revetment. If a discharge of oil is greater than 10 gallons but less than 55 gallons it must be reported within 48 hours (by phone or fax). If a discharge is less than 10 gallons it may be reported in writing on a monthly basis. All fires and explosions must also be reported. The DNR 24 hour spill report number is (907) 451-2678. The Northern Regional office of the Division of Land shall be supplied with all follow-up incident reports. MLUP/CI 93-017 Page 3 This permit, with the stipulations, is consistent with the Alaska Coastal Zone Management Program and Local District Plan. This geophysical exploration permit is issued in accordance with Alaska Statute 38.05, Alaska Miscellaneous Land Use Regulations 11 AAC 96, and Alaska Statute 46.40. The state's approval of this application signifies only that the state has no objection to the operations as outliued in the application. It does not constitute certification of any property right or land status claimed by the applicant nor does it relieve the applicant of responsibility to obi_in approvals or permits from other persons or governmental agencies as may also be required. Sincerely, Matt Rader Natural Resource Manager (3) Attachments cc: Distribution MLUP/CI/93017I Distribution MLUP/CI 93-017 Susitna - Moquawkie Jeff Hastings Northern Geophysical 2361 Cinnabar Loop Anchorage, Ak 99510-3139 Tim Rumfelt/Gary Saupe' 1 3601 "C" Street, Suite 133z Anchorage, Alaska 99503 Tim Stevens/Rick Smith DNR Division of Lands 4420 Airport Way Fairbanks, Alaska 99709 Don Mckay ADF&G 333 Raspberry Road Anchorage, Alaska 99502 Mary Pearsail KPB Planning Dept. 144 N. Blnkley Soldotna, Alaska 99669 Ken Hudson Mat-Su Borough Planning Dept. 350 East Dahlia Ave. Palmer, Alaska 99645 Ron Morris NMFS Box 43 222 West 7th Ave Anch. AK 99513 Ann Rappoport USFWS Anch. Field Office 605 West 4th Ave. Rm 62 Anchorage, Al( 99501 Steven Braund Northern District Set Netters P.O. Box 101480 Anchorage, Alaska 99669 Thomas Mears Cook Inlet Aquaculture Assoc. HC2 Box 849 Soldotna, Alaska 99669 Theo Matthews United Cook Inlet Drift As.' P.O. Box 389 Kenai, Alaska 99611-0389 Ivan Every Comm. Fishermen of Cook Inlet HC 1, Box 968 Kenai, Alaska 99611 Don Standifer Tyonek Village Council P.O. Box 820009 Tyonek, AK 99682 Doug Blossom Cook Inlet Fisherman's Fund P.O. Box 39036 Nlnilchik, AK 99639 Sera Phlm Tyonek Native Corporation 1689 "C" Street Ste. 219 Anchorage, AK 99501 Loren Flagg Kenai Fisherman's Associ 34824 Kalifonsky Beach R, Soldotna, AK 99669 Cook Inlet Region, Inc 2525 "C" Street Anchorage, AK 99503 Molly Birnbaum, DGC Pipeline Coordinator's Office 411 West 4th Ave. Ste. 2C Anchorage, Ak. 99501 Jim Frechione Interim Mental Health Trust Officer ADNR, Division of Lands Mental Health Plaintiffs c/o Dave Thomas, Attor: 406 G Street Ste. 206 Anchorage, Ak 99501 Permit # 'ermit Fee Paid Jate Accented OFFICIAL USE ONLY STATE OF DEP.AH{TMENT OF NATURAL RESOURCES DMSION OF OIL AND GEOPHYSICA_L EX2~LORATION PERMIT Applicant: ARC,? .qLA..~K'. iNC. Address: P.0. BOX ' Ancheraze, 'Las~a.99510-0)60 Phone: 907)265-6.~9 Contractor: Northern '.3eophysica! of Alaska Address: P}61 C i:qn~'s~r Anchorage, "laska. 99507-'j1~9 Phone: (907) ~'~z~-0079 GeneralLocation: Please s=o attached man. Period Requested: From: I0-c l-©~ To: 6-1-9a Contact Person: N~Lt22 e: Address' idike ',/erheoks Title: Acauisition Geoohvsieist : ' ::.~',' ~ 00'~60 Phone: (907) ..~nche~a~=~.,... , Alaska.995~''_,~,-0260_ Transition zone GeophysicaiTecho~que: Seismic (complete betow).XX Otherlattached description) A) Method: Marine: XX Vessel Name: N/~--- · Registered Owner: Official ~umber: Radio (]'all Number: Upland: )[Z Vibrosels: Portable: XX Conventional: Track ~X Other: B)Ener~ySource: Foulter,Shot hole, Transition airguns. I£Explosive: Type: Ammonia Nitrate Total Lbs/Shot tkrray: ~_ 0-20lbs · Shot Spacing: ] ,~5' C) Number of Line Miles to be Shot: App. ~.00 line miles D) Line Location Map: The applicant is required to submit a map(s) showing the exact location of all proposed seismic lines. The applicator may request that this map be maintained confidential as provided in AS 88.05.0~$(aX9). Do you request confidentiality'? Yes X X No 'Housing for Project Personnel' A) Housing type: ',.".( Permanent, location Vec.o, Little Susitna Lodge Temporarw, please describe structures B) Number of Personnel: / C) Drinking Water Supply' D) Disposal of Solid W~ms: --ack E) Disposa~ of L/qmd Wastes' hmuled to an epprovea szze. Fuel Storage- A) Type of Fuel: 7e,..i B) Amount to be Stored: ' 40-1000 C) Method of Storage: !'~00 Gallon D) Location of Stored Fuel' N/A Gallons. Surface Travel' A) The applicant must provide a list of all surface transport vehicles to be used in , - Nowel~ !60,snowmachines,. ! ~ V¢$se!s. this activity: ~ ~ 00, - - B) Will use of this equipment require clearing of vegetation? No- if yes, describe method and amount of clearing required. C) WiHfivercrossingsberequired? Yes ifyes, Hstm~ordrmpage. Please see enclosed maps. Also note crossings happen when solid enough ~ce nas ~orme~ zo' al'low this. Indemnity: Amount: Bon~ingCompany- Travelers Indemnity Address: P.O. Box 1201 Farmihgto~, CT. 060[)4 "' 50.000.00 Bond ID Number 790G?59A Type: XX Statewide Bond Corporate Surety Personal Secured Savinys Cash The applicant agrees that operations shall be conducted in conformance with applicable Federal, State and local laws and regulations now, or hereafter, in effect during the life of an>, permit issued under this application. In particular, the applicant agrees that operations shall be conducted in st~ct compliance with the provisions of the Alaska Miscellaneous Land I7se Regulations, and the terms and special stipulations contained in any permit issued under this application. The applicmut certifies that he has read and is familiar with the ~klaska Miscellaneous Land Use Signature' Date 10-21-93 Print Name Ted~K. Smith Title Party Chie£ DO NOT WRITE BELOW THIS LIhrE L3_ND USE PERMIT The DIVISION OF OIL A~x~D GAS g~rants to ARCO Alaska Inc. the right to use State of Alaska lamd~, as described in this application, subject to 11 A~AC 96.010 tb_ru 96.250, Miscellaneous Land Use Reg~Jations, and the attached special stipulations. Effective dates for permit: January 1, 1994 tO June 1, 1994 STATE OF ALASKA TITLE' Natural Rasourca Mana~ar Date January 4, 1994 · ~./treemli~':' /ii ,' II .. ~ / ,; aC3..; .... . ~ - . '. ~s_ _ ..'"" -' ~ i ' ~" ...~'-~'"~ ~- ~ /,.'".', ' ' - '" - ..... ':7~- -1 :'. .. . .,.. ~ o_ ,, ~ , _ · ~/.~ ,. ./ ' , .- .. ~w~ B~l~g~. . ~ - · .... ~ ~'~, - '--':" ,7~ . . ~' - ,.~ . ._ ~ ., - ~ ~ ' ..... :.~ ,. . ' . ~ ~ ~ ~.:J. '~ . ':; ...-~,;., ~.~ ~ ~ ,~- y -.~ .. "%...~. " ' ' :' : ,' ~ ~. ~'7:"~.: ~' . i ; ~00 ~ ,'~'~,~. ) .~ ,.~ LO~e ' -:, ,, i.' ' ',, ,~,~ "' ,~ ,.. ~ '. V~ ' L' t '. '~' ~ , .. ~ ~ - , , ",,., ' ~ " ~ - ~ ~ '~ . Z '~ " .,.'.,~q?,". b :- ~ ~ ~'~.: ' .... .-.. '~'~ ~.,/,: ~.. ,~ ~,~.t~ ,. · ,,. _ ~. 2~:'' ~ ' ' '"5, : ~",. ,,., .~'; '~Y" ~.~ '~ L ' "' ' ~:' ' · -. ~% ' ,. ~ '..., · ~,~. ~ · , . ,. ,,. ,~ ~ , . ? ,, . , %:00 , , .~ lO ~4~',~' . .: .- ,. , ,~ .... ~m l." , ~ ~ / i 'l~ '8 30' R 12W '9 :~ ,: R lOW 151" MLUP/CI 93-017 Attachment (1) Conditions of Consistency with ACMP , Explosives shall not be detonated within, beneath, or adjacent to marine, estuarine, or fresh waters that support fish and wildlife during periods when fish or marine msmmals are present unless the detonation of the explosive produces an instantaneous pressure rise in the water body of no more than 2.7 psi or ,mless the water body, including its substrate, is frozen. Explosives must not produce a peak particle velocity greater than 0.5 inches per second in a spawning bed during the early stages of egg incubation. For the shallow hole explosive technique the minimum offset from fishbearing streams and lakes is: Minimuln Charge Offset 1-2 lbs. 52 feet 15.84 meters 5 lbs. 82 feet 24.99 meters 10 lbs. 116 feet 35.35 meters 20 lbs. 161 feet 49.11 meters 25 lbs. 184 feet 50.08 meters , For the above ground explosive technique (poulter) the minim-m offset from fishbearing waters for a 50 lb. charge is 50 feet. For lbs. of charge between the above categories, use the minimum offset for the next higher category. Exceptions to this setback, or new categories, may be approved by the Division of Oil and Gas in consultation with ADFG. Note: Minimum offsets for shallow hole explosives are based upon the use of explosives with detonation delays of 8 milliseconds or greater occurring between each charge such that no explosion or combination of explosions will produce an instantaneous pressure in fish bearing waters which exceeds 2.7 psi. All vehicles used to carry explosives must be clearly marked with the word "EXPLOSIVES". All shot wire must be removed from the area. .. Equipment, other than vessels, must not enter open water areas of a watercourse during winter. Ice or snow bridges constructed at stream crossings must not contain extraneous material (i.e., soil, rock, wood, or vegetation) and must be removed or breached before spring breakup. Alterations of the bank~ of a watercourse are prohibited. Attachment (1) Page 1 MLUP/CI 93-017 3. Existing roads, trails, and natural clearings must be used wherever possible. . . Trails and campsites must be kept clean. Trash, survey lath, trail markers, and other debris must be picked up and properly disposed. All hazardous material contniners and fuel dr~ms must be marked with the contents, and permittee's or contractor's nnme. Stationary fuel storage facilities must not be placed within the ~rmual floodplain of a watercourse or closer than 100 ft. to a waterbody and must be placed within an impermeable barrier providing 110 percent capacity of the largest independent fuel storage container. 7. Refueling of vehicles must not occur on an aunual flood plain of a watercourse. . . 10. 11. Sorbent material in sufficient quantity to handle operation spills must be on hand at all times for use in the event of an oil or fuel spill. Airguns must not be discharged in open salmon districts or subdistricts during regularly scheduled or emergency commercial salmon fishing periods between June 1st and September 1st. This timing restriction may be extended to September 15th ff the Division of Oil and Gas, in consultation with the Dept. of Fish and G~me, determines tha't significant harvest levels are expected during that time. Permittee is responsible for obtaining information and m~int~ining contact with the ADFG as necessary. For additional information contact the ADFG Commercial Fisheries Division in Soldotna at 262-9611. ((KPB Enforceable Policies 7.3 Maintenance and Enhancement of Fisheries; 12.1 Priority Use; 5.9 Geophysical Surveys; 5.5 Navigating and Commercial Fishing (6 AAC 80.130(c)(1)) Unless approved by the Director of the Division of Oil and Gas, in consultation with ADFG, there shall be no marine seismic operations conducted within one mile of the mouth of any stream specified by ADFG as being important for the spawning, rearing, or migration of anadromous fish. (KPB Enforceable Policies 7.3, Maintenance and Enhancement of Fisheries; 12.1 Priority Use, Geophysical Surveys 5.9, and Navigating and Commercial Fishing 5.5.(6 AAC 80.130(c)(1)) All aircraft associated with the seismic program must maiutain a minim~]m altitude of 1,500 feet above ground level and one mile horizontal distance from all shoreline cliffs, bluffs, and rocky outcrops (excluding take offs and landings). This stipulation is not intended to restrict sling line activities along shot lines. Additional operations at lower altitudes may be allowed upon approval of ADNR after consultation with the ADFG. Human safety will take precedence over aircraft restrictions. This stipulation is required to reduce the potential for unnecessary disturbance of wildlife and their habitat. Attachment (1) Page 2 I~ILUP/CI 93-017 12. Should any historic, prehistoric, or archeological sites be discovered during the course of field operations, activities which would disturb such resources should be stopped. The State Historic Preservation Office (762-2626) and the Mat-Su Borough Cultural Resources Division (745-9859) should be contacted immediately. 13. Traditional and customary access to subsistence use areas shall be m~int~i-ed -uless reasonable alternative access is provided. 14. Seismic operations shall not conflict with the spring subsistence harvest utilized by the surrounding village comm,mities. 15. Explosives shall not be detonated within, beneath, or adjacent to marine, estuarine, or fresh waters that support fish and wildlife during periods when fish and marine mammals are present unless the detonation of the explosive produces an instantaneous pressure rise in the water body of no more than 2.5 psi or unless the water body, including the substrate, is frozen. Attachment (1) Page 3 MLUP/CI 93-017 Attachment (2) (Rev. 11/22/93) Reference: Cook Inlet Region Seismic Survey Uplands and Tidelands, Explosive Energy Source Under 11 AAC 96.040 the following Alaska Department of Natural Resources administrative stipulations are attached to and made a part of the terms and conditions of the Geophysical Exploration Permit: . The permittee shall notify and obtain approval from the Division of Oil and Gas in advance of any activities which significantly deviate from the approved plan. Any action taken by the permittee or his agent which increases the overall scope of the project or which negates, alters, or minimizes the implied intent of any stipulation contained in this permit will be considered a significant deviation from the approved plan. Notification must include the date and the specific nature of the proposed operation, the reasons why the operation is different and a map showing the location of the operation. Significant deviations from the approved plan are permitted without prior notice to protect h-man safety or living resources; however, any such emergency deviation must be reported in writing to the Director, Division of Oil and Gas within 48 hours. , The permittee shall provide the Alaska Department of Natural Resources with the name of a contact person who shall be familiar with the daffy location and operating status of the seismic crew(s). The contact person shall provide this information to the Department of Natural Resources when requested by an authorized representative of the Department. 3. The Department of Natural Resources may require that an authorized representative of the Department be on-site during any operations conducted under this permit. 4. A completion report must be submitted within thirty (30) days after termination of permit activities. This report must contain the following information: a) The dates when work was actually performed and the number of line miles actually surveyed. b) A navigation diskette, a reproducii~le shot point map, and paper shot point map. The paper shot point map must show data ownership by line. If all lines are under single ownership a statement to that effect is sufficient. c) A U.S.G.S. topographic map showing the actual location of all camps, shot lines and routes of travel. d) A report covering incidents of surface damage, land use conflicts, and the follow up corrective actions taken. e) A statement of cleanup activities and methods of debris disposal. Attachment (2) Page 1 MLUP/CI 93-017 5. The Director, Division of Oil and Gas has the fight at any time to amend or modify any provisions of this permit, or revoke this permit. 6. A copy of the permit and stipulations must be posted in a prominent location in the operator's c~mp. . Should any hydrocarbons (excluding coal) be encountered during the drilling of shot holes, all operations must be discontinued and the Alaska Oil and Gas Conservation Commission notified at 279-1433. . If flowing or artesian water is encountered during the drilling of shot holes, the Division of Land shall be contacted at 451-2700. Action may be required to stop the flow. . The permit authorizes access across and exploration activity upon lands owned by the State of Alaska. No person may engage in mineral exploratory activity on land, the surface of which has been granted or leased by the State of Alaska, or on land for which the state has received the reserved interest of the United States, until good- faith attempts have been made to agree with the surface owner or lessee on settlement for damages which may be caused by such activity. If agreement csnnot be reached, or the lease or surface owner c~unot be found within a reasonable time, operations may be commenced on the land only with the specific approval of the director, and after making adequate provision for full payment of any d~mages which the owner may suffer. The approval of this permit without express numeration does not grant specific approval. 10. The seismic exploration activities granted under this permit must not diminish the use and enjoyment of lands encompassed within a native allotment. Before entering a pending or approved native allotment, the permittee shall contact the Bureau of Indian Affairs and Bureau of Land Management and comply with applicable federal law. 11. All wastewater must be disposed of in a manner acceptable to the Alaska Department of Environmental Conservation and drinking water must meet Alaska drinking water standards. For additional information contact the Alaska Department of Environmental Conservation. 12. Permittee shall abide by the provisions of Alaska's wildlife feeding regulation, 5 AAC 81.218. This regulation provides that it is unlawful to deliberately feed bears, wolves, foxes or wolverines or to deliberately leave human food or garbage in such a msnner that it attracts such animals. 13. In areas of subsistence harvest, the permittee will coordinate survey activity with local subsistence users to prevent unnecessary conflicts. Permittee shall make a good-faith attempt to coordinate survey activities with the owners of trap-lines if known. Care must be taken to avoid disturbing trap-lines within the survey area. Attachment (2) Page 2 MLUP/CI 93-017 Attachment (3) (REV 3/9/92) Geooh_vsical Data Submission Requirements As a condition for granting the Geophysical Exploration Permit for the seismic exploration progrnm the permittee shall comply with the following seismic exploration data submission requirement under 11 AAC 96.210. 1. Within 30 days following completion of the seismic exploration program the permittee is required to notify the Division of Oil and Gas, in writing, of the acquisition of all geophysical exploration data. 2. Within 30 days after completion of initial processing of the data, the permittee shall inform the Division of Oil and Gas, in writing, of the availability of this processed exploration data. 3. The Division of Oil and Gas reserves the right to inspect and require submission of all geophysical exploration data for a-period of five years following notification of completed initial processing. When requested, the permittee is generally required to submit the following processed seismic data: a. A mylar shot point location map. b: A digital location tap with UTM or .~Aaska State Plane coordinates for each shot point. A list indicating tape content and format specifications is to accompany the tape. c. Elevations for each shot point, if available. de Copies of the common depth point (CDP) seismic sections representing the best effort out of the production processing phase for each line shot (ie. all filters, NMO, and static corrections have been fmc tuned to yield an interpretable section). This will include: i. one reproducible mylar and folded blackline print of all AGC and relative amplitude sections preferable at 2.5 inches/second, 24 traces/inch, variable area wiggle trace normal polarity. .. ii. one reproducible mylar of the AGC section at double the scale as that submitted above, preferably 5 inches/second, 12 traces/inch, variable area wiggle trace, normal polarity. iii.' all processing steps, parameters, and corrections should be supplied either on the section or listed separately. iv. each section should be annotated with shot point numbers, line ties, timing lines, line identification, and any other information necessary for interpretation. Attachment (3) Page MLUP/CI 93-017 e. One folded paper print of each velocity analysis preferably 2.5 inches/second. A transmittal form listing the submitted material and itemizing the cost incurred for copying and shipping. The state will reimburse the permittee for all reasonable costs which are incurred as a result of this submission requirement. In most cases, this will be limited to that cost associated with copying and shipping. Reimbursement procedures will be initiated within 30 days after receipt of all requested material. All exploration Data and exploration information which is submitted should be marked CONFIDENTIAL. All material should be either hand-carried by bonded courier and delivered to the physical address off Matt Rader NRM ADNR Division of Oil and Gas 3601 C Street, Suite 1380 Anchorage, Alaska or mailed, registered and insured, to: Matt Rader NRM ADNR Division of Oil and Gas P.O. Box 1007034 Anchorage, Alaska 99510-7034 Attachment (3) Page 2 ~ lineaments that act with other structural and depositional elements to define the extent of the riel 'd~'/~v~,~,~. ~o ,~ -~-~--"~~x' '~'~'~----~"~'~'~ ° ~-~ ' ~' e~sed_a_s_si~nific~nt.su rface Chair ~ ~- Comm ~- PRESTON GATES & ELLIS ATTORNEYS July 5, 1994 David Johnston, Commissioner and Chairman Russ Douglass, Commissioner Tuckerman Babcock, Commissioner Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 Z-Energy's Request for Spacing Exception NBR No. 12-2 Cook Inlet, Alaska Dear Commissioners: Enclosed are copies of approved assignments of Alaska Oil and Gas Lease ADL 381224 from leaseholders Paul L. Craig and Peter G. Zamarello to Z-Energy, Inc. As of June 21, 1994, Z-Energy holds a 100% working interest in the lease, which is the subject of the above well spacing application. The assignment applications were made in April 1994, prior to the Z- Energy well spacing application to the Commission, but approval by DNR apparently was delayed because of a failure to file the required number of executed copies. I also would like to clear up one other technical matter. Z-Energy's original well spacing application to the Commission, in its May 9, 1994 letter, referenced 20 AAC 25.055(a)(4), which begins "where gas has been discovered ..... "Although Z-Energy is optimistic about the prospects for discovering gas on its lease, it of course has not yet drilled a well on its lease. Z-Energy's initial letter to the Commission should have referenced 20 AAC 25.055(a)(2), which concerns exploration for gas. Although the nature of Z-Energy's application was discussed at length in the June 10, 1994 hearing, as well as in my letter to you of the same date, I wanted to be certain that no further confusion exists. Please accept this letter as a formal correction of the initial application. Erik Opstad will be providing additional geologic information concerning faulting to the Commission, as discussed at the June 10, 1994 hearing, within the next week. A copy will be provided to counsel for ARCO Alaska, Inc. as well. [~ E C E I V ~ D SUITE 400 dUL - Co 1994 .r,,laska Oil & Gas Cons. Commission h 420 COEUR D'ALENE · LOS ANGELES · PORTLAND · SEATTLE · SPOKANE · TACOMA · WASHINGTON, D.C. A PARTNERSHIP INCLUDING A PROFESSIONAL CORPORATION Page 2 July 5, 1994 Please let me know if you have any further questions. Sincerely, PRESTON GATES & ELLIS By: Mark H. Wittow CC: Rosanne Jacobsen, counsel for ARCO Alaska, Inc. Joe Dygas, BLM Mike Kotowski, DNR RECEIVED d U L - 6 1994. Alaska 0il & Gas Cons. Commission Anchorage WALTER J. HICKEL, GOVERNOR DEPT. OF NATURAL RESOURCES DIVISION OF OIL AND GAS PO. BOX 107034 ANCHORAGE. ALASKA 99510-7034 PHONE: (907) 762-2553 Assignor: Peter G. Zamarello 4240 Old Seward Highway #A16 Anchorage, AK 99503 Assignee: Z-Energy Ibc. 2900 Boniface Parkway #610 Anchorage, AK 99504-3132 DECISION JUN 2 3 199 Oil and Gas Lease ADL 381224 /~ssignment Application Approved Application for approval of assignment of 75.0 percent working interest from Peter G. Zamarello to Z-Energy Inc. is hereby approved effective June 21, 1994. Peter G. Zamarello will retain 8.43750 percent overriding royalty interest.. This assignment is approved as to the working interest only and does not constitute approval or acceptance of any stipulations or attachments to the assignment instrument. An approved assignment is enclosed with this decision. Enclosure JE/JS/dl/381224.PGZ RECEIVED Alaska Oil & 6as Cons. Commission Anchorage DO&G 25-84 (LEASE ASSIGNMENT) Revised 7/91 DNR #10-113 LEASE ADL 381224 EFFECTIVE DATE OF LEASE April 1, 1993 STATE OF ALASKA DEPARTMENT OF NATURAL RESOURCES DIVISION OF OIL AND GAS ASSIGNMENT OF INTERF~T IN OIL AND GAS LEASE The undersigned assignor whose address is as owner of Peter G, Zamarello 4240 Old Seward Highway #A16~ Anchorame, Alaska 99503 Seventy-Five (75%) percent of the lease's working interest - percent overriding royalty interest does h~reby assign to Z-Energy. Inc., a Delaware corporation whose address is 2900 Boniface Parkwav #610. Anchorage. Alaska -- 1. Seventy-Five (75%) 2. - 3. The assignor is retaining - 4. The assignor is retaining 8,4375 OF.. 8/8THS. 5. The assignor previously reserved - 6. The assignor previously conveyed - 7. LANDS AFFECTED by this assignment of interest T , the assignee, 99504-3132 , percent working interest; percent overriding royalty interest percent of the lease's working interest. percent overriding royalty interest percent overriding royalty interest. percent overriding royalty interest Tract 75-024 13 N , R 10 W , Seward Meddian, Alaska, Tract A Section 11, Unsurveyed, E 1/2, 320 acres; Section 12, Unsurveyed, Ail, including the bed of the Beluga River, Excluding U.S. Survey 3901, 635 acres; containing 955 acres, more or less. RECEIVED J U L, '" 6 1994 A~.ska. OJ[ & Gas Cons. Commission Anchorage The Notification Lessee for the purpose of receiving any and all notices from the State of Alaska in connection with the lease will be: Name Z-Energy Inc. Attn: Paul L. Craig, President ~ City, State, Zip Address 2900 Boniface Parkway, Suite #610 Anchorage, Alaska 99504-3132 We, the undersigned, request the approval of this assignment application. We attest that this application discloses ail parties receiving an interest in the lease and that it is filed pursuant to 11 AAC 82.605 and 11 AAC 82.615. We further attest that all parties to this agreement are qualified to transfer or hold an interest in oil and gas leases pursuant to 11 AAC 82.200 and 11 AAC 82.205. Whether approved in whole or in part, the assignee agrees to be bound by the provisions of said lease. Zamarello Assignor's Name (Print or Type) & Title April 26. 1994 Dam Company Name THE UNITED STATES OF AMERICA) )ss. STATE OF ALASKA ) Qualification File # ,19 ~' 5/, before me, a notary public in , duly commissioned and swom, ,,,, t~ me known and known to me m be the This certifies that on the ,,g ~9~ day of and for the State of Alaska personally appeared Peter G. Zamarello person described in, and who executed the foregoing assignment, who then after being duly sworn according to law, acknowledged to me under oath that he executed same freely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate first above written. Assignee's Name (Print or Type) & Title THE UNITED STATES OF AMERICA) )ss. STATE OF ALASKA ) Notary Public My Commission expires April 26, 1994 Date Z-Energy Inc. Company Name Qualification F'tle # This certifies that on the 4' ~~ day of ~ ., 19 9' 5/ , before me, a notar9 public in and for the State of Alaska .. , duly commissioned and sworn, personally appeared Paul L. Cra±Ig , t~ me known and known to me to be the person described in, and who executed the foregoing assignment, who then after being duly sworn according to law, acknowledged to me under oath that he 'executed same freely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate first above written. Notary Public Comm o : APPROVAL The foregoing assignment is approveCc~ as to the lands described in item 7 thereof, effective as of the date set forth below. G-'~'~'a'skaA~5 0il & Gas Cons. Commission DIVISION OF OIL & Anchorage RECEIVED JUL -'$ 1994- JUN 2, 1199 Effective Date of Assignment WALTER J. HtCKEL, GOVE,"~NOR DEPT. OF NATURAL RESOURCES DIVISION OF OIL AND GAS PO. BOX 10'/1334 ANCHORAGE. ALASKA 99510.7034 PHONE: (907) 7~2-2553 DECISION Assignor: ' Paul L. Craig ' 4962 Castle Court ' Anchorage, AK 99508 · Assignee: _ Z-Energy Inc. 2900 Boniface Parkway #610 Anchorage, AK 99504-3132 JUN 2 3 199 Oil and Gas Lease ADL 381224 Assignment Application Approved Application for approval of assignment of 25.0 percent working interest from Paul L. Craig to Z-Energy Inc. is hereby approved effective June 21, 1994. Paul L. Craig will retain 4.06250 percent overriding royalty interest. This assignment is approved as to the working interest only and does not constitute approval or acceptance of any stipulations or attachments to the assignment instrument. An approved assignment is enclosed with this decision. E. Ea~on't ~ Director Enclosure J E/JS/dl/381224 ,RECEIVED JUL, -'G 1994 Oil & ~-as Cons. Commission Anchorage A~gnor's Signature // Paul L. Craig i/ / Assignor's Name (Print oi Type) & Title April 25, 1994 Company Name THE uNrrED STATES OF AMERICA) )SS. STATE OF ALASKA ) Qualification File # dayof ~' -~ .., 19 q~L ,before me, a notary public in This certifies that on the and for the State of Alaska" ,. , duly commissioned and sworn, personally appeared Paul L. Craig . , m me known and known to me to be the person described in, and who executed the foregoing assignment, who then after being duly sworn according to law, acknowledged to me under oath that he executed same fxeely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate first above written. Z-ENERGY 3.NG./ "/.~ / ///. Paul L. Craig, Preside~ Assignee's Name (Print or Type) & Title Notary Public My Commission expim~s April 26, 1994 Date Z-Energy Inc Company Name THE UNITED STATES OF AMERICA) )ss. STATE OF ALASKA Qualification me #.. ~,~ [ t~! This certifies that on the ...o e~ ~ day of ,~...,...~ ,19 ] ~/ , before me, a notary public in and for the State of Alas ka ff' , duly commissioned and swom, pemonally appeared Paul L. Craig ~, to me known and known to me to be the person described in, and who executed the foregoing assignment, who then after being duly swom according to law, acknowledged to me under oath that he executed same freely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate first above written. Notary Public My Commission expires Y'..,,~.F//~',Y' APPROVAL The foregoing assignment is approved as to the lands described in item 7 thereof, effective as of the date set forth ,ow. , RECEIVED m ,JUL ~AMES~.(~SON A~.sk~,O~ :& Gas Cons. C0mm~ssmH ' DI~EC~ -, Anch0ra~e D1VISION OF OIL & fi~ JUN 2 1199 , Effective Date of Assignment DO&G 25-84 (LEASE ASSIGNMENT) Revised 7/91 DNR #10-113 LEASE ADL 381224 EFFE~ DATE OF LEASE April 1, 1993 STATE OF ALASKA DEPARTMENT OF NATURAL RESOURCES DIVISION OF OIL AND GAS ASSIGNMENT OF INTEREST IN OIL AND GAS LEASE Paul L. Craig The undersigned assignor whose address is 4962 Castle Court, Anchorage~ Alaska 99508 as owner of Twenty-Five (25%) percent of the lease's working interest percent ovemding royalty interest Z-Energy Inc., a Delaware corporation 3. The assignor is retaining 4. The assignor is retaining does hereby assign to whose address is 2900 Boniface Parkway #610, Anchorage. Alaska 99504-3132 1. Twenty-Five (2570) percent working interest: 2. - percent overfidh~g royalty interest. -- 4,0625 OF 8/8THS 5. The assignor previously reserved - 6. The assignor previously conveyed - 7. LANDS AFFECTED by this assignment of interest T , the assignee, ! percent of the lease's working interest. percent overriding royalty interest. percent overriding royalty interest. percent overriding royalty interest Tract: 75-024 13 N , R 10 W , Seward Meridian , Alaska, Tract A Section 11, Unsurveyed, E 1/2, 320 acres; Section 12, Unsurveyed, Ail, including the bed of the Beluga River, Excluding U.S. Survey 3901, 635 acres; containing 955 ,acres, more or less. RECEIVED JUL -'G !994 ()ii & Gas Cons. Commission ,Anchorage The Notification Lessee for the purpose of receiving any and all notices from the State of Alaska in connection with the lease will be: Name Z-Energy Inc. Atto: Paul L. Craig, President Address 2900 Boniface Parkway, Suite #610 ? City, State, Z~p Anchorage, Alaska 99504-3132 We, the undersigned, request the approval of this assignment application. We attest that this application discloses all parties receiving an interest in the lease and that it is filed pursuant to 11 AAC 82.605 and 11 AAC 82.615. We further attest that all parties to this agreement are qualified to transfer or hold an interest in oil and gas leases pursuant to 11 AAC 82.200 and 11 AAC 82.205. Whether approved in whole or in part, the assignee agrees to be bound by the provisions of said lease. i£:~BPM KUP~RUK PETROLEUM EM~IMEERIM~ ARCO Alaska, Inc. Post Office Box 100360 Anchorage, Alaska 99510-0360 Telephone 907 276 1215 July 11,1994 Post-It" brand fax transmittal, memo 7671 Mr. David Johnston, Chairman Alaska Oil and Cas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501 __ ~_ . . ii By FAX Dear Mr. lohnston: .Subject: Drainage Radius Calculation for BRU 212-18 Attached is an estimate of original gas in place (GIP) and an equivalent drainage radius (req).calculation for Beluga River Unit well 212-18. The req estimate was requested bythe commission during the June 10, 1994 hearing on Z-Energy's request for a location exception for NBR 12-2. The calculations are intended to show an expected magnitude of the drainage radius for BRU 212-18. Production is commingled from multiple sands in the Beluga formation's G and H intervals. The latest material balance (P/Z) analysis indicates a GIP of approximately 10.6 BSCF. From the volumetric equation and given reservoir parameters, this GIP equates to 207 acres. Assuming a cylindrical drainage pattern, req is estimated to be I690 feet. Also attached is a copy of my resume and Kerri Thompson's resume. Please call me at (907) 263-4304 if you have any'questions. Sincerely, D. A. Grove BRU/Kuparuk Staff Manager DAC/BN:fl (084) Attachments ¢C: Frederick H. Boness Paul Craig, Joe Dygas, Carol Lee, Mike Shook, Corey Woolington, Preston, Gates, and Ellis Z-Energy, Inc. Bureau of Land Management DNR, State of Alaska Shell Western E&P, Inc. ChevrOn U.S.A., Inc. ARCO Ara~.k~, I~¢, ~: a Subeidi~v o~ AilartlicRIchtiel~Cor~l~arty Estimation of Gas in Place and Drainage Radius .BRU 212-18 8RU 212-18 is the northernmost well within the Beluga River Unit. The well was drilled and completed in 1975 and first produced in 1985. Commingled production is from sands in the Beluga formation's G and H intervals and has ranged from 1 to 4 MMSCFD. Gas composition is 99+% methane and the reservoir appears to be primarily a depletion drive reservoir. The following calculations are intended to show the expected magnitude of BRU 212-18 drainage radius. Estimation of original gas in place (GIP) by material balance is traditionally used for this type of reservoir. The general material balance equation reduces to the gas material balance equation' G~gi -- (G - Gp) ~g 1. G -- Original GIP (scl) Bgi -- Initial gas FVF (rvb/scf) (313 -- Cumulative production (scf) Bg -- Gas FVF at current pressure (rvb/scf) (FVF is formation volume factor) with the following assumptions' - No water drive - No interstitial water produced - Reservoir pore volume is constant - 'Reservoir temperature is constant - No NGLs condense in reservoir - Change in rock and interstitial water volumes are negligible - Average reservoir pressure for each' cumulative production point Substituting z~ 2. Bg = 0.00504 ,--- P and solving for P/Z: [=- z Given the above assumptions', P/Z vs. Gp should plot as a straight line on Cartesian coordinates with a y-intercept of (Pi/Zi) and a negative slope of (-Pi)/(ZiG). If the line is extrapolated to P =- O, then Gp -- G and an original gas in place estimate is Obtained. .JUL 11 '94 1£:44RM KURRRUK PETROLEUM EHGIHEERIHG R.3/9 Figure 1 (P/Z vs. Gp for BRU 212-18) illustrates this technique. A linear best fit of all the data by the least squares method is' P/Z---231 Gp + 2741 where P = average reservoir pressure (psia) at time of given Gp values C.13 = cumulative production (scl) Extrapolating to P -- 0 yields G ~- 11.9 BSCF. The linear trend deteriorates with the last two data points. Possible reasons for the non-linear deviation in the data are a weak water drive, significant formation and/or water compressibilities, or anomalous pressure data due to the effects of commingled layers. Additional pressure data over time is required to validate the trend and its cause. The apparent flattening of the line's slope results in an optimistic estimation of gas in place. If the last two data .points are not honored, a linear best fit by the least squares metl3od is: P/Z = -304 Gp + 2797 Extrapolating to P = 0 yields G = 9.2 BSCF. The range of material balance reserve estimates is from 9.2 to 11.9 BSCF with an average of 10.6 BSCF. The areal extent of this average reserve estimate carl then be calculated from the volumetric equation with the following assumptions: G = 43,560 AhO( 1-Sw ) 4. 5.615 · Bg G - Original GIP (scf) A = Areal extent (acres) h = Pay thickness (feet) -- Porosity Sw = Water saturation Bg -- Gas FVF (rvb/scf) 43,560 ft2/acre 5.615 ft3/rvb Sands are homogeneous Constant values of 9, Sw, h in each sand layer Average ~ and Sw of all pay as input to equation Solving for A: 5.615 · GBg ZiT ....... where Bg = 0.00504 ,,,-- 43,560 eh~(1-$w) Pi , .JUL 11 '94 12:44PM KUPARUK PETROLEUM EMGIMEERIMG P.4/9 For BRU 212-18: G -- 10,6 Bscf Pi -- 2428 psia Zi - 0.825 T. -- 560°R h = 55 ft = 0.23 Sw = 0.50 and (0.825 ·560) Bg= 0.00504 ·.- -- ..... = 0.000959 2428 $.615 '10.6 w,g· (0D00959) A= =207 43,560 ·55· (0.23) · (1-0.50) Assuming a cylindrical shaped reservoir, an contain the estimated reserves is: rvb/scf acres equivalent IA·43,560 ~267 ,43,560 r eq -- .= -- 1690 feet; radius required to . JUL 11 'D4 1~:44PM KUP~RUK ~ETR©LEUM EM~IMEERIM~ P.5/~ FIGUtLE 1. BRU 212-18 3000 2500 2000 .. N~ "-..,,~'-.,,~ P/Z - -231 Gp + 2741 =. ~$oo "'. lOOO _ ...~._.~...~-, ,, ,, ,, 0 2 4 6 8 10 12 14 16 BRU 212-18 Material .Balance Data Date Gp(mcf) Gp(bct) P(pala) Z Gp(bcf) 10/31/75 0 0,00 2426 ' 0.825 0.00' 2943 7/31/85 110951 0.11 2228 0.828 0.11 2691 10/31/86 669992 0.67 2136 0,830 0.67 26?3 10131/86 920406 0.92 2017 0.832 0.92 2424 5/31190 1742696 1.74 1889 0.838 1.74 2254 4/30/91 2492985 2.49 1761 0.842 2.49 2091 3/31/92 3472018 3,47 1639 0.850 3.47 1928 3/31/93 4358580 4.36 1572 0.852 4.36 1 845 3/31/94 6155161 5.16 5,16 11.68 ,JUL 11 '94 12:45PM KUPARUK PETROLEUM EMGIMEERIMg PoG,"9 Eauat)on References . Worldwide. Practical H. C. "Slip" Slider Penwell Publishing Tulsa, OK Equation 5-21 Petroleum Reservoir .Engineering Methods Company, 1983 page 274 Petroleum Reservoir Enqineer!ng (Physic~,l ProDerties) James W. Amyx; Daniel M. Bass, Jr.; Robert L. Whiting McGraw Hill Book Company, 1960 New York, NY Equation 8-30 page 573 . · A.Dplied PetrQleum Rese. rvoir ..Engine. ering B. C. Kraft and M. F. Hawkins Prentice-Hall, Inc., 1959 Edgewood Clifts, N. J. Equation 1-6,' 1-7 page 24 Slider EquatiOn 5-12 page 270 3. Amyx, etal Equation 8-32, page 593 ~ .blatura! Gas Engineering !Production and Storage) Donald L. Katz, Robert L Lee MaGraw-Hill Publishing Company, 1990 Equation 10-1a page 435 Craft and Hawkins Equation 1-13 page 26 BN:fl (082) JUL ii '94 12:45PM KUPARUK PETROLEUM ENGINEERING P.?/9 Resume of DEBRA A. GROVE PROFESSIONAL EXPERIENCE ARCO Alaska, Inc. Beluga t Kuparuk Staff Manager, Anchorage, Alaska January, 1993- present Responsible for alt aspects of Beluga River Fielcl including operations, engineering, safety, environmental, and financial performance. Serve as an Anchorage contact for Kuparuk Operations and interface with other AAI departments, working interest owners and regulatory agencies. Perform special projects and studies for Kuparuk Field Manager. ARCO Oil & Gas Company Joint Interest District Engineer, Houston, Texas August, 1991 - December, 1992 Responsible for ARCO's offshore Gulf of Mexico CATO properties. Influenced partners to initiate development/extension drilling programs and workover/recompletion programs in the mature Grand Isle 41/43/47 and WC 66 fields. Initiated extension drilling in EC 62/64 fields. Drilling and remedial programs were very successful in developing bypassed and undeveloped oil and gas reserves. Worked closely with Conoco to reduce drilling and operating costs. Project Coordinator, Houston, Texas November, 1990-July, 1991 Coordinated a multi-discipline geoscience, land and engineering team to exploit the Austin Chalk horizontal drilling oil play. Analyzed trends and well performance. Recommended locations and drilled twelve horizontal wells. Evaluated co-owner proposals and acreage submittals. Implemented engineering, operational and strategy changes to reduce cost, improve well performance and increase the overall project value. Coordinated evaluation and prioritization of thirty onshore exploration prospects. Senior Drilling t Completions Engineer, Houston, Texas February, 1990 - October, 1990 Prepared completion, workover, drilling and P&A procedures, cost estimates and regulatory permits for onshore and offshore weIls. Responsible for safety and costs of operations. Became District specialist on subsurface safety valves. Developed a comprehensive guide for safety valve selection to minimize future failures. Senior ProUuction / Facilities Engineer, Penitas,' Texas July, 1988- January, 1990 Identified, evaluated, prepared procedures and supervised workovers, recompletions, well testing, stimulations, P&A's, coiled tubing cleanouts, perforating and cased hole logging in eight fields in south Texas. Designed and implemented two compression projects and several minor facility projects. Acquired regulatory permits and monitored allowables. Reservoir Engineer, Houston, Texas June, 1983 - June, 1988 Performed pressure transient, icg, well and reservoir analyses, evaluated economics, and .recommended development and extension drilling, recompletions, workovers, well conversions, stimulations and fracture treatments in Wilcox, Vicksburg, Frio and Yegua fields in south Texas. Planned and initiated development of three newly discovered gas fields. Evaluated numerous exploration prospects. Evaluated producing and non-producing properties for acquisition, divestiture and farmout. Prepared reserve reports, long range plans and budgets. ,EDUCATION Texas A&M University, College Station, Texas Bachelor of Science in Petroleum Engineering in May, 1983 Grade Point Average: 3.8/4 RECEIVED JUL 1 1 1994 Oi,t,& ,Gas boris. ~jummtssto~ Honors' Whiting Award for Outstanding. Petroleum Engineering Graduate, Petroleum Equipmed~~s Association National Outstanding Student Award, Magna Cum Laurie, Tau Beta Pi Engineering Honor Society, Phi Kappa Phi Honor Society, Houston Endowment Scholarship ~UL ii 'g~ 12:~PM KUPRRUK PETROLEUM ENGINEERING DEBRA A. GROVE Page 2 ,SpeCfic ~fq. rmation R~ardi~ Ex~rtise in SelecU.ng_ Well Locati.o~ ! have been directly responsible for the development of existing fields and nearby extension opp~ities throughout my career. I have evaluated and pursued numerous development, extension ~ execration prospects as well as numerous producing properties and undeveloped acreage for acquisition or dN, e,s~ture. My experience has covered many different aspects relating to development and extension d~'i~ling end often involved the coordination of tand, geoscience, engineering, operations and marketing person~. As a reservoir engineer, I performed research on existing we Is and trends in an area transient, log, core, well systems and reservoir performance data to identify opportunit~' rea .'~!? pertinent land, engineering and geologic information and sel~ted well Iocatio'ns. evaluated economics and obtained funding approvals. I provided reservoir engineering operations, l also developed strategies for developing new fields based on geologic, Below I have listed specific examples illustrating my experience n selecting well locations. Ex.0Jorati_on/Extensj, on Drilling_and Farmout Evaluatio~ Determined reserves ..... and evaluated economics for numerous gas and some oil extension .~.a, ' ,,,e~,~' '"..,.:' a prospects. Coordinated the engmeenng evaluation of thirty exploration projects in 1991, '~~~1~, twenty farmout requests for undeveloped acreage in south Texas. Made recommendati,o,~,,~e, s~~p farmout acreage based on offset well performance, current mapping expected reserves ~R~~~l~&" ~r Gulf of Me4i.co, Offshore Louisiana. Under my supervision, joint engineering and geoscience teams identified numerous develepr~et, exploration prospects in Grand Isle 41/43/47 West Cameron 66 and East Cameron 62/e41 CATO partners to initiate drilling programs in these fields, Drilling programs were very s~.", '.". .developing bypassed and undeveloped oil and gas reserves. Austin Cha!k, Wilson and Gonzales Counties, Texas Performed reservoir studies and analyzed vertical well production trencls. Worked counterparts to select locations and obtain funding for a horizontal drilling program. oil wells with varied varied results. Evaluated numerous acreage submittals for horizon~l,,,~ng i' " opportunities. Zabasco Field, Hidalgo County, Texas Performed.reservoir and economic analyses. Selected locations for two extension gas maps. Obtained funding and provided reservoir engineering support during drilling and tes~[" .t~l~e~,~ wells proved to be commercial producers. ' ' '" Las Ovei_'a8 an_d Roieta_Fields, Zapata County, Texas Performed reservoir and economic analyses. Selected locations for one extension and two wells based on existing maps. Obtained funding and provided reservoir engineering suppo~.~ng,~lll~,, ' testing, and fracture stimulation operations. Two weIIs were commercial and one was ~ Obtained approval for a 3-D seismic program to assist in optimizing development of Role~al!~s~.~.' internal extension plays and one large acreage submittal including both producing and und~;ife~. ~i~'~$. Rollem aod .Bright Fal.con Fields., Bee County and Jackson Counties, Texas. Developed an evaluation and testing program for the discovery well in each gas field. Eva, l~a~ed ~.li . , , . . performance, trend reformation and acreage pos~t~on. Developed a strate.~y for subsea~uef~l initiated development drilling in both fields. Drilled two successfu developr~nt wells an~ _C_oium_ bus Field, Colorado County, Texas Performed a reservoir study and identified a location for an infill well. Obtained funding arid ~iilled a successful gas well. &2:4?PH KUPARUK PETROLEUM ENGINEERING P. 9/9 KERRI IRENE THOMPSON 7511 Huckleberry Circle Anchorage, AK 99502 (907) 243-3987 EDUCATION: WORK EXPERIENCE: University of Washington, Seattle, Washington M,S. GEOPHYSICS---September 1989 GPA: 3,44/4.00 Honors: Fellowship, tuition and living expenses Memberships: American Geophysical Union · Society of Exploration Geophysicists Colorado School of Mines, Golden, Colorado B,S. GEOPHYSICAL ENGINEERING---May 1987 Minors: Geology and Mineral Economics ' '. GPA: 3.26/4.00 ' ' Honors: Amoco Scholarship, tuition 1983-1987 · Academic Dean's List · Academic Honor Roll Memberships: Society of Exploration Geophysicists · Society of Student Geophysicists · Society of Women Engineers Arco Alaska, Inc.- South Alaska Exploration Anchorage, Alaska---Geophysicist September 1989-Present Interpreted and mapped onshore and offshore seismic data in and around Cook Inlet Basin for prospect generation · Planned testing for and monitored the acquisition and processing of several innovative seismic programs · Recommended several acreage acquisitions and drilling opportunities · Performed geological, geophysical and petrophysical well-site work on several exploratory and development wells · Participated in geological field programs studying the Tertiary and Mesozoic geology of the Upper Cook Inlet Basin University of Washington - Geophysics Department Seattle, Washington---Research Assistant August 1987- September 1989 Areas of research were focused on but not limited to the State of Washington's seismic network · Prime responsibility was to analyze focal mechanisms for the western Mount Rainier seismic zone and assess its tectonic significance · Secondary responsibility was to analyze data comparing three earthquake location routines commonly used in the United States and prepare results for section of technical report submitted to the Department of Energy , 31JL 11 '94 02:31PH RR~ LEGRL DEPT P.1/B f , ,ak ARCO ALASKA, INC. LEGAL DEPARTMENT FAX COVER SIiEET Inly 11, 19~4 Page I of $ FROM: Rosanne M. lacobsen, ~q, ARCO Alaska, Inc. Anchorage, Alaska Tel~hone: 907-265-6549 TO: Post-It'" brand fax transmittal memo 7671 I # of pages ICG. Ic°' I IPhone ~ JDept. j ~ .. Mr. David Johnston Chairman/Commissioner Alaska Oil & Gas Conservation Commission Phone: 279-1433 Fax: 276-7542 Paul T, Craig Z-Energy Inc. Phone: 563-5686 Fax: 561-5478 Frederick H. lioness, E Preston, Gates & Ellis Phone: 2'76-1969 Fax: 276-1365 Joe Dygas Bureau of Land Management Phono; 271-4403 Fax: 271-5425 Carol Lee Department of Natural Resources Division o£ Oil and Gas Phone: 762-2547 Fax: 562-3852 ,MESSAGE RECEIVED dUL 1 1 1994 Alaska 011 & Anchorage Confirmation copies wi:il be mailed. , FAX NUMBER: 90%265-6998 CONFIRMATION: 907-265-6051 CONFIDI~b~IALITY NOT!C.._ The documents accompanying this facsimile m~sage contain confidential communications which may be subject to protection ander the attorney-client privilege or the attorney work-product doctrine. These documeats are intended solely for the use of the proper addressee and should not be read or retalne~l by anyone other than the intended recipient. Ir you have received this telecopy in error, please notify us immediately by collect telephone call at the number shown above. Thank you. ARCO Ala,:ka, In~;. Legal Department Peat Offi~,e Pox 100360 AnChorage Alaska 99510 Tele,~hone 907 266 6E49 Ro~,anr~(~ M. Jacobsen Attorney July 11~ 1994 Mr. David Johnston Chairman Commissioner Alaska oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501 BY Re: Z-Energy'~ Request for Location Exception for NBR 12-2 Dear Commissioner Johnston: This lette~ addresses .~.v~.~al points whie. h arose during the June 10, 1994 hearing and also responds to Z-Energy's June 10 lette~ which w~ no~. made available t~ ARCO prior to the hearing. First, ARCO. agrees with Z-Energy that exception~ to statewide 'spacing rule~ may. be gran%ed. However, they may only be granted under the specific circumstances set forth in AS 31.05. 100(b) .!/ In sum, AS 31.05. 100 (b) atlthu~-i~ the Commi.~sion to grant a location exception only where the It.is unlikely that AS 31.05.100 applies only to established pool~, because these are typically already governed by pool rules. If the statute does only apply to emtablished pools, then 20 AAC 25.055(a), which is authorized by AS 31.05.100, may also be restricted to established pools. This interpre- tation would leave the vast majority of the state without statewide spacing rules. Even if AS 31.05.100(b) only applies to established drilling units, it is a good model. The legislature has already deter- mined' that it protects correlative right~ of uf~mmt owners. There islittle difference between e~tablished pools (that are nonUnitized) and other acreage, as far as co~relative right~ RECEIVED inc. iS a Subaldiary of Atiarttlc RiChfield JUL 1 1 1994 Alaska 0i! & f~as (~ons. (;ommtss~ Anchorage JUL il '~4 02:a2PM AAI LEGAL DEPT P.a~"O Mr. David Johnston July 11, 1994 Page 2 applicant can prove that a well drilled 1500 feet from a secti, on. l~De would be unproductive, or where topographical conditions-'~' would make the drilling of a well 1500 feet from a .~ectlon line unduly burdensome. Z-Energy ham not met its burden of Droving that an exception location is authorized by statute. To the contrary, abundant eVid~no~ wa~ in%rodtle~.d at the hearing which showed that Z-En.e~gy believes that all of Section 12 may be filled with ga~: ~-/ petroleum Information reported on May 11, 199~, after interviewing Z-Energy, that Z-Energy ' s prosp=ot covers 955 aore~, in seotion~ 11 and 12 (Exhibit I1); Erik Opstad's map, prepared for Z-Energy and dated September 1993, shows that gas ¢ove~s the vast majority of Section 12 (Exhibit 9); z-Energy clearly stated that the X33-12 well was p. roductive in a meeting with ARCO r=~z-~sentativ¢~ · n the fall of 1993. (Tr. at 107.) Erik Opstad's Executive Summary, prepared for Z-F. nergy and dated September 15, 1993, state~ the following regarding Bu~glin'~ X33-12 well: The conclusion drawn from these obser- vations is that the Sterling A horizon contains. Dorous and permeable sandstone OaD~.ble of. producing gas at.._si~nificant .rates when drilled and comDleted. These logs were al~o submitted to 3 other Z-Energy does not rely upon the "topographical considerations" g~ound. ARC() ~how~d that the topographical eon~id~ra~.ions a~ worse at the exception location than at a location 1500 feet from %he se~tlon line. A~u~ing a ~t~aight hole is arilled, the surface location would not only be in the "crook" of the ~olug~ Rivor, but it would be on the opposite side of the Beluga River from roads, pipelines, and other facilities. It remains ~2R¢O's position, however, that none of the acreage JUL 1'1 199,4 ' Anohorago JUL 11 '94 02:SSPM AAI LE~AL'DEPT P.4/B Mr. David Johnston July 11, 1994 Dagc 3 A/ prominent Alaskan log analysts in a blind test fo£ th~iz- v~inio~%. There was unani- mous consensus with this conclusio_n_.. (~.xhibit 13 at page 9.) (emphasis added,). The Executive Summary also states: ,,There are no apparent structura.l....Or ~eDo-~itional barriers whlc~ would pressure isolate tract ADL-3812...24 from the greater Beluqa River.u..n..1.t accumulation." (Ex~iDit 13 at page 4) (emphasi~ added). No Z-Energy or ARCO maps indicate any faults which would separate a location 1500 feet from the section line from Beluga River Unit production. (Exhibits 5, 6, 8, 9, 10.) Ke:~ri Thompson, who has reviewed and mapped the me'~.~m~ c data over the Beluga River Unit and sections 11 and 12, including the 1993 seismic aata, ~ee~ no faul~ in ~.he "enti~. g~ pay interval." (Tr. at 141-42.) w. rik Opstad agreed with Ms. Thomp~on's analysis: ,,T don't ~.~o a lot of -- a lot going on in %he main section either." (Tr. at 142.) The ~ evidence which could possibly support Z-Energy's position wa~ inLrvduo~d la'~ i~ Lhe day when Mr. Op~ta~ opined that a lineament on an aerial photograph might be a fault. (Tr. at 14Z.) MS. Grove and ~s..Thompson both testified that the lineament was the shoreline and was due to modern-day processes. {Tr. at. 14z-43.) ar. opstad agreed. (Tr. at ~ven if the lineament is a fault, Mr. Opstad has not shown where the fault would intersect the prospective horizons, an~ that the fault would cause a location 1500 feet from the sec- tion line to be unprOdUctive. Indeed, Mr. Opstad's own maps (Exhibits ~ 8 9) and testimony (Tr. at 142) contradict this position.l;' ' At the hearing, Mr. 0D~tad attemDted to "exDlain away" his previous maps and writings. Mr. Opstad even admitted that "we haven't Dut any of our real interuretations out on the table" ¢ E IV E O ~. D~v~.d Johnston July 11, 1994 Page. 4 RECEIVED Anohomg~ In sum, Z-Energy simply has not shown that there is any loca- tion %500 foot or more from the section lin~ which would unproductive~ or would eYen be "less productive" than the exception location.~! Thus, the Commission laakn the ~tatu- tory authority to grant the location exception request. Second, the evidence ~hows that the Beluga River Unit is not draining Section ~Z. B~lUg~ River well No. Z%~-18, the closest well,, is 1800 feet from Section 12. The regulations presume a ~5~00-£oot drainage radius. ZO AAC (a)(4). Mr. Opstad also testified that a 1500-foot 4rainage radius wa~ appropriate zor t~is area. (Tr. at 117.) Finally, ARCO's material balance calculations indicate that the well's drainage ~adius i~ approximately 169o feet. ment to ARCO's letter dated July 11, 1994.) This same evidence proves that the exception location, if successful, would drain Beluga River Unit ~eserves. Mr. O.Dsta~ admitte~ this. (Tr. at 117.) Third, ARCO does not'believethat the AS 31.05.100(b) findings must be made in circumstances where correlative rights are not threatened. The~intent of AS.31.0~.100(b) is to Drotect cor- relative rights. Thus, if an exception location is requested ~within a unit or established drillin~ unit, or if a Drotest is not received, the Commission need not make the explicit finding Even if the ,Commi=mion were to find that ~he AS 31.05.100(b) findings must be made. in all circumstances, the Commission has broa~ powers to prevent waste and in~urc tho greatest ultimate recovery. AS 31.05.030. In cases where correlative rights are not threatene~ ~y an e~¢eption location and the exception location would provide the best management of the reservoir~ the Commission has the power to grant th~ exception location. 4_/(... continued) (Tr. at 103,) Apparently, z-Energy alters its view of the geology ~o match l=s audience. Z-Energy's repeate~ rationale ~'or t~e location exception is that such a location would be "optimal." ~veryone would like to drill wells in optimal locations. However, the statute simply doesn't allow a location exception to be granted on thi~ ba~i~. Z-~nergy's remedy i~ to acquire optimal acreage. Mr_ D~v{d Johnston July il, 1994 Page 5 Fourth, Z-Energy argued that the well sRacing regulation does not apply to the bottom hole location ~ exploration wells, because exploration wells are governed by 20 AAC 25.0SS(a)(2) (the e~ploration provision) inmtead of (a)(A) (development). (Exhibit i at page 2.) However, a well drilled immediately pools is not, an exploration well and should be governed by (~) (4). (See Tr. a~ 55.) A= any rata, it is unlikely tha~ the Commission intended, by the slight differences in wording Detween (~)(2) and (~) (4), to allow an exploration, but not a development, exception location well to drain an offset lease. Finally, if the location exception is granted, the Commission must protect the Beluga RAver Unit ownors' correlative rights. ~eloW are several options: (1) As the Commission noted, one option is to not authorize Z-Energy to produce lt~ well. (2). The Commission may prorate production from Z-~nergy's well and grant ARCO a similar location exception. For example, if z-Energy's well drains 160 .acres, and only 80 acres are on Z-Energy's lease, Z-Energy should only be allowed to produce half of the reserves. This can be accomplished by prorationing Z-Energy's production,~/ but, because prorationing'alone still allows Z-Energy to drain the Beluga River Unit'~ reserves (but at a slower ~t~), ARCO should.be allowed to drill an offset well 300.feet from'the section line. (However, as noted at the hea~ng, this option may not prevent waste or insure the greatest ultimate recovery.). This type of'approach i~ common in the Lower ~ -- Oklsho~, Colorado, North Dakota, and Nebraska statutes authorize allowables of this type'. Oee also Kramor aha Martin, the La___~w 9f.....Poollng.....~Dd Unitization § 5.02[2]; Chevron oi~ v. O.i3.and Gas conservation..C~mission, 43~ P.Zd 781 (Mon%. 1967); ~ y_. Corporation Commie,.ion of the Stat. e.of...Oklahoma., 575 P.2d 109 (Okla. '1979). Alaska ~tatutes also se~m to authori~e allowable~ of this type. See AS 31.0~.030(c) and (e)(6); AS 31.05.100(e). In addi51o~, the definition of corr=lative rights includes the concept of only producing reserves on your lease. AS 31.05.170(2). But' it would b~ ~d'visable for the Commission to first promulgate regulation, aut~i~i_n~ thi~ JUL ii '94 02~94PM AAI LEGAL DEPT P,?/@ Mr. David Johnston July 11, 1994 Page 6 (3) Z-Energy may produce the well under an integrated a~reement. ~0 AAC 25.517(b), (c). (Because the well ha~ not yet been drilled or tested, it is difficult to datmrmlne ~he t~m~ under which the well might be added to the Beluga River Unit. However, unit= typically do not reimbur~ offset well owners for the cost of drilling the well, do not re~llocatc pa~t production to the offm~t well owners, and require reimbursement for proportionate coasts of the pipeline an4 other faoilltie~.) (4) Z-Energy m~y pursue involuntary unitization. (However, it is unlikely that an involuntary unl'~ization woul~ b~ granted. As ~h= Commi~oion noted, involuntary unitizations will not be granted unless four £1ndi~9~ are ma~e. (AS ~.05.110; Tr. at 31-33.) One of these four findings is that. the unitization i~ reasonably nece~sa£~ for secondary or tertiary recovery. No secondary recovery is needed for t~e Beluga River unit because it is a gas field; thus, involuntary unitization is not authorized.) Each of these options is complex and would require much time and effort to ensure that correlative rights are protected. Protracted agency proceedings and litigation ~ay result. By merely following the sDacinq rules, the Commission ensures that correlative rights are protected and waste is pre- vented.I/ In sum, Z-Energy has not proved that it is entitled to location exception under the statute. THUS, the Commission w~.thot~t n~at~:to~y ~uthor~%y to grant it. . jUL ! ! 1994 Recall that the Commission has recently stated that the statewi~e spa=in9 rule~ are ~re~umptively appropriate for' preventing waste, protecting correlative rights and in~uring the greatest ultimate recovery. Mr. David Johnston JUly 11, 1994 Page 7 ARCO Alaska a~k~ the Commission to follow its spacing rule~ and deny Z-Energy's request for a location exception. We appreciate your consideration. Sincerely, cc: Frederick H. Boness, Esq. Paul Craig, Z-Energy Joe Dygas, BLM Carol Lee, DNR Michael T. Shook, Shell Western E&P Corey Woolington, Chevron, U.S.A. BY FAX BY F~X BY FAX RECEI,VED Z-Energy EXHIBIT .. System Series Lithology ~ Forms.elan thickness{fee! ) Rec. ..=..:~:::...x=~;:... Alluvium .. "' ....... ~,~.. . '., .,.- ,~ ~,. Glacial ;. :t':'J.','~.'. ~.~ 2 ~- = -==,- :-,rr Sterling Fro. 0 : ~~::~ I1,000' .., . ~ ~.. :~ ....... ',2. ............. ~... Belugn Fro. 0 ~ I~ ............... Z . ii ~ ~ :7~3~'.~ ;~ Chuitna Mem. ~ ~"'~'"':;'"'~"" ~id. ~round ~ Z ....... Shonl ~em. z,~ ....... } 2600'- 5000' o U .... :.; ~:~' _~:.. ~ =~;. ,~,,~,? .,~ Hemlock Congl. '-' ~<~ ~~'~ W. Foreland ~m. Voo~ .~.--'~'",,~.' ,., ,..... ,n ., ,. ..~;~- 300'- 1400' ~ ','2.~. ';;::.~..;~.~'~':'1 o - shoo ~ ~ ~ :'¢~/.","~..,",','~ ,' Unnemed O' - 1800' 0 .......... O' ~ ,".', .: ' .'.." :'..': "' - 7000' ~ ~ :~ ~.-/~ ~'~: '~. ~. ~ · ~ .~;:.~:.'.~:.:~.:: ~ o - e7oo. ~l ~ ~d.i O'.T e4°°:i i i LEGEND Conglomerate Sandstone Siltstone 'Mudstone/Shale Coal Volconics Oil production Interval Gas production interval Surface oil seeps REFERENCES Alaska Geological Socfsly, 1970,oll ar~ gm flelc~ in Ihl Cook Inlet B~ln,Alaska. CoMer. wood, X.W. and Fockllr, W.C., 1972, ~oposed Itrotiqrophic nomenclature for Keno, Group, Cook Inle! Basin, Alaska. Am. Assoc. Pi Irol~m Geologlefl BulI.,v.$6 no;4, p. 739-754 Magoon, L.B., and ClaypooI,G. E., 1979, P~froh,~m .Geology of Cook Inlif Basin, Alaska -- an exploration model: U.$,G.$.optn file r~orf n0.79-548. Oellwmon, R.L., and Read, B.L.,1980, Stratigraphy, Slructure, and Economic Geology of the Ill,arena Quadrangle, Alaska: U.$.G.S. Bull. 1368 -B. Flsh~', M.A., and Ma~}oon,L.B., 1978, Geologic Frame- work of Lower Cook Inlet,Alaska, A.A. RG, 8ulh, Vol. 62 NO. 3, p, 373-402. ALASKA OIL AND GAS CONSERVATION COMMISSION GENERALIZED STRATIGRAPHIC COLUMN Cook Inlet Basin, Alaska April, 1981 A ,generalized stratigraphic column for the Cook Inlet area, Alaska, modified after a 1981 publication by the Alaska Oil & Gas Conservation Commission. This presentation includes the Hemlock as a Member of the Tyonek Formation as has become common practice in recent years. . r , EXPLORATION DRILLING UNIT 20 AAC 25.055 (2) V ii Ill I'lll Ii i ! ! ii i < --2,280 FEET .... > A t_.~l ¢'-,,1 1 v Total Ar, ea (100%) = 27,878,400 sq. ft. (640 Acres) 20 ACC 25.055(2) (18.65%) = 5,198,400 sq. ft. (119.3 Acres) Exception Required (81.35%) = 22,680,000 sq. ft. (520.7 Acres) Z-Energy Inc. EXHIBIT PRESTON GATES & ELLIS ATTORNEYS July 5, 1994 David Johnston, Commissioner and Chairman Russ Douglass, Commissioner Tuckerman Babcock, Commissioner Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 Z-Energy's Request for Spacing Exception NBR No. 12-2 Cook Inlet, Alaska ' Dear Commissioners: Enclosed are copies of approved assignments of Alaska Oil and Gas Lease ADL 381224 from leaseholders Paul L, Craig and Peter G. Zamarello to Z-Energy, Inc. As of June 21, 1994, Z-Energy holds a 100% working interest in the lease, which is the subject of the above well spacing application. The assignment applications were made in April 1994, prior to the Z- Energy well spacing application to the Commission, but approval by DNR apparently was delayed because of a failure to file the required number of executed copies. I also would like to clear up one other technical matter. Z-Energy's original well spacing application to the Commission, in its May 9, 1994 letter, referenced 20 AAC 25.055(a)(4), which begins "where gas has been discovered ..... "Although Z-Energy is optimistic about the prospects for discovering gas on its lease, it of course has not yet drilled a well on its lease. Z-Energy's initial letter to the Commission should have referenced 20 AAC 25.055(a)(2), which concerns exploration for gas. Although the nature of Z-Energy's application was discussed at length in the June 10, 1994 heating, as well as in my letter to you of the same date, I wanted to be certain that no further confusion exists. Please accept this letter as a formal correction of the initial application. Erik Opstad will be providing additional geologic information concerning faulting to the Commission, as discussed at the June 10, 1994 heating, within the next week. A copy will be provided to counsel for ARCO Alaska, Inc. as well. ~ E C ~IV ~ D SurrE 400 JUl_ - G 1994 . ~,.., ~-,,i & Gas Cons. Commission 420 L STREET ANCHORAGE, ALASI~ 99501-1937 PHONE: (907) 276-1969 FACSIMILE: (9~T~hl~'?~]-~365 COEUR D'ALENE. LOS ANGELES · PORTLAND · SEATTLE · SPOKANE · TACOMA · WASHINGTON, D.C. A PARTIqERSlqlP INCLUDING A PROFESSIONAL CORPORATION Page 2 July 5, 1994 Please let me know if you have any further questions. Sincerely, PRF_,STON GATES & ELLIS By' Mark H. Wittow cc: Rosanne Jacobsen, counsel for ARCO Alaska, Inc. Joe Dygas, BLM Mike Kotowski, DNR RECEIVED JUL - 6 1994 ~!aska 0ii & Gas Cons. Commission Anchorage WALTER J. HIC,KEL. GOVERNOR DEPT. OF NATURAL RESOURCES DIVISION OF OIL AND GAS PO, BOX ~0'~34 ANCHORAGE, ALASKA 99510-7~3,t PHONE: (907) 7~2~2553 Assignor: Peter G. Zamarello 4240 Old Seward Highway #A16 Anchorage, AK 99503 Assignee: Z-Energy 2900 Boniface Parkway #610 Anchorage, AK 99504-3132 DECISION JUN 2 3 lgg Oil and Gas Lease ADL 381224 Assignment Application Aooroved Application for approval of assignment of 75.0 percent working interest from Peter G. Zamareilo to Z-Energy Inc. is hereby approved effective June 21, 1994. Peter G. Zamarello will retain 8.43750 percent overriding royalty interest.. This assignment is approved as to the working interest only and does not constitute approval or acceptance of any stipulations or attachments to the assignment instrument. An approved assignment is enclosed with this decision. Director Enclosure JE/JS/dl/381224.PGZ RECEIVED JUL -~ *we....: oil & Gas Cor]s. Commission 4nchorage DO&G 2544 (LEASE ASSIGNMENT) Revised 7/91 DNR #10-113 LEASE ADL 381224 EFFECTIVE DATE OF LEASE April 1, STATE OF ALASKA DEPARTMENT OF NATURAL RESOURCES DIVISION OF OIL AND GAS 1993 ASSIGNMENT OF INTEREST IN OIL AND GAS LEASE The undersigned assignor whose address is as owner of Peter G, Zamarello 4240 Old Seward Highway #Al6) AnchoraKe) Alaska 99503 Seventy-Five (75%) percent of the lease's working interest - percent overriding royalty interest does hereby assign to Z-En~.rgy. Inc., a Delaware corporation whose address is 2900 Boniface Parkway {~6~0, ABghorage. Alaska 1. Seventy-Five (75%) 2. -- -- 3. The assignor is retaimng - 4. The assignor is retaimng 8.4375 OF. 8/STHS. 5. The assignor previously reserved - -- 6. The assignor previously .conveyed 7. LANDS AFFECTED by this assignment of interest T , the assignee, 995o4-3132 , percent working interest; percent overriding royalty interest. percent of the lease's working interest. percent overriding royalty interest. percent overriding royalty interest. percent ovemding royalty interest. Tract 75-024 13 N , R 10 W , Seward Meddian, Alaska, Tract A Section 11, Unsurveyed, E 1/2, 320 acres; Section 12, Unsurveyed, All, including the bed of the Beluga River, Excluding U.S. Survey 3901, 635 acres; containing 955 acres, more or less. RECEIVED JUL -6 1994 0il & Gas Cons. Commission Anchorage .. The Notification Lessee for the purpose of receiving any and ail notices from the State of Alaska in connection with the lease will be: Name Z-Energy Inc. Atm: Paul L. Craig, President Address 2900 Boniface Parkway, Suite .#610 ~ City, Shate. ;Zip Anchorage, Alaska 99504-3132 We, the undersigned, request the approval of this assignment application. We attest that this application discloses all parties receiving an interest in the lease and that it is filed pursuant to 11 AAC 82.605 and 11 AAC 82.615. We further attest that all parties to this agreement are qualified to transfer or hold an interest in oil and gas leases pursuant to 11 AAC 82.200 and I I AAC 82.205. Whether approved in whole or in part. the assignee agrees to be bound by the provisions of said lease. Zamarello Assignor's Name (Print or Type) & Title April 26, 1994 Dam Company Name THE UNITED STATES OF AMERICA) )SS. STATE OF ALASKA Qualification File # certifies that on the ~,o ~0.-~ day of .t~.~ ,19 .~ q', before me, a notary pubUc This and for the State of Alaska ~ , duly commissioned and sworn, personally appeared Peter G. Zamarello , to me known and known to me to be the person described in, and who executed the foregoing assignment, who then after being duly sworn according to law, acknowledged to me under oath that he executed same freely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate first above written. Paul L. Craig, Presider~ Assignee's Name (Print or Type) & Title Notary Public My Commission expires l April 26: 1994 Date Z-Energy Inc. Company Name THE UNITED STATES OF AMERICA) )SS. STATE OF ALASKA Qualification Ftle# % ~ q [ This certifies that on the .,~ ~.4~ day of ~ .... 19 ff_.~, before me, a notar~ public in and for the State of Alaska a. , duly commissioned and sworn, personally appeared Paul L. Craig , to me known and known to me to be the person described in, and who executed the foregoing assignment, who then after being duly sworn according to law, acknowledged to me under oath that he executed same freely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate first above written. Notary Public APPROVAL ! The foregoing assignment is approve";:l as to the lands described in item 7 thereof, effective as of the date set forth below. -- DIRECTOR G''4'~zskaA~ 0ii & Gas Cons. Commission DIVISION OF OIL & Anchorage R. ECF_IVED jUL - S !994 JUN,. ! 199 Effective Date of Assignment WALTER J. HICKEL. GOVE,-~NO~ DEPT. OF NATURAL RESOURCES DIVISION OF OIL AND GAS P O. BOX ~07034 ANCHORAGE: A~SKA 99510-;~334 PHONE: (907) 7~2-2553 Assignor: Paul L. Craig 4962 Castle Court Anchorage, AK 99508 Assignee: _ Z-Energy Inc. 2900 Boniface Parkway #610 Anchorage, AK 99504-3132 DECISION JUN 2 3 199 Oil and Gas Lease ADL 381224 Assianment Aoolication Aooroved Application for approval of assignment of 25.0 percent working interest from Paul L. Craig to Z-Energy Inc. is hereby approved effective June 21, 1994. Paul L. Craig will retain 4.06250 percent overriding royalty interest. This assignment is approved as to the working interest only and does not constitute approval or acceptance of any stipulations or attachments to the assignment instrument. An approved assignment is enclosed with this decision. E. Eas'on~ ~ Director Enclosure JE/JS/dl/381224 RECEIVED JUL - S "'"' "~'~' ".'.}ii ,.-. ,~..~::~ & Gas CoDs. Commission Anch0r~e A~sig~or s Signature /I Paul L. Cra±g Assignor's Name (Print of Type) & Title April 25, !994 Dam Company Name TIlE UNITED STATES OF AMERICA) )ss. STATE OF ALASKA ~ Qualification File # TNs certifies mat on the ~ ~ ~ day of ~ 19 57 ~ before me, a notary pubnc in and for the State of Alaska , duly commissioned and sworn, personally appeared Paul L. Craig , tO me known and known to me to be the person described in, and who executed the foregoing assignment, who then after being duly sworn according to law, 'acknowledged to me under oath that he executed same freely and voluntarily for the uses and pu .rposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate first above written. Z-ENERGY INC.<. "/ //" ,,., ^ssig ';si rur - Paul L. gratg, President Assignee's Name (l~nt or Type) & Title Notary Public My Commission eXl~i~,.ss ~/~_.~,,~ .//?-.,'"' April 26, 1994 Date Z-Energy Inc Cotupany Name THE UNITED STATES OF AMERICA) )ss. STATE OF ALASKA ) Qualification me # ~ I q-I This certifies that on the .7 tO ~ day of ~ ,19 ,~ z/, before me, a notary public in and for the State of Alaska ~' ..... duly commissioned and sworn, personally appeared Paul L. Craig ., to me known and known to me to be the person described in, and who executed the foregoing assignment, who then afmr being duly sworn according to law, acknowledged to me under oath that he executed same freely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate fir.~t above wri~n, Notary Public My Commission expires .~'.,,~ ~/.~',,~" APPROVAL The foregoing assignment is approved as to the lands described in item 7 thereof, effective as of the date set forth RECEIVED '" DIRECTUH .... "-~ DNISi0N 0F 0IL & ~ JUN 2 1199 Effective Date of Assignment ~ -- Ill Il lmm [ ..... DO&G 25-84 (LEASE ASSIGNMENT) Revised ?/91 DNR #10-113 LEASE ADL 381224 EFFECTrVE DATE OF LEASE April 1, 1993 STATE OF ALASKA DEPARTMENT OF NATURAL RESOURCES ' '. DIVISION OF OIL AND GAS ASSIGNMENT OF INTEREST IN OIL AND GAS LEASE Paul L. Craig The undersigned assignor whose address is 4962 Castle Court, Anchorage~ Alaska 99508 as owner of Twenty-Five (25%) percent of the lease's working interest percent ovemding royalty interest Z-Energy Inc., a Delaware corporation does hereby assign to whose address is 2900 Boniface Parkway #610, Anchora?. Alaska 99504-3132 1. Twenty-Five (25%) percent working interest: 2. - percent overriding royalty interest. 3. The assignor is retaining 4. The assignor is retaining 4.0625 OF 8/8THS 5. The assignor previously reserved - 6. The assignor previously conveyed - 7. LANDS AFFECTED by this assignment of interest T , t.he assignee, ! percent of the lease's working interest. percent overriding royalty interest. percent overriding royalty interest. percent overriding royalty interest. Tract 75-024 13 N , R. 10 W , Seward Meridian , Alaska, Tract A Section 11, Unsurveyed, E 1/2, 320 acres; Section 12, Unsurveyed, All, including the bed of the Beluga River, Excluding U.S. Survey 3901, 635 acres; containing 955 .acres, mom or less. RECEIVED , JUL -G ~994 f"~ .... m & Cms Cons. Commission Anchor2¢ The Notification Lessee for the purpose of receiving any and all notices from the State of Alaska in connection with the lease will be: Name Z-Energy :[nc. Arm: Paul L. Craig, President City, State, Zip Address 2900 Boniface Parkway, Suit.. 1/610 Anchorage, Alaska 99504-3132 We, the undersigned, request the approval of this assignment application. We attest that this application discloses all parties receiving an interest in the lease and that it is filed pursuant to 11 AAC 82.605 and 11 AAC 82.615. We further at, st that all parties to this agreement are qualified to transfer or hold an interest in oil and gas leases pumuant to 11 AAC 82.200 and 11 AAC 82.205. Whether approved in whole or in part, the assignee agrees t~ be bound by the provisions of said lease. ,JUL Z1 '~4 ARCO Alaska, Inc. Post Office Box 100360 Anchorage, Alaska 99510-0360 Telephone 907 276 1215 July 11, 1994 Post-It'" ~orancl {ax transmittal Mr. David Johnston, Chairman Alaska Oil and Cas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501 ! . - . .. _ il . i i _ By FAX 17 l~--/z, t,/ WITNESS R · R COURT REPORIT:RS (~ 277-0572 LAUREL L. KEHLER Dear Mr. Johnston: .Subject: Drainage Radius Calculation for BRU 212-18 Attached is an estimate of original gas in place (GIP) and an equivalent drainage radius (req) calculation for Beluga River Unit well 212-18. The req estimate was requested bythe commission during the June 10, 1994 hearing on Z-Energy's request for a location exception for NBR 12-2.. The calculations are intended to show an expected magnitude of the drainage radius for BRU 2'12-18. Production is commingled from multiple sands in the Beluga formation's C and H intervals. The latest material balance (P/Z) analysis indicates a GIP of approximately 10.6 BSCF. From the volumetric equation and given reservoir parameters, this GIP equates to 207 acres. Assuming a cylindrical drainage pattern, req is estimated to be 1690 feet. Also attached is a copy of my resume and Kerri Thompson's resume. Please call me at (907) 263-4304 if you have any'questions. Sincerely, D. A. Grove BRU/Kuparuk Staff Manager DAG/BN:fl (084) Attachments CC: Frederick H. Boness Paul Craig, Ioe Dygas, Carol Lee, Mike Shook, Corey Woolington, Preston, Gates, and Ellis Z-Energy, Inc. Bureau of Land Management DNR, State of Alaska Shell Western E&P, Inc. Chevron U.S.A., Inc. ARCO A;a;l(a, I,¢, iS a Subeidiarv o! AilenliCRlchliel~ComD&ny JUL 11 '~4 1E:43k~d KUPNNUK Estimation of Gas in Place and Drainage Radius · BRU 212-18 BRU 212-18 is the northernmost well within the Beluga River Unit.,. The well was drilled and completed in 1975 and first produced in 1985. Commingled production is from sands in the Beluga formation's G and H intervals and has ranged from 1 to 4 MMSCFD. Gas composition is 99+% methane and the reservoir appears to be primarily a depletion drive reservoir. The following calculations are intended to show the expected magnitude of BRU 212-18 drainage radius. Estimation of original gas in place (GIP) by material balance is traditionally used for this type of reservoir. The general material balance equation reduces to the gas material balance equation' GBgi -- (G - Gp) Bg 1, G -- Original GIP (scf) Bgi -- Initial gas FVF (rvb/scf) Gp -- Cumulative production (scl) Bg -- Gas FVF at current pressure (rvb/scf) (FVF is formation volume factor) with the following assumptions' - No water drive - No interstitial water produced - Reservoir pore volume is constant - Reservoir temperature is constant - No NGLs condense in reservoir - Change in rock and interstitial water volumes are negligible - Average reservoir pressure for each cumulative production point Substituting z~ 2. Bg = 0.00504 '---- ? and solving for P/Z' ~'=- Gp+ Given the above assumptions', PtZ vs. Gp should plot as a straight line on Cartesian coordinates with a y-intercept of (Pi/Zi) and a negative slope of (-Pi)/(ZiG). If the line is extrapolated to P = 0, then Gp -- G and an original gas in place estimate is obtained. Figure 1 (P/Z vs. Gp for BRU 212-18) illustrates this technique. A linear best fit of all the data by the least squares method is' P/Z =-231 Gp + 2741 where P = average reservoir pressure' (Ps,a)' at time of given Gp values Gp = cumulative production (scl) Extrapolating to P -- 0 yields G = 11.9 BSCF. The linear trend deteriorates with the last two data points. Possible reasons for the non-linear deviation in the data are a weak water drive, significant formation and/or water compressibilities0 or anomalous pressure data due to the effects of commingled layers. Additional pressure data over time is required to validate the trend and its cause. The apparent flattening of the line's slope results in an optimistic estimation of gas in place. If the last two data .points are not honored, a linear best fit by the least squares method is: P/Z = -304 Gp + 2797 Extrapolating to P = 0 yields G = 9.2 BSCF. The range of material balance reserve estimates is from 9.2 to 11.9 BSCF with an average of I0.6 BSCF'. The areal extent of this average reserve estimate can then be calculated from the volumetric equation with the following assumptions: G -- 43,560 .~( i-Sw ) 4. 5.615 · Bg G -- Original GIP (scf) A = Areal extent (acres) h = Pay thickness (feet) O -- Porosity Sw = Water saturation Bg -- Gas FVF (rvb/scf) 43,560 ft2/acre 5.615 ft3/rvb Sands are homogeneous Constant values of 9, Sw, h in each sand layer Average O and Sw of all pay as input to equation Solving for A: 5.615 · GBg 43,560 where Bg = 0.00504 Pi JUL ~L '~4 1K:44PM KUPRRUK PLIKOLLUM ~H~£H~Mb ~.~ For BRU 212-18: G -- 10,6 Bscf Pi = 2428 psia Zi -- 0.825 T. -- 560°R h = 55 ft = 0.23 Sw = 0.50 and Bg = 0.00504 (0.825 .560) ·-- - ..... = 0.000959 2428 5.6i5 -10.6 W, 9 · (0D00959) A = =207 43,560 ·55· (0.23) · (i-0.50) Assuming a cylindrical shaped reservoir, an contain the estimated reserves is' rvb/scl equivalent radius required to A·43,560 207 '43,560 req -- = , = 1690 feet . 12:44PM KURARUK RETROLEWM EMG±H~±MG FIGURE 1. BRU 212-18 N "' 1 500 3000 e 2500 i~~~4~ ooo I ' ~ "-,.,. ~ P/7. ;- -~31 Gl3 * 2741 0 ' ' ' """"'" -- - -":~- ' - ---1 0' 2 4 6 8 10 12 ~14 Gp (B$cf) BRU 212-16 Material ,Balance Data Dala Gl~(mcf). Gp(l=cf) P(pala) Z Gp(bcf) 10/3117S 0 0,00 2428 ' 0.825 0,00' 2943 7/31185 110951 0.11 2228 0.828 0,11 2691 10/31/86 669!)92 0,67 ;~136 0,830 0.67 25?3 10/31188 920406 0,92 2017 0,832 0,92 2424 5/31190 1742696 1,74 1889 0.838 1.74 2254 4/30/91 2492985 2,49 1761 0,842 2,49 2091 3/31192 3472018 3,47 1639 0.850 3,47 1928 3/31/93 4358580 4,36 1572 0,852 4,36 1 845 3/31t94 5155161 5,16 5,16 11 JUL 11 "~4 iw:4oPM KUMNRUK ~LIRULLOM LMblMBLRIN~ ~ .... '-~ Eaua.tjQn References 1. ~Worldwide Practical Petroleum Reser_voiE.Engineerin¢ Methods · · H. C. "Slip" Slider Penwell Publishing Company, 1983 Tulsa, OK Equation 5-21 page 274 Petrole_um Reservoir En¢ceer(ng (Ph~zsical Pro0erties) James W. Amyx; Daniel M. Bass, Jr.; Robert L. Whiting McGraw Hill Book Company, 1960 New York, NY Equation 8-30 page 573 2. Applied Petroleum Rese. rvoir _Engine. ering B. O. Kraft and M. F, Hawkins Prentice-Hall, Inc., 1959 Edgewood Clift$, N. J. Equation 1-6, 1-7 page 24 Slider Equation 5-12 page 270 3. Amyx, etal Equation 8-32, page 593 4, .~atural Gas_Engineering fproducl;ion and Storage) Donald L. Katz, Robert L. Lee MaGraw-Hill Publishing Company, 1990 Equation 10-1a page 435 Craft and Hawkins Equation 1-13 page 26 BN;fl (082) .JUL 11 '~4 1¢::4DF~'~ KUI-'HNUK ~'P_INOLb. U~'I b.r',lr~.Lr'lh_b.~.Lrt~ ,. r/.., Resume of DEBRA A. GROVE PROFESSIONAL EXEERIENCE ARCO Alaska, Inc. Beluga / Kuparuk Staff Manager, Anchorage, Alaska Jsnuary, 1993- present ' :.:'..' Responsible for all aspects ol Beluga River Field including operations, engineering, safely, e .nvironmental, and financial performance. Serve as an Anchorage contact for Kuparuk Operations and interface with other AAI departments, working interest owners and reguiatory agencies. Perform special projects and studies for Kuparuk Field Manager. ARCO Oil & Gas Company Joint Interest District Engineer, Houston, Texas August, 1991 - December, 1992 Responsible for ARCO's offshore Gulf of Mexico CATO properties. Influenced partners to initiate development/extension drilling programs and workover/recompletJon programs in the ma,~re Grand Isle 41/43/47 and WC 66 fields. Initiated extension drilling in EC 62/64 fieids. Drilling and remedial programs were very successful in developing bypassed a.qd undeveloped oil and gas reserves. Worked closely with Conoco to reduce drilling and operating costs. Project Coordinator, Houston, Texas November, 1990-July, 1991 Coordinated a multi-discipline geosdence, land and engineering team to exploit the Austin Chalk horizontal drilling oil play. Analyzed trends and well performance. Recommended locations and drilled twelve horizontal wells. Evaluated co-owner proposals and acreage submittals. Implemented engineering, operational and strategy changes to reduce cost, improve well performance and increase the' overall project value. Coordinated evaluation and prioritization of thirty onshore exploration prospects. Senior Drilling / Completions Engineer, Houston, Texas' February, 1990 - October, 1990 Prepared completion, workover, drilling and P&A procedures, cost estimates and regulatory permits for onshore and offshore wells. Responsible for safety and costs of operations. Became District specialist on subsurface safety valves. Developed a comprehensive guide for safety valve selection to minimize future failures. Senior ProUuction / Facilities Engineer, Penitas,' Texas July, 1988- January, 1990 Identified, evaluated, prepared procedures and supervised workovers, recomptetions, well testing, stimulations, P&A's, coiled tubing cleanouts, perforating and cased hole logging in eight fields in south Texas. Designed and implemented bNO compression projects and several minor facility projects. Acquired regulatory permits and monitored allowables. Reservoir Engineer, Houston, Texas June, 1983-June, 1988 Performed pressure transient, Jog, well and reservoir analyses, evaluated economics, and recommended development and extension drilling, recompletions, workovers, well conversions, stimulations and fracture treatments in Wilcox, Vicksburg, Frio and Yegua fields in south Texas. Planned and initiated development of three newly discovered gas fields. Evaluated numerous exploration prospects. Evaluated producing and non-producing properties for acquisition, divestiture and farmout. Prepared reserve reports, long range plans and budgets. .EDUCATION Texas A&M University, College Station, Texas Bachelor of Science in Petroleum Engineering in May, 1983 Grade Point Average: 3.8/4 RECEIVED JUL 1 1 1994 Alaska Oil & Gas boris. ~;ommkSstOt~ Honors: Whiting Award for Outstanding. Petroleum Engineering Graduate, Petroleum Equipme~~s Association National Outstanding Student Award, Magna Cum Laurie, Tau Beta Pi Engineering Honor Society, Phi Kappa Phi Honor Society, Houston Endowment Scholarship DEBRA A, GROVE Page 2 Sp~..ifi¢ b'lfq, rmation R~arding Expertise in SeleCti~ Well Locations i have been directly responsible for the development of existing fields and nearby extension opportunities throughout my career. I have evaluated and pursued numerous development, extension ~ :exploration prospects as well as numerous producing properties and undeveloped acreage for acquisi~ or .di'~,esCtur.e. My experience has covered many different aspects relating to development and extension d¢i~ling ~d often involved the coordination of land, geoscience, engineering, operations and marketing personreI. As a reservoir engineer, I performed research on existing wells and trends in an area transient, tog, core, well systems and reservoir performance data [o identify opportuniti~',.. ~..~' {1,~!; pertinent land, engineering and geologic information and sel~ted well locations, I calcul~'~, ' evaluated economics and obtained funding approvals. I provided reservoir engineering ~," '~~ , operations. I also developed strategies for developing new fields based on geologic, en,gif~.~~es~ Below I have listed specific examples illustrating my experience in selecting well locations. ' . ,' Ex!3. Jora~i_on/Extensj. on Drillin_cLand Farmout. Evaluation~s Determined reserves and evaluated economics f0r numerous gas and some oil extension, ,ac~,,,e~~a. · ~ ~ &, · · prospects. Coordinated the engineering evaluation of thirty exploration prolects in 1991. '~J~~, twenty farmout requests for undeveloped acreacje in south Texas Made recommendatio:~,,t.o _ · ,,.,, farmout acreage based on offset well performance, current mapping expected reserves ~,.'e~,ii~&" or Gulf of Me)al,Co, Offshore Louisiana Under my supervision, joint engineering and geoscience teams identified numerous develc~pra._e,~t, exploration prospects in Grand Isle 41/43/47 West Cameron 66 and East C'zmeron CATO partners to initiate drilling programs in these fields. Drilling programs were very s~""!"' developing bypassed and undeveloped oil and gas reserves, Austin Chalk, Wilson and Gonzales Counties, Texas Performed reservoir studies and analyzed vertical well production trends, Worked counterparts to select locations and obtain funding for a horizontal drilling program. oil wells with varied varied results, Evaluated numerous acreage submittals for horizont'a;t,,~ng i" " opportunities. Zabasco Field, Hidalgo County, Texas Perfo.rmed reservoir and economic analyses. Selected locations for two extension gas maps. Obtained funding and provided reservoir engineering support during drilling and teslii~~l~g wells proved to be commercial producers, ' ' '" Las Ove!a$ an¢ Roleta..Fields, Zapata County, Texas Performed reservoir and economic analyses. Selected locations for one extension and two ~.~el.~tt.~as wells based on existfng maps. Obtained funding and provided reservoir engineering suppo,~;.!¢~,~, ~.8~.it~' testing, and fracture stimulation operations. Two wells were commercial and one was a, r~ft~,a.~r. Obtained approval for a 3-D seismic program to assist in optimizing development of Ro[e~.,,~'a"~Y~ internal extension plays and one large acreage submittal including both producing and und~~ . Rollem ~,od .Bright Fa[con Fields., Bee County and Jackson Counties, Texas [;)eYeloped an evaluation and testing program for the discovery well in each gas field, Ev,a~C,e(:l ~lI . performance, trend information and acreage position. Developed a strategy for subseque~ t~r~d initiated development drilling in both fields. Drilled two successful development wells and or~:~ ' _Columbus Field, Colorado County, Texas Performed a reservoir study and identified a location for an infill well. Obtained funding ~cl ~i~lecl a successful gas well. J'UL 11 *94 i2:4'¢'PM KUPA~UK eb~ROLEUM EMGIM~bRiNG P.'d/~ EDUCATION: WORK EXPERIENCE: KERRI IRENE THOMPSON 7511 Huckleberry Circle Anchorage, AK 99502 (907) 243.3987 Unive)'sity of Washington, Seattle, Washington M,S. GEOPHYSICS---September 1989 GPA: 3.44/4.00 Honors: Fellowship, tuition and living expenses Memberships: American Geophysical Union · Society of Exploration Geophysicists Colorado School of Mines, Golden, Colorado B.8. GEOPHYSICAL ENGINEERING---May 1987 Minors: Geology and Mineral Economics GPA: 3.26/4.00 ' Honors: Amoco Scholarship, tuition 1983.1987 · Academic Dean's List, Academic Honor Roll Memberships: Society of Exploration Geophysicists · Society of Student Geophysicists · Society of Women Engineers Arco Alaska, Inc.- South Alaska Exploration Anchorage, Alaska---Geophysicist September 1989-Present Interpreted and mapped onshore and offshore seismic data in and around Cook Inlet Basin for prospect generation · Planned testing for and monitored the acquisition and processing of several innovative seismic programs, Recommended several acreage acquisitions and drilling opportunities · Performed geological, geoPhysical and petrophysicai well-site work on several exploratory and development wells · Participated in geological field programs studying the Tertiary and Mesozoic geology of the Upper Cook Inlet Basin University of Washington - Geophysics Department Seattle, Washington---Research Assistant August 1987- September 1989 Areas of research were focused on but not limited to the State of Washington's seismic network · Prime responsibility was to analyze focal mechanisms for the western Mount Rainier seismic zone and assess its tectonic significance · Secondary responsibility was to analyze data comparing three earthquake location routines commonly used in the United States and prepare results for section of technical report submitted to the Department of Energy ARCO ALASKA~ INC. LEGAL DEPARTMENT FAX COVER SHEET July 11, 1994 Page I of $ FROM: Rosanne M. lacobsen, Lq, ARCO Alaska, Inc. Anchorage, Alaska Telephone: 907-265-6549 TO: Post-IV' brand fax transmittal memo 7671 I # of pages IT° .% IDept. Fax ~ D ~ Ma'. David Johnston Chairman/Commissioner Alaska Oil & Gas Conse~wation Commission Phone: 279-1433 Fax: 276-7542 Paul T, Craig Z-Energy Inc. Phone: 563-5686 Fax: 561-5478 l=rederick H. Boness, Esq. Preston, Gates & Ellis Phone: 276-1969 Fax: 276-1365 Joe Dygas Bureau of Land Management Phone: 271-4403 Fax' 271-5425 Carol Lee Department of Natural Resources Division of Oil and Gas Phone: 762-2547 Fax: 562-3852 MESSAGE RECEIVED JUL 1 1 1994 Alaska Oil & [las Anchorage Confirmation copies will be ma.fiect. ] F~ ~~: 907-265-6998 CONFIRMATION: 90%265-6051 CONFIDE.~fIALITY NO~ICE The documents accompanying this facsimile message contain confidential communications which may be subject to protection under the attorney-client privilege or the attorney work-product doctrine. These documents are intended solely for the use of the prooer addressee and should not be read or retained by anyone other than the intended recipient. Il' you have received this telecopy in error, please notify us immediately by collect telephone call at the number shown above. Thank you. . JUL 11 'D4 0£:3~PM ~AI LEgaL DEPT ~.~/~ ARCO Alaska, Inc. Legal Department Po~t Otfi~e Oox 100360 Anchorage Alaska 99510 Telephone 907 26t; Ro~ann~ M. Jacobsen Attorney July 11, 1994 Mr. David JOD_nston Chairman Commissioner Alaska oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501 Re: Z-Energy's Request for Location Exception for NBR 12-2 Dear Commissioner Johnston: This letter addresses sp.v~.~a], points whie. h arose du=ing the June 10, 1994 hearing and also responds to Z-Energy's June letter which w~m no'~. made available t: ARCO prior %0 the hearing. First, ARCO. agrees with Z-Energy that exceptions to statewide spacing rule~ may. be granted. ~owcv¢~, they may only ~e granted under the specific circumstances set forth in AS 31.05. ~00(b) .!/ In ~um, AS 3~.05.100(b) authu£'iz~ ~h~ Commission to grant a location exception only where the It is unlikely that AS 31.05.100 applies only to established pools, because these are typically already governed by pool rules. If the statute does only apply to established pools, then 20 AAC 25.055(a), which is authorized by AS 31.05.100, may also be restricted to established pools. This interpre- tation would leave the vast majority of the state without $tatewide spacing rules. Even if AS 31.05.100(b) only applies to established drilling units, it is a good model. The legislature has already deter- mined that it protects correlative rights of of~m~t owners. There is little difference between established pools (that are nonunitized) and other acreage, as far as correlative rights RECEIVED JUL I 1 1994 Alaska 0il & G~ L;On$. [;ommiSSt~ A nrhn~n¢~ · JUL 11 '~4 ~.~ HHL L~bHL D~Vl V.Jxb Mr. David Johnston July 11, 1994 Page 2 applicant can prove that a well drilled 1500 feet from a section liDe would be unproductive, or where topographical conditionsz-' would make the drilling of a well 1500 feet from a gection line unduly burdensome. Z-Energy ham not met its burden of Droving that an exception location is authorized by statute. To the contrary, abundant evidence wag in%rodua~.d at the hearing which showed that Z-En.e~gy believes that all of Section 12 may be filled with petroleum Information reported on ){ay 11, 1994 after interviewing Z-Energy, that Z-Energy' pro~p~c% covers 955 aore~ in section~ 11 and 12 (Exhibit 1.1); Erik Opstad's map, prepared for Z-Energy and dated September 1995, shows that gas covers the v.~ct majority of Section !2' (Exhibit 9); z-Energy clearly stated that the X33-12 well was productive in a meeting with ARCO in the fall of 1993. (Tr. at 107.) Erik Opstad's Executive Summary, prmpared for Z-Energy and dated SeptemDer 15, 1993, s~ates the following regarding Burglin'~ X33-12 well: The conclusion drawn from these obser- vations is that the Sterling A horizon contains porous and permeable sandstone ca.~ble of~ Drod~ucing gas at.~_si~nificant .r~tes when drillgd and ~om~leted. These logs were also submitted to 3 other Z-Energy does not rely upon the "topographical considerations" ground. ARCO ~how~d that %he ~opographical considered, ions ar~ worse at the exception location than at a location 1500 feet from the section line. A~uming a ~traight hole is the ~urface location would not only be in the "crook" of the ~oluga Rivor, but it would be on the opposite side of the Beluga River from roads, pipelines, and other facilities. It remains ARCO's position, however, that none of the acreage JUL '1 I 199,4 Anc;florage Mr. David Johnston July 11, 1994 prominent Alaskan log analysts in a blind test for ttl~i~- upinioI%. There was unani- mous consensus with this conclusion.. (~.Xhibit 13 at page 2) (emphasis added). The Executive Summary also states: ',There are n__o apparent structural or deDo~itional barriers which would pressure isolate tract ADL-3812..24 from the greater Beluga River.u..n.i.t accumulation." (Ex~iDlt 13 at page 4) (emphasis added). No Z-Energy or ARCO maps indicate any faults which would separate a location 1500 feet from the section line from Beluga River Unit production. (Exhibit~ S, 6, 8, 9, 10.) Kerri Thompson, who has reviewed and mapped the .~ei.~mi ~. data over the Beluga River Unit and Sections 11 and 12, including the 1993 seismic data, ~ee~ no faul~ in ~.he "enti~.~. g~ Day interval." (Tr. at 141-42.) W. rik Opstad agreed with Ms, Thompson's analysis: ,,I don't ~cc a lot of -- a lot going on in the main section either." (Tr. at 14~.) The on.q~ evidence which could possibly ~upport Z-Energy's posi'tio~', wa-~ introduced la'~ in Lhe day when Mr. Op~ta~ opined that a lineament on an aerial photograph might be a fault. (Tr. at 14Z.) MS. Grove and Hs.. Thompson both testified that the lineament was the shoreline and wa~ due to modern-day proces'ses, (Tr. at 14z-4J.) ~r. opstad agreed. (Tr. at 14 .) Even if the lineament is a fault, Mr. Opstad has not shown where the fault would intersect the prospective horizons, an~ that the fault would cause a location 150o feet from the sec- tion line to be unprOdUctive. Indeed, Mr. Opstad's own maps (Exhibits 5 8 9) and testimony (Tr. at 142) contradict this position.~/' ' .. At the hearing, Mr. OD~tad attempted to "explain away" his previous maps and writings. Mr. Opstad even admitted that "we haven't put any of our real interpretations out on the table." JUL .LJ. Mw. Dav~.d Johnston July 11, 1994 Pag~ 4 RECEIVED JUL, .7..! 19,.94. Anchorago In sum, Z-Energy simply has not shown that there is any loca- tion 1500 foot or more from the section lin~ which would ba unproductive~ or would even be "less productive" than the exception location.~/ Thus, the Commission lackn the stmtu- tory authority to grant the location exception request. Second, the evidence shows that the Beluga River Unit is not draining Section lZ. ~lug~ River well No. Z~2-18, the closest well, is 1800 feet from Section 12. The regulations presume a ~.00-~oot drainage radius. (a)(4). Mr. ODstad also testified that a 1500-foot drainage radius was appropriate £or t~ls area. (Tr. at 1~7.) Finally, ARCO's material balance calculations indicate that the 212-18 well's drainage ~adius is approximately 1690 feet. (Attach- ment to ARCO's letter dated July 11, 1994.) This same evidence proves that the exception location, if successful, would drain Beluga. River Unit reserves. Mr. ODstad admitted this. (Tr. at 117.) Third. ARCO does not believe thatthe AS 31.05.100(b) findings must be made in circumstances where correlative rights are not threatened. The intent of AS 31.05.100(b) is to protect cor- relative rights. Thus, if an exception location is requested within a unit or established drilling unit, or if a Drotest is not received, the Commission need not make the explicit finding that AS 31.05.100(b) Even if the .Commie=ion w~r~ to find that the AS 31.0S.100(b) findings must be made. in all circumstances, the Commission has broa~ powers to prevent waste and insuro tho greatest ultimate recovery. AS 31.05.030. In cases where correlative rights are not threatene~ by ~n e~¢eption location and the exception location would provide the best management of the reservoir~ the Co]%mtission has the power to grant the exception location. 4_/(... continued) (Tr. at 103.) Apparently, z-Energy alters its view of the geology ~o match its audience. Z-Energy's repeate~ rationale Zor the location exception is that such a location would be "optimal." Everyone would like to drill wells in optimal locations. However, the statute simply doesn't allow a location exception to be granted on this basis. Z-~nergy's remedy is to acquire optimal acreage. Mr. D~vid Johnston July ll, 1994 Page 5 Fourth, Z-Energy argued that the well spacing regulation does not apply to the bottom hole location ~ ~xp!oration wells, because exploration wells are governed by 20 AAC 25,0SS(a)(2) (the exploration provision) ingteaa of (a)(~) (d~v~lopment). (Exhibit I at page 2.) However, a well drilled immediately downdip from a producing fiold an~ ~e~i~ne~ ~o target ~nmm~n pools is not an exploration well and should be governed by (~) (4). (see Tr. at 55.) At any rate, it is unlikely that the Commission intended, by the slight differences in wording between (a) (2) and (a)(4), to allow an exploration, but not a development, exception location well to drain an offset lease. Finally, if the location exception is granted, the Commission must pro~ect the BelUga River Unit ownurs' correlative rights. Below are several options: (1) As the Commission noted, one option is to not authorize Z-Energy to,produce its well. (~) The Commission may prorate production from Z-Energy's well and grant A~,CO a similar location exception. For example, if Z-Energy's weal drains 160 .acres, and only B0 acres are on Z-Energy's lease, Z-Energy should only be allowed to produce half of the reserves. This can be accomplished by prorationing Z-Energy's production,~! but, because Drorationing'alone still allows Z-Energy to drain the Beluga River Unit's reserves (but at a slower r~t~), ARCO should be allowed to drill an offset well 300 feet from'the section line. (However, as notmd at the hear~nG, this option may not prevent waste or insure the greatest ultimate recovery,) This type of'approach i~ common in the Lower ~8 -- Oklahoma, Colorado, North Dakota, and Nebraska statutes authoriz~ allowables of this ~ype'. ~ee als___9 Kramor an~ Martin, the La~ 9f~.Pooling...aDd Unitization § 5.02[2]; Chevron Qi! v. 9il and Gas Conservation ~ommission, 455 P.Zd 781 (Mon~. 1967); H~lDin ¥. Corporation Commis~.ion of the State of 0klahom~, 575 P.2d 1.09 (Okla. 1979). Alaska ~tatutes also seem to authorize allowables of this type. See AS 31.05.030(c) and (e)(6); AS 31.05.10o(e). In addition, the definition of correlative .rights includes the concept of only producing reserves on your lease. AS 31.05.170(2). But' it would b~ advisable for the Co, is, ion to first promulgate regulations authorizing this type of allowa~e. RECE).V~'~, Mr. Dauid Johnston July ll, 1994 Page 6 (3) Z-Energy may produce the well under an integrated a~reement. ~.0 AAC 25. 517(b) , (c). (Because the well ha~ not yet been drilled or tested, it is difficult to d~t~rmine th~.. tm~m.~ under which the well might be added to the Beluga River Unit. However, uni~ typicmlly do not reimburse. ~ffset well owners for the cost of drilling the well, do not reallocatc past production to the offset well owners, and require reimbursement for proportionate coasts of th= pip. line an~ other facilities.) (4) Z-Energy may pursue involuntary unitization. (However, it is unlikely that an involuntary 'uni~ization would b~ granted. A~ ~h~ Commi~oion noted, involuntary unitizations will not be granted unless four ~indln~s are made. at 31-33.) One of these four findings is that the unitization is reasonably necessary for secondary or tertiary recovery. No secondary recovery is needed for t~e Beluga ~iver Unit because it is gas field; thus, involuntary unitization is not authorized.) Each of these options, is complex and would require much time and effort to ensure that correlative rights are protected. Protracted agency proceedings and litigation may result. By merely following the sDacin~ rules, the Commission ensures that correlative rights are protected and waste is pre- vented.I/ In sum, Z-Energy has not proved that it is entitled to a location exception under the statute. Thus, the Commission is w~.thnut ~tat~:to~y ~uthor~%y to grant it. RECEIVE[,) Recall that the CommiSsion has recently stated that the statewide spacing rule~ are presumptively appropriate for preventing waste, protecting correlative rights and insuring t~e greatest ultimate recovery. JUL 11 'D~ O~:3~PM A~I LEgaL DEPT Mr. David Johnston July 11, 1994 Page 7 ARCO Alaska asks the Commission to follow its spacing rules and deny Z-Energy's request for a location exception. We appreciate your consideration. Sincerely, cc: Frederick H. Boness, Esq. Paul Craig, Z-Energy Joe Dygas, BLM Carol Lee, DNR Michael T. Shook, Shell Western E&P Corey Woolington, Chevron, U.S.A. BY FAX BY FAX BY', FAX F:~DATA~ROS~WI~AOOCC,LTR R CEIVED Atas~ 0il & Gas L, ons. L;ommiss~o" Anchorage m ! [ I = ' '.Clay: Med gray. gumbo w/trace · of tan and bro~n siltstone ;...=. · .:. · Sand: Vfgr, clayey I -' Coal~ Low grade, silty probably ,. · ~ thin bedded with gray clay and light gray to dark brown · · ? .... sightly to highly · g · · siltstone "d' · - - ""'' SlUstone ,L! to dk gy, corb O: 0.-~ · .L~..,,.,~ ~.¢oal: Cow grade, sil,{y. ~/' ,, .... ' thin beds of ~on todorK · ~ brown ~ - slits/one and medium To ~ .... % light grey. gummy clay · Coal with gas ~lltslOne: Lt lo dl~ gy. cart) . ' ::': :'::: :':':':;S~,d: Vi'~.,,b,d , . . , Thin Coals'~d 'cl.~ '.',.~..'~?.:~, ,~ ~',. , : , ;C~:Soft. gY.l~..~ilY. . ,. ,,,~,-,$, ofl gr~ clay and lanlo d~ "~ 2 ~ ] ~ '. ~ .' 2 i SSnd:. F to vfgr, cly: and (Jl~ silty c6al; and tan to die brn O - -,list; and some gray clay O wt. 52' c! leo I1% . . IV~d Wt 10.4 · ¢I ~ gl 12% LAG BY CA,RBIDE 41 Mieot 112 ~ Mudlog from BW X33-12 illustrating a significant gas show in the Beluga Formation down-dip from the proposed NBR 12-2 location. 152° ,/ ............ :1;.:?, ~50° ,o ,........[....,,:......-.~. > :.> >. %... ::i:i:i:i:i¢:.:.:.:.:.:.:.:.:.,...... 0 k,. 10 20 \"30 152° Major fault ione or fault, dashed where inferred; U, upthrown side, D, downthrown side 0 ~0 150° 2O Shelikof trough Pluton 40 mi ;30 km Major fault systems bounding the Shelikof trough and the Cook Inlet,basin. Both the Castle Mountain and Bruin Bay fault zones are dearly visible as surface lineaments..These high-angle (60° - 70°) features display right-laterali~la~a~l~a~m drag. evidenced by offset stream drainages. i uA~L _ .~#._L_L_ +5000' MSL .co -5000' UJ .10,000' .15,000'- 0 10 km L I pre-Tertiary basement complex Vertical exaggeration 5X Beluga · . ~ basin Cook Inlet basin +5000' > '~ ~ ~ ~ ,5000' ""' O MSL ~/~ MSL ~~~sement complex c ~. x. 4o.ooo'- ' ' / / ~ ' ' ,~o,ooo' o ~, '/ ~/ ; I · ~ , ' .15,000, · 15,000'- 0 10 km .... . V e~t i~ ~x~tio~.X. .-.~ " - .... .--- . ' ... ......... . ........ ,, .... .~=:.,~" _- 't~ ........ . '......~., ' B,l~g~ g;i~; : '.:..~ ...::';. :';': [-~ :. 'cOok~.r,~;~:_.'..- . ~.:'; .: .... · ...._. ~' .~_~ basin-' .-' .'- .-. ~ ~ ~ ~ --- . c ~'; = < .=~ ~ ~c' +~000'- ~ . = c ~ ~ .~ ~~ ~ . ,, ~~ ~ ~ ~ ~ ,~ooo' MSL-~~~.~ -~. MSL -~ooo'- ~ ~ - 10.000'- '. ' '~ ~ t t -.10.000' 'pre-Tertiary . j basement complex ~ . ~ ,9 ,.. ~ ~i. I' -15,000' ' ~ ", l'0km - '1 , ,15,000' 60° Vertical'exaggeration 5X BEND IN SECTION 62° S I.l.~i l II;.I basin -5000' MSL pre,Tertiary basement complex -5000' -10,OO0' I x~ .15.000' LOCATION OF STRUCTURE SECTIONS 152° 150o TORDRILLO MTNS 62° .B :'lgtt,~S~o u r r :. ~h~lcacham'~ ''- Cak. e, .. KENAI , MTNS 3,Omi 50 km 152° 150° ;00. Figure 5. Structure sections based on geophysical profiles across the Beluga basin and ,'~djacent areas. From Hackett (1977). I + -F + + -t- -t- + + 'i- : I .- I I " I I -- -I- - ~._ + ± + + + -I- -I- I , t + -t- + + t + + -t- + 't' · I~N-13W I 13N--I?W 1 + + + -f + + + + I i + + + T + + + + * T~ + + -I- + -I- 15N-Iii 4- -I- + -i- 'i + + + + '~ +., . -+ -I- 14N--IIW . + · .f -t- + + I --i-- . + · -F + , + + I:~N -IIW + + '4- + + + + + + -I- ' PHiLLiPS · IV. Tyon¢l~ St PTD 6063 +. i 14N + Lewis River Un River ,N CR~J Burg I/n .+ · 4- + 14N '::?: CITt£S~ 636 a:~ '1'4 N-. y. t + Ivan River Field + 4- + ~r ISN --OW .~ + + .+ 4- -+ + 113elugo Ri' er Field 2~.oz.~ / ~'51 + + + + + + J .... . .. ~-. -..::;.: · + -~ + t ' - ' ~t- 4- - ' .N0rthJ Cook IZN--SW + .. [del n l,/'q \\\\x \~\ Xl + + + . ~-~<xx~.x',._'f~.',t + + + , K-~x' q-: q x x x .'- x_~_l__ _,_'--L ---- --- 3,'x-,c~.x. xq~-xxxXiXlNn-lh Cook Inlet , ~-,/'zk~.x.x:' ?.".x.. , · .... I ri~ ia , Z-Energy EXHIBIT . ..- .;;.: - . , .. k~,'', thic~n ess(f eot ) ~ Rec. ~[~ [ [ ~.~ ~:::~;~:;[ ~ Alluvium ..... ': ......... Sterling Fro. ~ i ii ~.. ~.. .... , ......... , .............. Beluge Fro. 0 ~ ............... d- 6000~ ~ ~' Chuifna Mem. 0 ':'~'~':'~"~'~:': 1400'- ZT00' '~, ;. ,.... ~ - , · ' "11 il L 2600'- 5000' ~o .,.. ~ ---, , ~-. ; ~:' '~"~'~'~' ~ Hemlock' Co~. ,'.- ' ~, -- V~,..?.&::.,. ~.: · o,~ 7o~' . LEG.END ' '.".. Conglomerate Sandstone Siltstone 'Mudstone/Shole Cool F~ Volcanics ~. '011 production Inte~w~;. · -~ Gas production interval -~ S:urf(~ce oil seeps R EF ER ENC ES: d...CONSERVATION .COMMISSION~-',. ".- . GENERALIZED :':'~''' ' "STRATIGRAPHJC' COLUI~NI*" Cook Inlet B:a'si:n', A,la'~ko: A:Dril' 1981. A generalized stratigraphic column for. the Cook Inlet a. rea; Alaska; modified after a.1981 publication' by the Araska O,i,~ & Gas conservatiOn. Commission. This presentation includes' the Hemlock a~, a-Mere'bet of the Tyonek Formation as has become common practice in' recent',yea;r~. EXPLORATION DRILLING UNIT 20 AAC 25.055 (2) A ,, CED o 5 ~280 FEFT --_--- < --- 2 ;280'FEET" .... s'."... -' : - X X'X X X X Total Area (100%) 20 ACC 25.055(2) (18.65%) Exception Required (81.35%) Z-Energy I'nc. = 27,878,,40.l} scl. ff.. (640; Acres), = 5,~95,.40~0, sq. fi; (1:1'~.3 Acre~)'. =. 22,68o, o, oersq:-ft,;'(5'Ze.7 Acres) EXHIBIT ~'£~' ALASKA OIL AND GAS CONSERVATION COMMISSION PUBLIC HEARING--JULY 12, 1994 Z-ENERGY NBR 12-2 SPACING EXCEPTION NAME & COMPANY (please print) TESTIFYING Yes No a:\c:\forms~attend.doc [jo] PRESTON GATES & ELLIS ATTORNEYS June 10, 1994 Russ Douglass, Commissioner Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 RECEIVED Z-Energy's Request for Spacing Exception NBR No. 12-2 Cook Inlet, Alaska Dear Commissioner Douglass: I am writing on behalf of our client Z-Energy, Inc., to respond to the question contained in your letter of June 1, 1994, in which you requested testimony concerning "any legal standards or approriate precedents that the commission should consider prior to rendering a decision in this matter." This letter responds to that request. The commission is generally charged with promoting the conservation of oil and gas and the prevention of waste. AS 31.05.030(b), As 31.05.030(e)(3), AS 31.05.095. The commission also is charged, in statutory provisions not directly relevant to the location of an exploratory well, "to protect and enforce the correlative rights of lessees in a pool" (AS 31.05.100(a) and "to insure a greater ultimate recovery of oil and gas" (AS 31.05.110). The protection of correlative rights is a primary function of oil and gas conservation statutes. The commission's stat~ttes define correlative rights as ... the opportunity afforded, so far as it is practicable to do so, to the owner of each property in a pool or property in a pool to produce without waste the owner's just and equitable share of the oil or gas, or both, in a pool ... substantially in the proportion that the quantity of recoverable oil or gas, or both under the property bears to the total recoverable oil or gas or both in the pool AS 31.05.170(2). Under its guiding statutes, the commission has adopted regulations that establish certain rules for the spacing of wells and provide it with the discretion to issue exceptions to those SUITE 400 420 L STREET ANCHORAGE, ALASKA 99501-1937 PHONE: (907) 276-1969 FACSIMILE: (907) 276-1365 COEUR D'ALENE · LOS ANGELES · PORTLAND · SEATTLE · SPOKANE · TACOMA ° WASHINGTON, D.C. A PARTNERSHIP INCLUDING A PROFESSIONAL CORPORATION requirements. The exception provision is a fundamental aspect of the spacing provisions -- without it, the spacing requirements could, in situations such as this, result in an unconsitutional confiscation of property. See, e.g., Imperial American Resources Fund v. Railroad Commission of Texas, 557 S.W.2d 280, 286 (Tex. 1977) (citing cases); Chevron Oil Co. v. Oil and Gas Conservation Com'n, 435 P.2d 781, 783 (Mont. 1967); see also State v. Jarmon, 25 S.W.2d 936 (Tex. Civ. App. 1930). Contested exceptions to the spacing regulation should be granted when "the exceptions are necessary to prevent waste or confiscation of property." Imperial American, 557 S.W.2d at 286. As a leading treatise states with regard to well spacing exceptions, "[g]enerally, an exception location may be approved when it is necessary to prevent waste or to prevent inequity or loss of property rights .... "B. Kramer & P. Martin, Pooling and Unitization § 5.02[s] at 5-58 (1992). Such circumstances include "the structural necessity of a bottom-hole location near a property line for the owner to have the opportunity to produce a fair share of the oil or gas on the property." Id. at 5-63. In Texaco, Inc. v. Railroad Commission of Texas, 716 S.W.2d 138 (Tex. Civ. App. 1986), the commission approved and the court upheld TXO's contested exception application to allow drilling closer to the boundary line. In upholding the exception, the court noted that "[t]o complete a profitable well (one which would cover drilling costs), TXO would need to drill closer to the Section Nine boundary line than the ordinary spacing rules would allow .... " Id. at 140. Z-Energy is seeking permission to drill an exploratory gas well. By definition, it is testing an area whose potential to produce gas is uncertain. To prevent waste and protect its correlative rights, Z-Energy should have the ability to drill a well in the location on its lease where it believes it is most likely to encounter gas. If Z-Energy encounters gas, the commission subsequently may consider how the discovery is related to the adjacent Beluga River Unit. But until a well is drilled, and drilled into the most prospective part of the lease, the existence of any gas on the Z-Energy lease cannot be determined. Denying Z-Energy's request for a spacing exemption would have the effect of causing waste and failing to protect its correlative rights. Denying the exception would force Z-Energy to drill in a location whose potential for the discovery of gas is reduced and would reduce Z- Energy's ability to produce any gas on its lease. Given the exploratory nature of its well, Z- Energy is unaware of any possible valid objection that may be made by the owners of operators of the adjacent Beluga River Unit. By definition, an exploratory gas well located outside the unit boundaries cannot cause waste or interfere with the correlative rights of those parties. Z-Energy also notes that the commission's well spacing regulation appears to impose no limit on the bottomhole, as opposed to surface, location of an exploratory well. Compare 20 AAC 25.055(a)(2) ("the surface location for a well exploring for gas must be at least 1500 feet from the drilling unit boundary') with 20 AAC 25.055(a)(4) ("where gas has been discovered [no] gas pool [may] be opened to the well bore closer than 1,500 feet to any section line ..."). Nonetheless, Z-Energy seeks an exception to ensure that any potential question concerning its bottomhole location is settled and to enable it to place the surface of the well in the most economical permitted location. Page 3 June 10, 1994 CC: Please let me know if you have any further questions. Sincerely, PRESTON GATES & ELLIS By: / Mark H. Wittow Commissioner Johnston Commissioner Babcock J. Patrick Foley Joe Dygas Mike Kotowski Mike Shook Corey Woolington Z-ENERGY INC. June 9, 1994 Dave Johnston, Chairman Alaska Oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501 Re: Application of Z-Energy for Well Spacing Boundary Exception for North Beluga River exploration well NBR 12-2. Dear Chairman Johnston: I am writing in response to the question raised by ARCO Alaska, Inc. in its protest dated May 26, 1994, to the application for a well spacing exception for Z-Energy's North Beluga River exploration well NBR 12-2, dated May 9, 1994 (copy enclosed). My signature on the application was intended to verify, as required by 20 AAC 25.055(b), that the facts stated in the letter are true and the attached plat is correct. To prevent any further question, I hereby state with regard to my letter of May 9, 1994, that l am a person acquainted with the facts stated in the letter, that all the facts stated in the letter are true, and that the plat attached to the letter correctly portrays pertinent and required data. Please let me know if you have any further question. CC: Sincerely, Z-Ener~n61' attached list Enclosure 32413-00.001 \611verif.0UW 2900 BONIFACE PARKWAY, #610 ANCHORAGE, AK 99504-3132 TELEPHONE: 907-563-5686 FAX: 907-562-7489 Mike Kotowski State of Alaska, DNR/DOG P.O. Box 107034 Anchorage, AK 99510-7034 Mike Shook Shell E & P Inc. Attn: Land Department 601 West 5th Anchorage, AK 99510 J. Patrick Foley Arco Alaska, Inc. P.O. Box 100360 Anchoraqe, AK199510-0360 Joe Dygas Bureau of Land Management AK-984 222 West 7th, #13 Anchorage, AK 99513-7599 Corey Woolington Chevron U.S.A. Inc. Attn: Land Department 225 Bush Street San Francisco, CA 94104-4289 ARCO Alaska, Inc. [ Legal Department Post Office Box 100360 Anchorage Alaska 99510 Telephone 907 265 6549 Rosanne M. Jacobsen Attorney CONFIRMATION COPY THIS IS THE ORIG!NAL, FOR YOUR RECORDS, OF A FACSIM~L~ T, RAN~MISSION SENT 1'O YOU ON _ /~/'"7 / ~ y ~ _ June 7, 1994 D. W. Johnston, Chairman Commissioner A~ 3001 Porcupine Drive Anchorage, AK 99501-3192 Fax: 276-7542 Re: Z-Energy's Request for Subpoena Duces Tecum NBR #12-2 Cook Inlet, Alaska Dear Mr. Johnston: Z-Energy has requested that the Commission issue a subpoena duces tecum to ARCO Alaska, Inc. ("ARCO") for the production of all seismic data related not only to Z-Energy's lease but to the surrounding Beluga River Unit leases. Z-Energy notes that this data would be "valuable" in assessing the hydrocarbon potential on Z-Energy's lease. ARCO agrees that this data is indeed valuable to its owners. However, Z-Energy is not entitled to the data for free. Z-Energy may certainly acquire its own seismic data to evaluate its lease. ARCO should not be required to provide Z-Energy with the information Z-Energy apparently believes will support its request for a spacing location exception. In addition, Z-Energy's request for a subpoena duces tecum does not show the relevance of the data as required by 20 AAC 25.557(b). ARCO is unable to determine the relevance of the data because Z-Energy has not yet set forth its reasons for requesting a location exception. The subpoena duces tecum request also fails to set forth the facts sought to be proved by the data and does not establish that Z-Energy has a proper relation to the matter as required by 20 AA C 25.557(b). ARCO Alaska, Inc. is a Subsidiary of Atlantic Richfield Company D. W. Johnston, Chairman Commissioner June 7, 1994 Page 2 Z-Energy's inability to set forth any basis for its subpoena and location exception requests illustrates the reason behind ARCO's request for a pre-hearing conference. ARCO still has no notice as to the bases for Z-Energy's requests. In fact, depending on what issues are raised at the hearing, it may be appropriate for ARCO to request that the Commission issue a subpoena duces tecum to Z-Energy regarding Z-Energy's basis for its exception location request. We are writing this letter to notify the Commission that ARCO will move to quash any subpoena for the seismic data that the Commission may issue. The Commission may recall that it has previously quashed a subpoena that it issued to Chevron U.S.A., Inc., as operator of the Beluga River Unit, for geophysical and geological data, because the data "is of a proprietary nature and has great value." Order to Quash Subpoena, Conservation Files 149 and 150, March 29, 1978. We appreciate your consideration. Sincerely, Rosanne ~ :jls cc; Joe Dygas, BLM Mike Kotowski, State of Alaska, DNR Mike Shook, Shell Western E&P, Inc. Corey Woolington, Chevron U.S.A. Paul Craig, Z-Energy Fredrick H. Boness, Preston, Gates and Ellis ARCO Alaska, Inc.~r Legal Department Post Office Box 100360 Anchorage Alaska 99510 Telephone 907 265 6549 Rosanne M. Jacobsen Attorney June 3, 1994 CONFIRMATION COPY · m,s ,s O 'rO OF A FAOSIUlLE TP~_N~MISStON SENT TO vOUON Russell Douglass, Commissioner Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 Fax · 276-7542 Re: Z-Energy's Request for Location Exception NBR ~12-2 Cook Inlet, Alaska Dear Mr. Douglass: Please provide ARCO Alaska, Inc. with a complete copy of the public record on the above-referenced matter. We anticipate that the public record will include correspondence from Z- Energy, the Bureau of Land Management, State of Alaska, and others. If possible, please transmit these documents via fax at (907) 265-6998. Thank you. Sincerely, Ros ann~~M. Jacobsen :jls Gas Cons. G0mmiss%0n Anchorage ARCO Alaska, Inc. is a Subsidiary of Atlantic Richfield Company 04:£?P~ AA[ LEGAL DEPT P. 1/£ FAX COVER SHEET lunc :3, I994 Page 1 of 2 FROM: Ro~anne. M. Jacobsen COMPANY NAME: ARCO, ATO-2088 PHONE NUMBER: .. 907/~65-65~9 FAX NIIMBER: 907/265-6998 , TO: Mr. Russell Douglass, Commissioner COMPANY NAME: Alaska Oil & Gas Conservation Commission PHONE NUMBER: 279.1433 276-7542 CONFIRM: 907/265-6051 MESSAGE RECEIVE dUN 06 1994 Alaska Oil & Gas uons. t,u,,~l.a~ss~u" Anchorage OONFID ENTI~J~ITY N. OTI CE The doeumoats accompanying this fa~aiaxil, mv~agv ~a ~mfia~Ual communi~oas w~ch my ~ subj~t to proration ~der ~e attom~y~li~t privileg~ or ~e at~m,y work-pr~uct d~t~¢. ~ d~mea~ are in~nd~ ~ololy ~r ~¢ u~ of ~v p~ up~r ~d~ ~d ~o~d not ~ r~ or re~n~ by ~yone ot~t ~ ~e inteud~ t~ipient. If you have r~iv~ ~is tel~opy in e~or~ pl~ notify us i~iately by ~oll~t telephone call at the numbor shorn a~ve. ~k you. ARCO Alaska, In<;. ~ Legal Department Anchorage Ataska 99510 T.;,I~. phone 907 26S 6549 Rosanne M. Jacobsen Attorney June 3, 1994 Russell Douglass, Commissioner Fax: Alaska Oil & Ga~ Conservation Co~i~$ion 3001 Porcupine Drive Anchorage, Alaska 99501-319Z Z-E~r~y'~ ~equest for Location Excep~ion N~R 912-2 Cook Inlet, Alaska Dear Mr. Douglass: Please provide ARCO Alaska, Inc. with a complete copy of the public ~ecord on the above-referenced matter. We anticiDate that ~he public record will include correspondence from Z- ~nerg¥, the Bureau of Land Management, State of Alaska, and other~. if possible, please transmit these documents via fax at (907) 265-6998 ~ Th~n~ you. Sine, rely, :jls RECEIVED JUN 06 1994 Alaska 0il & Gas t, ons. ~u~,~ss~' Anchorage ARCO Alasl(~, Iflc;. is a Subsidiary of Atlantic PRESTON GATES & ELLIS ATTORNEYS June 1, 1994 David W. Johnston, Chairman/Commissioner Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 RE: Protest to Z-Energy's Request for Spacing Exception NBR No. 12-2 Cook Inlet, Alaska Dear Mr. Johnston: I am writing on behalf of my client Z-Energy, Inc. Under 20 AAC 25.557, the Commission has the power to issue subpoenas duces tecum for the production of materials which are relevant to a hearing before the Commission. We respectfully request that the Commission issue a subpoena duces tecum to protestant, ARCO Alaska, Inc., for the production of all seismic data in its possession relating to the section covered by Z-Energy's lease and the three sections which are east, southeast and south of Z-Energy's lease respectively. We believe that the seismic data will be valuable in helping the Commission assess the appropriateness of granting the exemption requested by Z-Energy in that it may disclose information about faulting and/or the extent of the productive zones within the Beluga River Unit. Sincerely, PRESTON GATES & ELLIS By: f / ,? "/: ' "~:~ .... ':':: ...... Frederick H. Boness CC: SUITE 400 J. Patrick Foley Joe Dygas Mike Kotowski Mike Shook Corey Woolington RECEIVED dON -2 1994 u, & Gas Cons. Commission 420 L STREET ANCHORAGE, ALASKA 99501-1937 PHO/~fl.~YJ~ 276-1969 FACSIMILE: (907) 276-1365 COEUR D'ALENE · LOS ANGELES · PORTLAND · SEATI'LE · SPOKANE ° TACOMA · WASHINGTON, D.C. A PARTNERSHIP INCLUDING A PROFESSIONAL CORPORATION ALASKA OIL AND GAS CONSERVATION COMMISSION Junel, 1994 WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 Carol Lee Natural Resource Manager State of Alaska Department of Natural Resources Division of Oil and Gas P. O. Box 107034 Anchorage, Alaska 99510-7034 Re: Request for spacing exception for 'NBR 12-2 Dear Ms. Lee: Thank you for your comments regarding the request for spacing exception by Z-ENERGY INC. for the North Beluga River 12-2 exploratory gas well. Please be advised that a formal protest has been received and the hearing will be held as scheduled on June 10, 1994. The hearing will be held in accordance with 20 AAC 25.540. As stated in 25.540(c)(6) the applicant will testify first with other interested parties following. The commission will allow cross-examination of witnesses by the applicant or affected owners after designation of a single questioner from each party wishing to do so. Additionally, the commission requests testimony regarding any legal standards or appropriate precedents that the commission should consider prior to rendering a decision in this matter. The Department of'Natural Resources, Division of Oil and Gas is welcome to submit oral or written statements in accordance with 20 AAC 25.540. Sincerely, Russell A. Douglass Commissioner ALASKA OIL AND GAS CONSERVATION COMMISSION June 3, 1994 WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 Joseph A. Dygas Chief, Branch of Lease Operations U. S. Department of Interior Bureau of Land Management 222 W. 7th Avenue, #13 Anchorage, Alaska 99513-7599 Re: Z-ENERGY INC. NBR 12-2 Spacing Exception Dear Mr. Dygas: Thank you for your comments regarding the request for spacing exception by Z-ENERGY INC. tbr the North Beluga River 12-2 exploratory gas well. Please be advised that a formal protest has been received and the hearing will be held as scheduled on June 10, 1994. The hearing will be held in accordance with 20 AAC 25.540. As stated in 25.540(c)(6) the applicant will testify first with other interested parties following. The commission will allow cross-examination of witnesses by the applicant or affected owners after designation of a single questioner from each party wishing to do so. Additionally, the commission requests testimony regarding any legal standards or appropriate precedents that the commission should consider prior to rendering a decision in this matter. The Bureau of Land Management is welcome to submit oral or written statements in accordance with 20 AAC 25.540. Sincerely, Russell A. Douglass Con]missioner ALASKA OIL AND GAS .CONSERVATION COMMISSION WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 276-7542 June l, 1994 Paul L. Craig President Z-Energy Inc. 2900 Boniface Pkwy, #610 Anchorage, AK 99504-3132 Re: Request for spacing exception for NBR 12-2 Dear Mr. Craig: The commission has received a protest to your application for spacing execption for the North Beluga River 12-2 (NBR 12-2) well. The protest was filed by ARCO Alaska, Inc. and raises questions regarding the appropriateness of the NBR 12-2 location. Accordingly, a hearing, will be held at the commission offices at 9:00 am on June 10, 1994. The hearing will be held in accordance with 20 AAC 25.540. As stated in 25.540(c)(6) the applicant will testify first with other interested parties following. The commission will allow cross-examination of witnesses by the applicant or affected owners at~er designation of a single questioner from each party wishing to do so. Additionally, the commission requests testimony regarding any legal standards or appropriate precedents that the commission should consider prior to rendering a decision in this matter. The commission looks forward to hearing your testimony concerning the appropriateness of the NBR 12-2 spacing exception. Sincerely, Russell A. Douglass Commissioner CC. ARCO Alaska, Inc. Harry Noah UNOCAL Chevron USA Shell Western E & P Inc. ALASKA OIL AND GAS CONSERVATION COMMISSION June 1, 1994 WALTER J. HICKEL, GOVERNOR 3001 PORCUPINE DRIVE ANCHORAGE, ALASKA 99501-3192 PHONE: (907) 279-1433 TELECOPY: (907) 27~-7542 J. Patrick Foley ARCO Alaska, Inc. P. O. Box 100360 Anchorage, AK 99510-0360 Re~ Request for spacing exception for NBR 12-2 Dear Mr. Foley: The commission has reviewed your protest of a spacing execption for the North Beluga River 1.2-2 (NBR 12-2) well. Your protest was timely filed and raises questions regarding the appropriateness of the 'NBR 12-2 location. Accordingly, a hearing will be held at the commission offices at 9:00 am on June 10, 1994. The hearing will be held in accordance with 20 AAC 25.540. As stated in 25.540(c)(6) the applicant will testil~ first with other interested parties following. The commission will allow cross-examination of witnesses by the applicant or affected owners after designation of a single questioner from each party wishing to do so. Additionally, the commission requests testimony regarding any legal standards or appropriate precedents that the com~nission should consider prior to rendering a decision in this matter. The commission has decided not to hold a pre-hearing conference due to the short time left before the hearing. The commission looks forward to hearing your testimony concerning the appropriateness of the NBR 12-2 spacing exception. Sincerely, Russell A. Douglass Commissioner ARCO Alaska, Inc. Post Office Box 100360 Anchorage, Alaska 99510-0360 Telephone 907 276 1215 May 26, 1994 Mr. David W. Johnston, Chairman / Commissioner Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501-3192 Re: Protest to Z-Energy's Request for Spacing Exception NBR No. 12-2 Cook Inlet, Alaska Dear Mr. Johnston: ARCO Alaska, Inc. ("ARCO"), as operator of the Beluga River Unit, hereby protests Z-Energy's request for a spacing exception for its proposed NBR No. 12-2 well. The proposed well location is 300 feet from the lease line of ADL 58815, 1200 feet closer than is allowed under 20 AAC 25.055. ADL 58815 is within the Beluga River Unit. Z-Energy's application, which has not been verified as required by 20 AAC 25.055(b), puts forth no facts which demonstrate why a spacing exception is necessary. Thus, ARCO can only generally protest Z-Energy's request for a spacing exception at this time. Moreover, even if Z-Energy were to demonstrate valid technical reasons for drilling so close to the Beluga River Unit, allowing a spacing exception would raise a substantial and material issue as to how the Beluga River Unit's correlative rights will be protected. Pursuant to 20 AAC 25.540(a), ARCO requests that a hearing be held as provided for in the Commission's notice published May 11, 1994. Please provide ARCO with a copy of your notice regarding this hearing. ARCO also requests a pre-hearing conference to identify which issues will be presented before the Commission during the hearing. Because Z-Energy's application is not verified and does not present any details as to why Z-Energy believes a spacing exception is warranted, ARCO cannot adequately prepare its case. A pre-hearing conference to discuss the issues will give ARCO, and the Commission, notice as to the facts and legal arguments Z-Energy will present at the hearing. Procedural matters can also be discussed at the pre-hearing conference. Thank-you. Sincerely, J. Patrick Foley JPF\RMJ RECEIVED MAY 2 6 1994 Alaska 0il & Gas Cons. Commission Anchorage CC: Paul Craig, Z-Energy, Inc. Joe Dygas, Bureau of Land Management Mike Kotowski, State of Alaska, DNR/DOG Mike Shook, Shell E&P Inc. Corey Woolington, Chevron U.S.A. Inc. ARCO Alaska, Inc. is a Subsidiary of Atlantic Richfield Company AR3B,-6003-.C WALTER J. HICKEL, GOVERNOR DEPT. OF NATURAL RESOURCES DIVISION OF OIL AND GAS P.O. BOX 107034 ANCHORAGE, ALASKA 99510-7034 PHONE: (907) 7~2-2553 May 26, 1994 Mr. David W. Johnston, Chairman/Commissioner Alaska Oil and Gas Conservation Commission 3001 Porcupine Drive Anchorage, AK 99501-3192 Re: Z-Energy's Request for Spacing Exception NBR No. 12-2 Well ADL 381224 Dear Mr. Johnston: This is not a formal protest of Z-Energy's request for a spacing exception on ADL 381224. However, the Department of Natural Resources, Division of Oil and Gas wants you to be aware that the adjacent section to the East of the subject lease is unleased state land. We are also concerned about the impact of the spacing exception on the Beluga River Unit leases. Please consider the state's correlative rights in your review of the proposed well location. Sincerely, Carol Lee Natural Resource Manager CL/xenergy.wpd REE£1V£D JUN - 1 1994 ktaska 0ii & Gas Cons, Commission Anchorage wF'n United States Depamnent of the Interior BUREAU OF LAND MANAGEMENT ALASKA STATE OFFICE 222 W. 7th Avenue, #13 ANCHORAGE, ALASKA 99513-7599 Memorandum Alaska Oil and Gas Conservation Commission From: Chief. Branch of Lease Operations Subject: Z Encrgy's Application for Drilling .Permit for Proposed Well Adjacent to the Beluga River Unit We are aware of the proposed drilling operation just outside the boundary of the Beluga River Unit. It is our understanding that this well would be within the 1500 boundary set by the Commission around the l~lugn River Unit for gas wells. It is also our undemtanding that additional State leases exist outxide this 1500 foot perimeter. We believe that a decision to grant approval B)r ~e drilling of this well has an impact or ramifications on the Beluga Rivci' Unit. We al~ believe that it would be prudent to identify and consider the kinds of issues that might ensue from the drilling of a commercial well at the proposed location on the Beluga River Unit,, For example, we believe that the evidence for the establishment of a commercial well in paying quantities should be unquestionnable and demonstrated via a Production test so that there is no question as to the long term producibility of such a well prior to making any necessary subsequent change~ to the Beluga River Unit. We have not had sufficient time to identify all these possible issues and potential problems; therefore, we. are requesting that a Hearing be l~eld on the Z Energy proposed well operation in order to develop a better understanding of Unit related issues. In conclusion, we are not opposed to the exploratory drilling of the well per se, but are concerned with the terms and conditions of thc operation and implications and impact on the adjoining Beluga River Unit subsequent to the drilling operation by Z En¢l'gy. seph A. Dygas Chief, ~r..ch of ~se ~rauons .............................. FAX TRANSMITTAL ~eot.~o~n~ P~ne ~ ~-~40-O~.Bt~3~ ~09-~ ~ 1 GEN .,, Notice of Public Hearing STATE OF ALASKA Alaska Oil and Gas Conservation Commission Re: The application of Z-ENERGY INC. for exception to 20 AAC 25.055 to allow drilling the NBR 12-2 exploration gas well. Z-ENERGY INC. by letter dated May 9, 1994 has requested an exception to the provisions of 20 AAC 25.055(a)(4) for the drilling of an exploratory gas well adjacent to the northern boundary of the Beluga River Unit in South Central Alaska. The exception would allow Z-ENERGY INC. to drill the NBR 12-2 exploratory gas well to a bottom-hole location that is closer than 1,500 feet from a section line. The well will be drilled as a straight hole at the following location: 1200' from the south line and 300' from the east line of Section 12, T13N, R10W, Seward Meridian (SM). A person who may be harmed if the requested order is issued may file a written protest prior to 4:00 PM May 26, 1994 with the Alaska Oil and Gas Conservation Commission, 3001 Porcupine Drive, Anchorage, Alaska 99501, and request a hearing on the matter. If the protest is timely filed and raises a substantial and material issue crucial to the Commission's determination, a hearing on the matter will be held at the above address at 9:00 am on June 10, 1994 in conformance with 20 AAC 25.540. If a hearing is to be held, interested parties may confirm this by calling the Commission's office, (907) 279-1433 after May 26, 1994. If no protest is filed, the Commission will consider the issuance of the order without a hearing. Russell A. Douglass, CSmmissioner Alaska Oil and Gas Conservation Commission Published May 11, 1994 5289 STOF0330 02140002 $57.00 AFFIDAVIT OF PUBLICATION STATE OF ALASKA ) THIRD JUDICIAL DISTRICT ) SS. Eva M Kaufmann being first duly sworn on oath deposes and says that she is the Advertising Representative of the Anchorage Daily News, a daily newspaper. That said newspaper has been approved by the Third Judicial Court, Anchorage, Alaska, and it now and has been published in the English language continually as a daily newspaper in Anchorage, Alaska, and it is now and during all said time was printed in an office maintained at the aforesaid place of publication of said newspaper. That the annexed is a copy of an advertisement as it was published in regular .issues (and not in supplemental form) of said newspaper on: May 11 ,1994 and that suCh newspaper was regularly distributed to its subscribers during all of said period. That the full amount of the fee charged for the foregoing publication is not in excess of the rate charged private individuals. --'Notice of Public,. H-&,i[i~g ' STATE OF ALASK~ I '~, Alaska .Oi~ml". l Gas conservat!on i',Commission !Re: Tl~e. ,,apPliCatiOn. of l r Z~ENER'Gy 'iNC; ji~'~Ception : to 20 AAC' 25.055 to allow dril- , iing'.tt~e NBR 12,2."exploration gas walk. '.' Z-ENERGY .INC. by". letter ! dated 'May 9~. 1994."has ~/:.e- . .quested 'art .:e~¢eptiOn~ to ~,the ..~rbvisions of...20 AAC '25.055 (a)(4) for the drilling of exploratory, gas well 'ac~jacent to the northerh'boOndarY of the BelUga Ri*var Unit 'in. South Central Alas~a~; '..t ',/.... The exception would allow Z'ENERGY*INC~ to'drill NBR '. 12-2 ex'plOrat0ry gas"Wel to a "b0ttom*hole '. location ::;that c user than 1,500 'feet... f[0m : Sect~n II~jThe welJ!.~/!ll be ',drilled as.:a *~traight' 1~61~ atthe fOilowlqg., location: 1-1200~. from I',~ S~)U'" ~ P~ aP.-" 3~.1 ~:rcn, t:',. ea.~' . '~e ~t ~e¢'oq :2. ¥':, S,.,,'.a'.' V.?-.-J -3~' '~;' .., ;:.: : '"c r:~=..-'.'sto: .~r.-.~'.- ,, ,~!~m..o.-_ ,'"::. : ..~ O hr '~'.- :','-': ';."S' DF'Or ?C -' :'?. =)/ ¥~, __ l 'Gas ~:-ser;at cn Cc'~'r ss o" ~.2:1 orcvE.~u-ce Dr'v.:. ;,,. ic'horage,'AlasKa 99501, ana're- ¥~quest a:.*hebrlng On the"ma~ter. .l~ .."..,% .' 'a"V' '' 1~.3~.'?r ,1 ~$L:~ crl).:'-.'.,I 'C '": ~'"1.~..('% 3r $ 3cnOr'"l re' .:.r, " "h'~ 'd ;at!'th'~.' ab0~e ,~dd~eSs at ,'~:00. am .i.J,un.e .:.10,., 1'9~4 i.n '.~onfor'ma.n.ce with,20 AA¢ 25.540. 'if' a' hearing i~,' to be I~eld, interested parties, may/ conf rm this by calling the~ Commission's office,' (907)./ 279-1433, after May 26, 1994. If no protest is filed, the Com-~ mission will con~,ider the issu- ] ance of the order without hearing. · '~' ' '-. '~?.,..:"' ~. D:%'.-..'cu.,.. '~.,2" :" :.$ :-,.~r ~,.6S~,O C., "'3'/ ,, $~. '..:".~;;r.d' :': C3 .... ~ :,~ :" :, _:;,.:..;'r .v;,...'..' 1_~.'. ...... signed (.-~,Y~ -1 ¥'Y~'~'/~""-~ ..... Eva M Ka-fmav'm ['x, Classified Advenis~g Rep~ 257-4296 Subscribed and sworn to before me this .~.~... day of ...~..~.~.. ...... , 1994 Notary Public in and for the State of Alaska. Third Division Anchorage, Alaska M Y COMMISSION EXPIRES: M'¢ Commission Expires: "'e?obPr 14, 1997 ................................. ]9 ...... Z-ENERGY INC. Mr. Robert P. Crandall Senior Petroleum Geologist State of Alaska Oil & Gas Conservation Commission 3001 Porcupine Drive Anchorage, Alaska 99501 Subject: 20 AAC 25.055 (b) -- Spacing Exception Request May 9,1994 Dear Mr. Crandall: By this letter Z-ENERGY INC. requests exception from the provisions of 20 AAC 25.055 (a,4) to allow the company's North Beluga River exploration well, NBR 12-2, to be drilled closer than 1,500 feet from a section line on tract ADL-381224. As illustrated in Exhibit 1, the proposed bottomhole location for NBR 12-2 is 1200' FSL & 300' FEL, Section 12, Township 13N, Range 10W, Seward Meridian. This location exceeds the 3,000 foot separation requirement of 20 AAC 25.055 for wells capable of producing from the same pool, but approaches to within 300 feet of Section 12's eastern boundary. The requested location is required to optimize the well's structural position, and to provide additional information concerning the correlation of potential ADL-381224 gas pools to those currently on production within the Beluga River Unit. Please call me should you have any questions concerning this request. Sincerely, Z-ENERGY IN;C,~ --~' .~ ,, .... / ~,,~ ~ ~ ~/ Paul craig, Oresident~ CC: List (A~ached) ~/-. 94NBR103 RE£EIVED MAY -9 1994 Alaska Oil & Gas Cons. Commission Anchorage 2900 BONIFACE PARKWAY, #610 ANCHORAGE, AK 99504-3132 1 of 3 TELEPHONE: 907-563-5686 FAX: 907-562-7489 Notified Offset Owners & Operators ARCO Alaska Inc. Operator, Beluga River Unit Attn.: Land Department P.O. Box 100360 Anchorage, Alaska 99510 Certified Lt.: P243407911 Mr. Harry A. Noah Commissioner Department of Natural Resources 400 Willoughby, 5th Floor Juneau, Alaska 99801 Certified Lt.: P243407916 UNOCAL Attn.: Land Department 909 West 9th Avenue P.O. Box 190247 Anchorage, Alaska 99519 Certified Lt.: P243407913 Chevron USA Attn.: Land Department 225 Bush Street San Francisco, CA 94104-4289 Certified Lt.: P243407897 Shell Western E&P Inc. Attn.: Land Department 601 West 5th Anchorage, Alaska 99510 Certified Lt.: P243407898 Paul Craig Private Land Holder 4962 Castle Court Anchorage, Alaska 99508 Hand Delivered 2 of 3 RECEIVED MAY -9 lg94. Alaska Oil & Gas Cons. Commission Anchorage 10 I I R ZAMARELLO ET AL 3-31-2000 ADL-381224 12 T13N ARCO 3 -31-2000 ADL-381220 SCALE: 2" = 1 Mile Proposed NBR 12-2 a! BRU 212-18 ARCO, etal -~-HBP ARCO, et a, ADL-58820 18 The proposed location for Z-Energy's North Beluga River NBR 12-2 is within ADL - 381224 and 1200' . FSL & 300' FEL, Sec. 12, Twp.13N, Rge.10W, Seward Meridian. As illustrated above the target is ' adjacent a western boundary of the Beluga River Unit operated by ARCO Alaska Inc. The nearest well that is potentially capable of producing from the same pool as the proposed Z-Energy well is BRU 212-18 located approximately 3,025 feet to the south. EXHIBIT 1 ~IAY 09 ~9~ 10:~7~ PAUL L. CRAI~ RH.D. . Z-ENERGY INC ( 229 Mr. Robert P. Crandail Senior Petroleum Geologist State of Alaska Oil & Gas Conservation Commission :1001 Porcupine Drive Anchorage, AlasKa 99501 Subject: 20 AAC 2S.0SS {b) -- Spacing Exception Re(luest May 9, 1004 Dear Mr. Crandall: By this lett~' Z-ENERGY INC. requests exception from the provisions of 20 AAC 25.055 (a,4) to allow the company's North Beluga River exploration well, NEE q 2.2, to be drilled closer than 1 ,§00 feet from a section line on tract ADL-38127.4. As illurtrated in Exhibit 1, th~ proposed bottomhoie location for NB-P, 12-2 is 1200' FSL & 3013' FEL, Section 12, Township 13N, Range lOW, ~eward M~ridian. Tt~i~ lucation ex¢eecls the 3,000 foot separatiul~ requirement or 20 AAC 25.055 l'or wells capable or proclucing from the =amc p~ol, Out approacl~es to within ~Oo te~t ct Section 12's eastern ~)oundar~-. The requested location is required to optimize the well's structural position, and to ~3rovicle additional information concerning the correlation of potential ADL-381224 gas I:)Ocls to those currantly an I~roduction within the Ftaluga River Unit. Please call mo should you have any questions concerning this request. Sincere{y, Z-ENERGY INC,~. · , ,. .. .. " /, ? ,. :: ,~ ~ J ,," // _~" / t Paul ~m~O, ~mmd,nt CC: List (~a~h~) ~' 04NB~ 08 2900 BONIFACE PARKWAY, 6610 ANCHORAGE. AK 9~504-31.12 1 of 3 TELEPHONE: 90%563-5686 FAX: 907-562-7~,80 MAY 09 ' 94 1 L7: U'.'4 PAUL L. CRAIG, PH.D. .Notified.Offset ,Owners & Ooeratom ARCO Alaska Inc. Operator, E~elut~ River Unit Attn.: Land Del~rtmen{ P.O. Box 100380 Mr. Har~y A. N~ah Department ~ Natural ~O Wl~t~, ~h Fk~r Jun~u, AI~ ~01 Certified Lt.: P24340791G UNOCAL Attn.: Land Department g0a West 9tfl Avenu~ P.O. Bo~ 190247 Ca,'tlfl~l Lt.: 1=243407913 Chevron USA Attn.: Land Department ~ l~ueh 5tree~ Sail Fl'a~, ~A f~4104-4~9 Cattifle~l Lt.; P243407897 ~.11W#tem E&P Inc. A~n.: ~ Departm~ 601 We~ 5th C~ed ~.: P2~7898 Paul OmiG Private Land Holder 4962 Cnstle Ooult An~hc~,aga, Alaska 99~8 Hand Delivamd 2of3 I 1 .... r~'- BEL UG~ SCALE: 2" -~ 1 Mile 13N I E ZAMAREL[O C~~~[~ ET AL 3 - 31 - 20O 0 ADL-381224 12 Proposed NBR 12-2 ARCO, el HBP USS etal BRU 212-16 ARCO, et o, ADL o58820 13 18 BRU 224-13 ~D:..-58831 ~: o,,. HaP' The proposed location I'or Z-Eneegy's Nodh Betuga River NBR I2-2 is within ADL - 381224 and 1200' FSi_ & 3430' FEL Sec. 12, Twp.13N, Rge.lOW, Seward Meridian. As iiluslraled above the target is adjacent a western boundary of the Beluga River Uni! operaled by ARCO Alaska Inc. The nearesl well that is petenlialty capable _o[ p_ro _d .uci.n.g Ir__or~...,the same pool as lhe proposed Z-Eeergy well is I~RU 212-18 UNOjCAL J"~ H BtU ARCO 3 - 31-2000 ADL -381220 EXHIBIT 1 r- J"...) WALTER J. HICKEL, GOVERNO DEPT. OF NATURAL RESOURCES DIVISION OF OIL AND GAS P.O. BOX 107034 ANCHORAGE. ALASKA 99510-7034 PHONE: (907) 762-2553 January 4, 1994 Mike Verheoks ARCO Alaska Inc. P.O. Box 100360 Anchorage Alaska 99510-0360 RE' Geophysical Exploration Permit Moquawkie - Susitna MLUP/CI 93-017 AK9310-04OG Dear Mr. Verheoks: The Division of Oil and Gas hereby approves your permit application of October 21, 1993, to conduct geophysical exploration on State of Alaska lands in thc general area of th~ Moquawkie and Susitna prospects. This permit, designated MLUP/CI 93-017 grants authorization to ARCO Alaska Inc. to conduct seismic surveys utilizing shallow hole explosives, above ground explosives (poulter) and marine airguns as energy sources. The shallow hole explosive program will take place above the mean and orcl;nary high waters marks. The technique includes drilling 25 to 50 foot deep holes every 165 feet using track mounted and helicopter portable drills. A 10 to 20 lb. charge of Ammonia Nitrate will be detonated in each hole. A mini-hole version will most likely be used in the mud flats. A typical mini-hole pattern consists of 16 holes, five feet deep, loaded with 1/2 lb. charges. The above ground explosive (poulter) technique would take place above the mean and ordinary high water marks. A typical poulter pattern would consist of ten, five lb. charges, elevated six feet off .the ground. The marine and some transition work will utilize airguns operated near 2000 psi. The total volume of the array will vary between 1200 ci and 3800 ci depending on water depths. To meet your requested time frame the effective date of this permit is from January 1, 1994 to June 1, 1994. This permit is subject to the stipulations set forth in Attachment (1), Attachment (2), Attachment (3), and the following stipulations: 1. The permit does not authorize activity on Original Mental Health Trust Grant Lands acquired under Section 202 of the Enabling Act. 2. Use of above ground explosive techniques (poulter) is prohibited east of the little Susitna River. MLUP/CI 93-O 17 Page 2 , . . . . . . 10. Shot holes will be backfilled with mud and cuttings. Blowouts will be backfilled and the area leveled up. Chaining maps, or other acceptable maps showing the location of the landing zones and blowouts will be included in the completion report. Prior to completion, copies of the map will be provided on request. Rehabilitation, if required, shall be completed to the satisfaction of DNR and in full consideration of technical guidance provided by the Division of Agriculture, Plant Material Center. ARCO Alaska Inc. Bond I.D. Number U-630618 can be used, in addition to the existing uses, to pay claims made by third parties for damages resulting from the exercise of rights under AS 38.05.125 and AS 38.05.130, or other rights to surface entry that may exist due to State ownership of the subsurface estate. Additional bonding may be required under AS 38.05.130. Approval of this permits does not coastitute the specific approval required under Attachment (2) Stipulation 10 for surface entry over the objection of the surface interest holder. The permittee shall defend, indemnify and hold the State of Alaska harmless from and against any and all claims, d~mages, suits, losses, liabilities and expenses for injury to or death of persons and d~mage to or loss of property arising out of or in connection with the entry on and use of State lands authorized under this approval by the permittee, its contractors, subcontractors and their employees. The Division of Oil and Gas, Permit and Compliance Unit shall be notified at 762-2555 if, during the conduct of operations, state resources are d~maged or a land use conflict occurs. The permittee shall immediately notify the Department of Environmental Conservation (DEC) of any unauthorized discharge, leak, or spill of hydrocarbons or toxic or hazardous substances. Notification shall be made to the Department of Environmental Conservation Mat-Su Area Office during normal working hours at 376-5038 for incidents occurring in the Mat-Su Borough, and at the Kenai Area Office at 262-5210 during normal working hours for incidents occurring in the Kenai Peninsula Borough. To notify DEC of incidents in either area outside of normal working hours call 1-800-478-9300. The permittee shall immediately notify the Department of Natural Resources (by phone) of any unauthorized discharges of oil to water, any discharge of hazardous substances other than oil, and any discharge of oil greater than 55 gallons solely to land and outside an impermeable revetment. If a discharge of oil is greater than 10 gallons but less than 55 gallons it must be reported within 48 hours (by phone or fax). If a discharge is less than 10 gallons it may be reported in writing on a monthly basis. All fires and explosions must also be reported. The DNR 24 hour spill report number is (907) 451-2678. The Northern Regional office of the Division of Land shall be supplied with all follow-up incident reports. MLUP/CI 93-017 Page 3 This pemit, with the stipulations, is consistent with the Alaska Coastal Zone Management Program and Local District Plan. This geophysical exploration permit is issued in accordance with Alaska Statute 38.05, Alaska Miscellaneous Land Use Regulations 11 AAC 96, and Alaska Statute 46.40. The state's approval of this application signifies only that the state has no objection to the operations as outlined in the application. It does not constitute certification of any property right or land status claimed by the applicant nor does it relieve the applicant of responsibility to obtain approvals or pemits from other persons or governmental agencies as may also be required. Sincerely, Matt Rader Natural Resource Manager (3) Attachments cc: Distribution MLUP/CI/93017I Distribution MLUP/CI 93-017 Susitna - Moquawkie Jeff Hastings Northern Geophysical 2361 Cinnal3ar Loop Anchorage, Ak 99510-3139 Tim Rumfelt/Gary Saupe' A 3601 "C" Street, Suite 1334 Anchorage, Alaska 99503 Tim Stevens/Rick Smith DNR Division of Lands 4420 Airport Way Fairbanks, Alaska 99709 Don Mckay ADF&G 333 Raspberry Road Anchorage, Alaska 99502 Mary Pearsall KPB Planning Dept. 144 N. Binkley Soldotna, Alaska 99669 Ken Hudson Mat-Su Borough Planning Dept. 350 East Dahlia Ave. Palmer, Alaska 99645 Ron Morris NMFS Box 43 222 West 7th Ave Anch. AK 99513 Ann Rappoport USFWS Anch. Field Office 605 West 4th Ave. Rm 62 Anchorage, Ak 99501 Steven Braund Northern District Set Netters P.O. Box 101480 Anchorage, Alaska 99669 Thomas Mears Cook Inlet Aquaculture Assoc. HC2 Box 849 Soldotna, Alaska 99669 _'rh. ~eo Matthews United Cook Inlet Drift Ass P.O. Box 389 Kenai, Alaska 99611-0389 Ivan Every Comm. Fishermen of Cook Inlet EC 1, Box 968 Kenai, Alaska 99611 Don Standifer Tyonek Village Council P.O. Box 820009 Tyonek, AK 99682 Doug Blossom Cook Inlet Fisherman's Fund P.O. Box 39036 Ninilchik, AK 99639 Sera Phlm Tyonek Native Corporation 1689 "C" Street Ste. 219 Anchorage, AK 99501 Loren Flagg Kenai Fisherman's Associ; 34824 Kalifonsky Beach R( Soldotna, AK 99669 Cook Inlet Region, Inc 2525 "C" Street Anchorage, AK 99503 Molly Birnbaum, DGC Pipeline Coordinator's Office 411 West 4th Ave. Ste. 2C Anchorage, Ak. 99501 Jim Frechione Interim Mental Health Trust Officer ADNR, Division of Lands Mental Health Plaintiffs c/o Dave Thomas, Attorl 406 G Street Ste. 206 Anchorage, Ak 99501 (~' { .... ermit Fee Paid ~ate Acce~ted OFFICIAL USE ONLY STATE OF ALAStCA DEPARTMENT OF NATURAL RESOURCES DIVISION OF OIL AND G~tS GEOPHYSICAL EXPLORATION PERMIT ADpiicant: ARC ~ ALA£?i' Address' ?. 0. B'0X ' 1:3 ~60 Phone' Anchorage, 'laska.99510-0),60 907)26 5-62~-9 Contractor: Northern Geophysical of Alaska Address: 2)61 Cinnq'~r !Loop Anchoraee, "l~ska. 99507-';;!]9 . Phone: 9o7 ) ~- ~-0o79 General Location: Please se~ attached map. Period Requested: From: l0 -c l _©o To' 6-l-92 Contact Person: B) Naine: Address: Mike './erheoks Title: /-'.cauisition Geoohvsicist '-.~. ~o:~ ~00260 Phone' (907).24g-0079 ..'\nchora.~e, Aiaska.995!0-07.60 Transiti.on zone Geophysical Technique: Seismic(complete below).XX Other I attached description) A) Method: Marine' XX Vessel Name: N/~--- Registered Owner: Official Number: Radio (]'all Number: Upland: )(Z Vibrose~s: Portable: XX Conventional: Track XZ Other: Energy Source: Foulter,Shot hole, Transition airguns. If Explosive: Type: Ammonia Nitrate Total Lba/'Shot Array: 10-20lbs. Shot Spacing: ] C) Number of Line Miles to be Shot: App. iL00 line miles D) Line Location Map: The applicmmt is required to submit a map(s) showing the exact location of all proposed seismic lines. The applicant may request that this map be maintained confidential as provided in AS 38.05.035(aX9). Do you request confidentiality? Yes XX No 'Housing for Project Personnel' A) Housing type: ?AZ Permanent, location Vec,o, Little Susitna Lodge Temporal,, please describe structures B) Number of Personnei:..~ ' C) Drinking Water Supply: .' D) Disposal of Solid Il) Disposal of' Liqmd Wastes: //., · , ./ -'ack h~uled t'o a:~ ~pprove~ szte. Fuel Storage' A) Type of Fuel- .7~, ..'~ __ B) Amount to be Stored: ' 50-1000 Gallons. C) Method of Storage: ~00 Gallon D) Location of Stored Fuel' N / A Surface Travel' A) The applicant must provide a list of all surface transport vehicles to be used in this activity: B~- ~.~0,Nowel! 160,snowmachines, ]-5 VEssels. B) Will use of this equipment require cteariny of veyetation? No if yes, describe method and smount of clearing required. C) WiH hvercrossmgsberequired? Yes ifyes, Hst m~ordrm~aye. Please see enclosed maps. Also note crosszngs wzli only happen when solid enough ice nas :ormem ~o allow this. Indemnity: Amount: $50. 000.00 Bond ID Number 790G759A Type' MX Statewide Bond BondinyCompany- Travelers Indemnity Corporate Surety Address: P.O. Box 1201 Personal Farmzn~ton, CT. '06034 SecuredSavinys Cash The applicant agrees that operations shall be conducted in conformance with applicable Federal, State and local laws and regulations now, or hereafter, in effect during the life oC any permit issued under this application. In particular, the applicant agrees that operations shall be conducted in st~ct compliance with the provisions of the Alaska ~{iscellaneous Land Use Regulations, and the terms and special stipulations contained in a_ny permit issued under this application. The applicant certifies that he has read and is f~milJar ~with the Alaska Miscetla_neous I~and Use Signature: ~ Date 10-21-93 PMntName Ted~K. Smith Title Party Chief DO NOT WRITE BELOW THIS LIRrE LAND USE PERA~IT The DIRqSION OF OIL A~ND GAS ~rants to ARCO Alaska Inc. the riyht to use State of Alaska lands, as described in this applicanon, subject to 11 .~(J 96.010 thru 96.250, Miscellaneous Land Use Regulations, and the attached special stipulations. Effective dates for permit: January 1~ 1994 to June 1, STATE OF ~KA TITLe: Natural R~sourcm Manager Date January 4, 1994 · ~ ~ ... . ~r.~ ~ ..-. · : - -" ....... '" - '~' '-'~": :',- L '%'~..: ~ 7._J' :~',..~-~-,., -.-~'" -~,: '_ --". .... · ", "~ : ' -'~5' '~"" - '-~-":". - --. - ' ,, ':' .,. ""---': '- 5':i~:12' ..~ i" ' . MI:' .,., ~us~tna': .-' - ' '-' -..~ "~ ;'.., .... '~.~. ..... ,, i:i -,, ,.: · ' . .... - -" '~' "'"~ '- ~*"~' '~ ' 'l- ,r .'"~( ' ' ',,'", :, .. . ~ ....,., . i..~,,, . ...,~- ., .!,,, . ..... . = : ~. .. ,,~ ' ."-~.. . /Di~mom~ ....... a.~ ,,_ : '! . -- ~.. 'i.'.t~''' : . , - '.-. k.~ ...... b"' '-.:" = ...-': -.' .... -~i ,~'[~]D~,.- , .... I ,,.J_ _ -;-_ . ', -," '--..-'~,; =~.::.,-:.. ,,-: ,~.~':..... i'. ,-"r:~ .- ' -- ..... --- ' - · - · i- - . ~,g-- I" · . .- '~ -,,.~ ,~ . " ',*'. - - .- , .~ . - %5 ' ~*" ~' --~ :'-' .... ·: ~ t · '~:' .. -"' - [' . .. ~- ;, . ~ ~' ,. :'~* . ',X.,.. . v- ..-_.- . . ~ £ ,.. , ir'l ~',,,,,, ~ ' ,"~.~¢~' .-' ' "~'.; i ! *'.. t ,.~.~ - ~ .". " :- · *" ' - [ ' '- ' ! :'~: ~ ...... '~.- ' .~: ",~ ~r, · .' '-,~- ! '. .... "' . .............. - ' · ,, - ,. ~ --~ .... -... .... - .... . ...... ' rw~::~'i:.:~... I ~ ,, ,, , ., .,, : ,.~,-e-o. .' '' I , . . ,.~- e,.J'~'14~ ./ ,~..' I '~ ~.:.' ..[~.111 ':::ii'. .i ,' t. :.. _- _ -t _'.-35-5-a r~,.,.. ' .7~,",-'.'... ':,.. =.---...-_.. /.-_~L.L.._-,----~'~.~' t4,,=;.,4__'_.'~_.. '~,1 - .'-"~"' ' '( ?::, _. - _ c~m~' i':.,'~ .... *.. :'.'.~.u,,.'.; ~_<--,.-~/~-. :~T_-~- '5",':-'*~'~'~:'~/'-~='-'-' "! ,'.- ~, : .." .. ":'.i...:.; i.i....:v : · · ~ . ' ~---- -- - - ' "~ ,- ~ - me, ' ~ ' '~,' - --:" .,. "- · ,;" ?:;'~' -,--, ~' .~ ",, i' - - '..~.~.-"-~,-- '". ~ : ~ ~ } ' ~, "}" '" -...:4::..'."~,?,~/...~: "' '" :" : :~ ? :'--~'_-~';~'5'r-'.._-'.~:.'~"-T:~'~- :-O"-~- ,--~ ', ~W- ~ ~'~'.' ~;! ·-'-'..'.:s.' .... -~ ~, ~ ~{- .:.~ ,,,<,.0,~.e,~. ., ! ',-~ .-- j z~i. -- .--. ~.'.,~ ~ ..,,' ....... _ ~ a ~ .~ .... -~ ~.~ ~,~-- .- ,~a./ : ~. - -- .v ..::'.v i' ., MLUP/CI 93-017 Attachment (1) Conditions of Consistency with ACMP . Explosives shall not be detonated within, beneath, or adjacent to marine, estuarine, or fresh waters that support fish and wildlife during periods when fish or marine msmmals are present ,mless the detonation of the explosive produces an instantaneous pressure rise in the water body of no more than 2.7 psi or -nless the water body, including its substrate, is frozen. Explosives must not produce a peak particle velocity greater than 0.5 inches per second in a spawning bed during the early stages of egg incubation. For the shallow hole explosive technique the minimum offset from fishbearing streams and lakes is: Charge Offset 1-2 lbs. 52 feet 15.84 meters 5 lbs. 82 feet 24.99 meters 10 lbs. 116 feet 35.35 meters 20 lbs. 161 feet 49.11 meters 25 lbs. 184 feet 50.08 meters , For the above ground explosive technique (poulter) the minimum offset from fishbearing waters for a 50 lb. charge is 50 feet. For lbs. of charge between the above categories, use the minim-m offset for the next higher category. Exceptions to this setback, or new categories, may be approved by the Division of Oil and Gas in consultation with ADFG. Note: Minimum offsets for shallow hole explosives are based upon the use of explosives with detonation delays of 8 milliseconds or greater occurring between each charge such that no explosion or combination of explosions will produce an instantaneous pressure in fish bearing waters which exceeds 2.7 psi. All vehicles used to carry explosives must be clearly marked with the word "EXPLOSIVES". All shot wire must be removed from the area. . Equipment, other than vessels, must not enter open water areas of a watercourse during winter. Ice or snow bridges constructed at stream crossings must not contain extraneous material (i.e., soil, rock, wood, or vegetation) and must be removed or breached before spring breakup. Alterations of the banks of a watercourse are prohibited. Attachment (1) Page 1 MLUP/CI 93-017 3. Existing roads, trails, and natural clearings must be used wherever possible. . . . Trails and c~mpsites must be kept clean. Trash, survey lath, trail markers, and other debris must be picked up and properly disposed. All hazardous material containers and fuel dr-ms must be marked with the contents, and permittee's or contractor's n~me. Stationary fuel storage facilities must not be placed within the annual floodplain of a watercourse or closer than 100 ft. to a waterbody and must be placed within an impermeable barrier providing 110 percent capacity of the largest independent fuel storage container. 7. Refueling of vehicles must not occur on an nnnual flood plain of a watercourse. . . 10. 11. Sorbent material in sufficient quantity to handle operation spills must be on hand at all times for use in the event of an oil or fuel spill. Airguns must not be discharged in open salmon districts or subdistricts during regularly scheduled or emergency commercial salmon fishing periods between June 1st and September 1st. This timing restriction may be extended to September 15th if the Division of Oil and Gas, in consultation with the Dept. of Fish and Game, determines that significant harvest levels are expected during that time. Permittee is responsible for obtaining information and m~int~ining contact with the ADFG as necessary. For additional information contact the ADFG Commercial Fisheries Division in Soldotna at 262-9611. ((KPB Enforceable Policies 7.3 Maintenance and Enhancement of Fisheries; 12.1 Priority Use; 5.9 Geophysical Surveys; 5.5 Navigating and Commercial Fishing (6 AAC 80.130(c)(1)) Unless approved by the Director of the Division of Oil and Gas, in consultation with ADFG, there shall be no marine seismic operations conducted within one mile of the mouth of any stream specified by ADFG as being important for the spawning, rearing, or migration of anadromous fish. (KPB Enforceable Policies 7.3, Maintenance and Enhancement of Fisheries; 12.1 Priority Use, Geophysical Surveys 5.9, and Navigating and Commercial Fishing 5.5.(6 AAC 80.130(c)(1)) All aircraft associated with the seismic program must m~intain a minim,~m altitude of 1,500 feet above ground level and one mile horizontal distance from all shoreline cliffs, bluffs, and rocky outcrops (excluding take offs and landings). This stipulation is not intended to restrict sling line activities along shot lines. Additional operations at lower altitudes may be allowed upon approval of ADNR after consultation with the ADFG. H-man safety will take precedence over aircraft restrictions. This stipulation is required to reduce the potential for unnecessary disturbance of wildlife and their habitat. Attachment (1) Page 2 l~ILUP/CI 93-017 12. Should any historic, prehistoric, or archeological sites be discovered during the course of field operations, activities which would disturb such resources should be stopped. The State Historic Preservation Office (762-2626) and the Mat-Su Borough Cultural Resources Division (745-9859) should be contacted immediately. 13. Traditional and customary access to subsistence use areas shall be m~ntsined ~nless reasonable alternative access is provided. 14. Seismic operations shall not conflict with the spring subsistence harvest utilized by the surrounding village comm,mities. 15. Explosives shall not be detonated within, beneath, or adjacent to marine, estuarine, or fresh waters that support fish and wildlife during periods when f~sh and marine m~mmals are present unless the detonation of the explosive produces an instantaneous pressure rise in the water body of no more than 2.5 psi or unless the water body, including the substrate, is frozen. Attachment (1) Page 3 MLUP/CI 93-017 Attachment (2) (Rev. 11122/93) Reference: Cook Inlet Region Seismic Survey Uplands and Tidelands, Explosive Energy Source Under 11 AAC 96.040 the following Alaska Department of Natural Resources administrative stipulations are attached to and made a part of the terms and conditions of the Geophysical Exploration Permit: . The permittee shall notify and obtain approval from the Division of Oil and Gas in advance of any activities which significantly deviate from the approved plan. Any action taken by the permittee or his agent which increases the overall scope of the project or which negates, alters, or minimizes the implied intent of any stipulation contained in this permit will be considered a significant deviation from the approved plan. Notification must include the date and the specific nature of the proposed operation, the reasons why the operation is different and a map showing the location of the operation. Significant deviations from the approved plan are permitted without prior notice to protect human safety or living resources; however, any such emergency deviation must be reported in writing to the Director, Division of Oil and Gas within 48 hours. e The permittee shall provide the Alaska Department of Natural Resources with the name of a contact person who shall be familiar with the daily location and operating status of the seismic crew(s). The contact person shall provide this information to the Department of Natural Resources when requested by an authorized representative of the Department. 3. The Department of Natural Resources may require that an authorized representative of the Department be on-site during any operations conducted under this permit. 4. A completion report must be submitted within thirty (30) days after termination of permit activities. This report must contac_in the following information: a) The dates when work was actually performed and the number of line miles actually surveyed. b) A navigation diskette, a reproducible shot point map, ~nd paper shot point map. The paper shot point map must show data ownership by line. If all lines are under single ownership a statement to that effect is sufficient. c) A U.S.G.S. topographic map showing the actual location of all camps, shot lines and routes of travel. d) A report covering incidents of surface damage, land use conflicts, and the follow up corrective actions taken. e) A statement of cleanup activities and methods of debris disposal. Attachment (2) Page 1 MLUP/CI 93-017 5. The Director, Division of Oil and Gas has the right at any time to amend or modify any provisions of this permit, or revoke this permit. 6. A copy of the permit and stipulations must be posted in a prominent location in the operator's camp. . Should any hydrocarbons (excluding coal) be encountered during the drilling of shot holes, all operations must be discontinued and the Alaska Oil and Gas Conservation Commission notified at 279-1433. . If flowing or artesian water is encountered during the drilling of shot holes, the Division of Land shall be contacted at 451-2700. Action may be required to stop the flow. . The permit authorizes access across and exploration activity upon lands owned by the State of Alaska. No person may engage in mineral exploratory activity on land, the surface of which has been granted or leased by the State of Alaska, or on land for which the state has received the reserved interest of the United States, until good- faith attempts have been made to agree with the surface owner or lessee on settlement for damages which may be caused by such activity. If agreement c,--ot be reached, or the lease or surface owner cannot be found within a reasonable time, operations may be commenced on the land only with the specific approval of the director, and after making adequate provision for full payment of any damages which the owner may suffer. '~ne approval of this permit without express n-meration does not grant specific approval. 10. The seismic exploration activities granted under this permit must not diminish the use and enjoyment of lands encompassed within a native allotment. Before entering a pending or approved native allotment, the permittee shall contact the Bureau of Indian Affairs and Bureau of Land Management and comply with applicable federal law. 11. All wastewater must be disposed of in a manner acceptable to the Alaska Department of Environmental Conservation and drinking water must meet Alaska drinking water standards. For additional information contact the Alaska Department of Environmental Conservation. 12. Permittee shall abide by the provisions of Alaska's wildlife feeding regulation, 5 AAC 81.218. This regulation provides that it is unlawful to deliberately feed bears, wolves, foxes or wolverines or to deliberately leave human food or garbage in such a manner that it attracts such animals.. 13. In areas of subsistence harvest, the permittee will coordinate survey activity with local subsistence users to prevent unnecessary conflicts. Permittee shall make a good-faith attempt to coordinate survey activities with the owners of trap-lines if known. Care must be taken to avoid disturbing trap-lines within the survey area. Attachment (2) Page 2 MLUP/CI 93-017 Attachment (3) (REV 3/9/92) Geophysical Data Submission Requirements As a condition for granting the Geophysical Exploration Permit for the seismic exploration progrnm the permittee shall comply with the following seismic exploration data submission requirement under 11 AAC 96.210. 1. Within 30 days following completion of the seismic exploration program the permittee is required to notify the Division of Oil and Gas, in writing, of the acquisition of all geophysical exploration data. 2. Within 30 days after completion of initial processing of the data, the permittee shall inform the Division of Oil and Gas, in writing, of the availability of this processed exploration data. 3. The Division of Oil and Gas reserves the right to inspect and require submission of all geophysical exploration data for a'period of five years following notification of completed initial processing. When requested, the permittee is generally required to submit the following processed seismic data: a. A mylar shot point location map. b, A distal location tap v. dth UTM or Alaska State Plane coordinates for each shot point. A list indicating tape content and format specifications is to accompany the tape. c. Elevations for each shot point, if available. d, Copies of the common depth point (CDP) seismic sections representing the best effort out of the production processing phase for each line shot (ie. all filters, NMO, and static corrections have been frae tuned to yield an interpretable section). This will include: i. one reproducible mylar and folded blackline print of all AGC and relative ~mplitude sections preferable at 2.5 inches/second, 24 traces/inch, variable area wiggle trace normal polarity. .. ii. one reproducible mylar of the AGC section at double the scale as that submitted above, preferably 5 inches/second, 12 traces/inch, variable area wiggle trace, normal polarity. iii.' all processing steps, parameters, and corrections should be supplied either on the section or listed separately. iv. each section should be annotated with shot point numbers, line ties, timing lines, line identification, and any other information necessary for interpretation. Attachment (3) Page 1 MLUP/CI 93-017 ( e. One folded paper print of each velocity analysis preferably 2.5 inches/second. f. A transmittal form listing the submitted material and itemizing the cost incurred for copying and shipping. The state will reimburse the permittee for all reasonable costs which are incurred as a result of this submission requirement. In most cases, this will be limited to that cost associated with copying and shipping. Reimbursement procedures will be initiated within 30 days after receipt of all requested material. All exploration Data and exploration information which is submitted should be marked CONFIDENTIAL. All material should be either hand-carried by bonded courier and delivered to the physical address of: Matt Rader NRM ADNR Division of Oil and Gas 3601 C Street, Suite 1380 Anchorage, Alaska or mailed, registered and insured, to: Matt Rader NRM ADNR Division of Oil and Gas P.O. Box 1007034 Anchorage, Alaska 99510-7034 Attachment (3) Page 2
