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O 145
Other Order 145 1. June 14, 2018 Request for information sent to CIE and Apache 2. July 2, 2018 Apache motion for 45 -day extension 3. July 3, 2018 AOGCC letter granting Apache time extension 4. July 10, 2018 CIE request for extension of time 5. July 11, 2018 AOGCC letter granting CIE extension of time 6. August 16, 2018 Joint letter requesting second extension of time 7. August 20, 2018 Email from AOGCC granting joint extension of time 8. September 11, 2018 CIE and Apache request for confirmation of bond availability and work proposal 9. September 21, 2018 Joint request for additional time 10. September 24, 2018 AOGCC response to bond and additional time requests 11. October 1, 2018 CIE and Apache response to request for information STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7'1 Avenue Anchorage, Alaska 99501 Re: Plugging and Abandonment of Wells Prior to Expiration of Owner's Rights in a Lease. Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells. Docket Number: OTH-18-037 Other Order 145 Three Mile Creek Unit 1 Three Mile Creek Unit 2 Three Mile Creek Unit 3 October 17, 2018 DECISION AND ORDER On June 14, 2018, Cook Inlet Energy, LLC (CIE), and Apache Alaska Corporation, (Apache), owners of State of Alaska Lease ADL 388233, were directed to provide the Alaska Oil and Gas Conservation Commission (AOGCC) with a designation of operator to indicate whether CIE or Apache would be the operator of record for purposes of plugging and abandoning the three Three Mile Creek wells formerly operated by Aurora Gas (Aurora). The Three Mile Creek wells are located on ADL 388233. Both CIE and Apache are owners of interests in ADL 388233. CIE is also a working interest owner (WIO) in the Three Mile Creek wells. As a result of three extensions of time granted to CIE and Apache the responses were due October 1, 2018. Neither CIE nor Apache has provided a designation of operator. CIE has never disputed that it is a WIO in the Three Mile Creek wells. However, rather than provide a designation of operator, CIE has twice offered to "immediately submit a Designation of Operator form and Application for Sundry Approvals" if AOGCC would agree to pay CIE Aurora's bond proceeds. In essence, CIE wants money in exchange for regulatory compliance. Apart from its desire to obtain the money, CIE has offered no authority in support of its claim that it is entitled proceeds from the Aurora bond as a condition of compliance with its regulatory obligations. Apache's response denies it is an "owner" for purposes of the duty to plug and abandon the Three Mile Creek wells. The response is supported by approximately 50 pages of exhibits, including the Department of Natural Resource's (DNR) nine page September 20, 2017 denial of CIE's attempt Other Order 145 October 17, 2018 Page 2 of 3 to assign its WIO in the Three Mile Creek wells. The DNR decision finds CIE to be a WIO in ADL 388233, including the Three Mile Creek wells of Aurora Gas. However, the DNR decision also finds that 1) ADL 388233 was horizontally segmented in September 2012, 2) Aurora Gas assigned only its interest in the deeper segments to Apache, and 3) the deeper segments of ADL 388233 lie below and are segmented from the producing intervals of the lease which contain the Three Mile Creek wells. Findings and Conclusions: Based upon the responses filed by CIE and Apache, including DNR's September 20, 2017 decision, AOGCC finds as follows: 1. With regard to the portion of ADL 388233 containing the Three Mile Creek wells, Apache has no "right to drill into and produce from" the pool containing the Three Mile Creek wells nor does Apache have the right to "appropriate the oil and gas" produced from the Three Mile Creek wells. Therefore, Apache is not an "owner" as that terns is defined in AS 31.05.170 and is not responsible to properly plug and abandon the Three Mile Creek wells prior to the expiration of its rights in ADL 388233. 2. CIE is a WIO in the Three Mile Creek wells and as such must properly plug and abandon those wells prior to the expiration of its rights in ADL 388233. Now Therefore It Is Ordered That: 1. Within 30 days of the date of this order, CIE shall submit for approval Sundry Applications to plug and abandon the Three Mile Creek wells. 2. Within one year of the date of this order, CIE shall complete plugging and abandonment of the Three Mile Creek wells. DONE at Anchorage, Alaska and dated October 17, 2018. Hollis S. French Chair, Commissioner � Cathy . Foerster Commissioner Other Order 145 October 17, 2018 Page 3 of 3 As provided in AS 31.05.080(a), within 20 days after written notice of the entry of this order or decision, or such further time as the AOGCC grants for good cause shown, aperson affected by it may file with the AOGCC an application for reconsideration of the matter determined by it. If the notice was mailed, then the period of time shall be 23 days. An application for reconsideration must set out the respect in which the order or decision is believed to be erroneous. The AOGCC shall grant or refuse the application for reconsideration in whole or in part within 10 days after it is filed. Failure to act on it within 10 -days is a denial of reconsideration. If the AOGCC denies reconsideration, upon denial, this order or decision and the denial of reconsideration are FINAL and may be appealed to superior court. The appeal MUST be filed within 33 days after the date on which the AOGCC mails, OR 30 days if the AOGCC otherwise distributes, the order or decision denying reconsideration, UNLESS the denial is by inaction, in which case the appeal MUST be filed within 40 days after the date on which the application for reconsideration was filed. If the AOGCC grants an application for reconsideration, this order or decision does not become final. Rather, the order or decision on reconsideration will be the FINAL order or decision of the AOGCC, and it may be appealed to superior court. That appeal MUST be filed within 33 days after the date on which the AOGCC mails, OR 30 days if the AOGCC otherwise distributes, the order or decision on reconsideration. In computing a period of time above, the date of the event or default after which the designated period begins to run is not included in the period; the last day of the period is included, unless it falls on a weekend or state holiday, in which event the period runs until 5:00 p.m. on the next day that does not fall on a weekend or state holiday. STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 711 Avenue Anchorage, Alaska 99501 Re: Plugging and Abandonment of Wells ) Docket Number: OTH-1 8-037 Prior to Expiration of Owner's Rights in a ) Other Order 145 Lease. Three Mile Creek Unit 1, Three Mile ) Creek Unit 2 and Three Mile Creek 3 wells. ) Three Mile Creek Unit 1 Three Mile Creek Unit 2 Three Mile Creek Unit 3 October 17, 2018 DECISION AND ORDER On June 14, 2018, Cook Inlet Energy, LLC (CIE), and Apache Alaska Corporation, (Apache), owners of State of Alaska Lease ADL 388233, were directed to provide the Alaska Oil and Gas Conservation Commission (AOGCC) with a designation of operator to indicate whether CIE or Apache would be the operator of record for purposes of plugging and abandoning the three Three Mile Creek wells formerly operated by Aurora Gas (Aurora). The Three Mile Creek wells are located on ADL 388233. Both CIE and Apache are owners of interests in ADL 388233. CIE is also a working interest owner (W IO) in the Three Mile Creek wells. As a result of three extensions of time granted to CIE and Apache the responses were due October 1, 2018. Neither CIE nor Apache has provided a designation of operator. CIE has never disputed that it is a WIG in the Three Mile Creek wells. However, rather than provide a designation of operator, CIE has twice offered to "immediately submit a Designation of Operator form and Application for Sundry Approvals" if AOGCC would agree to pay CIE Aurora's bond proceeds. In essence, CIE wants money in exchange for regulatory compliance. Apart from its desire to obtain the money, CIE has offered no authority in support of its claim that it is entitled proceeds from the Aurora bond as a condition of compliance with its regulatory obligations. Apache's response denies it is an "owner" for purposes of the duty to plug and abandon the Three Mile Creek wells. The response is supported by approximately 50 pages of exhibits, including the Department of Natural Resource's (DNR) nine page September 20, 2017 denial of CIE's attempt Other Order 145 October 17, 2018 Page 2 of 3 to assign its WIO in the Three Mile Creek wells. The DNR decision finds CIE to be a WIO in ADL 388233, including the Three Mile Creek wells of Aurora Gas. However, the DNR decision also finds that 1) ADL 388233 was horizontally segmented in September 2012, 2) Aurora Gas assigned only its interest in the deeper segments to Apache, and 3) the deeper segments of ADL 388233 lie below and are segmented from the producing intervals of the lease which contain the Three Mile Creek wells. Findings and Conclusions: Based upon the responses filed by CIE and Apache, including DNR's September 20, 2017 decision, AOGCC finds as follows: 1. With regard to the portion of ADL 388233 containing the Three Mile Creek wells, Apache has no "right to drill into and produce from" the pool containing the Three Mile Creek wells nor does Apache have the right to "appropriate the oil and gas" produced from the Three Mile Creek wells. Therefore, Apache is not an "owner" as that terms is defined in AS 31.05.170 and is not responsible to properly plug and abandon the Three Mile Creek wells prior to the expiration of its rights in ADL 388233. 2. CIE is a WIO in the Three Mile Creek wells and as such must properly plug and abandon those wells prior to the expiration of its rights in ADL 388233. Now Therefore It Is Ordered That: 1. Within 30 days of the date of this order, CIE shall submit for approval Sundry Applications to plug and abandon the Three Mile Creek wells. 2. Within one year of the date of this order, CIE shall complete plugging and abandonment of the Three Mile Creek wells. DONE at Anchorage, Alaska and dated October 17, 2018. //signature on file// //signature on file// Hollis S. French Cathy P. Foerster Chair, Commissioner Commissioner Other Order 145 October 17, 2018 Page 3 of 3 AND APPEAL NOTICE As provided in AS 31.05.080(a), within 20 days after written notice of the entry of this order or decision, or such further time as the AOGCC grants for good cause shown, a person affected by it may file with the AOGCC an application for reconsideration of the matter determined by it. If the notice was mailed, then the period of time shall be 23 days. An application for reconsideration must set out the respect in which the order or decision is believed to be erroneous. The AOGCC shall grant or refuse the application for reconsideration in whole or in part within 10 days after it is filed. Failure to act on it within 10 -days is a denial of reconsideration. If the AOGCC denies reconsideration, upon denial, this order or decision and the denial of reconsideration are FINAL and may be appealed to superior court. The appeal MUST be filed within 33 days after the date on which the AOGCC mails, OR 30 days if the AOGCC otherwise distributes, the order or decision denying reconsideration, UNLESS the denial is by inaction, in which case the appeal MUST be filed within 40 days after the date on which the application for reconsideration was filed. If the AOGCC grants an application for reconsideration, this order or decision does not become final. Rather, the order or decision on reconsideration will be the FINAL order or decision of the AOGCC, and it may be appealed to superior court. That appeal MUST be filed within 33 days after the date on which the AOGCC mails, OR 30 days if the AOGCC otherwise distributes, the order or decision on reconsideration. In computing a period of time above, the date of the event or default after which the designated period begins to run is not included in the period; the last day of the period is included, unless it falls on a weekend or state holiday, in which event the period runs until 5:00 p.m. on the next day that does not fall on a weekend or state holiday. Bernie Karl K&K Recycling Inc. P.O. Box 58055 Fairbanks, AK 99711 George Vaught, Jr. P.O. Box 13557 Denver, CO 80201-3557 Gordon Severson 3201 Westmar Cir. Anchorage, AK 99508-4336 Darwin Waldsmith P.O. Box 39309 Ninilchik, AK 99639 Penny Vadla 399 W. Riverview Ave. Soldotna, AK 99669-7714 Richard Wagner P.O. Box 60868 Fairbanks, AK 99706 r rI 11 P2RKINSC012 October 1, 2018 VIA HAND DELIVERY Commissioner Hollis S. French, Chair Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, Suite 100 Anchorage, AK 99501 Re: Docket Number: OTH-18-037 Response to Request for Information Dear Commissioner French: 1029 West Third Avenue 6 +1.907 279 8561 Suite 300 0 +1.907.276.3108 Anchorage, AK 99501-1981 perklnscoiecom Elena M. Romerdahl ERomerdahl@perkinscoie.com D . +1.907.263.6914 F, +1.907.263.6428 e 1 , :•.,{ , ?V T J : CG: 0N On June 14, 2018, the Alaska Oil and Gas Conservation Commission ("the Commission") requested that Cook Inlet Energy, LLC ("CIE") and Apache Alaska Corporation ("Apache") submit a Designation of Operator form advising the Commission of the identity of the operator for purposes of plugging and abandoning the Three Mile Creek wells located on State of Alaska oil and gas lease ADL 388233 (the "Request for Information"). The Request for Information states that operator Aurora Gas, LLC ("Aurora") is no longer deemed the operator of the Three Mile Creek wells and asks that CIE and Apache "submit a Designation of Operator form advising AOGCC as to which of them will be the operator for purposes of plugging and abandoning the wells." The Request for Information states that "AOGCC's regulations require that all wells which have been permitted on a property must be properly plugged and abandoned prior to expiration of the owner's rights in that property"; that "property" means a legally described tract of land to which a person has the right to drill and extract resources; that ADL 38233 is a "property"; and that CIE and Apache as owners of ADL 388233 are obligated to properly plug and abandon the Three Mile Creek wells prior to the expiration of their rights in ADL 388233. CIE does not dispute that Apache, Aurora, and CIE are owners of ADL 388233. Aurora, which was discharged in bankruptcy, is currently listed in AOGCC's records as owning 70% of ADL 388233 Segments 1 and 2 and 30% of Segments 3 and 4. Apache is currently listed as owning 70% of ADL 388233 Segments A and B and 127123-0003/141463962.2 October 1, 2018 Page 2 30% of ADL 388233 Segments C and D. CIE currently owns 30% of ADL 388233 Segments 1, 2, A, and B and 70% of ADL 38233 Segments 3, 4, C, and D. CIE acknowledges that, pursuant to AOGCC's regulations, the owners of ADL 388233 may not abandon their rights in the lease until the wells on ADL 388233 are properly plugged and abandoned. Due to Aurora's discharge in bankruptcy, the remaining owners now face increased financial and logistical responsibilities for plugging and abandoning the wells, which were previously operated by Aurora. After receiving the Request for Information, CIE dedicated significant resources to investigating the costs and logistics of plugging and abandoning the three wells located at Three Mile Creek. CIE conducted a site visit and worked with third -party consultants to assess the extent and nature of the work required. CIE also contacted Apache to discuss cost sharing for the plugging and abandonment work. In addition, CIE contacted both the Alaska Department of Natural Resources, Division of Oil and Gas ("DOG") and the Commission to discuss whether the proceeds from the Aurora bonds associated with ADL 388233 would be made available to the entity that agreed to serve as operator for the plugging and abandonment of the Three Mile Creek wells. As articulated in our September 21 letter to the Commission, DOG has confirmed that the proceeds from Aurora's $500,000 statewide bond, which DOG obtained following Aurora's bankruptcy, are not associated with any other leases previously held by Aurora and would therefore be available to the entity that commits to completing the plugging and abandonment at ADL 3 8823 3. In our September 11 letter to AOGCC, we asked that AOGCC confirm that, like DNR's $500,000 statewide bond, the $200,000 Aurora blanket bond associated with ADL 388233 would be made available to the entity that commits to completing the plugging and abandonment at ADL 388233. In its September 24 letter to Apache and CIE, the Commission stated that "Aurora's bond is not held for the benefit of any other operator, including CIE and/or Apache, and is not available to either CIE or Apache." After receiving this response, CIE realized that its September 11 request to the Commission did not clearly articulated CIE's request. It was not CIE's intent to request that the bond be made available to the entity that completes the plugging and abandonment; CIE intended to ask whether the proceeds from the bond would be available to the entity that agrees to plug and abandon the wells.' CIE apologizes for the lack of clarity in its September 11 request and any confusion it may have caused. In light of Aurora's ' CIE understands that, to the extent the Commission has not yet made a claim on Aurora's bond, the bond is not held for the benefit of CIE or Apache and therefore cannot be released to CIE or Apache. CIE's request that the Commission make the proceeds from the bond available to the entity that completes the plugging and abandonment assumes that the Commission can successfully obtain the $200,000 and, like DOG, can make those proceeds available to the entity that completes the final remaining remediation that the bond was originally obtained to secure. Pekns We LLP October 1, 2018 Page 3 bankruptcy and inability to pay its share of the costs required to plug and abandon the Three Mile Creek wells, CIE respectfully requests that the proceeds from the $200,000 Aurora blanket bond—which was originally obtained by AOGCC to ensure that Aurora's wells in Alaska were plugged and abandoned, and which currently only secures the Three Mile Creek wells—be made available to the entity that completes the plugging and abandonment of those wells. Although CIE never anticipated that it would be required to serve as operator of ADL 388233, CIE takes seriously its obligation to work with the other owner of the lease to ensure that the wells on the property are properly plugged and abandoned before the owners relinquish their interests in ADL 388233. As stated in our September 21 letter to the Commission, CIE is prepared to agree to serve as operator for purposes of plugging and abandoning the wells at ADL 388233 if it can confirm that CIE, as only one of the three working interest owners responsible under state law for cleaning up ADL 388233, will not be solely responsible for the costs of such plugging and abandonment. If AOGCC confirms that it can in fact and make the proceeds of Aurora's $200,000 blanket bond available to CIE as partial reimbursement for the plugging and abandonment work, CIE is prepared to serve as operator of ADL 388233 for purposes of plugging and abandonment. Upon receiving confirmation that the proceeds of the bond will be made available, CIE will immediately submit a Designation of Operator form and an Application for Sundry Approvals in order to begin plugging and abandonment work at ADL 388233 while continuing to discuss with Apache the appropriate allocation of those costs that will not covered by bond proceeds. CIE believes this request is reasonable in light of Aurora's bankruptcy and resulting failure to complete or pay for any portion of the remediation work at ADL 388233. CIE appreciates the Commission's willingness to provide CIE with additional time to evaluate the plugging and abandonment work and engage with Apache regarding the work and associated costs. If CIE can provide the Commission with any additional information, please let us know. Sincerely, Elena Romerdahl Counsel for CIE Perkins We LLP uW OFFICN OF Guess&Rudd P.0 1929 W 3- AVENUE SUITE 40 ANCXOMGE, AK 99591 TELEPKONE (907)M 2200 FACSIMILE (997) M2499 8W@gueS= IE.CCYO James D. Linxwiler George Lyle Adam Harki Guess & Rudd PC 1029 W. P Ave. #400 Anchorage, AK 99501-1958 Attorneys for Apache Corporation and Apache Alaska Corporation In the Matter of Request for Information: 20 AAC ) 25.300 ) Plugging and Abandonment of ) Wells Prior to Expiration of ) Owner's Rights in a Lease ) Three Mile Creek Unit 1, Three ) Mile Creek Unit 2, and Three ) Mile Creek 3 Wells ) OCT 01 2018 Docket Number: OTH-18-037 Apache Corporation's Response to the Commission's June 14, 2018 "Request For Information" Or In The Alternative Request For Reconsideration of Any Order or Decision Therein A. Introduction The Alaska Oil and Gas Commission (the "Commission" or "AOGCC") sent a letter dated June 14, 2018 to Apache Corporation ("Apache") and Cook Inlet Energy, LLC ("CIE") (the "Letter"), which was captioned: Request for information: 20 AAC 25.300 Plugging and Abandonment of Wells Prior to Expiration of Owner's Rights in a Lease Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells. The Letter directs Apache and CIE to submit a Designation of Operator form designating one of them to be operator for purposes of plugging and abandoning the Three Mile Creek Unit 1, Three Page I of 7 LAW OFFICES OF Guess&Rudd PC 1029 W. a' AVENUE SUITE "a ANCHORAGE, AK W501 TELEPHONE(90T)99&=0 FACSIMILE (902) 793-2299 1"@guesswdd.mm Creek Unit 2, and Three Mile Creek 3 Wells ("Three Mile Creek wells"), and thereafter res the designated operator to submit an Application for Sundry Approval to plug and the Three Mile Creek wells. though the Letter is captioned "Request for information: 20 AAC 25300," and reiterates in the t paragraph on page 2 that: "This request for information is made pursuant to 20 AAC 300," the substance of the Letter appears to issue the Commission's finding and decision signing legal and financial liability and responsibility for plugging and abandoning the Three le Creek wells to one or both of Apache and CIE, and requiring one or both of Apache and E to take the actions necessary for plugging and abandoning. Furthermore, the Letter states it: "Failure to respond within the time designated is itself a regulatory violation" and the "reserves the right to pursue an enforcement action in connection with this matter." Because Apache is uncertain whether the Commission intended the Letter to only be a "Request for information," or whether the Letter was intended to be an "order or decision," Apache is herein providing responsive information, and is alternatively seeking reconsideration under AS 31.05.080(a) if the Letter was intended to be, or is construed to be, an order or decision. B. The Commission's Statutory and Regulatory Authority For Abandonment of Wells Alaska law provides that, in order to "carry out the purposes" of Chapter 05 (the "Alaska Oil and Gas Conservation Act") of Title 31 ("Oil and Gas.") the Commission: "shall adopt regulations and orders and take other appropriate action. AS 31.05.030(c). Among those "purposes," the Commission "may require ... (3) the drilling, casing, and plugging of wells in a manner that will prevent the escape of oil or gas out of one stratum into another, the intrusion of water into an oil or gas stratum, the pollution or fresh water supplies by oil, gas, or salt water, and prevent blowouts, cavings, seepages, and fires." AS 31.05.030(d)(3). To accomplish that purpose of "plugging of wells," the Commission adopted 20 AAC 25.105(a), titled: "Abandonment of wells." In relevant part, that regulation states that: "All wells that have been permitted on a property under 20 AAC 25.005 must be abandoned before expiration of the Page 2 of 7 -AW OFFICES OF Guess&Rudd PC ION W V AVENUE SUITE 400 ANCHORAGE, AK 99501 TELEPHONE(90])]93-2200 FACSIMILE (07) MX2389 Iaw@guessrudd.mm s rights in that property or if, after notice and hearing, the commission orders for safety reasons or because the operator has effectively abandoned operations to the expiration of the lease." ice the duty to abandon wells is dependent on the "owner's rights in that property," any duty Apache is dependent on whether it is an "owner." Under 20 AAC 25.990(47), "owner" is fined as having "the meaning in AS 31.05.170." In turn, AS 31.05.170(1) defines "owner" as: ie person who has the right to drill into and produce from a pool and to appropriate the oil and s the person produces from a pool for that person and others." Finally, the term "pool" is fined in AS 31.05.170(12) as "an underground reservoir containing, or appearing to contain, a accumulation of oil or gas." C. Apache Was Not An "Owner" of the Property Into Which The Three Mile Creek Wells Were Drilled and From Which Hydrocarbons Were Produced The Letter alleges that "CIE and Apache are owners of the property, ADL 388233, and obligated to properly plug and abandon the Three Mile Creek wells prior to the expiration of their rights in ADL 388233." Letter at 2. However, since Apache owned its divided working interests only in certain deep rights of ADL 388233, which depths were not penetrated or produced by any of the Three Mile Creek wells, Apache contends that it was, by definition, not an "owner" under the 20 AAC 25.105(a), and that Apache therefore has no legal obligation under that regulation to abandon the Three Mile Creek wells. As is explained in the April 20, 2018, Decision ("DOG Decision") issued by the Alaska DNR Commissioner, Andrew Mack, a copy of which is attached as Exhibit 1, ADL 388233 "is a divided interest lease by both depth and area with either different segments." Id. at p. 2." "Segments 1-4 are the area divisions at the shallower depths, and segments A -D are the area division at a lower depth." Id. (and referencing Figure 1 therein, which shows the surface boundaries of the eight segments). Segments A -D of the Lease are below the geologic marker identified as the Lower Tyonek Formation, at a measured depth of 9,566 feet in the Three Mile Creek #1 well. Page 3 of 7 lAW OFFICES OF Guess&Rudd PC 1028 W T' AVENUE SUITE 400 ANCHORAGE. AK 89501 TELEPHONE(9Pp]85-1200 FACSIMILE (807) 2912299 law®gCeSMUdd.COM Only Apache and CIE own working interest percentages in Segments A -D in the Lower Tyonek formation. at p. 3 (Segments A -D are hereafter referred to as the "Deep Rights"). contrast, only Aurora Gas, LLC ("Aurora") and CIE, but not Apache, own working interests Segments 1-4 in the Upper Tyonek Formation. Id., Table 1 (showing the respective ownership held by Aurora and CIE in each segment in the Upper Tyonek Formation and of CIE Apache of each segment in the Lower Tyonek Formation) (Segments 1-4 are hereafter to as the "Shallow Rights"). to the Alaska Division of Oil and Gas' ("DOG's") July 29, 2005, "Approval of an tion to Form the Three Mile Creek Participating Area," (a copy of which is attached as 2), the participating area for the Three Mile Creek ("TMC PA") "is stratigraphically limited to the Beluga Formation Sands between 3,530' and 4,605' measured depth (MD) in the TMC Unit 1 well ...." Id. at p. 1-2. The TMC Unit 1 well was drilled by Aurora in December 2004 to "8,105' MD, 8,015.6' TVD." Id. at 3. This was almost eight years before Apache acquired its divided interest in the Deep Rights in September 2012. See, Exhibit 1 at p. 2 ("Finally, in September 2012, the Lease was horizontally segmented and Aurora Gas assigned its interest in the deeper segments to Apache Alaska Corporation.") Similarly, Conservation Order 558 ("CO 558," a copy of which is attached as Exhibit 3), was issued by the Commission on October 7, 2005, and states in Finding 4. "Delineation History and Development Plans" that: "During December 2004, Aurora drilled the TMCU No. 1 discovery well from a surface location in Section 35 to a bottom hole location in Section 34 of T13N, RI l W, Seward Meridian ("S.M.") reaching a total measured depth ("MD") of 8,180 feet, 8,011 feet true vertical depth ("TVD")." See, Exhibit 3 at p. 2. As a result, although the DOG and the Commission describe slightly different measured depths and true vertical depths for the Three Mile Creek Unit No. 1 well, it is clear that well never penetrated the Deep Rights in which Apache had a divided working interest. In addition, the Commission's online well records show that the Three Mile Creek Unit 2 well was drilled and Page 4 of 7 UW OFFICES OF Guess&Rudd P.L 1029 W.0' AVENUE SUITE <00 ANCHORAGE, AK 99501 TELEPHONE(90r)7g}2200 FACSIMILE (907) M3-2299 le @guessludd com )mpleted to a "driller total depth" of 5307 feet, and a TVD of 4899 feet by November 25, 2005, id the Three Mile Creek 3 was drilled and completed to a "driller total depth" of 5159 feet, and TVD of 4771 feet by October 27, 2011. See, Exhibits 4 and 5. As a result, these two wells so never penetrated the Deep Rights in which Apache had a divided working interest, and were )th completed before Apache acquired its interest in the Deep Rights in September 2012. "Three Mile Creek Gas Pool" is identified in Finding 3 of CO 558 as "an accumulation of common to, and correlating with, the interval between 1,700 feet and 5,531 feet in the TMCU No. 1 well," and is defined in Rule 1 of CO 558 as: "gas -bearing sandstone common to, and correlating with, the intervals between the measured depths of 1,700 feet and 5,531 feet in the Three Mile Creek No. 1 exploration well."' See, Exhibit 3 at p. I & 4. In other words, the deepest portion of the Three Mile Creek Gas Pool, as defined by the Commission in CO 558 (and by the DOG), is located stratigraphically almost 4000 feet above the boundary to the Deep Rights. As was confirmed in the DOG Decision, the Deep Rights `lie below and are separated from the producing intervals of the Lease." Exhibit 1 at p. 2. D. Since It Was Not An "Owner," Apache Has No Legal Obligation to Abandon the Three Mile Creek Wells Because Apache had no legal right to, and did not, "drill into and produce from" the Three Mile Creek Gas Pool, or participate in any well that did so, Apache was legally not an `owner" according to the definitions in 20 AAC 25.990(47) and AS 31.05.170. Since it was not an "owner," Apache has no legal obligation to abandon the Three Mile Creek wells under 20 AAC 25.105(a), which only requires that: "All wells that have been permitted on a property under 20 AAC 25.005 must be abandoned before expiration of the owner's rights in that property ...." Since the Three Mile Creek wells did not penetrate the Deep Rights, and since production from the Three Mile Creek Pool did not occur from the Deep Rights, Apache has no legal obligation under the Commission's statutes or regulations to abandon the Three Mile Creek wells. 2 On August 8, 2005, the DOG issued an amendment (a copy of which is attached as Exhibit 6) to its July 29, 2005 "Approval of an Application to Form the Three Mile Creek Participating Area" to include "all unitized substances in the Beluga Formation Sands between 1,700' MD/1,623' TVD and 5,531'MD/5,364'TVD in the TMC Unit #I well within the boundaries of the approved participating area." As a result, the DOG and the Commission's description of the depths of the Three Mile Creek PA are identical. Page 5 of 7 LAW WICESOF Guess&Rudd PC 1029W 3' AVENUE SUITE 400 ANCNORAGE.AK 99501 TELEPHONE (907)]932200 FACSIMILE (9W) 293-2299 law@guessmComm E. Apache Supports The Appointment of CIE As Successor Operator nce it only owns a divided interest in the Deep Rights of ADL 388233, it is unclear whether pache has any legal rights to determine whether CIE should be required by the Commission to appointed as successor operator for operations in the Shallow Rights. However, if Apache )es have such a legal right with regard to the appointment of a successor operator for the callow Rights of ADL 388233, then Apache contends that CIE is the appropriate party to be ich a successor operator since it appears to be the only solvent entity remaining which owns a vided working interest in the Shallow Rights. F. As An "Owner," CIE Is Legally Obligated to Abandon the Three Mile Creek Wells If, because of its bankruptcy proceeding, Aurora was relieved from legal and/or financial responsibility for the abandonment of the Three Mile Creek wells, then Apache contends that CIE, as the remaining divided working interest owner in the Shallow Rights is the entity which has legal responsible for plugging and abandoning the Three Mile Creek wells. Unlike Apache, CIE did have the "right to drill into and produce from" and "to appropriate the oil and gas the person produces from" the "pool" into which the Three Mile Creek wells were drilled, and is therefore an "owner" under 20 AAC 25.105(a) which is required to abandon those wells prior to the expiration of CIE's interest in ADL 388233. Such a result is also equitable because, unlike Apache, CIE obtained significant financial benefits from the gas production from the Three Mile Creek wells and the Three Mile Creek Gas Pool. G. Conclusion Apache requests that the Commission accept the above information as an adequate response to the Commission's "request for information" pursuant to 20 AAC 25.300. In the alternative, if the Commission intended its Letter to be an "order or decision" which assigned to Apache any legal or financial liability or responsibility for plugging and abandoning the Three Mile Creek wells, then Apache hereby requests under 31.05.080(a) that the Commission reconsider that order or decision, and instead issue an order or decision which holds that Apache has no legal or Page 6 of 7 :ial responsibility for the abandonment of the Three Mile Creek wells for the reasons set above. DATED at Anchorage, Alaska, this 151 day of October, 2018. & Rudd PC eys for Apache Corporation and e Alaska Corporation :efl George R. Lyle, 5sq. Taylor e Corporation Post Oak Blvd., Suite 100 on. TX 77056 Elena Romerdahl, Esq. counsel for CIE Perkins Coie 1029 W 3`d Avenue, Suite 300 Anchorage. AK 99501 LAW OFFICESOF Guess&Rudd PC 1028 W.3' AVENUE SUITE 00 ANCHOPLAGE.AK89501 TELEPHONE (90))]932200 FACSIMILE (907)183-2299 IaW@gu9ssluCC.mm Page 7 of 7 THE STATE °ALASKA April 20, 2018 GOVERNOR BILL WALKER Tim Jones Senior Landman Cook Inlet Energy, LLC 601 W.5th Avenue, Suite 310 Anchorage, AK 99501 tjones@glacieroil.com Re: Appeal of September 29, 2017 Assignment Denial Dear Mr. Jones: Department of Natural Resources COMMISSIONER'S OFFICE 550 W 7th Avenue, Suite 1400 Anchorage, AK 99501-3560 Main: 907.269.8431 Fax: 907.269.8918 CERTIFIED MAIL RETURN RECEIPT REQUESTED I. Cook Inlet Energy, LLC (CIE) appealed the Department of Natural Resources (DNR), Division of Oil and Gas (Division), Director's September 29, 2017 decision denying CIE's working interest assignment in oil and gas lease ADL 388233 (Lease) to Aurora Gas, LLC (Aurora Gas). For the reasons stated below, the Director's decision is affirmed. Introduction CIE raises two points on appeal: 1) CIE argues the Division incorrectly relied upon 11 AAC 82.605(d) to reject CIE's lease assignment application.' 2) CIE contends the Division violated the covenant of good faith and fair dealing "by leading CIE to believe that it had assigned its interest in the lease and by failing to timely process the lease assignment application."2 CIE requests the commissioner vacate the D'irector's decision and remand to the Director, with instructions that she approve the assignment to Aurora Gas. Separately, CIE requests the Commissioner issue a decision finding that "CIE is not responsible for any of ADL 388233's abandonment liability." 3 Additionally, CIE requests a hearing. After reviewing the briefing submitted by CIE, and for the reasons stated below, the D'irector's decision is affirmed and CIE's request for a hearing is denied. 'CIE Appeal of Director's Decision (CIE Appeal), October 19, 2017, at 2. 2 Id. at 3. ' Id. at 5. Exhibit 1 - Page 1 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 2 of 9 H. Background The Lease is a divided interest lease by both depth and area with eight different segments. The segments were created by prior assignments of lease interest. The Division issued the Lease to Anadarko Petroleum Corporation (Anadarko) and ARCO Alaska, Inc. (ARCO), on February 1, 1997. Anadarko and ARCO assigned all their interests in the Lease to Aurora Gas in January 2002. Aurora Gas was 100 percent working interest owner in the Lease until late 2005 when Aurora Gas assigned part of its interest, four segments of the Lease, to Forest Oil Corporation (Forest) and its subsidiaries. Forest changed its name to Pacific Energy Alaska Operating LLC (Pacific Energy) in September 2007. Then, after its bankruptcy proceedings, Pacific Energy assigned its interest in the Lease to CIE on December 15, 2009. Finally, in September 2012, the Lease was horizontally segmented and Aurora Gas assigned its interest in the deeper segments to Apache Alaska Corporation (Apache). The deeper segments lie below and are separated from the producing intervals of the Lease. Segments 1-4 are the area divisions at the shallower depths, and segments A—D are the area division at a lower depth. See Figure 1. Figure 1: Segments of ADL 388233 15 --may\ 13- Segments 1 and A ' Segments 2 and B21 Segments 3 and :C; x v' zc 26 Segments 4 and D 1 - - ----- 33B , l The table below identifies both the interest owner for each segment and the respective ownership percentage, as of the time CIE applied to assign its interest. Exhibit 1 - Page 2 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 3 of 9 Table 1: Three Mile Creek ADL 388233 Upper Tyonek Formation Segment Lease No Segment Working Interest Owner A 388233 1 AURORA GAS, LLC 70 all wells 388233 1 COOK INLET ENERGY, LLC 30 all wells 388233 2 AURORA GAS, LLC 70 388233 2 COOK INLET ENERGY, LLC 30 388233 3 COOK INLET ENERGY, LLC 70 388233 3 AURORA GAS, LLC 30 388233 4 COOK INLET ENERGY, LLC 70 388233 4 AURORA GAS, LLC 30 Lower Tyonek Formation Lease No Segment Working Interest Owner % 388233 A APACHE ALASKA CORPORATION 70 388233 A COOK INLET ENERGY, LLC 30 388233 B APACHE ALASKA CORPORATION 70 388233 B COOK INLET ENERGY, LLC 30 388233 C COOK INLET ENERGY, LLC 70 388233 C APACHE ALASKA CORPORATION 30 388233 D COOK INIM ENERGY, LLC 70 388233 D APACHE ALASKA CORPORATION 30 Segments A—D of the Lease are below the geologic marker identified as the Lower Tyonek Formation, at a measured depth of 9,566 feet in the Three Mile Creek #1 well. Only Apache and CIE own working interest percentages in Segments A—D in the Lower Tyonek formation. All of Aurora Gas's interest in the Lease now exists in Segments 1-4, above the Lower Tyonek Formation. CIE applied for transfer of its working interest in the Lease to Aurora Gas on April 13, 2016. Less than three weeks later, on May 3, 2016, Aurora Gas creditors filed an Involuntary Chapter 11 Bankruptcy Petition against Aurora Gas in the United States Bankruptcy Court for the District of Alaska (U.S. Bankruptcy Court). By June of 2017 Aurora Gas was reporting that it would soon begin the process of liquidation. On August 10, 2017, Aurora Gas filed a "Motion To Reject And Terminate Surface Use Agreement And Mineral Leases Pursuant to 11 U.S.C. § 365(a), Subject To Possible Assumption And Assignment Of Certain Leases" (Motion). Aurora Gas suspended all wells with temporary plugs so they have not been able to produce since August 2017. The U.S. Bankruptcy Court granted the Motion on September 14, 2017. 4 Debtor's Status Report at 2, In Re Aurora Gas, LLC, A-16-00130 (Bankr. D. Alaska 2018), ECF No. 224. Exhibit 1 - Page 3 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 4 of 9 CIE's request for transfer and assignment of its interest in the Lease was denied by the Division on September 29, 2017.5 The Division first determined that because the Lease is a divided interest lease, its transfer and assignment is presumed disapproved under 11 AAC 82.605(d).6 The Division also determined that CIE's application failed to show that its request for transfer and assignment to Aurora Gas met the criteria of 11 AAC 82.605(d)? Finally, the Division determined that "the [S]tate's interest would be adversely affected by assignment of interest in a lease to a company [that] has abandoned its interest in the lease and will shortly cease operations."8 CIE subsequently filed this appeal. I —IffiRMIGURM ONVI As explained below, the Director's Decision is affirmed. The assignment of CIE's interest in the Lease to Aurora Gas would adversely affect the State's interests. The Director's review of CIE's application pursuant to 1 I AAC 82.605(d)9 was appropriate. Furthermore, under 11 AAC 82.605(c) or (d), CIE's proposed assignment is barred. CIE's argument that the Division violated the covenant of good faith and fair dealing is without basis in fact or law. CIE's request to be absolved of abandonment liability is denied. CIE's request for a hearing is also denied. 1. CIE's Proposed Assignment to Aurora Gas Would Adversely Affect the State. CIE's primary argument is that the Division should have considered the Lease to be undivided under 11 AAC 82.605(c) instead of divided under 11 AAC 82.605(d). The Director's analysis under 11 AAC 82.605(d) is affirmed and remains the primary basis for DNR's decision. The Commissioner addresses CIE's argument regarding the application of 11 AAC 82.605(c) here because the facts and circumstances presented here bar approval of the assignment under either subsection. CIE's argument regarding which regulation applies fails to acknowledge or contradict the basis for the Director's Decision: DNR may deny applications for assignments that adversely affect the State's interests. Subsection .605(c) states that DNR will approve assignment of an undivided interest unless it "would adversely affect the interests of the state." Subsection .605(d) states that DNR will disapprove assignment of a divided interest unless it "would not adversely affect the 5 Decision Working Interest Assignment Denied (Decision). 6 Decision at 2. Id 9 Id. ' The Lease terms track 11 AAC 82.605(d), and also bar CIE's proposed assignment. Paragraph 18 of the Lease provides in pertinent part that: No assignment, sublease, or other transfer of an interest in this lease, including assignments of working or royalty interests and operating agreements and subleases, will be binding upon the state unless approved by the state... The state will disapprove a transfer of a divided interest in this lease if the transfer covers only a portion of the lease or a separate and distinct zone or geological horizon unless the lessee demonstrates that the proposed transfer of a divided interest is reasonably necessary to accomplish exploration or development of the lease, the lease is committed to an approved unit agreement. Exhibit 1 - Page 4 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 5 of 9 interests of the state." Regardless of which subsection is applied, DNR must consider the effect of the assignment on the State's interests. CIE cannot show that approval of its assignment application would not "adversely affect the interests of the state," because Aurora Gas, the proposed assignee of CIE's interests, had, at the time the Director denied CIE's assignment application, indicated it was not or would soon be incapable of operating or holding CIE's interest in the Lease. Pleadings in the bankruptcy proceeding indicated that Aurora Gas was not a willing or able assignee. It became clear in 2017 that Aurora Gas was in the process of liquidating its assets and ceasing operations, at which time it would no longer be qualified to hold interest in Alaska leases. Aurora Gas has since ceased operations. The Division correctly determined that assigning CIE's lease interest to Aurora Gas, which had already rejected its interest in the Lease and was in the process of ceasing operation, risked adverse impacts to the State. Aurora Gas is admittedly not capable of operating the Lease, nor is it capable of fulfilling obligations under the lease or applicable law to rehabilitate the leased premises and abandon all improvement to the State's satisfaction upon termination, including plugging and abandoning all wells. Aurora Gas had already stated it could not meet those obligations when the Director issued her Decision. Assigning an interest in the Lease to Aurora Gas while it could not meet Lease obligations would have an obvious adverse effect on the State's interests. As a practical matter, the State cannot assign a lease to an unwilling assignee. The Director's Decision on this point is affirmed and the application of 11 AAC 82.605(c) would not lead to a different result. Any transfer or assignment of CIE's interest in the Lease to Aurora Gas is barred as a practical matter due to Aurora Gas's acknowledgment prior to the Director's Decision that it would soon no longer be qualified to hold interest in Alaska leases. The assignment would also constitute a violation of i 1 AAC 82.605(c) or (d), as such an assignment would adversely affect the interests of the State. 2. The Division Did Not Violate the Implied Covenant of Good Faith and Fair Dealing. CIE argues that "DNR violated the covenant of good faith and fair dealing by leading CIE to believe that it had assigned its interest in the Lease and failing to timely process the lease assignment application." ") First, the Division had no duty, explicit or implied, to issue a decision on CIE's assignment application on any particular timeline. Second, the Division's review of CIE's application, which is required by regulation, does not constitute an "assurance" that the assignment will be granted. CIE's implied covenant of good faith and fair dealing argument is wholly mistaken. A. CIE's Timeliness Argument is Without Factual or Legal Support. As CIE recognizes in its appeal, "there is no time limit imposed in statute or regulation for a transfer decision.."" CIE's timeliness argument hinges solely on its contention that it has had other lease assignment applications processed more quickly than its ADL 388233 assignment 10 CIE Appeal at 3. 11 Id. at 4. Exhibit 1 - Page 5 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 6 of 9 application. 12 The implied covenant of good faith and fair dealing is meant to effectuate the reasonable expectations of the parties to the agreement, not to alter them, and it will not create a duty where one does not exist 13 Nothing in the applicable regulations or the Lease requires the Division to issue a decision on a request for transfer or assignment of a lease interest within a specific time, and the implied covenant of good faith and fair dealing cannot create this duty. CIE's allegation that it was prevented from marketing the Lease or considering whether it would submit its own development plan while its assignment application was pending 14 is equally unsupported. An assignment application does not prevent the assignor from continually considering the circumstances surrounding its lease interests and acting to protect its interest in the lease. CIE was aware of Aurora Gas's financial situation. CIE indicates in its appeal it chose not to market the Lease or otherwise consider what it would do if the Division determined the assignment was not in the best interest of the state. The State does not now bear the burden of CIE's misjudgment.rs Ultimately, any forbearance by the Division in issuing a decision as to CIE's assignment application objectively was reasonable considering the circumstances detailed in CIE's appeal and well known to CIE while its application was pending before the Division regarding the uncertainty surrounding Aurora Gas's financial condition. Indeed, less than three weeks after CIE filed its assignment application an involuntary bankruptcy was initiated against Aurora Gas by its creditors." The Division was under no obligation to grant CIE's assignment in the face of uncertainty as to whether Aurora Gas was qualified or financially capable of holding CIE's lease interests or operating the Lease. 17 Finally, the primary purpose of an oil and gas lease, considered a contract under Alaska law, 18 is the exploration and production of oil and gas for a specific term of years. Nothing in the Decision denying CIE's assignment of its interest in the Lease to Aurora Gas either defeated the purpose of the Lease or prevented CIE from receiving the benefit of the contract. CIE's alleged 12 Id 13 Casey v. Semca Energy, Inc., 92 P.3d 379,385 (Alaska 2004). 10 CIE Appeal at 4. is Moreover, although CIE may have preferred a decision to be [Wade within a specific period, it neither made any inquires to the Division as to when a decision might be forthcoming nor did it request that the Division issue a decision by a certain date. 16 An involuntary Chapter 11 bankruptcy petition was filed by certain of Aurora Gas's creditors on May 3, 2016. 17 See, e.g., Hawken Northwest, Inc. v. State, 76 P.3d 371, 382 (Alaska 2003) (declining to reach appellant's breach of covenant of good faith and fair dealing claim based on delay of approval of appellant's proposal to arrange financing through tax-exempt bonds where department's delay was found reasonable considering bonding proposal's novelty and complexity). 18 See, e.g., ConocoPhillips Alaska, Inc. v. State, 109 P.3d 914, 920 (Alaska 2005) (observing that parties were correct in describing lease as a contract). Exhibit 1 - Page 6 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 7 of 9 reliance on "the principle of cooperation"19 (also known as the "duty of cooperation") is unavailing as this duty obliges both lessor and lessee to act in a manner conducive to the accomplishment of the lease purpose, because the purpose of the Lease is the exploration and production of oil and gas. 20 CIE has failed to show that the Division breached any principle or duty either explicit under the Lease or implied that in tum prevented CIE either from oil and gas exploration and production or receiving any benefit therefrom. B. The Division Did Not Provide CIE Assurances that its Assignment would be Approved. CIE states that DNR violated the implied covenant of good faith and fair dealing by "leading CIE to believe that it had assigned its interest in the lease ,,21 "inducing CIE to believe that it would approve the assignment application,"22 and "suggesting that it would be approved."23 CIE does not provide any indication of what statements or actions by DNR lead, induced, or suggested to CIE that the assignment would be approved. As stated previously, the Division is under no duty to issue a decision on a lease assignment within a specific period. CIE also offers no evidence that the Division—in particular, a person with decision-making authority—made any promise to CIE that its working interests in the Lease would be assigned to Aurora Gas. CIE has failed to even explain or allege how the Division induced or lead CIE to believe that its assignment would be approved, or even suggested as much. It is axiomatic that no transfer of lease interests is binding upon the state unless approved by the commissioner.' CIE's awareness of this fact is reflected by the very existence of its assignment application. Had CIE believed that it could assign its interest to Aurora Gas through its own bankruptcy proceedings, without the approval of the Commissioner, no application would have been submitted. The assignment application was decided by the Division Director. Until the Director decides, Division personnel neither make promises regarding the outcome nor has CIE presented evidence of such a promise. And, because the decision to either approve or deny an assignment lies with the Division Director, it is unreasonable for an applicant to presume or rely on a CIE Appeal at 3 n. 2. 20 See 5 Williams & Meyers, Oil & Gas Law § 808 (LexisNexis & Matthew Bender Co. 2014) (emphasis added). 21 CIE Appeal at 3. 22 Id. at 3-4. 23 Id. at 4. 24 11 AAC 82.605(b). Exhibit 1 - Page 7 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 8 of 9 presumed outcome. Because CIE has failed to provide any specific allegations or evidence to support its claims on this point, any appeal of the Director's Decision on such grounds is denied. 3. CIE's Request that it be Absolved of Abandonment Liability is Improper. CIE has requested on appeal that in addition to approving its assignment to Aurora Gas, the Commissioner should also issue a decision finding that "CIE is not responsible for any of ADL 388233's abandonment liability."'-' The issue of abandonment liability is not before the Commissioner as part of this appeal. Furthermore, where assignment is approved, "the transferor is liable for all obligations under the lease or oil and gas exploration license accruing before the approval of the transfer."26 Where assignment is not approved, the assignor and its surety continue to be responsible for the performance of any lease obligations "as though no transfer had been filed for approval .,,21 CIE's request is outside the scope of this appeal and contrary to regulation. It is denied. 4. CIE Failed to Identify Issues Necessitating a Hearing. CIE requested a hearing without explanation of what issues it believes require a hearing. The Commissioner has discretion to hold a hearing when there are factual issues to resolve. 11 AAC 02.050. CIE raised no disputed factual questions nor does the Commissioner find that there are any. In administrative proceedings, the rule remains "that one need not hold a hearing if there is nothing to hold a hearing about; or, more precisely, `there is no requirement, constitutional or otherwise, that there be a hearing in the absence of substantial and material issues crucial to (the) determination. "'28 CIE is requesting its interest in the Lease be assigned to an entity that has stated it is incapable of operating the Lease and will soon not even be qualified to hold lease interests under 11 AAC 82.200. With regard to CIE's appeal, there is indeed "nothing to hold a hearing about," and CIE has failed to make any showing to the contrary. CIE's request for a hearing is denied. IV. FINDINGS 1. The State's interests would be adversely affected by the transfer of CIE's interest in ADL 388233 to Aurora Gas, a company that has abandoned its own interest in the Lease, and 25 CIE Appeal at 5. 26 11 AAC 82.605(b). 27 11 AAC 82.630(a). 28 White v. State, Dept of Natural Resources, 984 P.2d 1122, 1126 (Alaska 1999)(citations omitted). Exhibit 1 - Page 8 of 10 Re: CIE Appeal of September 29, 2017 CIE Lease Assignment Decision Page 9 of 9 has ceased or is in the process of ceasing operations in Alaska. Neither 11 AAC 82.605(c) or .605(d) allow such an assignment. 4. CIE has failed to show or even argue on appeal that transfer of its interest in the Lease to Aurora Gas would not adversely affect the State's interest, since Aurora Gas has ceased or is in the process of ceasing operations and has abandoned its own interest in the Lease. 5. The Division was under no obligation to issue a decision granting CIE's assignment application in a matter of weeks, without considering the financial condition of the transferee, or the transferee's capability or willingness to receive the assignment. The implied covenant of good faith and fair dealing cannot create such an obligation. 6. CIE failed to support its claim that the Division provided assurances that the assignment would be approved. 7. CIE's request to be absolved of all abandonment obligations is outside of the scope of this appeal. 8. CIE has failed to raise any material issues crucial to the commissioner's determination that necessitate a hearing. Accordingly, the Director's Decision is affirmed. CIE's request for an order absolving it of abandonment liability is denied. CIE's request for a hearing is also denied. This Commissioner's Decision is the final administrative order and decision of the department for the purpose of an appeal to Superior Court. An appellant affected by this final administrative order and decision may appeal to Superior Court within 30 days in accordance with the Alaska Rules of Court and to the extent permitted by applicable law. Tndrew I T. ab20 ssioner Exhibit 1 - Page 9 of 10 Exhibit 1 - Page 10 of 10 THREE MILE CREEK UNIT APPROVAL OF AN APPLICATION TO FORM THE THREE MILE CREEK PARTICIPATING AREA FINDINGS AND DECISION OF THE DIRECTOR, DIVISION OF OIL AND GAS UNDER A DELEGATION OF AUTHORITY FROM THE COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES, STATE OF ALASKA July 29, 2005 Exhibit 2 - Page 1 of 28 TABLE OF CONTENTS 1. APPLICATION FOR THE FORMATION OF THE TMC PA 11. ANALYSIS OF THE APPLICATION FOR THE FORMATION OF THE TMC PA.....................„.........2 1. PRIOR EXPLORATION AND DEVELOPMENT ACTIVITIES AND THE GEOLOGICAL AND ENGINEERING CHARACTERISTICS OF THE RESERVOIR...........................................................................................................2 2. THE APPLICANTS' PLAN OF DEVELOPMENT.......................................................................................................4 3. THE ENVIRONMENTAL COSTS AND BENEFITS.....................................................................................................5 4. THE ECONOMIC COSTS AND BENEFITS TO THE STATE........................................................................................7 5. OTHER RELEVANT FACTORS.............................................................................................................................. 7 III. FINDINGS...........................................................................................................................................................8 I. PROMOTE THE CONSERVATION OF ALL NATURAL RESOURCES.......................................................................... 8 2. PROMOTE THE PREVENTION OF ECONOMIC AND PHYSICAL WASTE...................................................................8 3. PROVIDE FOR THE PROTECTION OF ALL PARTIES OF INTEREST, INCLUDING THE STATE ..................................... 9 IV. DECISION.............................................................................................................................._...........................9 V. ATTACHMENTS Attachment 1. Exhibit A, Unit Tracts and Exhibit F, Unit Tract Expense Participation Attachment 2. Exhibit B, Map of the Three Mile Creek Unit Boundary Attachment 3. Exhibit C, PA Tract Production Participation and Exhibit E, PA Tract Expense Participation Attachment 4. Exhibit D, Map of the Three Mile Creek PA Attachment 5. Exhibit G, Three Mile Creek Unit First Plan of Development Attachment 6. Exhibit G-1, Three Mile Creek PA Redetermination Procedures Attachment 7. Exhibit H, Contractual Ownership of the Three Mile Creek Unit Attachment 8. Exhibit I, Contractual Ownership of the Three Mile Creek PA Attachment 9. Exhibit J, Map of the Three Mile Creek Unit Contractual Ownership Exhibit 2 - Page 2 of 28 I. Application for the Formation of the TMC PA On June 6, 2005, Aurora Gas LLC (Aurora), the unit operator, submitted an application to form the Three Mile Creek Participating Area (TMC PA) within the Three Mile Creek Unit ('IMC Unit) (the Application). The TMC Unit is located on the West side of Cook Inlet, about four miles west of the Beluga River Unit and seven miles north of the village of Tyonek. The TMC Unit encompasses approximately 8,080 acres within seven oil and gas leases. Approximately 5,520 acres lie within four State of Alaska leases (State Leases) and Cook Inlet Region, Inc. (CIRI) is the lessor of three oil and gas leases (CIRI Leases) that encompass the remaining 2,560 acres of the TMC Unit area. The State of Alaska, Department of Natural Resources, Division of Oil and Gas (the State, the DNR or the Division, as appropriate) and CIRI jointly administer the Three Mile Creek Unit Agreement (the Agreement). Aurora submitted the Application on behalf of itself and Forest Oil Corporation (Forest), the TMC Unit working interest owners (the Working Interest Owners or Applicants, as appropriate), Aurora submitted the Application in accordance with 11 AAC 83.351 and Article 9 of the Agreement. The Application included the following exhibits to the Agreement: Exhibit A, a schedule describing the TMC Unit; Exhibit B, a map of the TMC Unit; Exhibit C, a schedule allocating unitized substances within the TMC PA; Exhibit D, a map of the TMC PA; Exhibit G, the Unit Plan of Development (First POD); and Exhibit G-1, TMC PA redetermination procedures. In addition, Aurora submitted Exhibit H allocating unit expenses and Exhibit I allocating participating area expenses in accordance with the contractual ownership interests agreed to between Aurora and Forest. The proposed TMC PA contains portions of three leases and encompasses 960 acres (approximately 12% of the TMC Unit area), including 840 acres within one State Lease, ADL 388233, and 120 acres within the two CIRI Leases, C-061394 and C-061502. Aurora is the only working interest owner in the leases proposed for inclusion in the TMC PA, although Aurora has a contractual agreement to transfer 30% working interest ownership to Forest. Mobil Exploration and Producing North America, Inc. holds 1.46% overriding royalty interest in all three leases included in the TMC PA and Marathon Oil Corporation has 1.5% overriding royalty interest in C-061502. The State retains a 12.5% royalty on production from the State Lease and the three CIRI Leases specify a 16 2/3% royalty rate. For the reasons set forth in this Findings and Decision, the Division approves the formation of the TMC PA effective July 1, 2005, subject to concurrent approval by CIRI. Supporting geological, geophysical, and engineering data provided by Aurora and otherwise available to the Division justifies the formation of the TMC PA. The data indicate that the Beluga Formation within the proposed TMC PA is capable of producing or contributing to the production of gas in paying quantities. 1 The TMC PA is stratigraphically limited to the Beluga Formation Sands between 3,530' and 4,605' measured depth (MD) in the TMC Unit 1 well within the area I Paying Quantities is defined in I 1 AAC 83 395(4) as follows: "paying quantities" means quantities sufficient to yield a return in excess of operating, costs, even if drilling and equipment costs may never be repaid and the undertaking considered as a whole may ultimately result in a loss; quantities are insufficient to yield a return in excess of operating costs unless those quantities, not considering the costs of transportation and marketing, will produce sufficient revenue to induce a prudent operator to produce those quantities Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 1 Exhibit 2 - Page 3 of 28 described in Exhibit C and depicted on Exhibit D to the Agreement The Division also approves the allocation of gas produced from the TMC PA to the individual leases on a surface acreage basis and the working interest owners shall pay royalties on that production based on the information set forth in Exhibit C. Therefore, 87.5% of production from the TMC PA will be allocated to the State Lease and 12.5% to the CIRI Leases and Aurora will be solely responsible for paying royalties to the State and CIRL Unit expenses and TMC PA expenses, excluding royalties, will also be allocated on a surface acreage basis, but the expenses will be divided between Aurora and Forest based on the Working Interest Owners' contractual ownership set forth on Exhibit H and Exhibit 1, respectively. The Division's evaluation of the Application is set out in this Findings and Decision. Il. Analysis of the Application for the Formation of the TMC PA The Commissioner of DNR (the Commissioner) reviews unit -related applications, including the formation of participating areas, under AS 38.05.180(p) and I I AAC 83.301-11 AAC 83.395. The State statute and the DNR regulations set out the standards and criteria for formation of a participating area. The Commissioner or his designee2 may approve the formation of a participating area if he determines it is necessary or advisable in the public interest3. The Division's review of the Application is based on the criteria set out in 11 AAC 83.303 (a) and (b). The Division's evaluation of the Application under the six factors set out in l 1 AAC 83.303 (b) is set out directly below, followed by the Division's findings under the subsection (a) criteria and the Division's decision approving the Application. 1. Prior Exploration and Development Activities and the Geological and Engineering Characteristics of the Reservoir Technical data submitted in support of the Application included the following: type log, structural cross-section, stratigraphic correlation, log analysis, FMI analysis, sidewall core analysis, seismic sections, and structure maps. The Division will hold these data confidential under AS 38.05.035(a)(9)(C) and 11 AAC 96.220. Cook Inlet area geology maps from the 1960s and 1970s identified the regional fault and anticlinal trend that is the structural basis of the TMC Unit. The Broin Bay fault is the main structural feature in the unit area. The Moquawkie Anticline, a prominent anticlinal trend with an axial trace paralleling the fault, lies adjacent to and east of the Bruin Bay fault. Aurora identified two structural highs along the anticline in the TMC Unit area, the Three Mile Creek prospect (south) and the Olson Creek prospect (north), which are separated by a structural saddle. Aurora's objective in the Initial Plan of Exploration (Initial POE) was to delineate and test gas sands in the Beluga Formation above 2 By memorandum dated September 30, 1999, the Commissioner approved a revision of Department Order 003 that delegated this authority to the Director of the Division of Oil and Gas 3 The proposed unit action must be necessary or advisable in the public interest: "To conserve the natural resources of all or part of an oil or gas pool, field, or like area, the lessees and their representatives may unite with each other, orjaintly or separately with others, in collectively adopting or operating under a cooperative or unit plan of development or operation of the pool, field, or like area, or part of it, when determined and certified by the commissioner to be necessary or advisable in the public interest" AS 38.05. 180(p). Three Mile Creek Unit, Three Mite Creek PA Findings and Decision Page 2 Exhibit 2 - Page 4 of 28 4,300 feet true vertical depth (TVD) within the two prospect areas. The Tertiary (Miocene) Beluga Formation is present in the subsurface over much of the upper Cook Inlet Basin. It is well exposed in outcrops on the southern Kenai Peninsula near Homer and along the Beluga River. The Beluga Formation thins or is truncated locally on structural highs on the northeastern side of the Cook Inlet Basin. The Beluga Formation consists of interbedded, poorly sorted sandstone, siltstone, claystone, sub -bituminous coal and ash beds, with locally abundant pebbly sandstone and pebble conglomerate. The depositional environment for the Beluga Formation is interpreted as shallow braided streams. The Beluga Formation is 4,150 feet thick at its subsurface type section in the SOCAL Beluga River #1 well (now known as BRU #212-35), located east of the TMC Unit, within the Beluga River Unit. In the nearby Beluga River field, the Beluga Formation reservoir has an average porosity of 24%, and contains over 100 feet of net pay. In addition to the Beluga River field, the Beluga Formation also produced gas at Swanson River, Cannery Loop, Kenai, Lewis River, Nicolai Creek, North Cook Inlet, Stump Lake, Beaver Creek, and Theodore River fields. The Three Mile Creek Reservoir is constrained by the Moquawkie anticline to the west and prior exploration wells drilled to the southeast and east. The southeast boundary is defined by the Three Mile Creek State #1 well, drilled by Superior Oil Company in October 1967, which is located within Tract 4 of the TMC Unit. Drilled to a total depth of 13,773 feet to explore for oil, Superior found indications of gas in the Beluga Formation, but abandoned the well without testing to determine if the well could produce hydrocarbons in paying quantities. The North Tyonek State #1 well, drilled by Phillips Petroleum Company in 1973, is located just outside the eastern boundary of TMC Unit. Phillips drilled to a total depth of 6,063 feet and tested several intervals in the well, but abandoned the well because it could not produce gas in paying quantities. The State and CIRI approved the formation of the TMC Unit effective January 31, 2004, for the exploration and development of two natural gas prospects identified within the unit area, the Three Mile Creek Prospect and the Olson Creek Prospect. The 3 -year Initial POE contained plans to drill an exploration well in the Three Mile Creek Prospect, acquire new seismic data over the unit area within the first two years, and drill a second exploration well in the Olson Creek Prospect in the third year. In 2004, Aurora acquired and evaluated 44 miles of new 2D seismic data. In December 2004, Aurora drilled the TMC Unit I well to 8,185' MD, 8,015.6' TVD. Aurora tested several intervals in the Tyonek and Beluga Formations in the well. The type log for the TMC Unit I well defines the stratigraphic interval of the productive Beluga Formation in the TMC PA. The top of the Beluga Formation occurs at 3,530' MD and the base of the interval occurs at 4,605' MD in the TMC Unit 1 well. The well test produced gas at a rate of approximately 2 million cubic feet per day (MMCFD) from the Tsuga 2-6 interval in the Beluga Formation. Aurora mapped the depth of the lowest known gas for each productive interval based on its interpretation of seismic and well control data. The TMC PA includes all 40 -acre aliquot parts4 4 11 AAC 88.185(11) "legal subdivision" means an aliquot part of section of land according to the public land mutangular survey system, not smaller Thee Mite Creek Unit, Three Mile Creek PA Findings and Decision Page 3 Exhibit 2 - Page 5 of 28 that are intercepted by the 4,000' depth contour line depicted on Aurora's Tsuga 2-6 depth structure map. The Division cannot disclose the details of the confidential data, but the well and geophysical data provided in support of the Application, and otherwise available to DNR, indicate that the land proposed for inclusion in the TMC PA is known or reasonably estimated to be capable of producing or contributing to production of Unitized Substances in Paying Quantities from the Three Mile Creek Reservoir. The Division's evaluation of the subsurface geology supports the formation of the TMC PA to include the lands described in Exhibit C and depicted in Exhibit D to the Agreement (Attachments 1 and 2 to this decision). The Applicants' prior exploration activities and the geological and engineering characteristics of the TMC PA support approval of the Application under I 1 AAC 83.303(b)(2) and (3). 2. The Applicants' Plan of Development Aurora proposed that the First POD be effective July 1, 2005 through January 31, 2007, which supersedes the remaining term of the Initial POE. In the Initial POE, Aurora committed to drill an exploration well within the Three Mile Creek Prospect and acquire additional seismic data over the unit area by January 31, 2006, and form a participating area and drill a second exploration well by January 31, 2007. Aurora fulfilled the first three requirements, and the First POD incorporates the remaining exploration commitment contained in the Initial POE. The First POD includes plans to develop the reserves underlying the TMC PA and to explore the unit area outside of the participating area. Aurora will construct a production facility on the Central Pad for water separation, compression, and dehydration of the produced gas. Aurora will install a 6 -inch gathering line to ship pipeline quality gas from the Central Pad approximately five miles south to Aurora's Lone Creek pipeline. Sustained production from the TMC PA is scheduled to start in July 2005. Aurora plans to slowly increase the production rate from the TMC Unit I well to approximately 5 MMCFD. When cumulative production from the TMC Unit 1 well reaches 300 MMCFD Aurora will shut-in the well to perform a pressure build- up test. If the reservoir pressure test is favorable, Aurora will proceed with further drilling to delineate the TMC PA. The First POD includes plans to install two additional development drilling pads north and south of the Central Pad and drill four delineation/development wells. Aurora plans to drill two wells in 2005, TMC Unit 2 well from the North Pad and TMC Unit 3 well from the South Pad. Data from the first three wells will determine the bottom -hole locations for two additional wells. Aurora anticipates drilling the TMC Unit 4 well from the North Pad and the TMC Unit 5 well from the South Pad in 2006. Primary gas treatment facilities may be located on the North and South Pads with gathering lines installed to ship the gas to the Central Pad where it will be processed for sale. than one- quaver ofonecluaderofone section of land, containing approximately 40 acres, where a section of land contains section lots, "legal subdivision" also mrrms those section lots; "legal subdivision" also means a protected legal subdivision according to any protracted public land rectangular survey prepared by the division or Bureau of Land Management of the Department of the Intoner, and made available to prospective applicants for leases; Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 4 Exhibit 2 - Page 6 of 28 I 1 AAC 83.351 (a) states " Mthe participating area may include only land reasonably known to be underlain by hydrocarbons and known or reasonably estimated through use of geological, geophysical, or engineering data to be capable of producing or contributing to production of hydrocarbons in paying quantities." The Division staff believes there is insufficient data to reliably map the Three Mile Creek Reservoir or to judge with any certainty what acreage will contribute to production in paying quantities. Aurora has shown however, that all of the acreage in the proposed TMC PA may fulfill the paying quantities requirement and the activities outlined in the First POD will provide additional data to evaluate Aurora's interpretation of the reservoir. Additional data obtained in the future may require revising the TMC PA boundary. By January 31, 2006, the Unit Operator shall notify the DNR and CIRI if the Working Interest Owners decide not to drill a 2"d Exploration Well in the Olson Creek Prospect, and if so, Tracts 6 and 7 will automatically contract out of the unit and the Working Interest Owners shall pay the State an amount equal to $16 per acre contracted.. If, by January 31, 2006, the Working interest Owners commit to drill an exploration well in the Olson Creek Prospect, the Unit Operator shall, by January 31, 2007, 1) drill a 2nd Exploration Well to the base of the Tsuga 2-4 interval or the stratigraphic equivalent of the 4,300' TVD marker, as seen in the Three Mile Creek State -1 Well, whichever is deeper to a bottom hole location within Tract 6, ADL 388232; 2) log the well (GR or SP, Resistivity and Neutron/Density or Porosity: appropriate triple combo log); and 3) complete, suspend, or abandon the well. If the Unit Operator fails to drill the 2nd Exploration Well, as described above, by January 31, 2007, then t) Tract 6 and Tract 7 will automatically contract out of the Three Mile Creek Unit; and 2) the Working Interest Owners shall pay the State an amount equal to $24 per acre contracted out of the unit. The Application, along with the First POD, contains sufficient plans and commitments to explore the TMC Unit and develop the hydrocarbons within the TMC PA. It protects the interests of the public, CIRI, and the State by committing the Applicants to drill delineation and production wells in the Three Mile Creek Reservoir, and to explore additional lands outside of the participating area. Therefore, Aurora's plans for development of the Three Mile Creek Reservoir and exploration of the TMC Unit area support approval of the Application under I 1 AAC 83.303(b)(4). 3. The Environmental Costs and Benefits Approval of the TMC PA is an administrative action that does not authorize any on -the -ground activity and, in itself, has no environmental impact. The DNR's approval of the First POD is only one step in the process to obtain approval to drill wells to develop the known gas reservoir within the TMC Unit. The unit operator must also obtain permits from various State and federal agencies including the Division's approval of a plan of operations. State unitization regulations require the Commissioner's approval of a plan of operations before the unit operator performs any operations on or in the unit area to minimize surface impacts.5 A proposed plan of operations must describe the operating procedures designed to prevent or 511 AAC 83.346. Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 5 Exhibit 2 - Page 7 of 28 minimize adverse effects on natural resources. When reviewing a proposed plan of operations, the Division will consider the unit operator's ability to compensate the surface owner for damage sustained to the surface estate and the plans for rehabilitation of the unit area. Unitization does not waive or reduce the effectiveness of the mitigating measures that condition the lessee's right to conduct operations on these leases. Article 8.2 of the Agreement requires that the unit plan of operations must be consistent with the leases, mitigation measures, and lessee advisories developed by the DNR for the State's most recent Cook Inlet Areawide lease sale. The mitigation measures include habitat and wildlife protection such as stream and water body setbacks and seasonal use restrictions to protect sensitive birds and animals. Mitigation measures such as seasonal restrictions on specific activities in certain areas can reduce the impact on bird, fish and mammal populations. State designated primary waterfowl areas protect bird populations. Regulating waste disposal is another way to limit environmental impacts. DNR also requires consolidation of facilities to minimize surface disturbances. With these and other mitigating measures, the anticipated exploration and development related activity is not likely to significantly impact bird, fish, and mammal populations. Exploration and development within the TMC Unit is subject to these mitigation measures, if proposed operations involve State surface or subsurface. When the unit operator submits a unit plan of operations for approval, the Division will apply the current mitigation measures uniformly across the unit, ensuring environmental protections that might not otherwise occur on private lands. However, the Division does not have the authority to approve a plan of operations or impose the State's mitigation measures for operations solely on CIRI lands. The TMC Unit is within the Alaska Coastal Zone, and therefore subject to the Alaska Coastal Management Program (the ACMP). Whether the activity is on State or CIRI land, the appropriate federal, State, and local agencies must determine if the unit operator's plans are consistent with the ACMP, and the lessees may not commence drilling or development operations until all agencies have granted the required permits. Area residents use the TMC Unit area for subsistence hunting and fishing. Oil and gas activity may impact some wildlife habitat and may affect subsistence activity. The environmental impact will depend on the level of development activity, the effectiveness of mitigation measures, and the availability of alternative habitat and subsistence areas. In any case, the anticipated activity within the TMC Unit will have less impact on habitat and subsistence activity than if the lessees developed the leases individually. Unitized exploration, development and production will minimize surface impact. The benefits of consolidated exploration and development, application of the State's Areawide mitigation measures, and the use of existing roads, lower the potential costs to the surrounding environment. Forming the TMC PA minimizes the environmental impacts and costs of exploration and development of the unit area supports approval of the Application under the 11 AAC 83.303(b)(1). Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 6 Exhibit 2 - Page 8 of 28 4. The Economic Costs and Benefits to the State Production will be allocated to each tract in the TMC PA based on its surface acreage within the participating area as a percentage of the total acreage in the TMC PA. If Aurora proceeds with delineation and development of the TMC PA in accordance with the First POD, it will acquire additional well data and a year of production data by July 1, 2006. This data may justify a revision of the TMC PA boundary, which would affect the allocation of production to the individual leases. Therefore, the Applicants, the Division, and CIRI agreed to the redetermination procedures set out in Exhibit G-1. By August 1, 2006, Aurora shall apply to revise the TMC PA based the parties' analysis of the data available through July 1, 2006. The Revised TMC PA will include lands then regarded as reasonably estimated to be producing or contributing to production in paying quantities and exclude lands reasonably proven to be incapable of contributing to production in paying quantities. Following approval by the DNR and CIRI, the Revised TMC PA shall be effective with respect to all parties retroactive to the first day of the commencement of production from the TMC PA. The parties will evaluate the production data and drilling schedule annually, and implement any subsequent revisions of the TMC PA in accordance with the procedures in Exhibit G-1. The redetermination procedures ensure that production will be allocated based on the best technical data available, and retroactive adjustments will ensure that the parties receive their fair share of royalties on production from the TMC PA. Approval of the proposed TMC PA and the First POD will result in both short-term and long- term economic benefits to the State. TMC PA production will generate construction jobs in the short-term and some long-term employment. Development and production from the TMC PA will provide royalty and tax revenues to the State over the life of the field. The lessees may reinvest revenues in new exploration and development in the State. Additionally, the TMC PA will deliver new natural gas supplies that help to stabilize the local and regional economy. Royalty, tax, and employment benefits derived from production and economic development will far exceed any additional administrative burdens associated with permitting TMC PA facilities, administering the unit leases, or collecting royalties on production. In summary, the economic benefits outweigh the costs. The working interest owners made meaningful commitments to explore and develop the unit area and the State will receive taxes, royalties, and increased economic activity. The redetermination procedures and retroactive adjustments to the production allocation schedule allow the State to maximize production revenue. Moreover, the discovery of additional gas reserves in Cook Inlet may help to maintain stable, low cost energy supplies for the surrounding area. Therefore, the DNR's evaluation of the economic costs and benefits to the State supports approval of the Application under 11 AAC 83.303(6)(5). 5. Other Relevant Factors The Agreement requires joint approval of the Application by the DNR and CIRI because the Three Mile Creek Reservoir underlies both State and CIRI leases. The Division and CIRI agreed to Aurora's proposal to allocate production from the TMC PA based on surface acreage. With joint management of the TMC PA, the State and CIRI will review Aurora's plans to delineate and develop the reservoir. The TMC Unit Plans of Development must be consistent with State Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 7 Exhibit 2 - Page 9 of 28 regulations and include plans to explore the area outside of the TMC PA. Reaching agreement on an acceptable development plan and an equitable allocation of production required the cooperation of all parties. Joint management of the TMC Unit and the TMC PA provides for development of State and private lands under a unified plan that reduces environmental impacts, conserves resources, and protects the interests of all parties. Joint management of the TMC PA supports approval of the Application under 1 I AAC 83.303(b)(6). III. Findings 1. Promote the Conservation of all Natural Resources The TMC PA will promote the conservation of both surface and subsurface resources through unitized, rather than lease -by -lease, development. Approval of the Application will reduce both the number of facilities required to explore for and develop reserves and the aerial extent or the footprint required to accommodate those facilities. The formation of oil and gas units, as well as the formation of participating areas within units, generally conserves hydrocarbons. Formation of the TMC PA will provide for efficient, integrated development of the Beluga Formation within the TMC Unit. A comprehensive operating agreement and plan of development governing the area will help avoid duplicative development efforts on and beneath the surface. There will be environmental impacts associated with reservoir development, but it must proceed according to an approved unit plan of development. Additionally, before undertaking any specific operations on State land, the unit operator must obtain the Division's approval of a unit plan of operations that must undergo extensive multi -agency review. The Division may condition its approval of a unit plan of operations and other permits with mitigation measures developed for the most recent Cook Inlet Areawide lease sale in addition to those in the leases. Compliance with the mitigation measures will minimize, reduce or avoid adverse environmental impacts. Creating the TMC PA will help maximize oil and gas recovery, while minimizing negative impacts on other natural resources. This reduction in environmental impacts and conservation of hydrocarbon resources is in the public interest. 2. Promote the Prevention of Economic and Physical Waste Forming a participating area prevents economic and physical waste by eliminating redundant expenditures for a given level of production, and by increasing ultimate recovery with the adoption of a unified reservoir management plan. Marginally economic reserves, which otherwise would not be produced on a lease -by -lease basis, can be produced from the TMC PA in combination with more productive leases. Facility consolidation lowers capital costs and promotes optimal reservoir management. Pressure maintenance and secondary recovery procedures are easier to design and achieve through joint, unitized efforts than would otherwise be possible. In combination, these factors allow the unit operator to develop and produce less profitable areas of a reservoir in the interest of all parties, including the State. Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 8 Exhibit 2 - Page 10 of 28 Reducing costs and environmental impacts through unitized operations will expedite development of reserves and will promote greater ultimate recovery of oil and gas from the unit area. This may increase and extend the State's income stream from production taxes and royalties. Formation of the TMC PA will facilitate the equitable division of costs and allocation of the hydrocarbon shares, and provide for a diligent development plan that helps to maximize hydrocarbon recovery from the reservoir. Further, the formation of a participating area, which enables commingled production, facility sharing opportunities, and adoption of a unified reservoir management strategy, may allow for the development of economically marginal hydrocarbon accumulations. 3. Provide for the Protection of all Parties of Interest, Including the State Because hydrocarbon recovery will more likely be maximized under a unified plan, the TMC PA protects the economic interests of the State, CIRI, and the overriding royalty interest owners. Formation of the TMC PA advances the efficient evaluation and development of the hydrocarbon resources while minimizing impacts to the area's cultural, biological, and environmental resources. Formation of the TMC PA protects the economic interests of the working interest owners and royalty owners of a common reservoir. The approved production allocation schedule ensures an equitable allocation of revenue to the lessors commensurate with the value of their leases. In addition, the redetermination procedures applicable to the TMC PA will protect the economic interests of all parties. The TMC PA will not diminish access to public and navigable waters beyond those limitations imposed by taw or already contained in the oil and gas leases covered by the Agreement. The Agreement provides for future expansions and contractions of the participating area, as warranted by data obtained by exploration or otherwise. The TMC PA and the Agreement thereby protect the public interest, the rights of the parties, and the correlative rights of adjacent landowners. IV. Decision The Division reviewed the statutes, oil and gas unitization regulations, the TMC Unit Agreement, and materials supplied by Aurora in support of the Application. Formation of the TMC PA within the TMC Unit will promote the conservation of all natural resources, promote the prevention of economic and physical waste, and provide for the protection of all parties in interest including the State, as discussed above. The Application adequately and equitably protects the public interest, is in the State's best interest, and it meets the requirements of AS 38.05.180(p) and 11 AAC 83.303 (a) and (b). 1. Aurora requested that approval of the TMC PA be effective July 1, 2005 through January 31, 2007, which is consistent with the proposed term of the First POD .6 I 6 Article 9.5 of the Agreement stares: "The Proper Authority will establish the efreaive dale ofthe initial Participating Area That effective dale shall he Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 9 Exhibit 2 - Page 11 of 28 approve the TMC PA effective July 1, 2005, subject to concurrent approval by CIRI. 2. The TMC PA includes: a. 960.00 acres described in Exhibit C and depicted in Exhibit D, and b. all unitized substances in the Beluga Formation Sands between 3,530` MD and 4,605' MD in the TMC Unit 1 well within the boundary of the approved participating area. 3. DNR accepts Exhibits A, B, C, D, G, H, and I to be true and correct as submitted; those exhibits are attached hereto as Attachments 1 through 7, respectively. 4. I approve the allocations of production to the tracts within the TMC PA set forth in Exhibits C and the allocation of TMC Unit expenses and TMC PA expenses set forth in Exhibits H and I, respectively. 5. The Division assigns Accounting Unit Code "TM01" to report test production prior to the effective date of the TMC PA. Aurora shall submit operator reports for gas produced and vented from the Three Mile Creek Unit I well that reference Accounting Unit Code TMOI and all test production shall be allocated to Tract 4, ADL 388233. 6. The Division assigns Accounting Unit Code "TMTM" to the TMC PA for royalty accounting purposes. All operator and royalty reports must reference this Accounting Unit Code for all gas produced after the effective date of the TMC PA. 7. The Unit Operator shall submit copies of the Facility Report of Produced Gas Disposition (AOGCC Form 10422) that specify the volume of gas produced from the TMC Unit that is vented, flared, sold, or otherwise disposed. 8. I approve the First POD, as set forth in Exhibit G, for the period from July 1, 2005 through January 31, 2007. In accordance with Article 8. 1.1 of the Agreement and State regulation 11 AAC 83.343, the unit operator shall submit an annual report to CIRI and the Division on January 31, 2006. The annual report must describe the extent to which the unit operator fulfilled the requirements of the First POD, and must include an explanation of any deviation or noncompliance with the approved plan. It must also provide detailed plans for the term of the plan and long-range development plans for the TMC PA. 9. In accordance with the redetermination procedures outlined in Exhibit G-1, by August 1, 2006, Aurora shall apply to the Division and CIRI to revise the TMC PA boundary based on the technical data available through July 1, 2006. The application must include detailed plans for the remaining term of the First POD and long-range development plans for the revised TMC PA. no later than the date of the first sustained Unit Production. Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page 10 Exhibit 2 - Page 12 of 28 10. If all parties agree that the data available through July 1, 2006 supports a continuation of the TMC PA boundary approved by this Finding and Decision, Aurora's proposed Second Plan of Development will be due on November 2, 2006, 90 days before the First POD expires. The Second POD must describe the extent to which the unit operator fulfilled the requirements of the First POD, and must include an explanation of any deviation or noncompliance with the approved plan. It must also provide detailed plans for the term of the Second POD and long-range development plans for the TMC PA. A person affected by this decision may appeal it, in accordance with 11 AAC 02. Any appeal must be received within 20 calendar days after the date of "issuance" of this decision, as defined in 11 AAC 02.040 (c) and (d), and may be mailed or delivered to Thomas E. Irwin, Commissioner, Department of Natural Resources, 550 W. 7th Avenue, Suite 1400, Anchorage, Alaska 99501; faxed to 1-907-269-8918; or sent by electronic mail to dnr anpcalsnadnr.state.ak.tis. This decision takes effect immediately. If no appeal is filed by the appeal deadline, this decision becomes a final administrative order and decision of the department on the 3155 day after issuance. An eligible person must first appeal this decision in accordance with 11 AAC 02 before appealing this decision to Superior Court. A copy of 11 AAC 02 may be obtained from any regional information office of the Department of Natural Resources. Original signed by Mark D. Myers, Director July 29, 2005 Mark D Myers, Director Date Division of Oil and Gas cc: Thomas E. Irwin, DNR Commissioner Teresa Ressler, CIRI John Norman, Chairman AOGCC Jeff Landry, Assistant Attorney General Attachments: Attachment 1. Exhibit A, Unit Tracts and Exhibit F, Unit Tract Expense Participation Attachment 2. Exhibit B, Map of the Three Mile Creek Unit Boundary Attachment 3. Exhibit C, PA Tract Production Participation and Exhibit E, PA Tract Expense Participation Attachment 4. Exhibit D, Map of the Three Mile Creek PA Attachment 5. Exhibit G, Three Mile Creek Unit First Plan of Development Attachment 6. Exhibit G-1, Three Mile Creek PA Redetermination Procedures Attachment 7. Exhibit H, Contractual Ownership of the Three Mile Creek Unit Attachment 8. Exhibit I, Contractual Ownership of the Three Mile Creek PA Attachment 9. Exhibit J, Map of the Three Mile Creek Unit Contractual Ownership Three Mile Creek Unit, Three Mile Creek PA Findings and Decision Page I 1 Exhibit 2 - Page 13 of 28 X v N fU t0 lD A. o N co Attachment 1 Three Mile Creek Unit Agreement Exhibit A. Unit Tracts and Exhibit F, Unit Tract Expense Participation 8/1/2005 Page 1 o/2 3MileExhibits27June05enr xls3 Mile Exhibits A and F saznnn unaTnm Tiad TnclLgvl Docriplion A<mpe i Tr¢t Avev;< part ci tlivn MneralOwn iLease Number Expiration 0nel Rvyelry Rate ORRI Burtlem; DRRI ' µ1p 10 µlW10%'. t iwnfti 12YmOt II Wru ScmaW xJmervl Nasky 19201q 23.76% Cain Inlet n. fdc C^13% 2RIV2006 Khwi 9h 146% Aurwa LU' 100'/. S�ro A1[ (aO W i I 14W. MplG plwalio &Prod arngNunb A - I c• e g 5 v9A _ 1 ' ccbvn IP. All I 64o W I "am -� - -'•— -.___. _ �> � ---_ 2.. T .12NO& 11 WsR5oesE ... ,Ala3i 360.00 .693% lbbk Wn txCOb1.M2'. 2!/82008. 16.6 m .296% - _. ,. 5.AmwsOU IW. N blf pl IiUnR Pmdun ng NmN [ed es Waz¢d: 5¢ti 4. L12 SA IN 6V24W1/d: 61 W 150°. (Marathon DilCwp eayov —p _aw-_'PTo."-0606! 123 3 T l2 11 i/ Sewkre Mayi6in=Altlu. BOm 099!6.. �f•.maxG 'etilac. C-061506 21t8/2008 16666A.° 2,98% Amms LLC Imm Mol Lpl eAre n6NOM pcN ati 1 IV CettriMd as ZM esCroVI_- oda.IN I I Scen d00L' I i ISIP,C M WurOil Cwpv uon wnWLnn I amakp goy r «. _. _. .__._ _.. 1 T 12 Ktla5. I1W A1aLL4auA. 3;320 Ge 8t09'A:_�aavbrAh" DNR ADL 388233 15120M 125% L. _, Alapnoun.L,C... Illsµ Mbl E lorauov a ProducungFoM IA6� Anne -71., •_ __ I, S ..22.0 Seen U furvryM, Sll1; I 330 W 64V03 (qi r W I. --------- - Seen- 26 U m MAll: f- Sccdu.27:Unmry ci E12.SWIl4.E12NW1N: 560WIr 8m8on3 JnmrvcyN.Al1: Seed..35. UnwrvRcd,AlIi lai gapprwvmeklY 2,960.00sm mweor less Se mcra3 2960 W'. — � -- -- Suon2 — 2 ,F. : 0 _ saz00023Unsuacard.Nln. I 3zaco:� _— ........ rroo lmttclr am -m-1 m_rce-Iess v3•..596aW. ! - Enrirconuies - approtimaVly 332000 acrca_mwc or !tris f-- 8/1/2005 Page 1 o/2 3MileExhibits27June05enr xls3 Mile Exhibits A and F Attachment 1 Three Mile Creek Unit Agreement Exhibit A, Unit Tracts and Exhibit F, Unit Tract Expense Participation Trac. Tract Lend Dnniption seria� Una Trarl Av<aae T—,Aveenl Pvlkiptlivn ! lo—A 0.n Ii. 1<eaa Nombai Frpinlion Nor! RoSdrY Rare ! mull Ru Nan ORRI WIO WIO% S Towxlho,13 Nam. Rmp IIW Rexed Nlai&uL AlIlA& TrcA 530.W 6M% Swe ltAWUL DNR ADL39gS16 lal2 . 125% 1.66% Aeon Cev LLC l00%. 5 Rmcnl ! I MO Expluru oo&?,oa-o gN.M, 166% Amenaa, lase• _ nwed.SWIH: 5 tion 22U --v----- F---- - _ ----i 1 s tion 21U d. WWNW V., 90 C0! j c e_' g Pprodm6tNs Macro xrca.mgewltss 1 3aIX00+—u--�� r I � � —i ___ - _ '. 6wuon 3i Unurrewd NWIl6 WI/ZDEI/J NF.1bNFt/4 280 OU I - -- ronulPmq �roaimeoly 28000 s mw< e `E nm ua1 s.pprowma¢I 5000as. 6 T Ulow It WM Scxed Alma 116aaa 149616 IOtRlxal 12% O.W% ForcS; PI Co IOU%_- 6l2non 1, 611u1r+1d. SWI/aSLI/V. HOW]' 13000i I, _ - —� —�_— — — - �� I ---1 lWupn 12 Unsurvccd EI/2lW ld EI/ NN'IId: -411nu Sation lJ,Umun_�d. Nl/2 SW 1/6 4X000 _ cvalinin eproyatdy 1160 M arcs ma — -- '1::--T 'q. •...:Li WWk3uaaW}.rbf "`AYpt. 53A.Oa.. 66aY. StecofAbi:a:DNR .ADL39d31F IIf10Wr. A1.5%: ffW`: Foms10i1C 100% 5meov l.UmurvovW NE]/6,EV]NWI/6.SWI /d_NWII45LI/V: 44000 TVI una AeKs toab al 100%. MineralAinrsAlp _ Aere Fereew A.ro. Fuml Mre %*IAoreea %afl.aapr Att c %of Font %.I[—or — SumAeras - _. cMl STATE TOTAL.--_.— 3SrtIW 5L6a% -- - _.-.— '_SRFIp 6A.334; a.gXd.dg Icnnvv. 336aw 40.00°!e 100.0046 0.06/ 0.0% ].66UOR 60.00bh 69:575: 3fa6M itihA% 30.4% 4400.00 100% J.&K, 00 100% 1921% zarAc 2,5001q 100% 5,510,00 100°/. 8.080.00 Adhough AURORA has 1 ns about tpe valdly orM " I L'n an ebuM 1 ution aM Ip recognize the ONR s regPlalpns regaNinp Un llzal Pnf' PtoCgI, AURORA eIMslp denllyiNsintnmatnoW itedeh nq.lpaddreu Ne al Bili us elaler _v �_ J� __------------ _ — �� _ i I T I 8/1/2005 Page 2 of 2 3MileExhibiLs27J11ne05dnr.xls3 Mile ExhiMtsA and Attachment 2 i HIBIT " B" Kr% ' 7' JU 0 6 2005 REE MILE EEK UNIT GREEPAEN rei CREEK UNIT (rev 5.05) _DIV SION OF OIL ND GAS r Ir•- x Lease y� 12 On'ner ... Tr lTR OW ers (hvnenbip 6 I C-061394 COSI Aurora Gas, LLC 100..00 2 C-061502 cm Aurora Gas. LLC 100_00 T13 3 C-061506 CIRI Aurora Gas. LLC 100_00 -R"17-1 4 ADL. 368233 DNR Aurora Gas, LLC 'HREE TR61 �t\ 1F MILE 5 ADL- 390516 DNR Aurora Gas. LLC 100..00 REEK v 1 6 T DNR "16117- 100..00 i Kr% MAR OF THE THREE MILE CREEK UNIT (rev 5.05) T 12�Nt 111lii x Lease � Jllinml Wo'ki Interest On'ner ... Tr Numbe OW ers (hvnenbip I C-061394 COSI Aurora Gas, LLC 100..00 2 C-061502 cm Aurora Gas. LLC 100_00 3 C-061506 CIRI Aurora Gas. LLC 100_00 4 ADL. 368233 DNR Aurora Gas, LLC 100..00 T1 5 ADL- 390516 DNR Aurora Gas. LLC 100..00 6 ADL- 388232 DNR Forest Oil Corporation 100..00 7 ADL- 390515 DNR Forest Oil Corporation 100..00 Exhibit 2 - Page 16 of 28 Attachment 3 Three Mile Creek Unit Agreement Three Mile Creek Participating Area Exhibit C, PA Tract Production Participation and Exhibit E, PA Tract Expense Participation Tract Tnrt LeQsl Oncriplion 5 -lion Trea I PA Traet It—,1, At,,PsrliaiPstian MnenlOwner LeaxNumber:Pspiralion Patel Royalty Rtlel ORR[ Burdens ORRIWIO IWIO% 1 Tawvdti 12N IIW-SaaNA4kueAlmk4 40.00 433 CocY leka Re Rra C.46HP94 =,l0nX6. 16656t5m -. 141P% '..<� Aspen O:sQ LEC- 10014 \1nMl Faplorelran & Yroducuny NoM1 5<euon 3. NlV 114NW I/4: 4000. r •__ _. _,_—_ _.__ 146% IAmmca lm• .__4___ ,Ia�VVrvximm.ay 40 x¢s.m Icss I 2 �TloWaIl, 12 Naft an IIWant, Sawrd Manneae. Alaska BOW 833. Copk wo, Reino, Ind 0061502 L292006 166666Nn 205% A. Oel, LIS 100. arc oani W dcxdbcd ss& S l_5 4 rvllllll Y. _ _.. an 00 M : A1 b EE,1Piton ProducunS YOMI I5 i • --- 1 90Yi M da_ O Cospuauon I —_.._ - r n r s a 00 _.._ Ppro IL BU 4 T rn), 11 N.A. R.,, I l West is xd.Mandan. Alh9 Trse4A WO 9750% &.,SA .. ADL30M 1131rom 1259: V4,06 A.Oas.W.0 IIW% � It14e imBPNuNnY NnM 1S146%� oM26U mtl SWI/4SW114_ 4000 1 Bao 34 U-ol.E11 EV2W 12, Sed 35;U eyW.wlaw . 00W 1 I Iu YaPPmsirrulely B4B.00acrc, les �_ —_____ I 11 _ __I_ j TuIeIP Puna A. Ac gryOP/ xdoB I Mron POmI j 411nnl Owrrenhi A,n Percent Aan %dA... %al. Aern %MPdres %dl.naor SumA Bum% cm 120W 12% 120M 125% 100.0% - I'M101 40% .':120.00 100.0°% SrAn Win 97,5% 94U W 871% Imm 6DIV1pf 00% 90.00 IW ,100.G°a TOTAL 950 Vn 100CN, IW rW. 960.00 r gllhouBn AURORA sas reservations a0put theralAiry oRhis IMatasl,in enabundto.o!mu4on andro.,oim the DNR,, r ... Won. rpeNinip UNalit:on omlocn, AURORA elands W allatt0y Nn ontano al oca, afnile, dolatonon, I4 endows IN Wooft tatm leen.. 6/1/2005 Page 1 of 1 3MileExhibits27June05dnr.xis3 Mlle Exhibits C and E J 1 Attachment 4 EXHIBIT D JlJN V N05 DTVI ION OF OIL D GAS R1 1 r Tia ,- 'HREE 1 TR5 i MILE ti x elf REEK `. MA®1/T f sZ y THRE IIILE i 4 CRE K PA w IX M 1 � Kr MAP OF THE THREE MILE CREEK UNIT AND THE .t. THREE MILE CREEK PARTICIPATING AREA Exhibit 2 - Page 18.of 28 Attachment 5 Exhibit G to the Three Mile Creek Unit Agreement First Plan of Development A. DURATION: This plan shall be effective from July 1, 2005, through January 31, 2007, and supersedes the remaining term of the Initial Plan of Exploration. B. ACTIVITY DURING THE INITIAL PLAN OF EXPLORTION The Three Mile Creek Unit No. 1 Well was drilled during December 2004 and four zones of interest were perforated and drill -stem tested in the Tyonek and Beluga formation reservoirs within January 2005. The lower two zones were non-commercial and plugged back, and a completion packer and tubing were run above the shallower two zones, which tested at a combined rate of about 2,000 mcf/day. The Nabors 129 rig was released in late January. The Unit Operator submitted an application for a proposed Three Mile Creek Participating Area. C. THE THREE MILE CREEK PARTICIPATING AREA 1) Drilline Operations Testing in the Three Mile Creek No. 1 Well will resume with another rig in the spring of 2005. At that time, several additional shallower Beluga sandstone zones will be perforated and tested, and packers and tubing will likely be run for either a dual or selective completion to isolate some of the shallower zones from the deeper zones, due to initial reservoir pressure differentials between the multiple zones. AURORA plans to drill up to two (2) appraisal/development wells within the Three Mile Creek Participating Area during CY 2005. Subject to environmental reviews and permits being sought, two development drilling pads will be constructed to the north and south of the existing well pad (TMC Central Pad). The Three Mile Creek Unit No. 2 Well will be drilled from the northern pad (TMC North Pad) then the Three Mile Creek Unit No. 3 Well will be drilled from the southern pad (TMC South Pad). The Three Mile Creek Unit Nos. 4 and 5 Wells, planned for CY-2006, will be sited after a review of the results of the subsequent drilling. 2) Other Development Activities: AURORA plans to construct a production facility on the TMC Central Pad for water separation from and compression, and dehydration of the sales gas, and, assuming successful development drilling, minor satellite facilities will be installed on the TMC North and South pads. A 6 -inch gas gathering pipeline will connect the TMC Central Pad facility to AURORA's Lone Creek gas gathering Exhibit 2 - Page 19 of 28 Attachment 5 Three Mile Creek Unit Agreement Exhibit G, First Plan of Development Page 2 of 3 pipeline, approximately 5 miles to the south. Pipeline construction will be facilitated by and will follow a pre-existing gravel road, generally known as the Superior Road. 3) Production: The initial production from the Three Mile Creek Unit is expected to occur on or before July, 1, 2005. The initial production from the Three Mile Creek No. I Well will be from the Beluga formation. AURORA expects to be producing from up to 3 wells by the end of CY 2005. The Three Mile Creek Unit No. 1 Well will be placed onto production and initial rates will slowly be increased to approximately 5MMcfd until cumulative production meets or exceeds 300MMcf at which time the well will be shut-in. Pressures will be taken followed by a 48 hour buildup with a surface pressure check recorder to confirm surface and calculate BH pressures. It is our anticipation no pressure loss of greater than 1 psi per hour loss will occur. Favorable reservoir pressure data will result in the Three Mile Creek Unit No. 2 Well being prosecuted. 4) Well Data: Drilling- 0 Producing- 0 Shut-in Pending Facility Installation- I Suspended- 0 Abandoned- 0 D. EXPLORATION ACTIVITIES OUTSIDE OF THE THREE MILE CREEK PARTICIPATING AREA 1) If the Working Interest Owners decide not to drill a 2"d Exploration Well: a) the Unit Operator shall notify DNR and CIRI in writing of the no -drill decision by January 31, 2006; b) Tract 6 and Tract 7 will automatically contract out of the Three Mile Creek Unit; and c) the Working Interest Owners shall pay the State of Alaska a payment equal to $16/acre x contracted acreage. 2) By January 31, 2007, the Unit Operator must drill a 2nd Exploration Well a) to the base of the Tsuga 2-4 interval or the stratigraphic equivalent of the 4,300' TVD marker, as seen in the Three Mile Creek State -I Well, whichever is deeper; b) to a bottom hole location within Tract 6, ADL 388232; c) log the well (GR or SP, Resistivity and Neutron/Density or Porosity: appropriate triple combo log); and d) complete, suspend, or abandon the well. Exhibit 2 - Page 20 of 28 Attachment 5 Three Mile Creek Unit Agreement Exhibit G, First Plan of Development Page 3 of 3 3) If the Working Interest Owners fail to drill the 2 I Exploration Well, as described above, by January 31, 2007: a) Tract 6 and Tract 7 will automatically contract out of the Three Mile Creek Unit; and b) the Working Interest Owners shall pay the State of Alaska a payment equal to $24/acre x contraction acreage. E. General Provisions: 1) After fulfilling all of the obligations in this First POD, any tract not having a portion of the lease included in an approved participating area by January 31, 2007, contracts out of the Unit Area, unless there is a well certified capable of producing in paying quantities located on that tract. 2) If the Three Mile Creek Unit terminates for failure to fulfill any of the commitments in this First POD, the Working Interest Owners will automatically surrender all expired State acreage within the Unit Area, effective the day the Unit terminates. 3) If acreage contracts out of the Three Mile Creek Unit area for failure to fulfill any of the commitments in this First POD, the Working Interest Owners shall automatically surrender all expired State acreage that contracts out of the Three Mile Creek Unit, effective the day the Unit contracts. The Commissioner and the President may delay contraction of the unit area if warranted. 4) The Working Interest Owners waive the extension provision of l I AAC 83.140 and Article 16.2 of the Three Mile Creek Unit Agreement, and the notice and hearing provisions of 11 AAC 83.374 applicable to default and/or termination of the Three Mile Creek Unit. 5) AURORA Gas, LLC, designated as Unit Operator, reserves the right to modify this Plan of Development if economic or geological factors warrant; however, such modifications or operations are not to be commenced without prior consent of the DNR and CIRI. Exhibit 2 - Page 21 of 28 Attachment 6 EXHIBIT G-1 to the Three Mile Creek Unit Agreement Revising the Three Mile Creek Participating Area The Three Mile Creek Participating Area (TMC PA) described in Exhibit C may be revised in accordance with the following provisions if well and/or production data derived from the TMC PA wells yield evidence to indicate and support a revision of a previously established and approved Participating Area ("Former PA"): 1.0 Revisions of the TMC PA require approval by the President and the Commissioner. 1.1 Proposal by Unit Operator- By August 1, 2006, the Unit Operator shall prepare and submit to the President and the Commissioner an application for expansion/contraction of TMC PA (the "Proposed PA") based upon analysis of the data available through July 1, 2006. No application shall be necessary if CIRI and the DNR agree that the aforementioned data supports a continuation of the Former PA. The Proposed PA will include lands then regarded as reasonably estimated to be producing or contributing to production in paying quantities and exclude lands reasonably proven to be incapable of contributing to production in paying quantities, provided, however, no Former PA lands shall be excluded from a Proposed PA because of depletion of Unitized Substances.' 1.2 Review and Approval of Proposed PA 1.2.1 The Unit Operator shall supply all appropriate supporting information to allow CIRI and the DNR to evaluate whether the Former PA should be expanded, contracted, or remain the same. 1.2.2 Within ten days after receipt of the Proposed PA and supporting data and analysis, CIRI and the DNR shall give the Unit Operator written notice as to whether the submission is complete. If CIRI and the DNR determine the submission to be incomplete, CIRI and the DNR shall provide the Unit Operator with a written notice of incompleteness, specifying the deficiencies in the submission. The Unit Operator shall submit additional data and analysis until CIRI and the DNR determine the submission to be complete. Nothing herein shall limit the rights of CIRI and the DNR under applicable statutes, regulations, leases and agreements, including Article 3.10 of the Three Mile Creek Unit Agreement, to request that the Unit Operator provide whatever data and interpretations the agencies deem necessary to fulfill their respective responsibilities. 1.2.3 The President and the Commissioner shall approve the Proposed PA or an Alternative Participation Area (the Revised PA). The DNR shall base its ' Article 9.6 of the Three Mile Creek Unit Agreement states "Land in a Participating Area shall remain in that Participating Area even if its Unitized Substances are depleted." Exhibit 2 - Page 22 of 28 Attachment 6 Three Mile Creek Unit Agreement Exhibit G-1, Three Mile Creek PA Redetermination Procedures Page 2 of 3 recommendations and decision on the criteria provided in the applicable statues and regulations, including but not limited to 11 AAC 83.303. CIRI will base its decisions on available scientific data and analysis. 1.3 Effective Date. Following approval by the Commissioner and the President, the First Revised PA shall be effective with respect to all parties retroactive to the first day of the commencement of production from the Former PA. 1.4 State Equalization Procedure. The Unit Operator and Working Interest Owners shall submit revised Operator and Royalty Reports for each month of production between the commencement of production and approval of the Revised PA. Debits and credits owed to or by the State shall be made to the State or the Working Interest Owners, as applicable, and calculated in the same manner as is required for payment for the royalty interests to the State in the Unitized Substances being produced from the TMC PA. 1.4.1 State Lease Provision 37 "... The amount of all royalty in value payments which are not paid when due under this lease or the amount which is subsequently determined to be due to the state or the lessee as the result of a redetermination will bear interest from the last federal banking day of the calendar month following the month in which the oil, gas, or associated substances were produced, until the obligation is paid in full. Interest shall accrue at the rate provided in AS 38.05.135(d) or as may later be amended......". 1.4.2 State Statute AS 38.05.135(d) "If a royalty or net profit share payment to which the state is entitled under AS 38.05.135 — 38.05.181 is not paid or is underpaid when it becomes due under (c) of this section, the unpaid amount of the royalty or net profit share payment bears interest in a calendar quarter at the rate of five percentage points above the annual rate charged member banks for advances by the 12th Federal Reserve District as of the first day of that calendar quarter, or at the annual rate of I I percent, whichever is greater, compounded quarterly as of the last day of that quarter." 1.5 CIRI Equalization Procedure. The Unit Operator and Working Interest Owners shall submit revised Operator and Royalty Reports for each month of production between the commencement of production and the approval date of the Revised PA. Debits and credits owed to or by CIRI shall be made to CIRI or the Working Interest Owners, as applicable, and calculated in the same manner as is required for payment for the royalty interests to CIRI in the Unitized Substances being produced from the Three Mile Creek Participating Area. Exhibit 2 - Page 23 of 28 Attachment 6 Three Mile Creek Unit Agreement Exhibit G-1, Three Mile Creek PA Redetermination Procedures Page 3 of 3 1.5.1 CIRI Lease Provision 35 (C-61394), Line 15 and Provision 25, Line 10 (C-61502) " ...The amount of all royalty in value payments which are not paid when due under this Lease or which are subsequently determined to be due as the result of a redetermination will bear interest from the date the obligation accrued, until it is paid in full, at the Default Rate....". 1.5.2 Default Rate is defined in CIRI Lease Provision 32.(k) (C-61394) and Provision 40 (t) (C-61502) as follows: "...a floating per annum rate equal to two percent (2%) above prime rate as announced by the National Bank of Alaska from time to time. However, in no event shall the Default Rate exceed the maximum interest rate permitted by law." 1.6 Overriding Royalty Interest Equalization Procedure. Debits and credits owed to or by the Overriding Royalty Interests shall be made to the Overriding Royalty Interest or the Working Interest Owners, as applicable, and calculated in the same manner as is required for payment to the Overriding Royalty Interests in the Unitized Substances being produced from the TMC PA. 1.7 After the first revision of the TMC PA in 2006, the Unit Operator, the DNR, and CIRI shall review the drilling schedule and production data from the TMC PA in connection with the annual review of the Unit Plan of Development. Any of the parties may propose an expansion or contraction of the TMC PA as appropriate following the procedures outlined above. The Proper Authority will establish the effective date of each later revision of the TMC PA. tmc pa redeterminationprocedures]8july05.doc Exhibit 2 - Page 24 of 28 Attachment 7 X S CID _Q TN V a N enrzaos Cr O M N Co Three Mile Creek Unit Agreement Exhibit H, Contractual Ownership of the Three Mile Creek Unit nar t,m l.olxw.lw�a >•tt�w� ; rn3 n.•y 1 A tn.l A.q.M r\gym .. � Mn I ..I o..... oxw Lra M1umge CYO trtMn Gq PaYmh Xae tlurJne ORPI Coq..nu. WIO '. o.rr.aln.l wlb � ^ x .t L i\WwC41w11 .AIYI... L9TA0 � 32%W-.. - CaW Wry `.ne.. Ctv.I YM 1':1'elfA rl1!1lIMY PDIM Axm Oa.11l' TM %n-3 AY. _ W'v (m-.anv line Mnn 11.11 Alk row I I i _ 3Iti MYnVIn Pim �Mnl. 1\M rtl tlI IrtaW' __� ._�_ 4 ___ •— _PIK P ' A! iai. wma¢Ir 5a000. r.n rveu .a .__ '_ 1+ x\Wa\.tllvN Wtl .. N11e ..69/4 dvt Wa La Cd415UT S]LYYF AIW i. DOE% -.!uses O�tilC Rwi I I j iwa: Yw n.ncnwwM we n n.�gia .rw .u..':i" 1YtYia .'.nwaS.:ew�rvcAs�ti:iwuK 2MXM nl>. weaArPw\xx Aut\� I:nl..v.l nus nnly, A.m.. n..cic ma 1 I 1 I I � � __• _. ��- S 35:Vm j –tet I -- vHllfr _.. -g - +.tlP a -wan -� :.... 3r.:. _.: txM:,p dWla<. �':.-. L - : 5 ' ♦wsas: u.0 �___._�L_ -----�--i----- maul�pru wlvu , I I I Page 1 ort 9MIIeEAhlbftQ7JUneM5 Pea Mlle EPhbtH m X _Q N N CD N N BnR035 0) 0 M N W Three Mile Creek Unit Agreement Exhibit H, Contractual Ownership of the Three Mile Creek Unit Ir TMnr trill pnerl ae irvr Puue nil Tm 1m. Mural (Arm Imm M�rbr r.W4e'.fy�m x. .re I ORN1 i OP0.1 I fCsnnrP4 � 10 5- T IlEhi Si yM1\Grfl4n.A Tu4A :-. ,SAM byy 4mYe! 1gx A/g.. rtrys W. OrYMYtl W10 1 e{ j p.l ..per n1e4::.vtS:ue 9nEoe 3:U J.AW IN: r_ E IIA(gl I -�. i 0 I6 I i-- [mtiN vimek LO W rent wTPr pe _ I_ i SrSew 3 —�— 5®anII'UwuM1nrO VWI/r.W VIdIIN,W INNFIM � HJVI 1 1 I I wnWnry Wpo4meN4 L000 anf nunarlcr _ I i —_ I lrvve or+mlWmr MSAm _ __ - - � •6.-.:.:T U ..ipN ••-,•••...�.»["�� 1'HIMHA1Y. .HYe INIL.-.. AplrlTtE.-, b1Wll pIH B. Am•Ov.iJ[ bti 1 Snpun 1, Uuw. SW SEIN.!!.25k H; 13:I r4 i I ipan 111{ Ay S¢Jun l9 Vur eG 6115WIrJ,FF➢JWN _ 1 S41 LV r.nn 1 $xqm l3. unwi "mruly l.IW Wwry lrortwlu i - -- ___ 16' �. •. 'a tS .. -•... •. Yv4Ye ,fi?(:".:"+ti.i/.-.�: SAT. Z7K 4BafPb1'a 1MCl,: ....WS 53.•..: -101604 6Iz n Amma4a 11C Yh _--{—%Vm1 Unv+ ni FI 61/+YWI.!$WI VWI(StiliJ. �J10W _ ' } llinrrd OweenAip -----"" A—.1 beVrrr..r •am4..rr faw Armv SunT _.. CIF.t _. _ S.SeOxrg 70k[ . '/+YW 224% MO?: 2,r60W IIp V.: SPAT[ S,mm 6112% 2RSCm 61AS%: St.74% _.T m 77m., 43.3% .� 3,432., IW W. TOTAL 1 (NIIIPVSRNMCRPN rea 6vv iEMNe N%Nq rtatl M ndGtOm :Mb pIPS¢tlMONRb O400rn¢ra N Ung200pn � � I cool ALlwaA axnm� m4i:rl.rm Porr.elue Pnw m..mlm.aImv i..rlPlewr Page 2612 3M1.e NhW.ne d,.Il Mik Fx btM Attachment 8 Thee Mile Creek Unit Agreement Three Mlle Creek Partlol,ea mg Ezleat I, Ccatractual Ownership or the Three Mile Creek Participating Ales 3Milalt hi0ils %] .OStlnr A.3 Mile EzhAit I s.m. PA T. Olpl Tm TrM pau' Aja TM AenaAt P.nRIP lbO MnaN Owver I r—m..W, I! p.4. N R.4 mo= 1 ORXI On WIO WIO% f Te.sN13.' IIR Willa AWFa Iel9 A.IIA CM MLy (m. CM1i91. LSF2hIlL 1(�6[Mii- ... I,YOY. M.wa Ctii LLC 4A _ _' Sa T.k IIdNW1i0 Mr0 _,____ __ � IdGX `vr M1A ,It«•____ FneP1.11' Iqt _ Y i 1: IIN 5eMiimdarc AMW 1P.N %IM Cwk Nkl Lx GWUO`. SOAK 16fMt`K 2'Ys# AmnO.LALC AM tGix �ti mMe wn W 14 !coup 'N h pl AIT.4sWY $n 9M11/3NC1/i- A00 OQII,, 1-- _ ._ 1 ifi# .1aNM[nu me —; 1.�S4M IW[Ita Ol.lm FinaWC .1ofL __I Yvur.�e ryr_ HYJ Y ToayRnl3!Mp II R'K Yxmi Ma4wl A#dY,TR�A pMW AI!1P. :Y.ss KAWiI%A /JXMtjU It1tMa{ 1'f%' tNM AuYn" IlG •W+L i rnm AiSvlx:.y, - � ' s.-wpn 4nvm'AH1 fFl<wW I _ ' Le N W yid [12.u2wlrz __ yI 4I110I I Su' 33-. [:,�nry W12W12: _I(AW � —_ •.I eon 1�IY tl94 W.ve<mrtam __ 1 '.. ' -�: _ —_. —i'�, _ 1 .__ r TmaP.anRu�ua u+w.. w.•:n hart: _ Mmenl UanaMp• A h ! %Nle<wr nn Aam %ar{'aml %slleanr Sum A. Wm!L — Cpn — IAW !2% RLM RJ# i6an M9n RP.+ 21a* 1Y00D IOn_lpy !rfAfY HOW 51.9# V.%.M .K•.ML S.W "MI. lal?c EAO.IA IP'l p, <i L— 02 6i:M I(rayw _wW i ' miN, • •• ___ _.._._ team _ —_-_• __. __ 3J?Y,L .__--__ 960.00 _.__. gUtpPAnn newvafiona.Iwlanvalldlgel YaLmlafeal,M aanubwllpn ehablamAnae MGpNR'a rapANely nperlPna Unieie5an Rug 'OMuetlnm AUnOftA lac npL Fla.Nnew MM1ie aeleningm ea W.f9lneveNalLMW[ aaaa. 3Milalt hi0ils %] .OStlnr A.3 Mile EzhAit I Attachment 9 ITREE MILE r rata UNIT GREEMEN N 7 y 1 12 TR6 13 Exhibit 2 - Page 28 of 28 T 13 R 1' ;f HREE TRS rfv 1,1^},A J MILE REEK I ) I yr* }✓, MAP OF THE THREE MI CREEK UNIT (rev 6.05 Y SCREE PA Ar Vr Y \ t{,C F..l f r J{/ � ♦. (. )ilii:\(L..A!. { Mineral G�' I,m{; Interest Lease Number Owner )wnmship M rxx[. r I C-061394 CI RI Aurora/FOC 70/30 ? X'Xih',l� `_ vK� n�s t rrr �( 2 C-061502 CI RI Aurora/FOC 70/30 �r J� K X {� �<i 3 C-061506 CIRI Aurora/FOC 70/30 4A ADL- 388233 DNR Aurora/POC 70/30 4-A ADL -388233 DNR Aurora/FOC 30/70 9 1rRQ 5 ADI, 3905!6 DNR Aurora/FOC 70/30 t ,.-. 6 .;. ADL -388232 DNR Aurora/FOC 30/70 7 ADL -390515 DNR Aurora/FOC 30/70 Exhibit 2 - Page 28 of 28 STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION 333 West 7th Avenue, Suite 100 Anchorage Alaska 99501 Re: THE APPLICATION OF ) Conservation Order No. 558 AURORA GAS, LLC for an order ) to establish pool rules for ) Three Mile Creek Unit development of the Three Mile ) Three Mile Creek Beluga Gas Pool Creek Beluga Gas Pool, Three Mile ) Creek Unit, Cook Inlet Basin, ) October 7, 2005 Alaska IT APPEARING THAT: 1. By application dated June 27, 2005, and received by the Commission on June 28, 2005, Aurora Gas, LLC ("Aurora") in its capacity as Unit Operator of the Three Mile Creek Unit ("TMCU"), requested an order from the Commission to define a proposed Three Mile Creek Beluga Gas Pool and to prescribe rules governing the development and operation of the pool. 2. Notice of a public hearing was published in the Anchorage Daily News on July 13, 2005. 3. The Commission held a public hearing August 16, 2005 at 9:00 AM at the Commission's offices at 333 West 7`h Avenue, Suite 100, Anchorage, Alaska. 4. Aurora submitted additional information to the Commission in support of their application on July 27, September 2, and September 12, 2005. FINDINGS: 1. Development Area: The area proposed for development is located within the central and southern portion of the TMCU approximately five miles west of the Beluga River Unit on the western side of the Cook Inlet. 2. Landowners. Owners, and Operator: The proposed development area lies within one State of Alaska lease, ADL 388233, and two Cook Inlet Region Incorporated ("CIRI") leases: C-061394 and C-061502. The State of Alaska and CIRI are the respective landowners of these leases. Aurora and Forest Oil Corporation are joint working interest owners of the leases. Aurora is the Operator of the properties within the development area. 3. Pool Identification: The proposed Three Mile Creek Beluga Gas Pool is an accumulation of hydrocarbons common to, and correlating with, the interval between 1,700 feet and 5,531 feet MD in the TMCU No. I well. Exhibit 3 - Page 1 of 5 Conservation Order 558 October 7, 2005 Page 2 4. Delineation History and Development Plans: During December 2004, Aurora drilled the TMCU No. 1 discovery well from a surface location in Section 35 to a bottomhole location in Section 34 of T13N, RIIW, Seward Meridian ("S.M.") reaching a total measured depth ("MD") of 8,180 feet, 8,011 feet true vertical depth ("TVD'. The well produced gas in potentially commercial quantities from six sand intervals within the Tertiary -aged Beluga Formation ("Beluga") during two separate well tests. Aurora plans to drill two additional delineation wells within Section 34 of TI 3N, RI IW, S.M., and to construct a 5 -mile long natural gas transmission pipeline from the TMCU Central Pad to the Lone Creek gathering line. First gas sales are projected in the third quarter of 2005. 5. Stratigraphy/Reservoir Properties: The TMCU contains dry gas within reservoir sandstones of the Beluga. The Three Mile Creek Beluga Gas Pool is comprised of many isolated fluvial channel sandstone reservoirs. The entire reservoir system was deposited in braided and meandering river channels. Based on characteristics seen in nearby wells and in the Beluga River Unit, individual trapping mechanisms are expected to be lenticular and discontinuous over the areal extent of the TMCU and form a complex reservoir system. The system displays a high proportion of lithic fragments and organic debris, and clay content ranging from 18 to 20%. Porosity in the sandstone ranges from 12 to 20% and averages 15%. Permeability ranges from I to 20 millidarcies and averages 5 millidarcies. Gas - water contacts have not been observed, but are expected to occur at varying depths because of the discontinuous nature of the reservoir. Obtaining commercial gas flow from this low permeability reservoir system requires commingling of production from multiple intervals within production wells. The composition of the gas within the pool is 99% methane, and it has a specific gravity of 0.565. The original reservoir pressure measured 1,452 psia at 2,933 feet TVD. 6. Structure: The Three Mile Creek structure is a north -south trending anticline bounded by a sealing fault to the west and three-way structural closure to the north, east and south. The closed area on the crest of the structure conforms to the proposed pool area. Aurora proposes a single Three Mile Creek Beluga Pool encompassing all of the currently identified Beluga sandstones of reservoir quality within the field. Geologic structure appears to be the main control over gas accumulations within the pool; however, future drilling may encounter on - structure or off -structure stratigraphic traps that contain gas. The pool will also include any undiscovered new Beluga sandstones that might be found by future wells drilled within the reservoir system. Tran Configuration: Structural elements are believed to be the dominant gas - trapping mechanisms, but the discontinuous nature of the Beluga channel sands suggests stratigraphic trapping of gas may also occur, although stratigraphic trapping has never been confirmed in Cook Inlet Basin. Future drilling may establish whether stratigraphic traps are present on the flanks of the Three Mile Creek structure. Exhibit 3 - Page 2 of 5 Conservation Order 558 Page 3 October 7, 2005 8. In -Place Gas Volume and Recovery Factor. The Three Mile Creek Beluga Gas Pool is currently estimated to contain 50 to 60 billion cubic feet of gas in-place. Approximately 90 percent of that gas is expected to be recoverable. 9. Reservoir Management: Aurora requests 60 -acre wellbore spacing to maximize resource recovery from the complex, low permeability Beluga sandstones. Aurora plans to commingle production from separate Beluga sandstones to offset low flow rates from individual sandstones. To ensure optimal resource recovery, Aurora proposes to limit commingled producing intervals to within 2,750 vertical feet within the same wellbore. 10. Reservoir Surveillance: Aurora proposes to conduct a single pressure survey on a selected, key well at least once per year. Bottomhole pressure may be computed by extrapolating surface measurements to bottomhole conditions. All reservoir pressure measurements will be referenced to a datum of 2,933 feet TVD. Flow contribution and detection of cross flow within the pool will be accomplished through the use of production logs. 11. Wellbore Construction: Aurora proposes that wells drilled in the Three Mile Creek Beluga Pool have a surface casing point between 600 feet TVD and 1,000 feet TVD. Aurora has requested the Commission not establish requirements for surface or subsurface safety valves for wells drilled to the pool. CONCLUSIONS: 1. Pool Rules for the development of the Three Mile Creek Beluga Gas Pool within the TMCU are appropriate at this time. 2. Reservoir delivery and well operability will be the initial focus of TMCU development. 3. Closely spaced wells will be required to effectively drain this complex, low permeability sandstone reservoir system. 4. Production from individual Beluga sandstones will need to be commingled to compensate for poor inter -well reservoir continuity and anticipated low individual sandstone productivity. 5. Regular monitoring of reservoir performance will ensure proper management of the pool and ensure greater ultimate recovery. 6. Setting surface casing between 600 feet TVD and 1,000 feet TVD will provide adequate well control. In order to isolate potential shallow gas -bearing zones and to protect freshwater, surface and production casing strings will need to be cemented to surface. Exhibit 3 - Page 3 of 5 Conservation Order 558 October 7, 2005 NOW, THEREFORE, IT IS ORDERED: Page 4 The following rules, in addition to the statewide requirements under 20 AAC 25 (to the extent not otherwise superseded by these rules), apply to development operations for the Three Mile Creek Beluga Gas Pool within the following affected area: Seward Meridian Township -Range, SM Sections T12N, Rl l W Section 03: W/2 of NW/4, NEA of NW/4 Section 04: NEA, N/2 of SE/4 Section 26: SWA of SWA T13N, RI 1 W Section 27: S/2 of NEA, SE/4, E/2 of SW/4 Section 34: E/2 of NW/4, E/2 of SW/4, E/2 Section 35: W/2 of W/2, W/2 of E/2 of SW/4 Rule 1 Pool Definition The Three Mile Creek Beluga Gas Pool is defined as gas -bearing sandstone intervals common to, and correlating with, the intervals between the measured depths of 1,700 feet and 5,531 feet in the Three Mile Creek No. 1 exploration well. Rule 2 Well Spacing Spacing units shall be a minimum of 60 acres. The Three Mile Creek Beluga Gas Pool shall not be opened in any well closer than 1,500 feet to any external boundary where ownership or landownership changes. Rule 3 Wellbore Construction Practices a. Surface casing point shall be set between 600 feet TVD and 1,000 feet TVD, and cemented to surface. Production casing shall also be cemented to surface. b. Wellbores shall not be perforated for production through intervals exceeding 2,750 vertical feet. Rule 4 Annual Reservoir Review An annual report must be filed by the operator on or before April 1 of each year. The report shall present an overview of reservoir performance, future development and reservoir depletion plans, and surveillance information for the prior calendar year, including: a. Reservoir pressure map at a datum of 2,933 feet TVD; b. Summary and analysis of reservoir pressure surveys within the pool; c. Results and, where appropriate, analysis of production, temperature and tracer surveys, observation well surveys, and any other special monitoring surveys; Exhibit 3 - Page 4 of 5 Conservation Order 558 Page 5 October 7, 2005 d. Estimates of yearly production subdivided by major contributing zones; e. Progress of plans and tests to expand the productive limits of the pool. Rule 5 Administrative Action Unless notice and public hearing are otherwise required, the Commission may administratively waive the requirements of any rule stated above or administratively amend any rule as long as the change does not promote waste or jeopardize correlative rights, is based upon sound engineering and geoscience principles, and will not result in an increased risk of fluid movement into freshwater. DONE at Anchorage, Alaska and dated October 7, 2005. John K. Norman, Chairman Alaska Oil and Gas Conservation Commission Daniel T. Scamount, Jr., Commissioner Alaska Oil and Gas Conservation Commission Cathy P. Foerster, Commissioner Alaska Oil and Gas Conservation Commission AS 31.05.080 provides that within 20 days after 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 ifs 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., I (Ya day after the application for rehearing was filed). Exhibit 3 - Page 5 of 5 9/26/2018 Wells- DataNliner3 Home Wells Well History Fractured Wells Facilities Production Natural Gas Liquid Injection Storage Wells Show 10 •entries ,Copy Page Qrmt Page Eypat All Well Current Current Spud Comph Permit API Name Confidential Operator Area Field Pools Class Status Date Dat, Stan Mir Stan Start M 205143 All Apia All wet Yes/N Wlndef All operat< All an All fie All poo All losses All stela: End MM M! THREE AURORA COOK THREE BELUGA Gas well, 205143 50283201160000 MILE CK No INLET GAS LLC MILE GAS Development single 10/18/2005 1125/; UNIT BASIN CREEK completion Permitted Class Development Permitted Status Gas well, single completion Last Status Change 1125/2005 Driller Total Depth 5307 True Vertical Depth 4899 Leases ADL0388233 Pad THREE_MILE_CK Wellhead Principal Meridian Seward Wellhead Township 13N Wellhead Range 11W Wellhead Section 35 Wellhead Footage NIS 679 N Wellhead Footage EIW 273 W Wellhead Operator Reported Coordinates (NAD27) Wellhead Operator Reported Coordinates (NAD83) Wellhead AOGCC Calculated Coordinates (NAD27) 61.1794298180131. -151.209456388219 Wellhead AOGCC Calculated Coordinates (NAD83) 61 1788698992056 _7,51,2116883 4666 Bottom Hole Operator Reported Coordinates (NAD27) Bottom Hole Operator Reported Coordinates (NAD83) Bottom Hole AOGCC Calculated Coordinates (NAD27) 61.183121956612, -151.215421362186 Bottom Hole AOGCC Calculated Coordinates (NAD83) §7„),625620291623, -151,21765300268G Showing 1 to 1 of 1 entries (filtered from 9,244 total entries) Exhibit 4, Page 1 of 1 92611018 Wells - DataMiner3 Home Wells Well History Fractured Wells Facilities Production Natural Gas Liquid Injection Storage Wells Show 10 r entries gopy page Print Page Egport AB Permit API Well Confidential Operator Area Field Pools Current Class Current Spud Complet Status Date Date Name Stan M Stan Mh 211071All APIs All Wel YesNo/Indet All operate All an All fie All poo All classes IAII status Eno MI End MM THREE AURORA COOK THREE BELUGA Gas well, 211071 50283201560000 MILE CK No GAS LLC INLET MILE GAS Development single 9/29/2011 10/272( 3 BASIN CREEK completion Permitted Class Development Permitted Status Gas well, single completion Last Status Change 10272011 Driller Total Depth 5159 True Vertical Depth 4771 Leases ADL0388233 Pad THREE—MILE CK Wellhead Principal Meridlan Seward Wellhead Township 13N Wellhead Range 11W Wellhead Section 34 Wellhead Footage WS 1244 S Wellhead Footage EAN 367 E Wellhead Operator Reported Coordinates (NAD27) 61.170248712, -151.213082601 Wellhead Operator Reported Coordinates (NAD83) 61 1696887414058, -151.215295233279 Wellhead AOGCC Calculated Coordinates (NAD27) 61.170246974141e, -161213069302419 Wellhead AOGCC Calculated Coordinates (NAD83) 61,169687003516 .151,216301934827 Bottom Hole Operator Reported Coordinates (NAD27) Bottom Hole Operator Reported Coordinates (NAD83) Bottom Hole AOGCC Calculated Coordinates (NAD27) 61.1721094552904, -151222228005485 Bottom Hole AOGCC Calculated Coordinates (NAD83) ¢7 1715494591687 -151 224460486621 Showing 1 to 1 of 1 entries (filtered from 9,244 total entries) - - Exhibit 5, Page 1 of 1 CERTIFIED MAUL RETURN RECEIPT REQUESTED August 8, 2005 Mr. Randall D. Jones, Manager, Land & Negotiations Aurora Gas, LLC .•.103.33-Riehnu)nd Avenue, Suite�.710 _. Houston, TX 77042 Re: Three Mile Creek Unit Three Mile Creek Participating Area Finding and Decision Amended Dear. Mr. Jones, 1 On Juiy'29; 201)5, the' DivW6n'of l a8d dais'. (t,(f .V. iiU4nJW6d a finding and decision approving. alune 6;"2005 application to form; the Three Mile Creek Participating Ara (the 6eeiiiZ.- . The_Division based. the pecision, in.part,.on production test ;datathat.Aurnra.Gas LLC (A6rora), the Three MiIc Creek Unit operator; submitted to supportof its appl'icaiton Aurora perforated and performed drill -stem tests on ;four zones of interest ,m:the Three Mile Creek #1 Well duri.ng_January'2005. The well produced gas from the Tsugu 2-6 interval in the Beluga -Formation at a rate of approximately,2 million cubic feet per day (MMCFD). The Decision limited the participating area to the productive interval and described the Three Mile Creek PA as "the Beluga Formation Sands between 3,530' and 4,605' measured depth (MD) in the, TMC Unid 1. well wi_ttty- the area described in Exhibit C and depicted on Exhibit D to the Agreement." Hi wever,•on July 29, 2005, the Division received additional data from well tests that Aurora conducted in June 2005. Aurora perforated and tested five shallower Beluga intervals, which produced in excess of 2 MMCFD: Division staff met with representatives from .Aurora on August 2, 2005, to review the'new well data and to discuss the vertical extent of the Three Mile Creek PA. By letter dated August 2, 2005, Aurora requested.the straligraphic intetva) included in the Threb, Mile Creek PA be redefined to include the ruga 3 through Tsug 6 iptergals 1effective Jtrly 1 2(105 1 Redefitiing the Tbree Mile;Creek 13X ivi i prbmote' the'consetvation of rill 'natural resources, promote the prevention of economic and physical waste, and provides for the protection of all j ph ties in interest including the State. Amending the Decision adequately and equitably protects the public interest, is in the State's best interest, and it meets the requirements of AS "Develop, Conserve, and Enhance Natural Resources for Present and Future Alaskans." A orinted on re.cled oaoer b v Cib. Exhibit 6, Page 1 of 2 l6 IV( 11,1 FRANK S ((wj �t,{�� L (l�� L SI`f^u1 �w] t r.3.7 0K GOVERNOR EYP 9'Ol�388 c3.7 d- TMO. PA r3t,ra&'/L DEPARTMENT OF NATURAL RESOURCES 550 WEST 7' AVENUE, SUITE BBo ANCHORAGE, ALASKA 99501-9560 DIVISION OF OIL & GAS PHONE: (907) 269-8800 FAX: (907) 269-8938 CERTIFIED MAUL RETURN RECEIPT REQUESTED August 8, 2005 Mr. Randall D. Jones, Manager, Land & Negotiations Aurora Gas, LLC .•.103.33-Riehnu)nd Avenue, Suite�.710 _. Houston, TX 77042 Re: Three Mile Creek Unit Three Mile Creek Participating Area Finding and Decision Amended Dear. Mr. Jones, 1 On Juiy'29; 201)5, the' DivW6n'of l a8d dais'. (t,(f .V. iiU4nJW6d a finding and decision approving. alune 6;"2005 application to form; the Three Mile Creek Participating Ara (the 6eeiiiZ.- . The_Division based. the pecision, in.part,.on production test ;datathat.Aurnra.Gas LLC (A6rora), the Three MiIc Creek Unit operator; submitted to supportof its appl'icaiton Aurora perforated and performed drill -stem tests on ;four zones of interest ,m:the Three Mile Creek #1 Well duri.ng_January'2005. The well produced gas from the Tsugu 2-6 interval in the Beluga -Formation at a rate of approximately,2 million cubic feet per day (MMCFD). The Decision limited the participating area to the productive interval and described the Three Mile Creek PA as "the Beluga Formation Sands between 3,530' and 4,605' measured depth (MD) in the, TMC Unid 1. well wi_ttty- the area described in Exhibit C and depicted on Exhibit D to the Agreement." Hi wever,•on July 29, 2005, the Division received additional data from well tests that Aurora conducted in June 2005. Aurora perforated and tested five shallower Beluga intervals, which produced in excess of 2 MMCFD: Division staff met with representatives from .Aurora on August 2, 2005, to review the'new well data and to discuss the vertical extent of the Three Mile Creek PA. By letter dated August 2, 2005, Aurora requested.the straligraphic intetva) included in the Threb, Mile Creek PA be redefined to include the ruga 3 through Tsug 6 iptergals 1effective Jtrly 1 2(105 1 Redefitiing the Tbree Mile;Creek 13X ivi i prbmote' the'consetvation of rill 'natural resources, promote the prevention of economic and physical waste, and provides for the protection of all j ph ties in interest including the State. Amending the Decision adequately and equitably protects the public interest, is in the State's best interest, and it meets the requirements of AS "Develop, Conserve, and Enhance Natural Resources for Present and Future Alaskans." A orinted on re.cled oaoer b v Cib. Exhibit 6, Page 1 of 2 Aurora Gas, LLC Three Mile Creek Unit Three Mile Creek PA Finding and Decision Amended Page 2 of 2 38.05.180(p) and 11 AAC 83.303 (a) and (b). Item 2 in Section IV of the Decision is amended to read as follows: 2. The TMC PA includes: a. 960.00 acres described in Exhibit C and depicted in Exhibit D, and b. all unitized substances in the Beluga Formation Sands between 1,700` MD/1,623' TVD and 5,531' MD/5,364' TVD in the TMC Unit #1 well within the boundary of the approved participating area. Redefinition of the stratigraphic interval included in the Three Mile Creek PA does not change the legal description of the tracts within the participating area or affect the allocation of produetiah nr*costs-approved in the Decision issued on July 29,-2005.-- A 9 2005.-- A person affected by this Decision may appeal it in accordance with 11 AAC 02. Any appeal must be received within 20 calendar days after the date of "issuance" of this Decision, as defined in 11 AAC 02.040 (c) and (d). Appeals may be mailed or delivered to Thomas E. Irwin, Commissioner, Department of Natural Resources, 550 W. 7`a Avenue, Suite 1400, Anchorage, Alaska 99501; faxed to 1-907-269-8918, or sent by electronic!,- riail Cte:.i dnr_appeals@dnr.state.ak.us. This Decision takes effect immediately. If no,appeal is Soled by. the. ! appeal deadline, this Decision becomes a final administrative order: --ands dAciglon:•-of: the' Department`on'the .31" day after issuance. An eligible person must first appeal This Decision in accordance with li AAC 02 before appealing this Decision to Superior:Couttl:rA copy of 11 AAC 02 may be obtained from any regional information office of the Department of Natural Resources. Sincerely, 44 Mark D. Myers -Director cc: Teresa Ressler, COU John Norman, Chair AOGCC Jim Cowan, Resource Evaluation Section Jeff Landry, Assistant Attorney General Exhibit 6, Page 2 of 2 10 THE STATE GOVERNOR BILL WALKER Elena M. Romerdahl Counsel for Cook Inlet Energy Perkins Coie 1029 West Third Avenue, Suite 300 Anchorage, AK 99501-1981 Re: Docket Number: OTH- 18-03 7 Alaska ©ii and Gas Conservation Commission September 24, 2018 George Lyle Counsel for Apache Guess and Rudd 1029 W 3rd Ave Ste 400 Anchorage, AK 99501 333 West Seventh Avenue Anchorage, Alaska 99501-3572 Main: 907.279.1433 Fax: 907.276.7542 W W W.aogcc.aloska.gov Plugging and Abandonment of Wells Prior to Expiration of Owner's Rights in a Lease Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells Dear Ms. Romerdahl and Mr. Lyle: On June 14, 2018 Cook Inlet Energy, LL (CIE) and Apache Alaska Corporation (Apache), operators of record for ADL 38823, were ordered to plug and abandon the wells located on that lease and provide additional information to Alaska Oil and Gas Conservation Commission (AOGCC). On July 2, 2018 Apache requested a 45 -day extension of time to respond to the order. An extension to August 24, 2018 was granted on July 3, 2018. On July 10, 2018, CIE joined Apache's request for an extension. CIE's request was granted on July 11, 2018. On August 16, 2018, CIE and Apache jointly requested an additional extension to September 24, 2018. The request was granted the same day. On September 11, 2018 CIE wrote AOGCC essentially indicating it would agree to plug and abandon the wells on behalf of itself and Apache if AOGCC would agree to pay CIE the $200,000 bond posted by Aurora Gas. The AOGCC did not respond to that letter. On September 21, 2018, CIE and Apache requested a third extension of five days to respond, conditioned on AOGCC responding to their inquiry as to the availability of its $200,000 bond for plugging the wells on ADL 38823. Aurora's bond is not held for the benefit of any other operator, including CIE and / or Apache, and is not available to either CIE or Apache. A five-day extension is granted. The response of CIE and Apache is due on or before October 1, 2018. This is the final extension AOGCC will grant for a response. Failure to comply with AOGCC's request for information is a violation of 20 ACC 25.300. Sincerely, Cathy . ferster Commissioner a PERKINSC012 September 21, 2018 VIA HAND DELIVERY Commissioner Hollis S. French, Chair Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, Suite 100 Anchorage, AK 99501 Re: Docket Number: OTH-18-037 Joint Request for Additional Time to Respond Dear Mr. French: 1029 West Third Avenue 0 +1.907279.8561 Suite 300 0 +1.907.276.3108 Anchorage. AK 99`91-1981 perkinscoie.corn Elena A Romerdahl ERomerdahl@perkinscoie.com D, +1.907.263.6914 F . +1.907.263.6428 SEP 2 1 2018 AVGCC On September 11, 2018, Cook Inlet Energy, LLC ("CIE") submitted to the Alaska Oil and Gas Conservation Commission ("AOGCC" or "the Commission") a letter in which it requested confirmation from AOGCC that the $200,000 Aurora Gas LLC ("Aurora") blanket bond held by AOGCC following Aurora's discharge in bankruptcy would be available to the entity that commits to completing the plugging and abandonment requirements for the wells located on ADL 38823 (the "Three Mile Creek Wells"). As noted in the September 11, 2018 letter, the Alaska Department of Natural Resources, Division of Oil and Gas ("DOG") has confirmed that the $500,000 Aurora statewide bond DNR holds would be available to that entity, as the only remaining lease associated with the $500,000 Aurora statewide bond is ADL 388233. Similarly, it is our understanding that the only remaining wells associated with the $200,000 Aurora blanket bond held by AOGCC are the wells located on ADL 388233. CIE and Apache Alaska Corporation ("Apache") are currently in discussions regarding the financial and logistical requirements of plugging and abandoning the Three Mile Creek Wells. The availability of the $200,000 Aurora bond will impact the outcome of those discussions. CIE and Apache therefore respectfully request an additional extension of time to respond to the Commission's June 14, 2018 request for information in order to allow the Commission to respond to CIE's September 11, 2018 letter. As noted in CIE's September I1 letter, the window for performing remediation work at ADL 388233 this season is closing. CIE and Apache are committed to completing their discussions and providing a response to the Commission as soon as the Commission confirms whether the $200,000 bond would be made available. CIE and Apache respectfully request that they be permitted to respond to the Commission's July 14, 2018 request for information within 5 business days of receiving the Commission's response to CIE's September 11 letter. September 21, 2018 Page 2 Representatives from CIE and Apache are available should the Commission wish to discuss the availability of the $200,000 Aurora bond. Thank you again for your consideration. Sincerely, � t t Elena Romerdahl Counsel for CIE 907.263.6914 ERomerdahl@perkinscoie.com Perkins Cue LLP George Lyle Counsel for Apache 907.793.2200 GLyle@guessrudd.com E669 PeRKINSCOIe September 11, 2018 VIA HAND DELIVERY Commissioner Hollis S. French, Chair Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, Suite 10011 Anchorage, AK 99501 1029 West Third Avenue O +1.907.279.8561 Suite 300 O +1.907.176.3108 Anchorage. AK 99501-1981 pedunsmie om Elena M. Romerdahl ERomerdahl@perkinscoie.com D , +1,907.263.6914 F, +1.907.263.6428 SEP 1 1 2M �! 1,0GC� Re: Docket Number: OTH-18-037 Request for Confirmation of Bond Availability and Work Proposal Dear Mr. French: On June 14, 2018, the Alaska Oil and Gas Conservation Commission ("AOGCC" or "the Commission") requested that Cook Inlet Energy, LLC ("CIE") and Apache Alaska Corporation ("Apache") submit a Designation of Operator form advising the Commission of the identity of the operator for purposes of plugging and abandoning the Three Mile Creek wells located on State of Alaska oil and gas lease ADL 388233. The Commission requested that the Designation of Operator form be submitted within 45 days of the June 14, 2018 letter. On July 3, 2018 and July 18, 2018, respectively, the Alaska Oil and Gas Conservation Commission ("the Commission") granted Apache's and CIE's first requests for an extension of time to respond to the Commission's request for information; and on August 17, 2018, the Commission granted a joint second request for an extension of time to respond to the Commission's request until September 24, 2018. Over the past few months, CIE has investigated the extent of the cleanup required at the Three Mile Creek wells and obtained an estimate of the costs associated with such cleanup. CIE has been informed that the estimated cost to plug and abandon the three Three Mile Creek wells and decommission the Three Mile Creek facilities is approximately $800,000.00. As the Commission notes in its June 14, 2018 request for information, Aurora Gas, LLC ("Aurora") was the operator of record for the Three Mile Creek Unit and wells but has been discharged in bankruptcy. CIE requested information from the Alaska Department of Natural Resources, Division of Oil and Gas ("DOG") and the Commission regarding the status of Aurora's bonds and confirmed that DOG continues to hold a $500,000 Aurora statewide bond and AOGCC continues to hold a $200,000 Aurora blanket bond that are September 11, 2018 Page 2 both associated with ADL 388233. DOG confirmed that the $500,000 Aurora statewide bond is not associated with any other leases previously held by Aurora, as all of the other leases held by Aurora were transferred to other entities during Aurora's bankruptcy proceedings. DOG has therefore confirmed that the $500,000 Aurora statewide bond would be available to the entity that commits to completing the plugging, abandonment, and cleanup requirements at Three Mile Creek. CIE and Apache have conferred regarding the cost estimate to plug, abandon, and decommission facilities at Three Mile Creek and the DOG and AOGCC bonds associated with ADL 388233. CIE has proposed to Apache that CIE will agree to serve as operator for purposes of plugging and abandoning the wells if 1) AOGCC confirms that, like the $500,000 Aurora statewide bond held by DOG, the $200,000 Aurora blanket bond held by the Commission would be made available to CIE to help pay for such work; and 2) Apache agrees to share the amount required to complete the plugging, abandonment, and cleanup at ADL 388233 that exceed the $700,000.00 in bonds. If the Commission agrees that the $200,000 Aurora blanket bond held by AOGCC would be available to the entity that commits to completing the plugging and abandonment work at ADL 388233, please let us know. As the Commission is aware, the window for performing remediation work is closing. If the Commission is able to confirm the availability of the $200,000 Aurora blanket bond before that window closes and CIE and Apache reach an agreement regarding cost sharing, CIE will be able to commence the work this season. If I can answer any questions, or if it would be helpful to discuss the above proposal in further detail, please let me know. Thank you again for your consideration. Sincerely, Elena Romerdahl Counsel for CIE 907.263.6914 ERomerdahl@perkinscoie.com cc: Tab Ballantine, Alaska Department of Law Perkins Cae LLP 7 Colombie, Jody J (DOA) From: Colombie, Jody J (DOA) Sent: Monday, August 20, 2018 9:14 AM To: Romerdahl, Elena M. (Perkins Coie); 'glyle@guessrudd.com' Subject: RE: Request for an Extension of Time George and Elena: The Commissioners have GRANTED your joint request for Extension of Time in docket number OTH-18-037 until September 24, 2018. Jody J. CoCombie .AOGCC SyeeiaC.Assistant .Kaska OilandGas Conservation Commission 333 'Nest 711 .Avenue .Anchorage,.Akuka 99501 Office: (907) 793-2221 Fax: (907) 276-7542 CONFIDENTIALITY NOTICE: This e-mail message, including any attachments, contains information from the Alaska Oil and Gas Conservation Commission (AOGCC), State of Alaska and is for the sole use of the intended recipient(s). It may contain confidential and/or privileged information. The unauthorized review, use or disclosure of such information may violate state or federal law. If you are an unintended recipient of this e-mail, please delete it, without first saving or forwarding it, and, so that the AOGCC is aware of the mistake in sending it to you, contact Jody Colombie at 907.793.1221 or iodv. colombie@alaska.aov. From: Colombie, Jody J (DOA) Sent: Thursday, August 16, 2018 12:56 PM To: Romerdahl, Elena M. (Perkins Coie) <ERomerdahl@perkinscoie.com>; 'glyle@guessrudd.com' <glyle@guessrudd.com> Cc: Colombie, Jody J (DOA) <jody.colombie@alaska.gov> Subject: Request for an Extension of Time Elena and George, The Commissioners have GRANTED your request for an Extension of Time until September 24, 2018. Thank you. Jody J. CoCombie .AOGCC SpeciaC.Assfstant .ACaska OifandGas Conservation Commission 333 West 711 .Avenue .Anchorage, .ACaska 99501 Office: (907) 793-1221 Fax: (907) 276-7542 CONFIDENTIALITY NOTICE: This e-mail message, including any attachments, contains information from the Alaska Oil and Gas Conservation Commission (AOGCC), State of Alaska and is for the sole use of the intended recipient(s). It may contain confidential and/or privileged information. PERKINScoie August 16, 2018 VIA HAND DELIVERY Commissioner Hollis S. French, Chair Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, Suite 100 Anchorage, AK 99501 1029 West Third Avenue O +1907.279.8561 Suite 300 O +l 907.276.3108 Anchorage. AK 99501-1981 perkinscoie.com Elena M. Romerdahl ERomerdahl@perkinscoie.com D, +1.907.263.6914 RECEIVED F +1.907.263.6428 AUG 1 lP 2018 AO CC Re: Docket Number: OTH-18-037 Joint Request for Extension of Time to Respond to Request for Information Dear Mr. French: On July 3, 2018 and July 18, 2018, respectively, the Alaska Oil and Gas Conservation Commission ("the Commission") granted Apache Alaska Corporation's ("Apache") and Cook Inlet Energy, LLC's ("CIE") first requests for an extension of time to respond to the Commission's June 14, 2018 request for information to CIE and Apache regarding the Three Mile Creek wells located on State of Alaska oil and gas lease ADL 388233 (the "Request for Information"). CIE's and Apache's responses to the Request for Information are currently due on August 24, 2018. Over the past several weeks, CIE and Apache have been diligently gathering information regarding the Request for Information. CIE is working with third -parry consultants and is currently conducting a site assessment to fully investigate the extent of the cleanup required at the Three Mile Creek wells. Significant progress has been made, and CIE and Apache are now in a better position to assess the amount of time needed to complete the investigation and discussions. CIE and Apache are confident that the investigation and related discussions will be complete such that a response to AOGCC can be provided by September 24, 2018. CIE and Apache therefore respectfully request one additional one- month extension of time until September 24, 2018 to respond to the Request for Information. Thank you again for your consideration. Sincerely, Elena Romerdahl George Lyle Counsel for CIE Counsel for Apache 5 THE STATE Alaska Oil and Gas ofAT ASK /1 Conservation Commission GOVERNOR BILL WALKER July 11, 2018 CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0006 0779 5142 Carl Giesler CEO Cook Inlet Energy, LLC, 601 W. 5"' Ave., Suite 310 Anchorage, AK 99501 Re: Docket Number: OTH-18-037 333 West Seventh Avenue Anchorage, Alaska 99501-3572 Main: 907.279.1433 Fax: 907.276.7542 www.00gcc.claska.gov Plugging and Abandonment of Wells Prior to Expiration of Owner's Rights in a Lease Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells Request for Extension of Time Dear Mr. Giesler: Cook Inlet Energy's July 10, 2018 request for an extension of time to file a response to the above referenced docket is granted. The revised due date is August 24, 2018. Sincerely, Hollis S. French Chair, Commissioner cc: Elena M. Romerdahl Counsel for CIE Perkinscoie 1029 West Third Avenue, Suite 300 Anchorage, AK 99501-1981 rd PeRKINSCOIe July 10, 2018 VIA HAND DELIVERY 1029 West Third Avenue O 4907,279.85611 Suite 300 O 1907.276.3108 Anchorage. AK 99501-1981 perkinscoie.com Elena M. Romerdahl ERomerdahl@perkinscoie.com D. +1.907.263.6914 F. +1.907.263.6428 Commissioner Hollis S. French, Chair RECEIVE® Alaska Oil and Gas Conservation Commission JUL 1 U 333 West 7th Avenue, Suite 100 218 Anchorage, AK 99501 A O G C C Re: Docket Number: OTH-18-037 Request for Extension of Time to Respond to Request for Information Dear Commissioner French: On June 14, 2018, the Alaska Oil and Gas Conservation Commission ("the Commission") requested that Cook Inlet Energy, LLC ("CIE") and Apache Alaska Corporation ("Apache") submit a Designation of Operator form advising the Commission of the identity of the operator for purposes of plugging and abandoning the Three Mile Creek wells located on State of Alaska oil and gas lease ADL 388233. The Commission requested that the Designation of Operator form be submitted within 45 days of the June 14, 2018 letter. CIE is currently gathering information and communicating with Apache regarding the request but believes that this process may require more than 45 days. CIE therefore respectfully requests an extension of time until August 24, 2018 to complete its investigation and respond to the Commission's June 14, 2018 request for information. Thank you for your consideration. Sincerely, Elena M. Romerdahl Counsel for CIE 3 THE STATE of�.LAS— — 1 GOVERNOR BILI. WALKER July 3, 2018 CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0006 0779 5388 Timothy Custer Senior VP Apache Corporation 2000 Post Oak Boulevard, Suite 100 Houston, TX 77056-4400 Re: Docket Number: OTH-18-037 Alaska Oil and Gas Conservation Commission 333 west Seventh Avenue Anchorage, Alaska 99501-3572 Main: 907.279.1433 Fax 907.276.7542 www.aogcc.alasko.gov Plugging and Abandonment of Wells Prior to Expiration of Owner's Rights in a Lease Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells Request for Extension of Time Dear Mr. Custer: Apache Alaska Corporation's July 2, 2018 request for an extension of time to file a response to the above referenced docket is granted. The revised due date is August 24, 2018. Sincerely, Hollis S. French Chair, Commissioner cc: Timothy Sullivan Executive VP Apache Corporation 2000 Post Oak Boulevard, Suite 100 Houston, TX 77056-4400 James D. Linxwiler George Lyle Adam Harki Guess & Rudd PC 1029 W 3rd Ave., #400 Anchorage, AK 99501-1958 i l OFFICESO Guess&Rudd PC IM9 W. S -AVENUE SHITE 4W ANCHORAGE, AK 99501 TELEPHONE (e07)79&nN FACSIMILE (907) 793-4299 Ia.@guessmdd.mm James D. Linxwiler George Lyle Adam Harki Guess & Rudd PC 1029 W. 3`d Ave. #400 AK 99501-1958 is for Apache Corporation and Alaska Corporation In the Matter of Request for Information: 20 AAC ) 25.300 ) Plugging and Abandonment of ) Wells Prior to Expiration of ) Owner's Rights in a Lease ) Three Mile Creek Unit 1, Three ) Mile Creek Unit 2, and Three ) Mile Creek 3 Wells ) RECEIVE® JUL 0 2 2018 AOGCC Docket Number: OTH-18-037 Apache Alaska Corporation's Motion for a 45 Day Extension of Time to File For Reconsideration of the Commission's Order and Determination in its June 14, 2018 Letter Apache Alaska Corporation ("Apache") hereby moves for a 45 day extension of time until August 24, 2018, to file a Motion for Reconsideration pursuant to AS 31.05.080 to the order and determination of the Commission contained in its letter dated June 14, 2018. The Alaska Oil and Gas Commission (the "Commission" or "AOGCC") sent a letter dated June 14, 2018 to Apache Corporation and Cook Inlet Energy, LLC (CIE) (the "letter"). This letter was received by Apache on June 18, and was forwarded to Apache's legal department for handling. The letter directs Apache and CIE to submit a Designation of Operator form designating one of them to be operator for purposes of plugging and abandoning the Three Mile Creek Unit 1, Three Mile Creek Unit 2, and Three Mile Creek 3 Wells ("Three Mile Creek wells"), and thereafter requires the designated operator to submit an Application for Sundry Approval to plug and these wells. The letter appears to be the Commission's determination and order that and CIE are the responsible working interest owners in ADL 388233. A copy of this is attached hereto as Exhibit 1. The letter refers to itself as a "request for information." However, the intent of the letter appears to be to issue the Commission's finding and decision assigning legal and financial liability and responsibility for plugging and abandoning the Three Mile Creek wells to one or both of Apache and CIE, and requiring one or both of Apache and CIE to take the actions necessary for plugging and abandoning. The cost of this undertaking will be substantial, likely in the millions of dollars. Underlining this apparent intent of the Commission, the letter also states that if Apache fails to act, it commits "a regulatory violation." Such a violation could subject Apache to substantial penalties and fines, pursuant to AS 31.05.150 and 20 AAC 25.535, and could further subject Apache to injunctions, pursuant to AS 31.05.160. The Commission has given Apache no prior notice of this action and no prior opportunity to be heard on the matter, thus denying Apache its fundamental Constitutional due process rights on this matter. The only opportunity for Commission review under the procedures stated in the letter would occur after Apache had possibly committed "a regulatory violation." Apache intends to file an application for reconsideration pursuant to AS 31.05.080 of the matters determined by the letter, and to seek a hearing on the matter, pursuant to AS 31.05.060 and 20 AAC 25.540, in order to accommodate its fundamental Constitutional due process rights, and to put before the Commission additional factual and legal issues it believes are material to these matters. AS 31.05.080 requires such a motion to reconsider to be filed "[w]ithin 20 days after written notice of the entry of an order or decision of the commission, or such further time as the commission grants for good cause shown." Apache received the letter on June 18, 2018, and 20 days from then is July 8, 2018. lAW OFFICES OF Guess&Rudd PO. IOM W 3' AVENUE SUITE 400 '1 2 ANOHORAGE.AK 99W1 TELEPHONE (907)793 -MG FACSIMILE (902) 793-2299 IaW@gUSSSWdd COm , this matter is far too complex for Apache to be able to respond meaningfully by July 8, In potential allocation to Apache of millions of dollars in liability, and the further threat of for substantial legal and financial penalties alone are sufficient reasons to justify an of time to file this motion. However, this matter is also subject to a large body of complex facts, including the status and effect of the pending Chapter 7 bankruptcy of present (or former) working interest owner Aurora Gas, LLC (the prior operator), the status and effect of the Chapter 11 bankruptcy reorganization of working interest owner CIE, and the resulting purchase of CIE's parent Miller Energy Resources, Inc. (now renamed Glacier Oil and Gas Corp.) by Apollo Global Management and various Highbridge Capital Management entities. These bankruptcy proceedings and transactions introduce a high level of complexity into these issues that the Commission must consider in issuing orders in this matter. In addition, as reflected in the approval of assignments by the Alaska Division of Oil and Gas, Apache only owns a working interest in the deep rights to oil and gas lease ADL 388233, and has never held any interest in the Three Mile Creek wells, and those wells have never penetrated into the deep horizons in which Apache does own an interest, and Apache never had any control over those wells or contributed to their cost. This limited ownership issue also requires the Commission's careful scrutiny. The matter of ownership and responsibility for these wells is also established by the various assignment agreements and operating agreements surrounding Apache's acquisition of these deep rights, which also establish that parties other than Apache are responsible. All these complex matters thus raise serious and substantial questions concerning the identity of the working interest owners responsible for the plugging and abandoning of the Three Mile Creek wells, and the allocation of liability among those owners. LAW OFFICES OF Guess&Rudd PC 1039 W.0 -AVENUE SORE 000 ANOHCSAGE, AK 99501 TELEPHONE (907)79}3300 FACSIMILE (907) 793-uW law@guesmdd,wm 20 day time limitation on seeking reconsideration might be appropriate, if these matter arose the context of ongoing legal proceedings where the facts and legal issues were well by both parties. However, Apache has little or no knowledge concerning much of the subject matter referenced herein, and in these circumstances an extension is justified. In addition to the foregoing, it would also be difficult for Apache to file its reconsideration motion by July 8 because the July 4 holiday lies within the 20 day period. Both of the undersigned (Linxwiler and Lyle) will also be on a pre -arranged trip out of the country from July 13 to July 20, and Apache's primary counsel on this matter, Andy Taylor, will be on a pre- arranged trip from July 18 to August 1, 2018. Apache will require a reasonable, and significant, additional amount of time to investigate and present these facts to the Commission, and to attempt to resolve any issues with the other parties involved. Apache believes that these matters provide ample "good cause shown" for the Commission to extend for 45 days to August 24, 2018 the time for Apache to file its motion to reconsider the Commission's action and request for a hearing on the matter. In summary, Apache respectfully requests an extension to August 24, 2018 to file its motion for reconsideration and for a hearing on the matter. Dated at Anchorage, Alaska, this ��ay of July, 2018. Guess & Rudd PC Attorneys for Apache Corporation and Apache Alaska Corporation C n L By: W I'�' James D. Linxwiler 13%: George R. Lyle UW OFFICES OF Guess&Rudd PC 1029 W. 3P° AVENUE SURE 400 A ANCHORAGE. AK 99501 TELEPHONE M7)7 3-2200 FACSIMILE (90]) 99}2299 `t 1a @guesswdd.wm cc: Andy Taylor Apache Corporation 2000 Post Oak Blvd., Suite 100 Houston, TX 77056 Carl Giesler CEO Cook Inlet Energy 601 W. 5`h Suite 310 Anchorage, AK 99501 I.A. OFFICES OF Guess&Rudd PC 1029 W.3°p AVENUE SURE apo ANCHOPAGE.AK 99501 TELEPHONE(90T)T93-2200 FACSIMILE (W 793$299 Iaw@guasSILIdd mm THE STATE 01 lL S GOVERNOR BILL WALKER Carl Giesler CEO Cook Inlet Energy, LLC, 601 W. 5'^ Ave., Suite 310 Anchorage, AK 99501 Timothy Custer Senior VP Apache Corporation 2000 Post Oak Boulevard, Suite 100 Houston, TX 77056-4400 Timothy Sullivan Executive VP Apache Corporation 2000 Post Oak Boulevard, Suite 100 Houston, TX 77056-4400 June 14, 2018 Alaska Oil and Gas Conservation Commission 333 West Seventh Avenue Anchorage, Alaska 99501-3572 Main: 907.279.1433 Fox: 907.276.7542 www.00gcc.oloska.gov CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0003 5185 6120 CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0006 0779 5043 CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0003 5185 6113 Re: Docket Number: OTH-18-037 Request for information: 20 AAC 25.300 Plugging and Abandonment of Wells Prior to Expiration of Owner's Rights in a Lease Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells Dear Sirs: Aurora Gas, LLC, the operator of record for the Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells (Three Mile Creek wells), has been discharged in bankruptcy, is no longer a functioning entity, and is no longer deemed the operator by AOGCC. The Three Mile Creek wells are located on State of Alaska oil and gas lease ADL 388233. None of those wells has been properly plugged and abandoned. Records from the Department of Natural Resources establish that both Cook Inlet Energy, LLC (CIE) and Apache Alaska Corporation (Apache) are working interest owners in ADL 388233. Contact with representatives of DNR indicates ADL 388233 is in default. AOGCC regulations require that all wells which have been permitted on a property must be properly plugged and abandoned prior to expiration of the owner's rights in that property. Property means a legally described tract of land to which a person has the right to drill and extract resources. EXHIBIT—L. Page—L of—,- Docket Number: OTH-18-037 June 14, 2018 Page 2 of 2 ADL 388233 is a property. CIE and Apache are owners of the property, ADL 388233, and obligated to properly plug and abandon the Three Mile Creek wells prior to the expiration of their rights in ADL 388233. Within 45 days of the date of this letter, CIE and Apache shall submit a Designation of Operator form advising AOGCC as to which of them will be the operator for purposes of plugging and abandoning the wells. The operator shall have 30 days after AOGCC approves the designation of operator to submit Applications for Sundry Approvals (Fort 10-403) for the plugging and abandonment of the Three Mile Creek wells. This request for information is made pursuant to 20 AAC 25.300. Failure to respond within the time designated is itself a regulatory violation. The AOGCC reserves the right to pursue an enforcement action in connection with this matter. Sincerely Cathy P Foerster Commissioner cc: Chantal Walsh Division Director DNR 550 W 7th Ave, Suite 1100 Anchorage, AK 99501-3560 EXHIBIT Page Z Of State of Alaska Alaska Oil and Gas Conservation Commission 333 West 7'h Avenue Anchorage, Alaska 99501_3572 Al5tl640 0006 0779 5043 'I�I�dlilillll���� Timothy Custer Senior VP Apache Corporation 2000 Post Oak Boulevard, Suite 100 _ tRT t6n, TX 77056-4400 770 rX Q T CD I :; o I� $6.88_0 US POSTAGE FIRST.CLASS 06250005385773 l 99501 N 11 THE STATE GOVERNOR BILL WALKER Carl Giesler CEO Cook Inlet Energy, LLC, 601 W. 5°i Ave., Suite 310 Anchorage, AK 99501 Timothy Custer Senior VP Apache Corporation 2000 Post Oak Boulevard, Suite 100 Houston, TX 77056-4400 Timothy Sullivan Executive VP Apache Corporation 2000 Post Oak Boulevard, Suite 100 Houston, TX 77056-4400 Re: Docket Number: OTH- 18-037 June 14, 2018 Alaska Oil ar�d Cas Conservation Commission 333 West Seventh Avenue Anchorage, Alaska 99501-3572 Main: 907.279.1433 Fax: 907.276.7542 www.aogcc.alaska.gov CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0003 5185 6120 CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0006 0779 5043 CERTIFIED MAIL RETURN RECEIPT REQUESTED 7015 0640 0003 5185 6113 Request for information: 20 AAC 25.300 Plugging and Abandonment of Wells Prior to Expiration of Owner's Rights in a Lease Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells Dear Sirs: Aurora Gas, LLC, the operator of record for the Three Mile Creek Unit 1, Three Mile Creek Unit 2 and Three Mile Creek 3 wells (Three Mile Creek wells), has been discharged in bankruptcy, is no longer a functioning entity, and is no longer deemed the operator by AOGCC. The Three Mile Creek wells are located on State of Alaska oil and gas lease ADL 388233. None of those wells has been properly plugged and abandoned. Records from the Department of Natural Resources establish that both Cook Inlet Energy, LLC (CIE) and Apache Alaska Corporation (Apache) are working interest owners in ADL 388233. Contact with representatives of DNR indicates ADL 388233 is in default. AOGCC regulations require that all wells which have been permitted on a property must be properly plugged and abandoned prior to expiration of the owner's rights in that property. Property means a legally described tract of land to which a person has the right to drill and extract resources. C:1 Iv .. AK 99501 VI I I I I I V I II IIIIII II II I II II I I III CF V VED Priority Cl stmned Mai Restricted CEO Cook Inlet Ener LLC 9Y 601 W. 5th Ave., Ste. 3 2• Anchoraoe. AK 99501 9590 9403 0910 5223 5234 16 nWITEWIMa eRegistered g Da Fi ,ary ❑ Return Recelptfor Merchandise ❑ Signanatare Conf rmatim ConfirrhatimTM g Restricted Delivery OFF IQI- 2000 Post Oak Boulevard, Sulu Ln $ LJ,.��,. �v ��n Houston, I XZW56-44QG T 0 Cmitled Mail Fes r-1 $ frl 0 trt brua Services& Fees (w ccx, adut wapyraptl M ❑Retum Recelpt(TmclMR) $— C3 O ❑Reform Receipt (eledmnlc) $ Merchandise ❑ Signature ConfinnationTM ❑Certned Mall Reabidetl Delhrery § C3 ❑Must Sb,re .Renulied § 0 ..D 0 LF -1 rq C3 171 ■ Complete items 1, 2, and 3. "• ■ Print your name and address on the reverse X so that we can return the card to you. ■ Attach this card to the back of the mailpiece, B. or on the front if space permits. nate. n.w.>eee," t.a• n Carl Giesler CEO Cook Inlet Energy, LLC 601 W. 5th Ave., Ste. 310 ❑ Agent Rf nted Name) C. Date of Delivery Cf) < -r I to •lK -t (� address different from Rem 1? ❑ Yes er delivery address below: ❑ No Carl Giesler Anchorage, II I IIIIII IIII AK 99501 VI I I I I I V I II IIIIII II II I II II I I III CF V VED Priority Cl stmned Mai Restricted CEO Cook Inlet Ener LLC 9Y 601 W. 5th Ave., Ste. 3 2• Anchoraoe. AK 99501 9590 9403 0910 5223 5234 16 ❑ Adult Signature Restricted Delivery ❑ Certified Mall® ❑ Certified Mail Restricted Delivery ❑ Collect an Delivery ❑ Collect on Delivery Restricted Delivery ❑ Insured Mal t.1. a n Mail Restricted Delivery 1. eRegistered g Da Fi ,ary ❑ Return Recelptfor Merchandise ❑ Signanatare Conf rmatim ConfirrhatimTM g Restricted Delivery Article Number (Transfer from service label) 7 015 0 6 4❑ n n n a S 1, A s rn ri .. Senior VP CF V VED ._n M _' e lQ I cfl Certified Mari Fee 2000 Post Oak Boulevard, Sulu r $ LJ,.��,. �v ��n Houston, I XZW56-44QG T t.rt Exthe Services & Fees (check .aria resat aPVrcPda ❑Rdum Re ipt(pardmyy) $ frl 0 ❑ Rotum Receipt (eledmnic) E O ❑CenMed Mal Reft1 tedaeiivery § C3 ❑ Adult Slanaturs RenulnJ $ m C3 D, Er f� M1 0 0 ED ED O S .D 0 Lill rR C3 M1 Timothy Sullivan Executive VP Apache Corporation 2000 Post Oak Boulev Houston, TX 77056-44C IJPetum RecelptlfiardcopN $ ❑Rehm R�ptleleobooic) $ ❑ Certleed Mall Restnded Delivery $ ❑M.ft 119 eture Required $ ■ Complete items 1, 2, and 3. " "W.asune, ■ Print your name and address on the reverse X �/ L3 Agent so that we can return the card to. you. ❑ Addle III Attach this card to the back of the mailpiece, eceived by (PLante�d Name) / C. Date of Del paci or on the front if se permits. ' A -I. AHar..rl to - D. Is delivery address diHermt from item 1? Yes T delivery address below: ❑ No Timothy Sullivan Executive VP Appche Corporation - JUN 2 2 2Qt$ 20b0 Post Oak Boulevard, Suite 100 Hous on, TX 77056-4400 IIIIII� Hous on, 111111111111111111111111111111111 ❑ Adultanature dultSg atureRestricted Delivery ❑ Certified Mail® 9590 9403 0910 5223 5233 93 ❑ Certified Mail Restricted Delivery ❑ Collect on Delivery 2. Article Number (banter from service label) ❑ Collect on Delivery Restricted Delivery "ail a 7015 0640 0003 5185 6113 pail Restricted Delivery Timothy Custer Senior VP Apache Corporation 2000 Post Oak Bouleval Houston, TX 77056-44Q PS Form 3811, July 2015 PSN 7530-02-000-9053 ■ Complete items 1, 2, and 3. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to ❑ Priority Mail Express ❑ Registered Mehra ❑ Registered Mail Restricted Delivery ❑ Return Receipt for Merchandise ❑ Signature Confirmation•'" ❑ Signature Confirmation Restricted Delivery Domestic Return Receipt ❑ Agent Seceived by (Panted Name) C. Date of [ �, t--�n t/ G ' /dr Is delivery address different from item 1? ❑ Yes or delivery address below: 0 No Timothy Custer Senior VP CF V VED Apache Corporation 2000 Post Oak Boulevard, Sulu l,l a. JIJ 2 <. �rJ� LJ,.��,. �v ��n Houston, I XZW56-44QG T �ll�illl III I'll I I l I I I I II III'll II II I I I I I II'I� 0 Adult Signature Restricted Delivery ❑ Priority Mail Expresso Mail - ❑Registered Mail Restricted 9590 9403 0910 5223 5234 09 ❑ Certified Mae El Codified Ma l Restricted Delivery Delivery ❑ Return Receipt for ❑ Collect on Delivery ❑ Collect on Delivery Restricted Delivery Merchandise ❑ Signature ConfinnationTM 2. Article Number from label) (transfer service '^-.— Mail O Signature Confirmation 17015 0640 0 0 0 6 0779 5043 Mail Restricted Delivery Restricted Delivery Ps Form 3811, July 2015 PSN 7530-02-D00-9053 Domestic Return Receipt I Docket Number: OTH-18-037 June 14, 2018 Page 2 of 2 ADL 388233 is a property. CIE and Apache are owners of the property, ADL 388233, and obligated to properly plug and abandon the Three Mile Creek wells prior to the expiration of their rights in ADL 388233. Within 45 days of the date of this letter, CIE and Apache shall submit a Designation of Operator form advising AOGCC as to which of them will be the operator for purposes of plugging and abandoning the wells. The operator shall have 30 days after AOGCC approves the designation of operator to submit Applications for Sundry Approvals (Form 10-403) for the plugging and abandonment of the Three Mile Creek wells. This request for information is made pursuant to 20 AAC 25.300. Failure to respond within the time designated is itself a regulatory violation. The AOGCC reserves the right to pursue an enforcement action in connection with this matter. Sincerely Cathy P Foerster Commissioner cc: Chantal Walsh Division Director DNR 550 W 7th Ave, Suite 1100 Anchorage, AK 99501-3560
