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Home My WebLink AboutCO 537 ,) . . J Image' Project Order File Cover Page XHVZE This page identifies those items that were not scanned during the initial production scanning phase. They are available in the original file, may be scanned during a special rescan activity or are viewable ~ direct inspection of the file. CD !137 .. Order File Identifier Organizing (done) ~wo-sided 1111111111111111111 0 Rescan Needed 1111111111111111111 RESCAN DIGITAL DATA OVERSIZED (Scannable) D Maps: D Color Items: D Greyscale Items: D Diskettes, No. D Other, No/Type: D Other Items Scannable by a Large Scanner D Poor Quality Originals: OVERSIZED (Non-Scannable) D Other: D Logs of various kinds: NOTES: BY: Helen ~ D Other:: I Date: I:J-: Ç( ttf 151 \I\'\tP I IIIIIIIIIIII~ II1II Date} d- g ð c.f 151 VVf{J I Project Proofing BY: Helen ~ Scanning Preparation x 30 = + = TOTAL. PAGES 'Z J (Count does not ¡,""clude cover sheet) 1f\A D Date:fd- g'i ðt( 151 I ',J , 1111111111111111111 BY: Helen 'Mari~ \ Production Scanning BY: Helen ~ Page Count from Scanned File: )<':J. (Count does include cover sheet) Page Count Matches Number in Scanning Preparation: ,/ YES Date: fa- ~ () 't 1 YES NO NO 151 vY1 P Stage 1 Stage 1 BY: If NO in stage 1 page(s) discrepancies were found: Helen Maria Date: 151 Scanning is complete at this point unless rescanning is required. ReScanned 11111-1111111 III BY: Helen Maria Date: 151 Comments about this file: Quality Checked 1/1 111111111 1111111 12/1/2004 Orders File Cover Page.doc ') ) INDEX CONSERVATION ORDER 537 Falls Creek #1 RD, Falls Creek #3, Susan Dionne #3 1. August 25, 2004 2. September 3, 2004 3. October 25,2004 Marathon's request for spacing exceptions for Falls Creek #1 RD, Falls Creek #3, Susan Dionne #3 Notice of Hearing, Affidavit of publication, e-mail Distribution list, bulk mailing Internal e-mail from AGO CO 537 ') ) STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West Seventh Avenue, Suite 100 Anchorage Alaska 99501 Re: THE APPLICATION OF Marathon Oil Company for an order approving regular production from three gas development wells in the Falls Creek and Susan Dionne Participating Areas of the Nini1chik Unit on the Kenai Peninsula IT APPEARING THAT: ) ) ) ) ) ) ) Conservation Order No.537 Falls Creek No. lRD Well Falls Creek No.3 Well Susan Dionne No.3 Well October 25, 2004 1. Marathon Oil Company ("MOC") by letter dated August 25, 2004, requested the Alaska Oil and Gas Conservation Commission to allow regular production of the Falls Creek No. lRD, the Falls Creek No.3 and the Susan Dionne No.3 gas development wells; 2. Notice of opportunity for public hearing was published in the Anchorage Daily News on September 3, 2004 pursuant to 20 AAC 25.540; and 3. No protests to the application, comments, or requests for public hearing were received. FINDINGS: 1. The surface location of the Falls Creek #IRD well is 1898 feet from the south line and 2885 feet from the east line, Section 6, TIN, 12W, Seward Meridian (SM). The bottom hole location for this deviated well is approximately 1830 feet from the south line and 5025 feet from the east line, Sec. 6, TIN, 12W, SM. 2. The surface location of the Falls Creek Unit No.3 well is 2846 feet from the east line and 1643 feet from the south line of Section 6, TIN RI2W, SM. The bottomhole location is approximately 2725 feet from the east line and 600 feet from the south line of Section 1 TIN RI3W, SM. Conservation Order No. 53'1 ) October 25, 2004 Page 2 of3 ') 3. The surface location of the Susan Dionne No.3 well is 194' from the south line and 1469 feet from the east line of Section 6, TIS, RI3W, SM. The approximate bottom hole location for this well is 1964 feet from the south line and 1090 feet from the east line of Section 1, TIS, RI4W, SM. 4. In Conservation Orders Nos. 468,472 and 491, MOC was granted spacing exceptions to permit the drilling and testing of these three wells notwithstanding that their locations did not conform to statewide well spacing requirements defined in 20 AAC 25.055(a)(2). Each conservation order provided that the well could not be placed on regular production until the Commission takes additional action, upon petition, and after notice and hearing, to offset any advantage MOC may have over other owners by reason of drilling the well to the exception location and to allow affected owners to produce their just and equitable share of hydrocarbons. 5. Following a determination that each of these wells was capable of producing in paying quantities, MOC applied to the Alaska Department of Natural Resources for the formation of participating areas including each of the wells in the Ninilchik Unit. The Department approved the formation of these participating areas. 6. In the event that a person claiming to be affected by regular production from one or more of the subject wells contends that additional action by the Commission is necessary to offset any advantage MOC may have, or to allow affected owners to produce their just and equitable share of hydrocarbons, such person may seek relief from the Commission irrespective of the provisions of Conservation Order Nos. 468, 472, and 491. CONCLUSION: 1. No further action by the Commission is currently required before regular production from the subject wells is permitted. Conservation Order No. 53? ) October 25, 2004 Page 3 of3 NOW, THEREFORE, IT IS ORDERED: MOC's application to permit regular production of the Falls Creek No. lRD, Falls Creek No.3, and Susan Dionne No.3 gas development wells is granted. DONE at Anchorage, Alaska and dated October 25 / n orman, ChaiÌman Alaska Oil and Gas Conservation Commission ~.".-! ~ .... ~ ~. v ~-,- ~~~ Daniel T. Seamount, Jr., 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 rehearing must be received by 4:30 PM on the 23rd day following the date of the order, or next working day if a holiday or weekend, to be timely filed. The Commission shall grant or refuse the application in whole or in part within 10 days. The Commission can refuse an application by not acting on it within the 10-day period. An affected person has 30 days from the date the Commission refuses the application or mails (or otherwise distributes) an order upon rehearing, both being the final order of the Commission, to appeal the decision to Superior Court. Where a request for rehearing is denied by nonaction of the Commission, the 30-day period for appeal to Superior Court runs from the date on which the request is deemed denied (i.e., 10th day after the application for rehearing was filed). CO 537 ) ) Subject: CO 537 From: Jody Colombie <jody_colombie@admin.state.ak.us> Date: Tue, 26 Oct 2004 11 :41 : 14 -0800 To: undisclosed-recipients:; BeC: Cynthia B Mc.iver <bren_mciver@admin.state.ak.us>, Robert E Mintz <robert - mintz@law.state.ak.us>, Christine Hansen <c.hansen@iogcc.state.ok.us>, Terrie Hubble <hubbletl@bp.c.om>, Sondra Stewman <StewmaSD@,BP.com>, Scott & Cammy Taylor <staylor@alaska.net>, stanekj <stanekj@unocal.com>, ecolaw <ecolaw@trustees.org>, roseragsdale <roseragsdale@gci.net>, trmjrl <trmjrl @aol.com>, jbriddle <jbriddle@marathonoil.com>, rockhill <rockhill@aoga.org>, shaneg <shaneg@evergreengas.com>, jdarlington <jdarlington@forestoil.com>, nelson <knelson@petroleumnews.com>, cboddy <cboddy@usibelli.com>, Mark Dalton <mark.dalton@hdrinc.com>, Shannon Donnelly <shannon.donnelly@conocophillips.com>, "Mark P . Worcester" <mark.p.\vorcester@conocophillips.com>, "Jerry C. Dethlefs" <jerry.c.dethlefs@conocophillips.com>, Bob <bob@inletkeeper.org>, wdv <wdv@dnr.state.ak.us>, tjr <tjr@dnr.state.ak.us>, bbritch <bbritch@alaska.net>, mjnelson <mjnelson@purvingertz.com>, Charles O'Donnell <charles.o'donnell@veco.com>, "Randy L. Skillern" <SkilleRL@BP .com>, "Deborah J. Jones" <JonesD6@BP.com>, "Paul G. Hyatt" <hyattpg@BP.com>, "Steven R. Rossberg" <RossbeRS@BP.com>, Lois <lois@inletkeeper.org>, Dan Bross <kuacnews@kuac.org>, Gordon Pospisil <PospisG@BP.com>, "Francis S. Sommer" <SommerFS@BP.com>, Mikel Schultz <Mikel.Schultz@BP.com>, "Nick W. Glover" <GloverNW@BP.com>, "Daryl J. Kleppin" <KleppiDE@BP.com>, "Janet D. Platt" <PlattJD@BP.com>, "Rosanne M. Jacobsen" <JacobsRM@BP.com>, ddonkel <ddonkel@cfl.rr.com>, Collins Mount <collins_mount@revenue.state.ak.us>, mckay <mckay@gci.net>, Barbara F Fullmer <b arb ara. f. fullmer@conocophillips.com>, bocastwf <bocastwt@bp.com>, Charles Barker <barker@usgs.gov>, doug_schultze <doug_schultze@xtoenergy.com>, Hank Alford <hank.alford@exxonmobil.com>, Mark Kovac <yesno l@gci.net>, gspfoff <gspfoff@aurorapower.com>, Gregg Nady <gregg.nady@shell.com>, Fred Steece <fred.steece@state.sd.us>, rcrotty <rcrotty@ch2m.com>, jejones <jejones@aurorapower.com>, dapa <dapa@alaska.net>, jroderick <jroderick@gci.net>, eyancy <eyancy@seal-tite.net>, "James M. Ruud" <james.m.ruud@conocophillips.com>, Brit Lively <mapalaska@ak.net>, jab <jah@dnr.state.ak.us>, Kurt E Olson <kurt_olson@legis.state.ak.us>, buonoje <buonoje@bp.com>, Mark Hanley <mark_hanley@,anadarko.com>, loren_leman <loren_leman@gov.state.ak.us>, Julie Houle <julie_houle@dnr.state.ak.us>, John W Katz <j"wkatz@sso.org>, Suzan J Hill <suzan_hill@dec.state.ak.us>, tablerk <tablerk@unocal.com>, Brady <brady@aoga.org>, Brian Havelock <beh@dnr.state.ak.us>, bpopp <bpopp@borough.kenai.ak.us>, Jim White <jimwhite@satx.rr.com>, "John S. Haworth" <john.s.haworth@exxonmobi1.com>, marty <marty@rkindustria1.com>, ghammons <ghammons@aol.com>, rmclean <nnclean@pobox.alaska.net>, mkm7200 <mkm7200@aol.com>, Brian Gillespie <ifbmg@uaa.alaska.edu>, David L Boelens <dboelens@aurorapower.com>, Todd Durkee <TDURKEE@KMG.com>, Gary Schultz <gary_schultz@dnr.state.ak.us>, Wayne Rancier <RANCIER@petro-canada.ca>, Bill Miller <Bill- Miller@xtoalaska.com>, Brandon Gagnon <bgagnon@brenalaw.com>, Paul Winslow <pmwinslow@forestoi1.com>, Garry Catron <catrongr@bp.com>, Shannaine Copeland <copelasv@bp.com>, , Kristin Dirks <kristin_dirks@dnr.state.ak.us>, Kaynell Zeman <kjzeman@marathonoil.com>, John Tower <John.Tower@eia.doe.gov>, Bill Fowler <Bill_Fowler@anadarko.COM>, Vaughn Swartz <vaughn.svlartz@rbccm.com>, Scott Cranswick <scott.cranswick@mms.gov>, Brad McKim lof2 10/26/2004 11 :41 AM CO 537 20f2 <mckimbs@BP .com> - -- ----------- ) ') - --------- - _.~---- . Content-Type: application/ms\vord i C053 7.doc Content-Encoding: base64 -------~-~., '----~- - ---" _.--~-- ,- - _J 10/26/2004 11:41 AM Citgo Petroleum Corporation PO Box 3758 Tulsa, OK 74136 Kelly Valadez Tesoro Refining and Marketing Co. Supply & Distribution 300 Concord Plaza Drive San Antonio, TX 78216 Jerry Hodgden Hodgden Oil Com pany 408 18th Street Golden, CO 80401-2433 Kay Munger Munger Oil Information Service, Inc PO Box 45738 Los Angeles, CA 90045-0738 Mark Wedman Halliburton 6900 Arctic Blvd. Anchorage, AK 99502 Baker Oil Tools 4730 Business Park Blvd., #44 Anchorage, AK 99503 Gordon Severson 3201 Westmar Cr. Anchorage, AK 99508-4336 James Gibbs PO Box 1597 Soldotna, AK 99669 Richard Wagner PO Box 60868 Fairbanks, AK 99706 Williams Thomas Arctic Slope Regional Corporation Land Department PO Box 129 Barrow, AK 99723 ) Mary Jones XTO Energy, Inc. Cartography 81 0 Houston Street, Ste 2000 Ft. Worth, TX 76102-6298 Robert Gravely 7681 South Kit Carson Drive Littleton, CO 80122 Richard Neahring NRG Associates President PO Box 1655 Colorado Springs, CO 80901 Samuel Van Vactor Economic Insight Inc. 3004 SW First Ave. Portland, OR 97201 Schlumberger Drilling and Measurements 2525 Gam bell Street #400 Anchorage, AK 99503 Ciri Land Department PO Box 93330 Anchorage, AK 99503 Jack Hakkila PO Box 190083 Anchorage, AK 99519 Kenai National Wildlife Refuge Refuge Manager PO Box 2139 Soldotna, AK 99669-2139 Cliff Burglin PO Box 70131 Fairbanks, AK 99707 North Slope Borough PO Box 69 Barrow, AK 99723 ') David McCaleb IHS Energy Group GEPS 5333 Westheimer, Ste 100 Houston, TX 77056 George Vaught, Jr. PO Box 13557 Denver, CO 80201-3557 John Levorsen 200 North 3rd Street, #1202 Boise,ID 83702 Michael Parks Marple's Business Newsletter 117 West Mercer St, Ste 200 Seattle, W A 98119-3960 David Cusato 200 West 34th PMB 411 Anchorage, AK 99503 Jill Schneider US Geological Survey 4200 University Dr. Anchorage, AK 99508 Darwin Waldsmith PO Box 39309 Ninilchick, AK 99639 Penny Vadla 399 West Riverview Avenue Soldotna, AK 99669-7714 Bernie Karl K&K Recycling Inc. PO Box 58055 Fairbanks, AK 99711 /I:~;þ ::J:I::: w Marathon spacing order ) ,/j ) 1)7 Subject: Marathon spacing order From: Rob Mintz <robert_n1intz@law.state.ak.us> Date: Mon, 25 Oct 2004 14:26:52 -0800 To: dan- seamount@.adrnin.state.ak.us, john - norman@admin.state.ak.us cc: bob - crandall@admin.state.ak.us, jody - colombie@admin.state.ak.us John, I understand that you are wondering about Finding 6 in this draft order. My reasoning is as follows. The language from the original spacing exception orders that is causing us trouble is the provision that the well not "be placed on regular production until the Commission takes additional action, upon petition, and after notice and hearing, to offset any advantage MOC may have over other owners by reason of drilling the well to the exception location and to allow affected owners to produce their just and equitable share of hydrocarbons." I think that during the past year the Commission has revisited the inclusion of such language in spacing exception orders and has decided that generally if a spacing exception is justified, then it is justified for production and not just for drilling and testing. After all, the whole point of well spacing and exceptions from well spacing rules is to deal with production. So what should have been done with these three spacing exceptions in the first place (assuming there was factual justification for them) would have been to grant them uncondi tionally. Note that the quoted language in large part comes from AS 31.05.100(b). But the better way to implement that language is for the Commission to be prepared to take appropriate action in response to an application from another affected person - e.g., to allow the offset owner to drill and produce closer to the property line than regularo spacing rules allow. I think that's how it's handled in other states. Well, since the three spacing exception orders say what they say, there seem to be two choices to fix the problem. One would be to amend the orders to remove the offending language. The other is to implement the orders - i.e., to grant permission to begin regular production from the wells. Although the former alternative might be more direct, I am concerned with a notice issue. If an application for a spacing exception requires notice by certified mail to nearby property owners, then I would think an application to amend - i.e., further expand - the exception also requires such notice. This has not been done by Marathon here. The alternative does not as clearly require personal notice to property owners if it is just implementing previously granted orders. OK, how do we implement the previously granted orders? The Commission has to "take additional action, upon petition, and after notice and hearing, to offset any advantage MOC may have" etc. The action we are taking here is to expressly recognize that the Commission stands ready to take further action if justified by the facts, on application by an affected person. It's awkward, but I can't think of any other way to permit regular production without amending the existing orders or without bringing nearby property owners into the case to be heard. (The problem is that notwithstanding unitization and the formation of a P A, there are non-uinitized tracts closer than 1500 feet to the exception wells.) ~/ 1 of 1 10/25/2004 3: 17 PM ::t:t:: N STATE OF ALASKA ) NOTICE TO PUBLISHER ') ADVERTISING ORDER NO. ADVERTISING ORDER , ': ,:~I;~:~W!~M :FOR INVOICE ADDRESS INVOICE MUST BE IN TRIPLICATE SHOWING ADVERTISING ORDER NO., CERTIFIED AFFIDAVIT OF PUBLICATION (PART 2 OF THIS FORM) WITH ATTACHED COPY OF ADVERTISEMENT MUST BE SUBMITTED WITH INVOICE AO-02514012 F AOGCC R 333 W 7th Ave, Ste 100 0 Anchorage, AK 99501 AGENCY CONTACT DATE OF A.O. Jody Colombie PHONE September 2,2004 PCN M (907) 793 -1 ?.?.1 DATES ADVERTISEMENT REQUIRED: ¿ Anchorage Daily News PO Box 149001 Anchorage, AK 99514 September 3, 2004 THE MATERIAL BETWEEN THE DOUBLE LINES MUST BE PRINTED IN ITS ENTIRETY ON THE DATES SHOWN. SPECIAL INSTRUCTIONS: Type of Advertisement X Legal D Display Advertisement to be published was e-mailed D Classified DOther (Specify) SEE ATTACHED SEND INVOICE IN TRIPLICATE AOGCC. 333 \V. 7th A\'e.. Suite 100 '.~." ": ,TO Anchorage. AK 9950] REF TYPE NUMBER AMOUNT 1 VEN DATE PAGEl OF TOTAL OF 2 PAGES ALL PAGES$ COMMENTS 2 ARD 3 4 02910 FIN AMOUNT SY CC PGM LC ACCT FY NMR DIST UQ 05 02140100 73451 2 /' l ,,- R:QU'SlTIo¿~~:;>\{JI£(o (~/ ( -'" " ) I vi DIVISION APPROVAL: ) ) Notice of Public Hearing STATE OF ALASKA Alaska Oil and Gas Conservation Commission Re: The application of Marathon Oil Company ("MOC") to approve regular production from three gas development wells in exception locations in the Falls Creek and Susan Dionne Participating Areas of the Ninilchik Unit on the Kenai Peninsula MOC by letter dated August 25, 2004, has requested the Alaska Oil and Gas Conservation Commission ("Commission") to allow regular production of the Falls Creek No. 1RD, the Falls Creek No.3, and the Susan Dionne No.3 gas development wells within 1,500 feet of a property line. All three wells were granted spacing exceptions by Conservation Orders Nos. 468, 472, and 491, to allow drilling and testing, but regular production was not allowed except by further order of the Commission. The surface location of the Falls Creek #IRD well is 1898 feet from the south line and 2885 feet from the east line, Section 6, TIN, 12W, Seward Meridian (SM). The bottom hole location is approximately 1830 feet from the south line and 5025 feet from the east line, Sec. 6, TIN, 12W, SM. The surface location of the Falls Creek Unit No.3 well is 2846 feet from the east line and 1643 feet from the south line of Section 6, TIN R12W, SM. The bottom hole location is approximately 2725 feet from the east line and 600 feet from the south line of Section 1 TIN RI3W, SM. The surface location of the Susan Dioill1e No.3 well is 194 feet from the south line and 1469 feet from the east line of Section 6, TIS, RI3W, SM. The bottom hole location is approximately 1964 feet from the south line and 1090 feet from the east line of Section 1, TIS, RI4W, SM. The Commission has tentatively scheduled a public hearing on this application for October 14, 2004 at 9:00 am at the offices of the Alaska Oil and Gas Conservation Commission at 333 West 7th Avenue, Suite 100, Anchorage, Alaska 99501. A person may request that the tentatively scheduled hearing be held by filing a written request with the Commission no later than 4:30 pm on September 20, 2004. If a request for a hearing is not timely filed, the Commission may consider the issuance of an order without a hearing. To learn if the Commission will hold the public hearing, please call 793- 1221. In addition, a person may submit written comments regarding this application to the Alaska Oil and Gas Conservation Commission at 333 West ih Avenue, Suite 100, Anchorage, Alaska 99501. Written comments must be received no later than 4:30 pm on October 4, 2004 except that if the Commission decides to hold a public hearing, written protest or comments must be received no later than the conclusion of the October 14, 2004 hearing. (j special accommodations in order to comment Colombie at 793-1221. / Published Date: September 3, ADN AO# 02514012 RE: Notice ') ) Subject: RE: Notice From: legalads <legalads@adn.com> Date: Thu, 02 Sep 2004 09:59:09 -0800 To: Jady Colombie <jody - colombie@admin.state.ak.us> Hi Jody: Following is the confirmation information on your legal notice. Please let me know if you have any questions or need additional information. Account Number: STOF 0330 Legal Ad Number: 279620 Publication Date(s): September 3, 2004 Your Reference or PO#: 02514012 Cost of Legal Notice: $230.68 Additional Charges Web link: E-Mail Link: Bolding: Total Cost to Place Legal Notice: $230.68 Ad Win Appear on the web: www.adn.com: XXXX Ad Win Not Appear on the web: www.adn.com: Thank You, Kim Kirby Anchorage Daily News Legal Classified Representative E-Mail: legalads@adn.com Phone: (907) 257-4296 Fax: (907) 279-8170 ---------- From: Jody Colombie Sent: Thursday, September 2, 2004 9: 1 0 AM To: legalads Subject: Notice «File: Ad Order form.doc»«File: Falls Creek Susan Dionne.doc» Please publish the attached tomorrow. lody 1 of 1 9/2/2004 10:43 AM Anchorage Daily News Affidavit of Publication 1001 Northway Drive, Anchorage, AK 99508 PRICE OTHER OTHER OTHER OTHER OTHER GRAND AD# DATE PO ACCOUNT PER DAY CHARGES CHARGES#2 CHARGES #3 CHARGES #4 CHARGES #5 TOTAL 279620 09/03/2004 02514012 STOF0330 $230.68 $230.68 $0.00 $0.00 $0.00 $0.00 $0.00 $230.68 STATE OF ALASKA THIRD JUDICIAL DISTRICT Teresita Peralta, being first duly sworn on oath deposes and says that she is an advertising representative of the Anchorage Daily News, a daily newspaper. That said newspaper has been approved by the Third Judicial Court, Anchorage, Alaska, and it now and has been published in the English language continually as a daily newspaper in Anchorage, Alaska, and it is now and during all said time was printed in an office maintained at the aforesaid place of publication of said newspaper. That the annexed is a copy of an advertisement as it was published in regular issues (and not in supplemental form) of said newspaper on the above dates and that such newspaper was regularly distributed to its subscribers during all of said period. That the full amount of the fee charged for the foregoing publication is not in excess of the rate charged private individuals. Signed 5{y4~JcU Subscribed and sworn to me before this date: J'ffU2~. g \ ~OO V Notary Public in and for the State of Alaska. Third Division. Anchorage, Alaska ~ COMMISSION EXPI~S: lCt IfÞó} r) . I IJ J} / J "' \ t \ (( (( {( ((II: fu/fJ1h~4Ja, . }(iljÁ~. ,,~~~I~',1'~ ~ ~"~OTA~þ'~~ ,-. --. .......... §~: ÞuSL\C : ê ::,.z.~ -.... J!f:~"" - . ,"I': .... ~_::: ~~. ~OF þ.~.' ~\.=" ;..;.. . . . . ''':.A- :\'" ;;1.1 ~"" ';#!t! '\" :l111)JJJJ)'" Notice of Public Hearin9 STATE OF ALASKA. . Alaska Oil and Gas Conservation Commission Re:Th~CIPplic::atiòr'lof lIAorathon QilCOmpqny ("MOC") to approve re9ula~prqdu~~lo.IJ from' I three 90S development well.. In exceptlO~ io[ot;ûr,; ;n Ihr:> Foil.. Creek C?n? S~..on I?lon~e Porlo.:,J(],rog ..r.,.,1) of the Nlnllch,k Unit on 1 he. Keo1o, P"r"n"ula MOC b'llE¡Hêrdalêd ÂU9 ust2S; 20Õ4 ?hos re- ested the Alaska Oil and .Go.. Con..ervotlon t~mmission ("Commission") tOClllow regulor pro. duction of the Falls CreE!I<,No. 1RD, the Foil.. Creek No "3, and the susan Qionne No.3 go.. deyel- opmenl ~ells within l,SOO feet of. a property hne. All three wells were gronted SPOCln9 exceptIon,> bv Con..ervotion Orders No... .168. 472, ond .191.. 10 01- low drillin9 ond te..tin9, bul regulor production wo.. not ollowed except bv further order of the Com- mis..ion. Tt1ésu rfOèé locatia,r\ol theFall!¡C ~eek#l,~Dwell is 1898 feet from the south line and.. 2~85feetfr~rn, the eost line, Section 6, TlN,12W,.Se'f'(°rdMerlø., . n (SM) The bottom holeJocatlo~\I,~'Clþ,p.rq)(I' ~atelY 1830 feet from the southlin/;¡ancl.5025 fE1et from the east line, Sec, 6, Tl N, 12W,S"",,\ ".', . . "~.~'...~rf6c:¿¡òt(tiðhofthe¡::O\"fs.C;r:eê(.'\.Jf¡it~q.:r well i.. 2846 feet from the e.a!)tlt.neC:lncl J643fE!rr from the soulh line of Section 6,. :nNR12W,SI\!I. The bottom hole locotion i.. oPPl'oxlmateIY.2725.f!,!4i1t from the eo..t line and 600 feet frornthE!southhn~ of Section 1 TlN R13W, SM. the' "ro,,, locot¡ûncfthr:> Susan DiohnêNò.3well is -'~'I"<:' Iro".' Ine ;,ou1h line and 1469 feet from the east lil1e pf Section 6, ns/ Rl~W, SM. The bot- 10m hole location is opproximotely1964 feet}rO~ the south line ond 1090 feet trom the east Itne 0 Section 1, T1S, RI4W, SM. The Commissionhastentativel~ sChedulédoPub- ¡;( hl?oring onthic; (1I)plicoti:onfor octpb~r 14,}99,4 ('1 Y ')0011'101 th", c,rl"es of'the Alaska 011 and Gas (O'1;,,,,r'.OI,on (orT'l'1',.;,sion at 333 West 7th Ayenue, ... I 1""100 ..nchoroo;¡.,. Aloska?9501. A perso~ "Jay ; ~~~':I 11101 Inp. r...n1'Jt,iveIYSChed.uled he(mng~e n:ld "é. 1,llng 0 .~r'I.It1nreqUest Wlthth~oC~Bó~s- ,>,on no 101.,.' Ihon J ;0 pm on September, ., . If a reqUest for a hearing is not timely filed, the Commission may c:onsider the i;;suance of ~n pr- der without a hearin9. To learn If the Commission will hold the publiC: hearing, please call 793-1221. I n addition a person may submit written co"'!- I ments rega;ding this applica!io,: to tthe33A3'~Sk~?t~ and Gas Conservation CommiSSion a es Avenue, Suite 100, Anchora9.e, Alaska 99501. W~it- ten comments must be. received no later than 4..30 pm on October 4, 2004 except tha! if the .Commls- sion decides .to hold a public he~rlOg, wntten ~o- test or comments must be received no It;lter t an the conclusion of the October 14, 2004 hearln9. If YOll are a person with a disability who may ne;d special accommodations in order to comment or 0 attend the public hearin9, please contact JodY Co- lombie at 793-1221. John K. Norman Chairman ADN AO# 02514012 Publish: September 3, 2004 I 02-902 (Rev. 3/94) ) \) Publisher/Uriginal Copies: Department Fiscal, Departmem, Receiving AO.FRM STATE OF ALASKA ADVERTISING ORDER Si:E apTTOM FOR INVOICE ADDRESS NOTICE TO PUBLISHER ADVERTISING ORDER NO. INVOICE MUST BE IN TRIPLICATE SHOWING ADVERTISING ORDER NO., CERTIFIED AO-02514012 AFFIDAVIT OF PUBLICATION (PART 2 OF THIS FORM) WITH .A:TTACHED COpy OF ADVERTISEMENT MUST BE SUBMITTED WITH INVOICE F AOGCC R 333 West ih Avenue, Suite 100 0 Anchorage,AJ( 99501 M 907-793-1221 AGENCY CONTACT Jody Colombie PHONE _(907) 793 -1 ?? 1 DATES ADVERTISEMENT REQUIRED: DATE OF A.O. September?, ?004 PCN T 0 Anchorage Daily News PO Box 149001 Anchorage, AK 99514 September 3,2004 THE MATERIAL BETWEEN THE DOUBLE LINES MUST BE PRINTED IN ITS ENTIRETY ON THE DATES SHOWN. SPECIAL INSTRUCTIONS: United states of America AFFIDAVIT OF PUBLICATION REMINDER State of ss INVOICE MUST BE IN TRIPLICATE AND MUST REFERENCE THE ADVERTISING ORDER NUMBER. A CERTIFIED COpy OF THIS AFFIDAVIT OF PUBLICATION MUST BE SUBMITTED WITH THE INVOICE. ATTACH PROOF OF PUBLICATION HERE. division. Before me, the undersigned, a notary public this day personally appeared who, being first duly sworn, according to law, says that he/she is the of Published at in said division and state of and that the advertisement, of which the annexed is a true copy, was published in said publication on the day of 2004, and thereafter for - consecutive days, the last publication appearing on the - day of , 2004, and that the rate charged thereon is not in excess of the rate charged private individuals. Subscribed and sworn to before me This - day of 2004, Notary public for state of My commission expires Citgo Petroleum Corporation PO Box 3758 Tulsa, OK 74136 Kelly Valadez Tesoro Refining and Marketing Co. Supply & Distribution 300 Concord Plaza Drive San Antonio, TX 78216 Jerry Hodgden Hodgden Oil Company 408 18th Street Golden, CO 80401-2433 Kay Munger Munger Oil Information Service, Inc PO Box 45738 Los Angeles, CA 90045-0738 Mark Wedman Halliburton 6900 Arctic Blvd. Anchorage, AK 99502 Baker Oil Tools 4730 Business Park Blvd., #44 Anchorage, AK 99503 Gordon Severson 3201 Westrnar Cr. Anchorage, AK 99508-4336 James Gibbs PO Box 1597 Soldotna, AK 99669 Richard Wagner PO Box 60868 Fairbanks, AK 99706 Williams Thomas Arctic Slope Regional Corporation Land Department PO Box 129 Barrow, AK 99723 ) Mary Jones XTO Energy, Inc. Cartography 810 Houston Street, Ste 2000 Ft. Worth, TX 76102-6298 Robert Gravely 7681 South Kit Carson Drive Littleton, CO 80122 Richard Neahring NRG Associates President PO Box 1655 Colorado Springs, CO 80901 Samuel Van Vactor Economic Insight Inc. 3004 SW First Ave. Portland, OR 97201 Schlumberger Drilling and Measurements 3940 Arctic Blvd., Ste 300 Anchorage, AK 99503 Ciri Land Department PO Box 93330 Anchorage, AK 99503 Jack Hakkila PO Box 190083 Anchorage, AK 99519 Kenai National Wildlife Refuge Refuge Manager PO Box 2139 Soldotna, AK 99669-2139 Cliff Burglin PO Box 70131 Fairbanks, AK 99707 North Slope Borough PO Box 69 Barrow, AK 99723 ) David McCaleb IHS Energy Group GEPS 5333 Westheimer, Ste 100 Houston, TX 77056 George Vaught, Jr. PO Box 13557 Denver, CO 80201-3557 John Levorsen 200 North 3rd Street, #1202 Boise,lD 83702 Michael Parks Marple's Business Newsletter 117 West Mercer St, Ste 200 Seattle, WA 98119-3960 David Cusato 200 West 34th PMB 411 Anchorage, AK 99503 Jill Schneider US Geological Survey 4200 University Dr. Anchorage, AK 99508 Darwin Waldsmith PO Box 39309 Ninilchick, AK 99639 Penny Vadla 399 West Riverview Avenue SOldotna, AK 99669-7714 Bernie Karl K&K Recycling Inc. PO Box 58055 Fairbanks, AK 99711 /7' 0 ( /.V c!-. /Î\ 1 l~íJ j i/.l/J'1 Notice ) ) Subject: Notice From: Jody Colombie <jody_colombie@admin.state.ak.us> Date: Thu, 02 Sep 2004 09: 11 :53 -0800 To: undisclosed-recipients:; Bec: Robert E Mintz <robert_mintz@law.state.ak.us>, Christine Hansen <c.hansen@iogcc.state.ok.us>, TeITie Hubble <hubbletl@bp.com>, Sondra Stewlnan <StewmaSD@BP.com>, Scott & CaInmy Taylor <staylor@alaska.net>, stanekj <stanekj@unoca1.com>, ecolaw <ecola\v@}trustees.org>, roseragsdale <roseragsdale@gci.net>, trmjrl <trmjr l@ao1.com>, jbriddle <jbriddle@~marathonoi1.com>, rockhill <rockhill@aoga.org>, shaneg <shaneg@evergreengas.con1>, jdarlington <jdarlington@:forestoil.com>, nelson <knelson@petroleUlllnews.com>, cboddy <cboddy@usibelli.c0111>, Mark Dalton <mark.dalton@hdrinc.com>, Shannon Donnelly <shannon.donnelly@.conocophillips.com>, "Mark P. Worcester" <mark.p.worcester@,conocophillips.C0111>, "Jerry C. Dethlefs" <jerry.c.dethlefs@conocophillips.com>, Bob <bob@jnletkeeper.org>, wdv <wdv@dnr.state.ak.us>, tjr <tjr@dnr.state.ak.us>, bbritch <bbritch@alaska.net>, mjnelson <lnjnelson@purvingertz.com>, Charles O'Donnell <charles.o'donnell@veco.com>, "Randy L. Skillen1" <SkilleRL@BP.com>, "Jeanne H. Dickey" <DickeyJH@BP.con1>, "Deborah J. Jones" <JonesD6@BP.com>, "Paul G. Hyatt" <hyattpg@BP.com>, "Steven R. Rossberg" <RossbeRS@BP.C01l1>, Lois <lois@inletkeeper.org>, "Joseph F. Kirchner" <KirclmJF@BP.com>. Gordon Pospisil <PospisG@BP.com>, "Francis S. Sommer" <SommerFS@BP.com>, Mikel Schultz <Mikel.Schultz@BP.com>. "Nick W. Glover" <GloverNW@BP.com>, "Daryl J. Kleppin" <K.leppiDE@BP.con1>, "Janet D. Platt" <PlattJD@.BP.com>, "Rosanne M. Jacobsen" <JacobsRM@BP.com>, ddonkel <ddonkel@cfl.lT.cOln>, Collins Mount <collins_ffiount@revenue.state.ak.us>, mckay <mckay@1gci.net>, Barbara F Fullmer <barbara.f.fullmer@conocophillips.com>, bocasnvf <bocastwf@bp.com>, Charles Barker <barker@usgs.gov>, doug_schultze <doug_schultze@xtoenergy.com>, Hank Alford <hank.alford@exxonmobi1.con1>, Mark Kovac <yesno 1 @gci.net>, gspfoff <gspfoff@,aurorapower.com>, Gregg Nady <gregg.nady@'.shell.com>, Fred Steece <fred.steece@state.sd.us>, rcrotty <rcrotty@ch2m.com>, jejones <jejones@,aurorapower.com>, dapa <dapa@alaska.net>, jroderick <jroderick@gci.net>, eyancy <eyancy@seal-tite.net>, "James M. Ruud" <james.m.ruud@conocophillips.com>, Brit Lively <mapalaska@ak.net>, jab <jah@dnr.state.ak.us>, Kurt E Olson <kurt_olson@legis.state.ak.us>, buonoje <buonoje@bp.com>, Mark Hanley <mark_hanley@~al1adarko.com>, loren_Ien1an <loren_lelllan@gov.state.ak.us>, Julie Houle <julie_houle@dnr.state.ak.us>, John W Katz <jwkatz@sso.org>, Suzan J Hill <suzan - hill@,dec.state.ak.us>, tablerk <tablerk@unocal.com>, Brady <brady@aoga.org>, Brian Havelock <beh@dnr.state.ak.us>, bpopp <bpopp@borough.kenai.ak.us>, Jim White <jim\vhite@satx.rr.com>, "John S. HaW0l1h" <john.s.haworth@exxonmobil.com>, marty <marty@rkindustrial.com>~ ghammons <ghammons@aol.com>, rmclean <rmclean@,pobox.alaska.net>, James Scherr <james.scherr@mnls.gov>, mkm7200 <mkm7200@aol.com>, Brian Gillespie <itbn1g@uaa.alaska.edu>, David L Boelens <dboelens@aurorapower.com>, Todd Durkee <TDURKEE@KMG.com>, Gary Schultz ~g~îßchultz@dnr.state.ak.Üs>, Wayne Rancier <RAN CIER@petro-canada.ca>,~illIv1iller <Bill- Miller@xtoalaska.com>, Brandon Gagnon <bgagnon@brenalaw.com>,PàulWmslow <pmwinslow@forestoil.cOln>, Garry Catron <catrongr@bp.com>, SharmameCopeland <copelasv@bp.com>, S uzanneAllexan <saUexan@he1menergy.cöm>,KristinDirk:s <kristin - dirks@dnr.state.ak.us>, KaynellZeman <kjzen1an@fuarathonoiLcol11>,.JohnTower <John. Tower@eia.doe.gov>,. BìHFowler<Bill_Fowler@anadarko.COM> 10f2 9/2/20049:12 AM Notice ') Creek Susan 20f2 ') Content-Type: applicationlmsword Content-Encoding: base64 9/2/20049:12 AM Public Notice ) ~t.J.Jjj~êt:iiPublic)Notice From: Jody Colombie <jody - colombie@admin.state.ak.us> Date: Thu, 02 Sep 2004 09: 11: 18 -0800 To: undisclosed-recipients:; BeC: "bren» Cynthia B Mciver" <bren_mciver@admin.state.ak.us>, Angela Webb <angie - webb@admin.state.ak.us> Please publish on website. Jody Creek Susan Content-Type: application/msword Content-Encoding: base64 1 of 1 9/2/20049: 12 AM Notice ) ) Subject: Notice From: Jody Colombie <jody - colombie@adn1in.state.ak.us> Date: Thu, 02 Sep 2004 09: 10:08 -0800 To: Legal Ads Anchorage Daily News <legalads@,adn.com> Please publish the attached tomorrow. Jody Content-Type: applicationlmsword Content-Encoding: base64 Order Creek Susan Content-Type: applicationlmsword Content-Encoding: base64 1 of 1 9/2/2004 9: 12 AM =+I:: ~ Alaska ~iness Unit Marathon Oil Company P,O. Box 196168 Anchorage, AK 99519-6168 Telephone 907/561-5311 Fax 907/564-6489 August 25, 2004 Mr. Bob Crandall Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, #100 Anchorage, AK 99501-3589 RECEIVED AUG! 6i2004 Alaska Oil & Gas Cons. Commission Anchorage RE: Conservation Order No. 468- Falls Creek #1 RD Conservation Order No. 491- Falls Creek #3 Falls Creek Participating Area Ninilchik Unit Conservation Order No. 472- Susan Dionne #3 Susan Dionne Participating Area Ninilchik Unit Gentlemen: The Captioned Spacing Exception Orders for wells located within the referenced Participating Areas contain language requiring "additional action" from the Commission prior to the wells being placed on "regular production". Marathon Oil Company hereby respectfully requests the Commission revise and re- issue an Order or Orders extinguishing this requirement. Prior to drilling each of the subject wells, Marathon applied for and received these Spacing Exception Orders. During this process, we were required to notify all working interest owners, royalty owners, and overriding royalty owners within a 3000' radius of the respective wellbores of our intentions. Accordingly, the issues regarding the protection of correlative rights and the prevention of waste were initially addressed at the Commission. Once the wells were deemed capable of commercial production, Marathon applied to the Department of Natural Resources (DNR) for the formation of these Participating Areas within the Ninilchik Unit. The Director ofDNR issued his Finding and Decision approving the Participating Areas on June 30, 2003. Again, issues regarding public notice, the prevention of waste, and the protection of correlative rights were addressed during this lengthy process. No "regular production" occurred from any well within the Ninilchik Unit prior to the Director's Decision. Accordingly, we respectfully request the Commission to issue the revised Order (s). Environmentally aware for the long run. ) ~) Please contact me at 907-564-6428, should you need any additional information. J. Brock Riddle Land Manager JBR/aid By Certified Mail Enclosures: Conservation Order No. 468- Falls Creek #1 RD Conservation Order No. 491- Falls Creek #3 Conservation Order No. 472- Susan Dionne #3 Directors Finding & Decision 8-25-04; 8:48AM; ;713 296 2999 # 2/ 13 '*' ~ .. .;¡,-¡ Conservati().1 Order No. 468 ') ) Page lof2 ~ ." . ' STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West Seventh Avenue, Suite 100 Anchorage, Alaska 995~1 Re. THE APPLICATION OF . Marathon Oil Company for an order granting) an exception to the spacing ) Falls Creek #1 RD reqUirements of Regula.tion 20 AAC 25.055 (a)(2) ) Explorato Well to provide ry for the drilling and testing of the) Falls Creek #1 RD expl~ratory wen to a bottom hole) April 4 2002 location ' that is closer than 1500 feet to a ) property line. ) Conservation Order No. 468 IT APPEARING THAT: 1) Marathon Oil Company by letter dated February 8, 2002, and received by the Commission on February 20, 2002, has requested an order allowing a spacing exception in accordance with 20 AAC 25.055(a)(2) for the proposed Falls Creek #1 RD exploratory well. The locations of prospective test intervals within this well may fall within 1500 feet of a property line. 2) The Commission published notice of opportunity for public hearing in the Anchorage Daily News on February 27, 2002, pursuant to 20 AAC 25.540. 3) No protests to the application were received. FINDINGS: 1) The surface location of the Falls Creek #1 RD wen is 18981 FSL & 28851 FEL, Section 6, T1 N, 12W, SM. The anticipated target interval is 1821' FSL & 50251 FEL, Sec. 6, T1 N, 12W, SM. The projected bottom hole location for this deviated well is 1830' FSL & 50251 FEL, Sec. 6, T1N, 12W, SM. 2) Marathon notified all offset owners, landowners, and operators of all wells within 3,000 feet of the Falls Creek #1 RD welL 3) There are no other completed wells or wells capable of producing gas within the same governmental section as the Fans Creek #1 RD Well. 8-25-04; 8:48AM; ;713 296 2999 # 3/ 13 ConservationOrd¿r No. 468 ) ) Page 2of2 '" 4} An eì<èeption to the well spacing provisions of 20 AAC 25.055 (a}(2) is necessary for the drilling of this well. CONCLUSION: 1) Granting a spacing exception to allow drilling of the Falls Creek #1 RD exploratory well promotes efficient exploration and development, and will not result in waste nor jeopardize correlative rights. 2) Before regular production is permitted from the Falls Creek #1 RD well, the Commission must take such action as will offset any advantage which the person securing the exception may have over the other producers by reason of the drilling of the well as an exception, and so that drainage from development units to the tract with respect to which the exception is granted will be prevented or minimized. AS 31.05,1 OO(b). NOW, THEREFORE, IT IS ORDERED: Marathon's application for exception to the well spacing provisions of 20 AAC 25.055 (a}(2) for the purpose of drilling and testing the Falls Creek #1 RD well is approved. The Falls Creek #1 RD well may not be placed on regular production until the Commission takes additional action, upon petition, and after.notice and hearing, to offset any advantage Marathon may have over other owners by reason of drilling Falls Creek #1 RD to the exception location and to allow affected owners to produce their just and equitable share of hydrocarbons. DONE at Anchorage, Alaska and dated April 4, 2002. Cammy Oechsli Taylor, Chair Alaska Oil and Gas Conservation Commission Daniel T. Seamount, Jr., Commissioner Alaska Oil and Gas Conservation Commission Conservation Order Index 8-21-04; 2:17PM; ;713 296 2999 .tUë:1~.l-1j VB cU{U UU~ \....Ul1ìS~::a Vè1L1UU ~...U.uJl111ì)ì)ìS1VU - \....VlIìSC.l Vè1UUlI V.lUCI J."4U. .....7.1 , . ~,) ) # 4/ 5 C è1~C .1 VI ¿. ,('" STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West Seventh Avenue, Suite 100 Anchorage Alaska 99501 Re: THE APPLICATION OF Marathon Oil Company for an order granting an exception to spacing requirements of Title 20 AAC 25.055 to provide for the drilling of the Falls Creek Unit No.3 gas delineation well. ) Conservation Order No. 491 ) ) Marathon Oil Company ) ~ Falls Creek Unit NO.3 ) ) June 16, 2003 ) IT APPEARING,THAT: 1. Marathon Oil Company submitted an application dated May 1, 2003 requesting exception to the well spacing provisions of Title 20 AAC 25.055(a)(2) to allow drilling the Falls Creek Unit No.3, gas delineation well to a location which is within 1500 feet of a property boundary with ownership changes. 2. Notice of opportunity for public hearing was published in the Anchorage Daily News on May 8, 2003 pursuant to 20 AAC 25.540. 3. No protests to the application were received. FINDINGS: 1. The Falls Creek Unit No.3 (FCU 3) gas delineation well will be drilled as a deviated hole with a surface location 2846 feet from the east line and 1643 feet from the south line of Section 6, T1 N R12W, Seward Meridian (8M) to a bottomhole location 2725 feet from the east line and 600 feet from the south line of Section 1 T1 N R13W, SM. 2. Offset landowners, owners and operators within 3,000 feet of the anticipated productive interval of the FCU 3 we] have been notified. 3. No protests to the spacing exception application were received. 4. The location of the FCU 3 well was selected as the most favorable structural position for Tyonek Formation gas reseNes available from the existing Falls creek Unit pad. 5. An exception to the well spacing provisions of Title 20 AAC 25.055 (a)(2) is necessary to allow the drilling of the FCU 3. CONCLUSIONS: 1. The requested spacing exception for the FCU 3 well should be granted, except that the Commission must take such action as will offset any advantage which Marathon Oil Company may have over adjoining owners by reason of the drilling the FCU 3 well as an exception, and so that drainage to the tract with respect to which the exception is granted will be prevented or minimized. 2. Evaluation of the lateral extent of the Tyonek Formation gas reserves in the FCU 3 will be required to insure protection of the correlative rights of adjoining owners. httn./IwUTnl ~t~tp ~k n~l1nr.~lI~kn~ap.~1 A nMTN/np'~/nròp.r~/co/co400 499/co491.htm 8/24/2004 pJãs~~-uj.l af¡9.'J~ 'L:onservauon , :)mmlSSS1On - L:Onservauon uraer l,O. 4"!~ 7' 3 2S6 2SSS rage ¿ df ¿ 5/ 5 , Nf;W, THEREFORE, IT IS ORDERED: 1. Marathon Oil Company's application for exception to the well spacing provision of 20 AAC 25.055(a)(2) is conditionally approved. 2. The FCU 3 well may not be placed on regular production until Marathon Oil Company has evaluated the lateral extent of the Tyonek Formation gas reserves in the FCU 3 and the Commission has been provided that evaluation and has had the opportunity to take additional action to offset any advantage Marathon may have over other owners by reason of drilling FeU 3 to the exception location. DONE at Anchorage, Alaska and dated June 16,2003. Sarah Palin, Chair Alaska Oil and Gas Conservation Commission Randy Ruedrich, Commissioner Alaska Oil and Gas Conservation Commissìon Daniel T. Seamount, Jr.. Commissioner Alaska Oil and Gas Conservation Commission ", " . " . """'~".''''..' ,-"."",,,.,,,,,,"'., -, .. I'i-~~"",'_.....v_...........,...v.'.'''-''. "1"'1"'.",. ConservaLion Order Index .. ,""''''''''''''''''-''''...-.- - . Home Webmaster .-~-_..''''.'''' http:/ fwww.state.ak.us/local/akpages/ADMIN/ogc/orders/co/co400_499/c0491.htm 8/24/2004 ) ') STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West Seventh Avenue, Suite 100 Anchorage Alaska 99501 Re: THE APPLICATION OF Marathon Oil ) Company ("Marathon") for an order granting) an exception to the spacing requirements of ) 20 AAC 25.055(a)(2) to provide for the) drilling and testing of the Susan Dionne #3 ) well in an undefined gas pool. - ) Conservation Order No. 472 Susan Dionne #3 Drilling and Testing June 5, 2002 (Corrected June 19,2002) IT APPEARING THAT: 1. Marathon Oil Company by letter dated March 20, 2002 has requested an order allowing a spacing exception to drill and test the Susan Dionne No.3 well in accordance with 20 AAC 25.055. The projected bottom hole location may fall within 1,500 feet of the property line. 2. The Commission published notice of opportunity for public hearing in the Anchorage Daily News on March 27, 2002, pursuant to 20 AAC 25.540. 3. No protests to the application were received. FINDINGS: 1) The surface location of this well is 194' from the south line (FSL) and 1469' from the east line (FEL) of Section 6, TIS, RI3W, Seward Meridian (SM). The projected bottom hole location for this well is 1964' FSL, 1090' FEL, Section 1, Tl S, RI4W, SM. 2) An exception to the well spacing provisions of 20 AAC 25.055 (a)(2) is necessary for the drilling and testing of this well within 1500' of a property line. 3) The Division of Go vernmental Coordination ha s de termined that the proposed Susan Dionne #3 project does not require a state review for consistency with the Alaska Coastal Management Program. 4) Marathon sent notice of the application for spacing exception by certified mail to all offset owners, landowners, and operators of all properties within 3,000 feet of the proposed Susan Dionne #3 well. ) CONCLUSIONS: ) 1) An exception to 20 AAC 25.055(a)(2) is necessary to allow drilling and testing of the Susan Dionne #3 well. 2) Granting a spacing exception to allow drilling and testing of the Susan Dionne #3 well will not result in waste or jeopardize the correlative rights of adjoining or nearby owners. 3) Before regular production is permitted from the Susan Dionne #3 well, the Commission must take such action as will offset any advantage which the person securing the exception may have over other producers by reason of the drilling and testing of the well as an exception, and so that drainage to the tract with respect to which the exception is granted will be prevented or minimized. AS 31.05.100(b). ' NOW, THEREFORE, IT IS ORDERED: Marathon's application for exception to the well spacing provision of 20 AAC 25.055(a)(2) for the purpose of drilling and testing the Susan Dionne #3 well is approved. The Susan Dionne #3 well may not be placed on regular production until the Commission takes additional action, upon petition, and. after notice and hearing, to offset any advantage Marathon may have over other owners by reason of drilling Susan Dionne #3 to the exception location and to allow affected owners to produce their just and equitable share of hydrocarbons. Corrected at Anchorage, Alaska on June 19,2002. Effective June 5, 2002. ( rku' ~ Cammy Oec i Taylor, Chair ð Alaska Oil an Gas Conservation Commission Daniel T. Seamount, Jr., 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 rehearing must be received by 4:30 PM on the 23rd day following the date of the order, or next working day if a holiday or weekend, to be timely filed. The Commission shall grant or refuse the application in whole or in part within 10 days. The Commission can refuse an application by not acting on it within the 10-day period. An affected person has 30 days from the date the Commission refuses the application or mails (or otherwise distributes) an order upon rehearing, both being the final order of the Commission, to appeal the decision to Superior Court. Where a request for rehearing is denied by nonaction of the Commission, the 30-day period for appeal to Superior Court runs trom the date on which the request is deemed denied (i.e., I Olh day after the application for rehearing was filed). Conservation Order No. 472 Page 2 of2 Effective June 5, 2002 Corrected June 19,2002 ) ) NINILCHIK UNIT THE FIRST EXPANSION OF THE UNIT AREA, FORMATION OF THE FALLS CREEK, GRASSIM OSKOLKOFF, AND SUSAN DIONNE PARTICIPATING AREAS, AND AMENDMENTS TO THE UNIT AGREEMENT FINDINGS AND DECISION OF THE DIRECTOR, DIVISION OF OIL AND GAS, UNDER DELEGATION OF AUTHORITY FROM THE COMMISSIONER STATE OF ALASKA DEP ARTMENT OF NATURAL RESOURCES June 30, 2003 ) I. INTRODUCTION, BACKGROUND AND DECISION SUMMARY.............................. 2 II. APPLICATION FOR THE EXPANSION OF THE UNIT AREA, FORMATION OF THE FALL CREEK, GRASSIM OSKOLKOFF, AND SUSAN DIONNE PARTICIPATING AREAS, AND AMENDMENTS TO THE UNIT AGREEMENT.................................................................................................................... 3 m. DISCUSSION OF DECISION CRITERIA...... ............ ........... ..... .................. ......... ............ 5 A. Decision Criteria considered under 11 AAC 83.303(b) ..........................................6 1. The Environmental Costs and Benefits of Unitized Exploration and Development ............................................................................................... 6 The Geological and Engineering Characteristics of the Proposed Expansion Area and Participating Areas, and Prior Exploration Activities in the Unit Area............................................................................................... 7 Further Plans for Exploration or Development for the Participating ........... Areas. . . . .. .. . . . . . .. . . . .. . . . . .. . . . .. . .. . .. .. . . . . .. .. . . . . . . . .. . . . . . .. .. . . . . .. . . . . . . . . .. .. . . . . . .. . .. . . . . .. . . . . . .. 12 The Economic Costs and Benefits to the State and Other Relevant ............ Factors. . .. . . . . . . . .. .. . . . . . . . . . . . . . . . . .. . .. . . . . .. .. . .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . .. . . .. . . . . .. .. . . . . . . . . . . . . .. 14 Decision Criteria considered under 11 AAC 83.303(a) ........................................ 15 1. Promote The Conservation of All Natural Resources ............................... 15 2. The Prevention of Economic and Physical Waste..................................... 16 3. The Protection of All Parties of Interest, Including the State.................... 17 Amendments to the Ninilchik Unit Agreement..................................................... 17 2. 3. 4. B. C. IV. FINDINGS AND DECISION ....... ............ ............................................................... ......... 18 ') ) I. INTRODUCTION, BACKGROUND AND DECISION SUMMARY On March 14, 2003, Marathon Oil Company (Marathon), as Operator, and majority working interest owner in the Nini1chik Unit, applied to the Department of Natural Resources, Division of Oil and Gas (Division) to expand the Ninilchik Unit to encompass the Falls Creek Unit area, form the Falls Creek, Grassim Oskolkoff and Susan Dionne Participating Areas within the existing and expanded Ninilchik Unit, and amend the Nini1chik Unit Agreement (Application). Simultaneous with the Application, Marathon and Union Oil Company of California (Unocal), as 75 percent of the working interest in the Falls Creek Unit, requested that the U.S. Department of the Interior, Bureau of Land Management (BLM) approve Marathon and Unocal's decision to voluntarily terminate the Falls Creek Unit Agreement in order to allow for expansion of the Ninilchik Unit to encompass the area embraced within the Falls Creek Unit. Marathon requested that the BLM's approval of the termination of the Falls Creek Unit take effect contemporaneously with the Division's approval of its proposed expansion of the Nini1chik Unit Area. The geographic area of the Falls Creek Unit is wholly within the Ninilchik Unit. At the time Marathon proposed the Ninilchik Unit in 2001, it requested that the Falls Creek Unit remain in effect pending the outcome of the Ninilchik Unit Initial Plan of Exploration. The Falls Creek Unit remained as a separate unit within a unit. Given the success of the Initial Plan of Exploration, Marathon and Unocal now request the termination of the Falls Creek Unit in order to form the Falls Creek Participati~g Area within the expanded Ninilchik Unit. Marathon provided geological, geophysical, and engineering data supporting the formation of the three participating areas within the Nini1chik Unit. The submitted data justifies the formation of the Falls Creek Participating Area (Falls Creek PA), the Grassim Oskolkoff (GO PA) and the Susan Dionne Participating Area (Susan Dionne P A). The data indicate that the upper Tyonek Formation within the three participating areas is capable of producing or contributing to the production of hydrocarbons in paying quantities. The Application also proposed two amendments to the Ninilchik Unit Agreement (Agreement) by the majority working interest owners in the Nini1chik Unit. The Agreement is based on DNR's State Only Royalty Owner model unit agreement form dated April 2001 (Model Form). At the time Marathon proposed the Ninilchik Unit in June 2001, it submitted the Model Form for the Ninilchik Unit Agreement with no modifications. The Division approved the Agreement on October 30, 2001. Subsequent to the approval of the Agreement, Marathon and the Division noted an error and an omission in the Agreement and Model Form. The proposed amendments to the Agreement address the error and omission. After reviewing the Agreement, the latest Model Form dated April 2002, and the most current lease form for the most recent leases within the unit acquired in the Cook Inlet Areawide 2002 sale, the Division proposed, and the majority owners accepted, a third amendment to the Agreement to further harmonize the terms and conditions of the latest lease form within the unit to the Agreement. The proposed third amendment is taken from the April 2002 Model Form. For the reasons set out in this Findings and Decision, the Division approves the expansion of the Nini1chik Unit to include the Falls Creek Unit Area, subject to the BLM's approval to terminate the 2 ) ') Falls Creek Unit Agreement. The Division approves the proposed amendments to the Agreement. The modifications to the Agreement are necessary and advisable to protect the public interest. In addition, the Division approves Marathon's application to form the Falls Creek P A, the GO P A and the Susan Dionne P A subject to Marathon drilling the Marathon Falls Creek #3 (MFC3) Well in 2003, the Marathon Nini1chik State #1 (MNSl) Well by 2005, and the Marathon Susan Dionne #2 (MSD2) Well by 2005. If the wells are not timely drilled, the areas later specified in this document will automatically contract out of the appropriate participating area and the tract allocation schedule for the participating areas will be subject to a re-determination to the first date of production. The three participating areas are limited to the acreage proposed by Marathon because that acreage is "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." 11 AAC 83.351(a). If additional data are. obtained or submitted in the future, the boundaries of the three participating areas may be revised. The Division also approves the tract allocation schedule for the three participating areas, Attachments 2 through 4 to this Findings and Decision. The tract allocation schedules adequately allocate production and costs among the leases in the three participating areas. Under Article 13.1 and Article 14.1 of the Agreement, respectively, the effective date of the unit expansion and unit agreement amendments is July 1, 2003. Under Article 9.5 of the Agreement, the effective date of the Falls Creek P A, GO P A and Susan Dionne P A, and their respective tract allocation schedules, is July 1, 2003. II. APPLICATION FOR THE EXPANSION OF THE UNIT AREA, FORMATION OF THE FALL CREEK, GRASSIM OSKOLKOFF, AND SUSAN DIONNE PARTICIPATING AREAS, AND AMENDMENTS TO THE UNIT AGREEMENT Marathon requested approval by the BLM to terminate the Falls Creek Unit, and simultaneously applied to the Division to expand the Nini1chik Unit to include the Fall Creek Unit Area, on March 14, 2003. The WIGs in the expansion area leases are Marathon, Unocal and ConocoPhillips Alaska, Inc. A map of the current Falls Creek Unit and schedule setting out the ownership interests in those leases within the unit is Attachment 1 to this document. This map and schedule also depict the lands proposed for the Nini1chik Unit expansion. The proposed Ninilchik Unit expansion area covers approximately 630.15 acres, and the total unit area after the expansion would be approximately 25,797.15 acres. With the application to expand the Ninilchik Unit, Marathon also applied to form the Falls Creek P A, the GO P A and Susan Dionne P A within the expanded Ninilchik Unit. The acreage within the proposed participating areas encompasses the intervals within the upper Tyonek Formation, which Marathon purports are capable of producing or contributing to the production of hydrocarbons in paying quantities. The proposed vertical definition for the Falls Creek P A includes the reservoir portions of the upper Tyonek Formation within the proposed participating area. The type log for the Falls Creek PAis the Marathon Falls Creek # 1 RD Well. The proposed Falls Creek P A encompasses approximately 988.68 acres, and a map of the Falls Creek P A and schedule setting out the ownership interests and 3 ) ) tract participation factors for the participating area are Attachment 2 to this document. The proposed vertical definition for the GO P A includes the reservoir portions of the upper Tyonek Formation within the proposed participating area. The type log for the GO PAis the Marathon Grassim Oskolkoff #1 (MG01) Well. The proposed GO PA encompasses approximately 1920 acres, and a map of the GO P A and schedule setting out the ownership interests and tract participation factors for the participating area are Attachment 3 to this document. The proposed vertical definition for the Susan Dionne P A includes the reservoir portions of the upper Tyonek Formation within the proposed participating area. The type log for this participating area is the Marathon Susan Dionne #3 (MSD3) Well. The proposed Susan Dionne P A encompasses approximately 1760.57 acres, and a map of the participating area and tract participation factors for the participating area are Attachment 4 to this document. Marathon submitted several attachments in support of the Application: (1) a proposed initial plan of development for each of the participating areas; (2) a map and legal description of the leases proposed for the three participating areas; (3) geological, geophysical and engineering data supporting the three participating areas; (4) the initial tract participation schedules for each participating area; and (5) a copy of the Ninilchik Unit Operating Agreement. Marathon submitted geological evidence to support the formation of the three participating areas to develop the various gas-bearing reservoirs of the upper Tyonek Formation within each proposed participating area under a unified plan of development. A 3-D seismic program is planned for the Ninilchik Unit area in late 2003 that will cover the Susan Dionne P A, the GO P A and the southern part of the Falls Creek P A. Marathon expects to drill the MNS 1 and the MSD2 Wells in 2004 or 2005 in the GO P A and the Susan Dionne P A, respectively. Marathon expects to drill the MFC3 Well within the Falls Creek PA this summer. Production facilities and the Kenai-Kachemak Pipeline are currently under construction to process and transport the gas from the proposed three participating areas. First gas production is anticipated in the third quarter 2003. Finally, Marathon proposed two amendments to the Agreement. First, delete the following sentence of the Recitals Provision of the Agreement: "All working owners of the Leases that are subject to this Agreement are parties to this Agreement." Second, add the following paragraph as Article 3.8 to the Agreement: "All data and information determined by the Commissioner to be necessary for the administration of this Agreement or for the performance of statutory responsibilities shall be provided by the Unit Operator, or Working Interest Owners, or both upon written request. All data and information provided to the Commissioner shall be protected from disclosure pursuant to the Lease, governing law, and regulations." After receipt of the Application, the Division proposed a third amendment to the Agreement as follows. Add the following paragraph as Article 12.4.1 to the Agreement: ''Notwithstanding any contrary Lease term or provision in 11 AAC 83.228-11 AAC 83.229, all royalty deductions for transportation, including marine and pipeline transportation, from the Unit Area to the point of sale are limited to the actual and reasonable costs incurred by the Working Interest Owners. These transportation costs must be determined by taking into account all tax benefits applicable to the transportation." 4 ') The Division determined that the Application was complete and published a public notice in the "Anchorage Daily News" and in the "Peninsula Clarion" on March 30, 2003, as required by 11 AAC 83.311. Copies of the public notice were also provided to interested parties in conformance with 11 AAC 83.311. The Division provided copies of the public notice to the Kenai Peninsula Borough, City of Kenai, Ninilchik Native Assn., Salamatoff Native Assn., Cook Inlet Region Corporation, and other interested parties. The Division also provided public notice to the Alaska Department of Environmental Conservation (DEC), Alaska Department of Fish and Game (ADF&G), and the Alaska Oil and Gas Conservation Commission (AOGCC). The public notices invited interested parties and members of the public to submit comments by April 29, 2003. The Division received two comments from the public, interested parties, or state or local agencies during the 30-day public comment period. An April 25, 2003 comment from the Kenai Peninsula Borough Coastal District (KPBCD) Coordinator stated that the Kenai Peninsula Borough Coastal Management Plan (KPBCMP) recognizes designated critical habitat areas, and that the oil and gas industry has consistently expressed interest, and requested exemptions from buffer distances from the Clam Gulch Critical Habitat Area as it has explored for and developed resources near this area. The KPBCMP comment recommended that permits for oil and gas development in the Ninilchik Unit be required to maintain the buffer for the critical habitat area. A subsequent letter from the Kenai Peninsula Borough Mayor, received on May 21, 2003, stated that the issues addressed and the comments offered by the KPBCD Coordinator involved matters of environmental permitting and were not relevant to the topic of unitization, and are not part of the responsibilities of the Coastal District as a matter of policy. The letter went on to state that the KPB does not object to the proposed Ninilchik Unit expansion. The second comment was received from Paul L. Craig, Manager PLC, LLC on April 29, 2003. PLC, LLC is the owner of a 2 percent overriding royalty interest in ADL 384314, a state lease contiguous with the northern boundary of the proposed Falls Creek P A. PLC, LLC supports the formation of the proposed Falls Creek P A. However, PLC, LLC requested that the Division carefully review all available geological and geophysical data defining the boundaries of the proposed Falls Creek PA, especially the northern boundary abutting ADL 384314. PLC, LLC's comments are addressed in section rn.A.2 of this Findings and Decision. III. DISCUSSION OF DECISION CRITERIA The Commissioner of the Department of Natural Resources (Commissioner) reviews unit-related applications, including expansion of units and the formation of participating areas, under 11 AAC 83.303--11 AAC 83.395. By memorandum dated September 30, 1999, the Commissioner approved a revision of Department Order 003 and delegated this authority to the Director of the Division of Oil and Gas (Director). The Division's review of the Application is based on the criteria set out in 11 AAC 83.303 (a) and (b). A discussion of the subsection (b) criteria, as they apply to the application, is set out directly below, followed by a discussion of the subsection (a) criteria. 5 ) ) A. Decision Criteria considered under 11 AAC 83.303(b) 1. The Environmental Costs and Benefits of Unitized Exploration and Development DNR considered environmental issues in the lease sale process, the initial unitization process for the unit area leases, this unitization process, and will review them again during the unit plan of operations approval process. Unitized exploration, development, and production minimize surface impacts by consolidating facilities and reducing activity in the field. The Initial Ninilchik Unit Plan of Exploration (POE) required the drilling of new exploratory wells and the workover of other wells within the unit area. The unit operator is required to obtain DNR's approval of a unit plan of operations and permits from various state and federal agencies before beginning operations, including exploratory wells and surface pad construction, within the unit area. A unit plan of operations provides a more detailed plan for surface activities incident to exploration and development of the unit area than does a POE or a plan of development (POD). When the unit operator begins the permitting process to commence operations under a POE or POD in a coastal area, it must submit a Coastal Project Questionnaire, permit applications, and supporting information to the appropriate state and federal agencies 1. The coordinating agency, in the case of a plan of operations, the DNR, issues a public notice and circulates the project to federal, state, and local agencies and the public for comments. The review will follow either a 30- day or 50-day schedule. The review participants, the various agencies and public, will have the opportunity to request additional information and submit comments. After reviewing the comments, the coordinating agency crafts additional mitigation measures as needed to ensure the proj ect is consistent with the Alaska Coastal Management Program and the KPBCMP. Any alternative measures are included in a Proposed Consistency Response. If the proposed response is acceptable to the agencies and the applicant, the DNR will issue a Final Consistency Response and the permits for the project can be issued by the appropriate agencies. When reviewing a proposed unit plan of operations, the Division considers whether the project complies with the mitigation measures contained in the most recent Cook Inlet Areawide oil and gas lease sale, site specific conditions, uses, or resources, and the rights of the surface owner if the state does not own the surface. If the operator and the surface owner have not come to an agreement for the payment of damages the operator may be required to post a bond an additional bond. DNR, DEC, and AOGCC have bonding and financial responsibility requirements to ensure performance by the operator and reclamation of the area. 11 AAC 96.060; 18 AAC 75; 20 AAC 25.025. Any new exploration and development activity that may occur following unitization must be consistent with the ACMP, and comply with DNR management objectives. 1 As a result of Executive Order 106, the Alaska Coastal Management Program (ACMP) moved from the Office of the Governor to the Department of Natural Resources (DNR) effective April 15, 2003. The policies and procedures of the ACMP remain the same at this time. State staffs, who implemented and managed the ACMP under the Division of Governmental Coordination (DGC) in the Governor's Office, are now employees in the Office of Project Management and Permitting (OPMP) within the Office of the DNR Commissioner. 6 ') ') State unitization regulations require the Commissioner to approve a Plan of Operations before the unit operator performs any field operations on the surface. 11 AAC 83.346. A proposed Plan of Operations must describe the operating procedures designed to prevent or minimize adverse effects on natural resources. When a unit operator proposes to explore or develop the unit area and submits a Unit Plan of Operations, the DNR will ensure that it complies with the lease stipulations and lessee advisories developed for the most recent Cook Inlet Areawide lease sale. The approval of the Nini1chik Unit expansion and formation of the three participating areas itself has no environmental impact. The unit expansion and participating area formation do not entail any environmental costs in addition to those that may occur when permits to conduct lease-by-lease exploration or development are issued. The Commissioner's approval of the unit expansion and participating area formation is an administrative action that does not convey any authority to conduct any operations on the surface within 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. DNR's approval of the Unit Plan of Exploration or Plan of Development is only one step in the process of obtaining permission to drill a well or wells or develop the known reservoirs within the unit area. The Unit Operator must still obtain approval of a Plan of Operations from the state, and permits from various agencies on state leases before drilling a well or wells or initiating development activities to produce known reservoirs within the unit area. With regard to the specific surface activities proposed for each of the participating areas, Marathon applied for permits and authorizations for the pads and wells for each participating area as well as the lateral flowline connections to the Kenai-Kachemak Pipeline and production facilities on the development pads from the various federal, state, and local agencies. Marathon has already received the permits and authorizations necessary for these activities. A copy of the Marathon's permit applications, the Final Consistency Determination with the ACMP for the projects, and the DNR approval of the Plan of Operations are available at the Division's Anchorage office. 2. The Geological and Engineering Characteristics of the Proposed Expansion Area and Participating Areas, and Prior Exploration Activities in the Unit Area Marathon submitted geological, geophysical and engineering data for each of the three proposed participating areas. These data included: a report defining the geology of the gas bearing reservoirs in each of the participating areas; structure maps on two horizons; separate net pay maps for each of the gas sand intervals within each participating area; a composite net pay map; structural well-log cross section through the upper Tyonek Formation; seismic lines; and well test results for the recently drilled wells within each participating area. A 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 the production of hydrocarbons in paying quantities. 11 AAC 83.351(a). "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 as a whole may ultimately 7 ) ') 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. 11 AAC 83.395(4). A participation area application must be evaluated under these standards, as well as those of 11 AAC 83.303. The expanded Ninilchik Unit will encompasses approximately 25,797 acres that overlie the Ninilchik anticline. The anticline fold axis trends approximately parallel to the Kenai Peninsula coastline for over 16 miles from near the community of Clam Gulch to just north of the town of Ninilchik. Shallowest in the south, it plunges to the north and is segmented by a number of crosscutting faults along the crest of the structure. These faults are believed to form part of the reservoir trap mechanisms in the three proposed participating areas. The surface expression of the anticline is visible along the cliffs that crop out along the coast. The Ninilchik anticline was recognized as a highly potential exploration target in the late 1950s and was mapped in the subsurface with the seismic, gravity, and magnetic tools available at the time. Fourteen exploration wells have been drilled on this structure since Standard Oil of California (SOCAL) first drilled there in 1961 (Table 1). The SOCAL Falls Creek #1 (SFC1) well was the first well drilled to test the promising anticlinal structure. Although the primary exploration objective was oil, none was found. However, gas was discovered in the upper Tyonek Formation in four sandstone zones and the SFC 1 was completed as a gas well in 1961. The SFC 1 was later plugged and abandoned because the estimated size of the accumulation did not justify the cost of facilities and transportation. Unocal drilled the Unocal Ninilchik 1 well in 1962 and tested gas in two Tyonek Formation zones. Between 1964-1978 six exploration wells were drilled with oil and gas objectives: the Mobil Ninilchik #1, SOCAL Falls Creek #2, Falls Creek #43-6, Brinkerhoff Ninilchik #1, Unoca1 Clam Gulch #1, and Texaco Ninilchik #1. All six of these wells were plugged and abandoned as dry holes without testing the upper Tyonek Formation. In 1979 the Texaco Nini1chik #1 well was drilled and flow tested gas from one upper Tyonek interval. Marathon drilled the Corea Creek #1 well in 1996, and drill stem tested four intervals within the upper Tyonek, recovering minimal gas with water. The results of the well verified and delineated the size of the Falls Creek reservoir. Table 1. Chronological list of exploration wells drilled on the Nllrilcllik anticline. Completion Total Date Status1 Depth2 04/24/1961 P&A-G 13,795 12/02/1962 P&A-G 14,940 OS/22/1964 P&A 12,722 07/18/1966 P&A 8,256 04/09/1973 P&A 8.400 02/25/1974 P&A 13,082 08/24/1978 P&A 14.200 Operator SOCAL UNOCAL Mobil SOCAL SOCAL Brinkerhoff UNOCAL Well Name & No. Falls Creek # 1 Ninilchik #1 Ninilcllik #1 Falls Creek #2 Falls Creek #43-6 Ninilchik #1 Clam Gulch #1 Location3 01-TIN-R13W SM 06-TlS-R13W SM 24-TlS-R14W SM 22- TIN-R13W SM 06-TIN-R12W SM 21-TlS-R13W SM 28-T2N-R12W SM API Number 501331000500 501331000200 501331000300 501331000600 501332024900 501332024300 501332031600 8 ') ) Texaco Ninilchik #1 08/30/1979 P&A-G 12.903 22-T1N-R13W SM 501332032600 Marathon Corea Creek #1 05/31/1996 P&A-G 9.738 12-T1N-R13W SM 501332046700 . Marathon GrassimOskolkoff#1 07/31/2001 GAS 11.600 30-T8N-R13W SM 501332049300 Marathon Grassim Oskolkoff#2 11/29/2001 GAS 12.026 19-T9N-R13W SM 501332050300 Marathon Susan Dionne #14 01/23/2002 GAS 7.430 06-T1S-R13W SM 501331000201 Marathon Falls Creek Unit #1RD 04/09/2002 GAS 8.900 06-T1N-R12W SM 501331000501 Marathon Susan Dionne #3 07/03/2002 GAS 10.255 01-T1S-R13W SM 501332051200 1. GAS - completed as a gas production well; P&A - plugged and abandoned; P&A-G - plugged and abandoned with gas show(s). 2. Total depth shown here is measured depth (MD) in feet. 3. Location shown here is bottom hole location only. Many wells are directionally drilled from a different surface location. 4. Susan Dionne #1 was previously known as Alaskan Crude Corp. McCoy Prospect #1. Recently, Marathon has re-examined the area with new seismic and drilling technology. Because the crest of the structure parallels the coastline, acquiring quality seismic data along the intertidal transition zone between the offshore marine and coastalland has always been a difficult, technically challenging and costly problem. In May 2001, Marathon acquired three high quality 2D seismic lines over the southern end of the structure and along the crest of the structure to help delineate potential exploration targets, especially along the crest of the anticline and the area south of the Falls Creek P A. Marathon has reprocessed these data to identify additional well locations in the Ninilchik Unit and to delineating the structure and reservoir limits for the proposed participating areas. The Susan Dionne Participating Area The Susan Dionne PA reservoir was discovered in 1962 when the UNOCAL Ninilchik #1 (UN1) tested gas from upper Tyonek Formation sand at 3,776 feet MD. The UN1 discovery was estimated at the time to be too small for development and was plugged and abandoned until 1985 when the UN1 was sidetracked. The sidetrack, named Alaskan Crude Corporation McCoy Prospect #1, was completed in 1986 and produced gas from upper Tyonek Formation sand, at 3,776 feet MD. Commercial production was never established from this sidetrack and the well was shut in. In 2001, Marathon took over operations for the sidetrack and renamed it the Marathon Susan Dionne #1 (MSD1). During the workover, several sands were identified in the well. One of these sands near the bottom of the Susan Dionne P A reservoir was tested and is reasonably known to be capable of producing in paying quantities. The MSD 1 was then recompleted as a gas well in the Susan Dionne PA reservoir. The MSD3 Well was completed as a gas producer in 2002, and confirmed the presence of gas found in the MSD 1. A permit-to-drill has been issued for the MSD2 at a location north of the MSD3, but that well has not been drilled to date. The Susan Dionne PA reservoir is defined as the interval between the depths of5,323 and 10,010 feet measured depth (MD) in the MSD3 type log, and comprises multiple sand intervals in the upper Tyonek Formation. The reservoir structure consists of a faulted anticline defined by three- way dip closure on the northwest, northeast and southeast. Closure on the southwest is by fault seal crosscutting perpendicular to the axial trend of the Ninilchik anticline isolating this reservoir from the southward extension of the anticlinal trend. Closure may also exist in a similar fashion on the north. The Susan Dionne P A reservoir sands are interbedded with silt, clay and coal and 9 ) ') were deposited in a fluvial environment. Grassim Oskolkoff Participating Area Exploration drilling in the GO P A began in 1966 with the drilling of the SOCAL Falls Creek #2, which was drilled to delineate the gas discovery at SOCAL Falls Creek #1. No tests were conducted on the GO P A reservoir sands and the well was plugged and abandoned. Gas was discovered in the GO PA reservoir in 1979 with the drilling and testing of the Texaco Ninilchik #1 (TN 1 ). The TNl was drilled to test the oil potential of the Hemlock Conglomerate. Eight intervals were tested from the upper Tyonek Formation through the Hemlock Conglomerate. The results were not encouraging enough for development, and the well was plugged and abandoned. Marathon planned to reevaluate the potential of the upper Tyonek Formation with the drilling and testing of the MGOl Well in 2001. The MGOl encountered several sands in the GO PA reservoir interval and one of these sands near the bottom of the GO P A reservoir was tested and is reasonably known to be capable of producing in paying quantities. The MGOl was then completed as a gas well in the GO PA reservoir. The Marathon Grassim Oskolkoff #2 (MG02) well in 2001 confirmed the gas-bearing intervals found in MGO 1. A permit-to-drill has been issued for the MNS1, south ofMG02, but that well has not been drilled to date. The GO P A reservoir is defined as the interval between the depths of 5,965 and 10,250 feet measured depth (MD) in the MGOl well type log, and is composed of multiple sand intervals in the upper Tyonek Formation. The reservoir structure consists of a faulted anticline defined by three-way dip closure on the southeast, southwest, and northwest. Closure on the northeast is by fault seal crosscutting perpendicular to the axial trend of the Ninilchik anticline. Closure may also exist in a similar fashion on the south. Deposited in a fluvial environment, the GO P A reservoir sands are interbedded with silt, clay and coal and are commonly laterally discontinuous. Consequently, and as is the case here, additional well and seismic data are often required to demonstrate reservoir continuity and communication for final determination of a P A. The proposed MSNl well is required for that purpose. Falls Creek Participating Area The Falls Creek PA was discovered in 1961 with the drilling of the SOCAL Falls Creek #1 (SFC1). The planned objective of this well was oil in the Hemlock Conglomerate. No oil was found in the Hemlock, but gas was discovered in the upper Tyonek Formation. Four Tyonek Formation sands were tested with individual flow rates of 30,000 to 2 million cubic feet per day. The well was completed in upper Tyonek Formation sand between 7,562-7,600 feet MD. In February 1964, the Falls Creek #1 well was certified as the discovery well, which established gas in commercial quantities in the Tyonek Formation. SOCAL followed the discovery by drilling two delineation wells as dry holes. The SFC2, referenced above, was drilled more than four miles south, in what is now the proposed GO P A. The SOCAL Falls Creek #43-06 was drilled in 1973, but results were negative and the well was not tested. Marathon drilled the Corea Creek Federal #1 as a dry hole in 1996. The Falls Creek PA reservoir is defined as the interval between the depths of 5,513 and 8,900 10 ) ") feet measured depth (MD) in the Marathon Falls Creek #lRD well type log, and is composed of multiple sand intervals in the upper Tyonek Formation. The reservoir structure consists of a faulted anticline defined by four-way dip closure on the southeast, southwest and northwest. Closure on the northeast is by fault seal crosscutting perpendicular to the axial trend of the Ninilchik anticline. A fault crosscutting perpendicular to the axial trend of the Nini1chik anticline may also limit the extent of the reservoir on the south. The Falls Creek P A reservoir sands, interbedded with silt, clay and coal, were deposited in a fluvial environment and are commonly laterally discontinuous. Consequently reservoir continuity is sometimes difficult to determine. Marathon based the Falls Creek P A boundary on their interpretation of the Lowest Known Gas (LKG) in each of the mapped sandstones of the upper Tyonek Formation within the participating area. Marathon's interpretation of the data has shown that the area included in the proposed Falls Creek P A is reasonably known to be underlain by hydrocarbons and known or reasonably estimated to be capable of producing or contributing to production of hydrocarbons in paying quantities. Based on other available data, the Division has some concerns regarding Marathon's interpretation of the southwest part of the proposed Falls Creek P A. The Division is including the acreage in question contingent on Marathon's drilling of the MFC3 Well to the permitted bottomhole location by July 2003 and having the well's results ultimately determine the configuration of the Falls Creek P A before first gas into the Kenai-Kachemak Pipeline. The lands in question are described in Attachment 2 as Ninilchik Unit Tract 3 (ADL 389727) within TIN, R13W, S.M. During the 30-day public comment period, the Division received a comment from PLC, LLC requesting scrutiny of the geological and geophysical data that define the area abutting the northern boundary of the proposed Falls Creek P A. The Division did not receive any geological, geophysical or engineering data with the comment from PLC, LLC. The comment was general and did not identify specific technical issues for the Division to investigate. To address this comment the Division reviewed data and interpretations submitted by Marathon and other working interest owners in the Falls Creek Unit, publicly available data, and other confidential data available to the Division. The northern boundary of the proposed Falls Creek PA is controlled by the areal extent of the LKG in the upper Tyonek Formation reservoir intervals. Based on all the data and interpretations available to the Division, all sand intervals of the upper Tyonek that are gas-bearing within the proposed Falls Creek P A, are below the depth ofLKG and are not gas-bearing outside of the proposed participating area northern boundary. The northern limit of the Falls Creek P A reservoir is determined by the Division to be contained completely inside the proposed participating area. Therefore, the area outside the proposed Falls Creek P A to the north is not included because that area is not underlain by hydrocarbons and known or reasonably estimated to be capable of producing or contributing to the production of hydrocarbons in paying quantities. In summary, there is some uncertainty as to the areal extent of the gas-bearing reservoirs of the upper Tyonek Formation within the southwestern part of the proposed Falls Creek P A. Subject to the terms and conditions set out in Section ill.A.3, Marathon's proposed drilling schedule outlined in the plan of development for each participating area, justifies the size of the three proposed participating areas. Delineation drilling will define whether the gas-bearing reservoirs 11 ') ') of the upper Tyonek sands extend onto the lands in question. The Division plans to closely evaluate results from the MFC3 well to determine whether the structure persists and the reservoir is present in the southwest portion of the proposed Falls Creek P A. There is some uncertainty regarding how abruptly the Ninilchik anticline plunges to the southwest and extent and continuity of the intra-reservoir sand intervals. If the results of the MFC3 well indicate that the structure plunges more abruptly on the southwest than Marathon currently believes, or the results of the MFC3 well indicate that the intra-reservoir sand intervals are not continuous, the Falls Creek P A boundary may contract. Marathon has reasonably demonstrated by geological, geophysical, and engineering data that the upper Tyonek Fonnation within the proposed participating areas contains commercial hydrocarbons. Results of development drilling within the participating areas, especially the Falls Creek P A, will delineate the geometry and distribution of the individual Tyonek gas-bearing reservoirs and more accurately define their true lateral extent. 3. Further Plans for Exploration or Development for the Participating Areas The mitial Ninilchik Unit Plan of Exploration (PO E), approved on October 30,2001, and effective until December 31, 2004, set out a timely sequence of reservoir delineation activities that was designed to facilitate the ultimate development and production of any gas reservoirs discovered within the unit area. As described above, these initial activities discovered sufficient volumes of gas within the Ninilchik Unit to justify the design and construction of the Kenai-Kachemak Pipeline (KKPL), a 33-mile, 12-inch diameter pipeline that will generally follow the Sterling Highway between Kenai and Ninilchik. First shipments of gas on KKPL are expected in the August- September 2003 timeframe from the Falls Creek #IRD well, the MG01 and MG02 wells, and the MSD3 well. In addition to the start-up of production from each of the three participating areas, the Initial Plans of Development (POD) submitted by Marathon for each of the three participating areas includes the following: (1) Marathon plans a 3D seismic program for the Ninilchik Unit in late 2003, which will cover the Susan Dionne P A, the GO P A, and the southern portion of the Falls Creek P A; and (2) following the interpretation of the 3D seismic data, Marathon expects to drill the Susan Diane #2 in the Susan Dionne PA and the MNS1 in the GO PA in either 2004 or 2005, and another well in the Falls Creek P A, MFC3, is planned for this July. Representations made to the Division indicate that the MFC3 well will be drilled in July 2003, and the well information will be made available before first gas production is delivered to the KKPL. Based on this representation, the Division and the majority working interest owners, Marathon and Unocal, have agreed that the well data will be made available to the Division for its review before first gas is delivered to the KKPL. The Division, in its sole discretion, will determine whether or not the southwest Falls Creek P A lands in question are appropriate for continued inclusion in the participating area. If the MFC3 well information is not available before first gas is delivered to the KKPL, the southwest Falls Creek P A lands in question will remain in the participating area until December 12 ') 31, 2003, unless the Commissioner, in his sole discretion, decides otherwise. The finally determined Falls Creek P A and the tract allocation schedule for those participating lands will be re-determined retroactive to the first day of production from the participating area. Any imbalances created by the retroactive adjustments of the Falls Creek P A tract participation schedule will be made from production of Unitized Substances from the Falls Creek P A after the effective date of the revised tract participation schedule. Marathon proposed the areal extent of GO P A to produce the gas reservoirs of the upper Tyonek Formation from the MGOl and MG02 wells, and the permitted, but not yet drilled, MNSl well. The areal extent of the GO P A is acceptable to the Division only if the MNS 1 is drilled to its proposed bottomhole location and produces the known gas reservoirs from the southern part of the participating area2. The Division, Marathon, and Unocal have agreed that failure to drill the MNS 1 well and commit to connect the well to the KKPL, prior to December 31, 2005, will cause an automatic contraction of the GO P A as to the identified lands. Marathon shall provide the Division with notice of the MNS 1 well drilling and the decision to produce or not produce the well to the KKPL. As with the Falls Creek P A, the tract allocation schedule for the contracted GO P A will be re-determined retroactive to the first day of production from the participating area, and any imbalances created by the retroactive adjustments of the revised GO P A areal extent and tract allocation schedule will be made from production of Unitized Substances from the GO P A after the effective date of the revised tract allocation schedule. Similarly with the Susan Dionne P A, Marathon proposed its areal extent to produce the gas reservoirs of the upper Tyonek Formation from the MSD3 well, and the permitted, but not yet drilled, MSD2 well. The proposed Susan Dionne P A is acceptable to the Division only if the MSD2 well is drill to its proposed bottomhole location and produces the known gas reservoirs from the northern part of the participating area3. The Division, Marathon, and Unocal have agreed that failure to drill the MSD2 well and commit to connect the well to the KKPL, prior to December 31, 2005 will cause an automatic contraction of the participating area as to the identified lands. Marathon shall provide the Division with notice of the MSD2 well drilling and the decision to produce or not produce the well to the KKPL. As with the other two participating areas, the tract participation schedule for the contracted Susan Dionne P A will be re-determined retroactive to the first day of production from the participating area, and any imbalances created by the retroactive adjustments of the revised Susan Dionne P A tract participation schedule will be made from production of Unitized Substances from the Susan Dionne P A after the effective date of the revised tract participation schedule. The currently proposed drilling schedule justifies the size of the three participating areas. The planned 3D seismic program and the delineation drilling will define whether commercially producible gas-bearing reservoirs of the Tyonek Formation extend onto the lands in question. 2 The southern parts of the GO P A are the lands described in Attachment 3 for Section 27 of ADL 384305 (NU Tract 4), and Section 28 of ADL 389180 (NU Tract 6). 3 The northern part of the Susan Dionne PA is NU Tract 6 (ADL 389180) described in Attachment 4. 13 ') ') 4. The Economic Costs and Benefits to the State and Other Relevant Factors Approval of the three participating areas will provide near-term economic benefits to the state by creating jobs associated with the construction of the KKPL, production facilities and operation of each participating area, and the further delineation of the hydrocarbon potential of the tracts within the participating areas. The state will also benefit from each participating area's further plan of development, which proposes to maximize the physical recovery of hydrocarbons from all the gas-bearing reservoirs of the upper Tyonek within each participating area. Maximum hydrocarbon production will enhance the state's long-term royalty and tax revenues. The working interest owners have provided sufficient technical data to define the prospects under consideration, have committed their diverse lease interests, and have agreed to a further plan of development, which ensures a timely sequence of drilling and development activities to evaluate and develop all the leases in the participating areas. Marathon submitted an allocation of production and cost schedule for the individual tracts/leases in the three proposed participating areas (Attachments 2 through 4 to this Findings and Decision) as required by 11 AAC 83.371. The proposed allocation distributes expenses and production among the tracts/leases in each participating area on a surface acreage basis. Each participating area is defined by the surface acreage covering the anticipated productive area. Since the gas-bearing Tyonek reservoirs are stacked sandstone bodies, the composite area of the reservoirs, which is controlled by structure and sandstone distribution, is summed together to define the outline of each participating area. Based on the above and the terms and conditions imposed in Section m.A.3 that the areal extent and tract allocation schedule for the tracts within each participating areas may be adjusted by the non-drilling of required wells, Marathon's tract allocation schedule is acceptable for allocating production and costs among the leases within the participating areas. Surface acreage as the basis for tract allocation for the tracts within the participating areas is a long-established allocation methodology for gas reservoirs. There are some potential economic costs associated with the participating areas. All the State of Alaska leases within the three participating areas reserve a 12.50/0 royalty to the state, except that the state's royalty share from the leases within the Falls Creek PAis subject to AS 38.05180(t)(5). AS 38.05.180(t)(5) entitles the lessee of all or part of the Falls Creek field that has been granted approval of a written plan submitted to the AOGCC under AS 31.05.030(i) to pay a royalty of five percent on the first 35 billion cubic feet of gas produced for sale from the field that occurs in the 10 years following the date on which the production for sale commences. Production for sale must commence before January 1, 2004. The Falls Creek Participating Area under the Falls Creek Unit contained 564.45 acres. The Falls Creek P A within the Ninilchik Unit contains 836.30 acres. The state's acreage represents approximately 84.6 percent of the production from the "field." The balance of the participating area, the non-state lands, is not subject to AS 38.05.180(t)(5) and will receive a 12.5 percent royalty share. The GO PA and the Susan Dionne PA are not subject to AS 38.05.180(t)(5). However, these two participating areas may be subject to newly signed legislation, AS 43.20.043. This statute entitles a State of Alaska taxpayer that is an operator or working interest owner directly engaging in the 14 ') ') exploration for and development of gas to a ten percent tax credit against its state tax liability for qualified capital investments and annual costs for qualified services. The taxpayer may not claim this credit if it accepts any other tax credit or royalty modification under different statutes. The State of Alaska leases in the Ninilchik Unit are written on a variety of forms, containing a variety of provisions. The lease forms vary from the very oldest form, the DL-l form dated 1960 to the very latest lease form, #DOG 200204. The Ninilchik Unit Agreement, approved on October 30, 2001, conformed and modified the leases to be consistent with the Agreement. Consistent lease provisions allow the working interest owners and the state to reduce the administrative burdens of operating and regulating the unit. Conforming the terms and conditions of the leases to the Agreement allows the state to avoid costly and time-consuming litigation on some problematic lease provisions in the forms. The need to amend the Agreement is required for three reasons: (1) not all working interest owners in the unit's leases are parties to the Agreement; (2) a discovery that a section of the April 2001 Model Form, the basis of the Agreement, was omitted from the final Agreement approved by the Division; and (3) the inclusion of lease form #DOG 200204 for ADLs 390105 and 390085 into the Ninilchik Unit area. The first two amendments deal with issues that should have been addressed when the unit was formed in October 2001. The third amendment includes the latest terms and conditions for leases within the Nini1chik Unit. The amendment avoids any potentially contradictory lease and Agreement provisions. The working interest owners and the State benefit by the continuation of consistent lease provisions to reduce the administrative burdens of operating and regulating the Ninilchik Unit. B. Decision Criteria considered under 11 AAC 83.303(a) 1. Promote The Conservation of All Natural Resources The unitization of oil and gas reservoirs and the formation of participating areas within unit areas to develop hydrocarbon-bearing reservoirs are -well-accepted means of hydrocarbon conservation. Without unitization, the unregulated development of reservoirs tends to be a race for possession by , competitive operators. This race can produce: (1) overly dense drilling, especially along property lines; (2) rapid dissipation of reservoir pressure; and (3) irregular advance of displacing fluids. These all contribute to the loss of ultimate recovery or economic waste. The proliferation of surface activity, duplication of production, gathering, and processing facilities, and haste to get oil and gas to the surface also increase the likelihood of environmental damage such as spills and other surface impacts. Requiring lessees to comply with conservation orders and field rules issued by the AOGCC would mitigate some of these impacts without an agreement to unitize operations. Unitization, however, provides a practical and efficient method for maximizing oil and gas recovery, and minimizes negative impacts on other resources. Our concern about lessees competing for the same reservoir is less in the proposed Ninilchik Unit expansion area and Falls Creek, GO and Susan Dionne PAs because the majority working interest owners - Marathon and Unocal-- have already aligned their leasehold interests in the proposed expansion acreage and the existing Ninilchik Unit. The majority working interest owners have executed various joint operating agreements that establish an area of common equity, establishing 15 ) ) ownership percentages covering all horizons within the boundaries of the Ninilchik Unit, and certain adjacent areas, between themselves. However, even with only one primary working interest owner group, expansion of the Ninilchik Unit and formation of the three participating areas will provide a comprehensive plan for developing each participating area and exploring all the reservoirs within the expanded unit. The POD for each participating area and the planned exploration activities for the other unit areas provide for an efficient, integrated approach to development of the Tyonek Formation gas-bearing reservoirs. The Ninilchik Unit expansion will promote the conservation of both surface and subsurface resources through unitized (rather than lease-by-lease) development. Unitization allows the unit operator to explore the area as if it were one lease. The expansion of the Nini1chik Unit and the formation of the participating areas over the upper Tyonek Formation reservoirs will allow this area to be comprehensively and efficiently explored and developed. Adoption of an operating agreement and plan of development governing that production will help avoid unnecessary duplication of development efforts on and under the surface. Facilities can be located to maximize recovery and to minimize environmental impacts, without regard for individual lease ownership. 2. The Prevention of Economic and Physical Waste Traditionally, under unitized operations, the assignment of undivided equity interests in the oil and gas reservoirs to each lease largely resolves the tension between lessees to compete for their share of production. Economic and physical waste, however, could still occur without an equitable cost sharing formula, and a well-designed and coordinated development plan. Consequently, unitization must equitably divide costs and production, and plan to maximize physical and economic recovery ITom any reservoir. It must also treat the royalty owner fairly. An equitable allocation of hydrocarbon shares among the working interest owners discourages hasty or unnecessary surface development. Similarly, an equitable cost-sharing agreement promotes efficient development of reservoirs and common surface facilities and includes rational operating strategies. Such an agreement further allows the working interest owners to decide well spacing requirements, scheduling, reinjection and reservoir management strategies, and the proper common, joint-use surface facilities. Unitization prevents economic and physical waste by eliminating redundant expenditures for a given level of production, and avoiding loss of ultimate recovery by adopting a unified reservoir management plan. Unitized operations greatly improve development of reservoirs beneath leases that may have variable productivity. Marginally economic reserves, which otherwise would not be produced on a lease-by-lease basis, often can be produced through unitized operations in combination with more productive leases. Facility consolidation saves capital and promotes better reservoir management by all working interest owners. Pressure maintenance and secondary recovery procedures, if necessary, are much more predictable and attainable through joint, unitized efforts than would otherwise be possible. In combination, these factors allow less profitable areas of a reservoir to be developed and produced in the interest of all parties, including the state. The majority of the lessees in the proposed unit expansion leases and participating areas have signed the Nini1chik Unit Agreement and the Unit Operating Agreement, and will share the existing 16 ') ) unit production capacity and infrastructure. Using this infrastructure and facilities eliminates the need to construct stand-alone facilities to process the volume of recoverable hydrocarbons from the unit expansion area and the three participating areas. Expanding the Ninilchik Unit and fonning the three participating areas include the leases that contain productive Tyonek Fonnation gas-bearing reservoirs and allowing these areas to access existing unit facilities and infrastructure prevents economic and physical waste. 3. The Protection of All Parties of Interest, Including the State The proposed expansion of the Ninilchik Unit and fonnation of the Falls Creek P A, GO P A and Susan Dionne P A seeks to protect the economic interests of all working interest owners of the reservoirs in the expanded unit and participating areas, as well as the royalty owner. Combining interests and operating under the tenns of the Agreement and the Ninilchik Unit Operating Agreement provides each individual working interest owner an equitable allocation of costs and revenues commensurate with the value of their leases. The amended Agreement in combination with the plan of development for each participating area with the agreed-to tenns and conditions outlined in Section ITI.A.3 promotes the state's economic interests because hydrocarbon recovery will be maximized and additional production-based revenue will be derived from the participating areas' production. Diligent development and exploration under a single, approved unit plan without the complications of competing leasehold interests are certainly in the state's interest. It promotes efficient evaluation and development of the state's resources, yet minimizes impacts to the area's cultural, biological, and environmental resources. Finally, the amendments to the Agreement confonn and modify the lease contracts to be consistent with the Agreement. Consistent lease provisions allow the working interest owners and the state to reduce the administrative burdens of operating and regulating the unit. Confonning the tenns and conditions of the leases to the Agreement allows the state to avoid costly and time- consuming litigation of some problematic lease provisions in the fonns. C. Amendments to the Ninilchik Unit Agreement The proposed amendments to the Agreement reflect the unique circumstances of the Ninilchik Unit and attempt to continue to harmonize the tenns and conditions of the various lease fonns for the leases within the unit to the Agreement. All the proposed changes are acceptable to the majority working owners and the state. The Agreement is based on DNR's State Only Royalty Owner model unit agreement fonn dated Apri12001 (Model Fonn). At the time Marathon proposed the Ninilchik Unit in June 2001, they accepted the Model Fonn as the Ninilchik Unit Agreement with no modifications. The Division approved the Agreement on October 30, 2001. Subsequent to the approval of the Agreement, Marathon and the Division noted an error and an omission in the Agreement and Model Fonn. The first two proposed amendments to the Agreement address the error and omission. 17 ..) ) The first amendment to the Agreement corrects an error in the Agreement. The error was, contrary to the Recitals Provision of the Agreement, that not all working interest owners of the leases in the Ninilchik Unit are parties to the Agreement. ConocoPhillips, an owner in ADLs 389737 (NU Tract 3), 384306 (NU Tract 5) and 384318 (NU Tract 1), was not a party to the Agreement. ConocoPhillips still is not a party to the Agreement. State unitization regulations do not require all parties of interest to be parties to the unit agreement. State law requires that parties to the unit agreement hold sufficient interest in the unit area to have effective control of unit operations. 11 AAC 83.316(c). In the expanded Ninilchik Unit, Marathon and Unocal control approximately 89.2 percent of the unit area with ConocoPhillips controlling approximately 2.16 percent. The second amendment corrects an omission from the April 2001 Model Form. The Apri12001 Model Form originally contained the proposed amendment language, but for an unknown reason was omitted from the copy of the Model Form provided to Marathon at the time of formation of the Ninilchik Unit in June 2001. The Amendment adds a new Article 3.8 to the Agreement, which requires the operator or working interest owners to provide certain information to the Commissioner. Lastly, after reviewing the Agreement, the latest Model Form dated April 2002, and the most current lease form for the most recent leases within the unit acquired in the Cook Inlet Areawide 2002 sale, ADLs 390085 and 390105, the Division proposed, and the majority owners accepted, a third amendment to the Agreement to further harmonize the terms and conditions of the latest lease form within the unit to the Agreement. The proposed amendment attempts to avoid any potentially contradictory lease and Agreement provisions. The proposed third amendment is taken from the Apri12002 Model Form, Article 12.5 of that Form, and the language addresses the latest lease language regarding the "Value" provision of the lease. Any new unit agreement proposed for state lands would be based on the April 2002 Model Form and would automatically include this article. IV. FINDINGS AND DECISION Considering the facts discussed in this document and the administrative record, I hereby make findings and impose conditions as follows. 1. The expansion of the Ninilchik Unit, the formation of the Falls Creek P A, GO P A and Susan Dionne P A, and the amendment to the Agreement promote the conservation of all natural resources, promote the prevention of economic and physical waste, protect all parties of interest, and are necessary and advisable to protect the public interest. AS 38.05.180(p); 11 AAC 83.303. 2. DNR complied with the public notice requirements of 11 AAC 83.311. 3. The applicants for expansion of the Ninilchik Unit have sufficient interest in the unit to exercise control of unit operations. 11 AAC 83.316(c). 4. The available well data and development plans justify the inclusion of the proposed lands within the Ninilchik Unit. Under the regulations governing formation and 18 ) ) operation of oil and gas units (11 AAC 83.301 - 11 AAC 83.395) and the terms and conditions under which these lands were leased from the State of Alaska, the lands described in Attachment 1 to this Findings and Decision are included in the expanded Ninilchik Unit, contingent upon BLM's approval to terminate the Falls Creek Unit. 5. The unitized development and operation of the leases will reduce the amount of land and fish and wildlife habitat that would otherwise be disrupted by individual lease development. This reduction in environmental impacts and interference with any subsistence activity is in the public interest. 6. The Ninilchik Unit expansion will not diminish access to public and navigable waters beyond those limitations (if any) imposed by law or already contained in the oil and gas leases. 7. The available geological and engineering data demonstrate that a paying quantities certification is appropriate for the lands proposed for the Falls Creek P A, GO P A and Susan Dionne PA subject to the terms and conditions set out in Section III.A.3. The data also suggest that the acreage is underlain by hydrocarbons and known and reasonably estimated to be capable of production or contributing to production in sufficient quantities to justify the formation of the three participating areas within the Ninilchik Unit. 8. The available geological and engineering data justify the inclusion of the proposed tracts within the three participating areas. Under the regulations governing formation and operation of oil and gas units (11 AAC 83.301 - 11 AAC 83.395), and the terms and conditions set out in Section III.A.3, and the terms and conditions under which these lands were leased from the State of Alaska, the lands described in Attachment 2 are included within the Falls Creek P A, the lands described in Attachment 3 are included in the Go P A, and the lands described in Attachment 4 are included in the Susan Dionne PA. 9. The formation of the Falls Creek, GO and Susan Dionne Participating Areas adequately divides costs and allocates produced hydrocarbons, and sets forth a development plan designed to maximize physical and economic recovery from the Tyonek Formation reservoirs within the three approved participating areas. 10. Under 11 AAC 83.351(a) and 11 AAC 83.371(a), the Division approves the allocations of production and costs for the tracts within the Falls Creek PA, GO PA and Susan Dionne P A under the terms and conditions set out in Section III.A.3 of this Findings and Decision. 11. Diligent exploration and delineation of the Tyonek Formation reservoirs underlying the approved participating areas is to be conducted by the Unit Operator under the plans of development and operation approved by the state. Before undertaking any specific surface operations, the unit operator must submit a Plan of Operations to the DNR and other appropriate state and local agencies for review and approval. All agencies must 19 ) ') grant the required permits before drilling or development operations may commence. DNR may condition its approval of a unit Plan of Operations and other permits on performance of mitigating measures in addition to those in the leases if necessary or appropriate. Requiring strict adherence to the mitigation measures will minimize adverse environmental impacts. 12. The Falls Creek PA, GO PA and Susan¡:!)ionne PA Plans of Development, subject to the terms and conditions of Section m.A.3, meet the requirements of 11 AAC 83.303 and 11 AAC 83.343. Each plan is approved until December 31, 2004, to synchronize each participating areas' Plan of Development with the hritial POE for the Ninilchik Unit. A revised participating area Plan of Development that describes the status of projects undertaken, drilling results, and the work completed, any changes or expected changes to the plan, and a further plan of development, must be submitted in accordance with 11 AAC 83.343. For the reasons discussed in this Findings and Decision, I hereby approve the First Expansion of the Nini1chik Unit, formation of the Falls Creek PA, GO PA and Susan Dionne PA, and their respective tract allocation schedules, and the amendments to the Ninilchik Unit Agreement subject to the conditions specified herein. These approvals are effective July 1,2003. 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 Tom 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_appeals@dnr.State.ak.us. This decision takes effect immediately. 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. Appeal Code: OG0063003NUFIRSTEXP3PAS it_j. CuJ!LG~~','- .:._~ ~ Mark D. Myers, Direc~6r Division of Oil and G ~ ~"? A '") /~ :::> , Lrt1Æ -X/. "'.-:-, v (/ / D te ) Attachments: 1) Map of and Former Falls Creek Unit and First NU expansion area leases 2) Map and Falls Creek P A Leases and Tract Participation Schedule 3) Map and GO P A Leases and Tract Participation Schedule 4) Map and Susan Dionne P A Leases and Tract Participation Schedule 5) Amended Ninilchik Unit Agreement NUFirstExp - FCP A- GOP A - SDP A - AmendUA.Appv.doc 20 ) .¡;',rt<. 2-1N-13W I-IN-13W 11-IN-13W 12-1N-13W MARATHON OIL COMPANY FALLS CREEK UNIT AS IT PRESENTLY APPEARS MARCH 11,2003 (WITH NINILCHIK UNIT TRACT J\TUMBERS) ') - '-'--'-'-'---"""",,,,' .,,,.. - "-'~-~" I "-<~'.'''--'I I '. I I (--~ I ~)5'-- J; , ~ / I /~ \ 1 '-¡At I "~':_/ I I I I 6-1r-12W ('-..... \188) ----./ (~ ~3~--, : "r" . (4911 ---r--~' -\'~ ( 5 :3/\ ! ""'(-'\ -::.7 , 5 }¡-)t ',-----./ ¡ I (;;'), \~;\, 7-1N-12vV NinilchikT FCU TRACT NO. RACT NO. 15A 3 188 14 49A 10A 50A 10B 51A 35 53A 36 62A 37A FALLS CREEK UNIT EXHIBIT "B" REVISED MARCH 11,2003 PRESENT TRACTS Page 1 of 2 Schedule of Leases State: Alaska DESCRIPTION OF PROPERTY RECORDING DATA BOOK PAGE DISTRICT GROSS ACRES LESSORl ROYALTY OWNERS ROYALTY ORRIS LESSEE! WI OWNER WI % DATE u.s. PUBLIC DOMAIN LANDS T 1N, R 13W, S.M. 10.23 United States of America 12.50% Loraine Ealand 1 % x 100% Marathon Oil Company 45% 1~/1967 Sec. 12: Lots 1, except that potion lying in the A-024399 Chevron USA, Inc. 7.5% x 50% Union Oil Co. of California 30% S/2NEl4 (See ORRI Note #1, following) Phillips Alaska, Inc. 25% STATE OF ALASKA LANDS .... TiN, R 13W, S.M. 564.45 State of Alaska 12.50% Chevron USA, Inc. 7.5% x 50% Marathon Oil Company 45% 1/27/1960 Sec. 1: SE!4NE/4 & SE/4 & SE/4SW/4 ADL 590 Parcel B (See ORRI Note #1, following) Union Oil Co. of California 30% Sec. 12: NEl4NW/4 & N/2NE/4, except that part Phillips Alaska, Inc. 25% lying above the line of mean high tide TiN, R 12W. S.M. Sec. 6: W/2 except that part lying above the line of mean high tide PATENTED FEE LANDS TiN, R 12W, S.M. 2.00 Heirs of William Wade Thebaut, dec. 12.50% Chevron USA, Inc. 7.5% x 50% Marathon Oil Company 45% 10/13/1960 21 21 Homer Sec 6: That part of Tracts #2 & #3 of Udelhoven 50%** (See ORRI Note #1, following) Union Oil Co. of California 30% Subdivision (Plat #H77-70) (a part ofGLO Lot Heirs of Ruth Udelhoven, dec. 25%* * * Phillips Alaska, Inc. 25% 2), less that part lying in SW/4NEl4 James Udelhoven 25% TiN, R 12W, S.M. 2.67 Heirs of William Wade Thebaut, dec. 12.50% Chevron USA, Inc. 7.5% x 50% Marathon Oil Company 45% 10/13/1960 21 21 Homer Sec 6: That part of Tract #4 of Udelhoven 50%** (See ORR! Note #1, following) Union Oil Co. of California 30% Subdivision (Plat #H77-70) (a part of GLO Lot Jennifer linnann Udelhoven 25% Phillips Alaska, Inc. 25% 2), less that part lying in SW/4NEl4 James Udelhoven 25% TiN, R 12W, S.M. 2.34 E.W. Vanderbilt ( apparently deceased, 12.50% Chevron USA, Inc. 7.5% x 50% Marathon Oil Company 45% 11/5/1960 21 129 Homer Sec 6: The North 165' of Lot 3 but heirs/successors unknown) 100% (See ORRI Note #1, following) Union Oil Co. of California 30% Phillips Alaska, Inc. 25% TiN, R 12W. S.M. 28.90 Harold Lee & Diane Pederson 100% 12.50% Chevron USA, Inc. 7.5% x 50% Marathon Oil Company 45% 4/16/1958 13 80 Homer Sec 6: Lot 3 except the North 165' & N/2SE/4 (See ORRI Note #1, fallowing) Union Oil Co. of California 30% Phillips Alaska, Inc. 25% TiN, R 12W, S.M. 12.11 Marcellus John Stark 75% 12.50% Chevron USA, Inc. 7.5% x 50% Marathon Oil Company 45% 3/21/1958 13 40 Homer Sec 6: Those parts of Clammers Haven Addition Norma Jeanne O'Riorden Nichols (See ORRI Note #1, following) Union Oil Co. of California 30% NO,1 (plat H-78-25). described as all of Block 1, 16.67% Walter G. Williams 8.33% Phillips Alaska, Inc. 25% Lot 2 and those parts of Block 1 ,Lot 4 lying outside the SEl4SW/4 AND those parts of Block 2, Lot 1 lying outside the SE/4SW/4 and all minerals underlying dedicated roads and easements lying outside the SEl4SW/4 (a part of GLO Lot 4) Schedule of Leases State: Alaska NinilchikT FCU TRACT NO. RACT NO. DESCRIPTION OF PROPERTY 628 378 TiN, R 12W, S.M. See 6: Those parts of Clarnrners Haven Addition NO.1 (plat H-78-25), described as all of Block 1. Lot 1 (a part of GLO Lot 4) 62C 37C TiN, R 12W, S.M. See 6: Those parts of Clarnrners Haven Addition No.1 (plat H-78-25), described as all of Block 1, Lot 3 (a part of GLO Lot 4) TRACT NOTE: This exhibit represents the Unit Tracts as they appear today (2003). GROSS ACRES LESSOR! ROYALTY OWNERS 4.46 Marcellus John Stark 75% Edward C. & Myong C. Greene 25% FALLS CREEK UNIT EXHIBIT "B" REVISED MARCH 11,2003 PRESENT TRACTS ROYALTY ORRIS 12.50% Chevron USA,lnc. 7.5% x 50% (See ORRI Note #1, following) 12.50% Chevron USA, Inc. 7.5% x 50% (See ORRI Note #1 , fallowing) LESSEE/WI OWNER Marathon oa Company 45% Union Oil Co. of California 30% Phillips Alaska, Inc. 25% Marathon Oil Company 45% Union oa Co. of California 30% Phillips Alaska, Inc. 25% *ORRI NOTE#1: Chevron USA. Inc. owns a 7.5% overriding royalty burdening Marathon Oil Company and Union Oil Company of California only. This ORRI burdens 1/2 working interest in the unit. 2.99 Marcellus John Stark 75% Ronald D. & Janet L Fales 25% **NOTE: The heirs of William Wade Thebaut, deceased are apparently JoAnn Steik, James Thebaut and Shirley Cox. RECAPITULATION BY LAND CATEGORIES: ***NOTE: The heirs of Ruth Udelhoven, deceased, are apparently the following: Ashley Udelhoven, Jesse Udelhoven, Jennifer Wiederspohn, Ann Davis, Dawn Dutton and Sandra Udelhoven-Taylor. 1 2 3 U.S. Public Domain Lands 1 Tract State of Alaska Lands 1 Tract Patented Fee Lands 4 Tracts TOTAL: 10.23 Acres 564.45 Acres 55.47 Acres 630.15 Acres Page 20f2 W1 % DATE RECORDING DATA BOOK PAGE DISTRICT 3/21/1958 . 13 40 ~~/1958 13 40 Homer Homer ) 2-1N-13W 11-1N-13W 0) .... 0) 0( ¡( 0( o(X)( '( y 0) I-lN-l3'W" 'x x >< )( x >< )( x x X)()()( ~x XXXXX)( X)()()( X)( XXX)( XXX)( )( x )( A 'X 'X X A 'X 'X 'X 'X 'X 'X 'X X ;~ ~S)/ I ~x 'X)"4"~ I ~x : X)( x: ~ 46 x x><) 3x x.~~ I X~X~O~e ~ x~~ ~ I e I I I I I I I I I I I ~ "" ( Ie Ie Ie 0( x x x x . xxxxx.. ,x@ : ~~ @ Q e7-1~ ~ MARATHON OIL COMPANY NINILCHIK UNIT FALLS CREEK PARTICIPATION AREA July 1, 2003 (Note: Cross-hatched (red) area represents former Falls Creek Unit boundary.) ( )II :x x )( x X 111 ;K X X x )( X x )eX x x y yYVVVYN'1V y 8 ( NINILCHIK UNIT FALLS CREEK PARTICIPATION AREA EXHIBIT "C" JULY 1, 2003 Page 1 of 3 Schedule of Leases State: Alaska Ninilchik Original Falls DESCRIPTION OF PROPERTY Unit Tract Creek Unit No. Tract No. GROSS TRACT ACRES PARTICIPATIO N FACTOR LESSORl ROYALTY OWNERS ROYALTY ORRIS LESSEE! WI OWNER RECORDING DATA WI % BOOK PAGE DISTRICT U.s. PUBLIC DOMAIN LANDS 15A T 1N, R 13W, S.M. Sec. 12: Lot 1, except that potion lying in the S/2NE/4 aid/a that part of Lot 1 lying in the NE/4NE/4 10.23 1.0347130% United States of America A-024399 12.50% Loraine Ealand 1 % x 100% Chevron USA, Inc. 6.5% x 50% (See ORRI Note #1, following) Marathon Oil Company 45% Union Oil Co. of California 30% ConocoPhillips Alaska, Inc. 25% ') STATE OF ALASKA LANDS 188 14 T1N, R 13W, S.M. Sec. 1: SE/4NE/4 & SE/4 & SE/4SW/4 Sec. 12: NE/4NW/4 & N/2NE/4, except that part lying above the line of mean high tide T1N, R 12W, S.M. Sec. 6: W/2 except that part lying above the line of mean high tide T1N, R 13W, S.M. Sec. 1: NE/4SW/4 & SW/4SW/4 Sec. 11: E/2NE/4 Sec. 12: W/2NW/4 T1N, R 12W, S.M. Sec. 6: That part of the W/2NE/4 lying below the line of mean high tide (EST. 31.85 acres) 564.45 57.0912732% State of Alaska ADL 590 Parcel B 12.5% Chevron USA, Inc. 6.5% x 50% (See Royalty Note (See ORRI Note #1, following) #1, following) Marathon Oil Company 45% Union Oil Co. of California 30% ConocoPhillips Alaska, Inc. 25% 271 .85 27.4962576% State of Alaska ADL #389737 12.5% Chevron USA, Inc. 6.5% x 100% (See Royalty Note (See ORRI Note #1, following) #1, following) Marathon Oil Company 60% Union Oil Co. of California 40% 3 None PATENTED FEE LANDS T 1N, R 12W, S.M. 10.44 1.0559534% Trudy S. Webb 12.50% Marathon Oil Company 60% 575 260 Kenai ) 46 None Sec 6: That part of GLO Lot 1 lying within the Union Oil Co. of California 40% W/2NE/4 (estimated 10.44 acres) T 1N, R 12W, S.M. 2.67 0.2699559% Heirs of William Wade Thebaut, dec. 12.50% Chevron USA, Inc. 6.5% x 100% Marathon Oil Company 60% 21 21 Homer 48 None Sec 6: Tract #1 of Udelhoven Subdivision (Plat 50%** (See ORRI Note #1, following) Union Oil Co. of California 40% #H77-80) (a part of GLO Lot 2) Heirs of Ruth Udelhoven, dec. 50%*** T 1 N, R 12W, S.M. 29.95 3.0293927% Heirs of William Wade Thebaut, dec. 12.50% Chevron USA, Inc. 6.5% x 100% 'Marathon Oil Company 60% 21 21 Homer Sec 6: That part of Tracts #2 & #3 & #5 & #6 & 50%** (See ORRI Note #1, following) Union Oil Co. of California 40% 49 None #7 of Udelhoven Subdivision (Plat #H77-80) (a Heirs of Ruth Udelhoven, dec. 25%* * * part of GLO Lot 2) lying in SW/4NE/4 and any James Udelhoven 25% mineral rights underlying roads in the SW/4NE/4 T 1N, R 12W, S.M. 3.62 0.3661448% Heirs of William Wade Thebaut, dec. 12.50% Chevron USA, Inc. 6.5% x 100% Marathon Oil Company 60% 21 21 Homer Sec 6: That part of Tract #4 of Udelhoven 50%** (See ORRI Note #1, following) Union Oil Co. of California 40% 50 None Subdivision (Plat #H77-80) (a part of GLO Lot 2), Jennifer Linnann Udelhoven 50% lying in SW/4NE/4 NINILCHIK UNIT Page 2 of 3 FALLS CREEK PARTICIPATION AREA EXHIBIT "C" JULY 1, 2003 Schedule of Leases State: Alaska RECORDING DATA Ninilchik Original Falls DESCRIPTION OF PROPERTY GROSS TRACT LESSOR! ROYALTY OWNERS ROYALTY ORRIS LESSEE! WI OWNER WI% BOOK PAGE DISTRICT Unit Tract Creek Unit ACRES PARTICIPATIO No. Tract No. N FACTOR - T 1N, R 12W, S.M. 2.00 0.2022899% Heirs of William Wade Thebaut, dec. 12.50% Chevron USA, Inc. 6.5% x 50% Marathon Oil Company 45% 21 21 Horner See 6: That part of Tracts #2 & #3 of Udelhoven 50%** (See ORRI Note #1 , fOllowing) Union Oil Co. of California 30% 49A 10A Subdivision (Plat #H77-80) (a part of GLO Lot 2), Heirs of Ruth Udelhoven, dec. 25%* * * ConocoPhillips Alaska, Inc. 25% less that part lying in SW/4NE/4 James Udelhoven 25% T 1N, R 12W, S.M. 2.67 0.2700570% Heirs of William Wade Thebaut, dec. 12.50% Chevron USA, Inc. 6.5% x 50% Marathon Oil Company 45% 21 21 Homer See 6: That part of Tract #4 of Udelhoven 50%** (See ORRI Note #1, following) Union Oil Co. of California 30% 50A 10B Subdivision (Plat #H77-80) (a part of GLO Lot 2), Jennifer Linnann Udelhoven 50% ConocoPhillips Alaska, Inc. 25% less that part lying in SW/4NE/4 T 1 N, R 12W, S.M. 2.34 0.2366792% E.W. Vanderbilt (apparently deceased, 12.50% Chevron USA, Inc. 6.5% x 50% Marathon Oil Company 45% 21 129 Homer ) See 6: The North 165' of Lot 3 but heirs/successors unknown) 100% (See ORRI Note #1, following) Union Oil Co. of California 30% 51A 35 ConocoPhillips Alaska, Inc. 25% T 1N, R 12W, S.M. 28.90 2.9230894% Harold Lee & Diane Pederson,1 00% 12.50% Chevron USA, Inc. 6.5% x 50% Marathon Oil Company 45% 13 80 Hcmer See 6: Lot 3 except the North 165' (See ORRI Note #1, following) Union Oil Co. of California 30% 53A 36 ConocoPhillips Alaska, Inc. 25% T 1N, R 12W, S.M. 34.99 3.5390622% Marcellus John Stark 75% 12.50% Chevron USA, Inc. 6.5% x 100% Marathon Oil Company 60% 13 40 Homer Sec 6: That part of GLO Lot 4 lying in the Norma Jeanne O'Riorden Nichols (See ORRI Note #1, following) Union Oil Co. of California 40% SE!4SW/4 less and except Block 1, Lot 9 and 16.67% 62 None Block 2, Lots 3 & 4 of Clammers Haven Addition Walter G. Williams 8.33% #1 (plat #H-78-25) and any interest in roads and easements dedicated to public use in the SE/4SW/4 T 1N, R 12W, S.M. 12.11 1.2248655% Marcellus John Stark 75% 12.50% Chevron USA, Inc. 6.5% x 50% Marathon Oil Company 45% 13 40 Homer See 6: Those parts of Clammers Haven Addition Nonna Jeanne O'Riorden Nichols (See ORRI Note #1, following) Union Oil Co. of California 30% No.1 (plat H-78-25), described as all of Block 1, 16.67% ConocoPhillips Alaska, Inc. 25% Lot 2 and those parts of Block 1 , Lot 4 lying Walter G. Williams 8.33% 62A 37A outside the SE/4SW/4 AND those parts of Block 2, Lot 1 lying outside the SE/4SW/4 and all minerals underlying dedicated roads and easements lying outside the SE/4SW/4 (a part of ì GLO Lot 4) T 1 N, R 12W, S.M. 4.46 0.4511065% Marcellus John Stark 75% 12.50% Chevron USA, Inc. 6.5% x 50% Marathon Oil Company 45% 13 40 Homer Sec 6: Those parts of Clammers Haven Addition Edward C. & Myong C. Greene 25% (See ORRI Note #1, following) Union Oil Co. of California 30% 62B 37B No.1 (plat H-78-25), described as all of Block 1, ConocoPhillips Alaska, Inc. 25% Lot 1 (a part of GLO Lot 4) T 1 N, R 12W, S.M. 2.99 0.3024234% Marcellus John Stark 75% 12.50% Chevron USA, Inc. 6.5% x 50% Marathon Oil Company 45% 13 40 Homer See 6: Those parts of Clammers Haven Addition Ronald D. & Janet L. Fales 25% (See ORRI Note #1, following) Union Oil Co. of California 30% 62C 37C NO.1 (plat H-78-25), described as all of Block 1, ConocoPhillips Alaska, Inc. 25% Lot 3 (a part of GLO Lot 4) T 1N, R 12W, S.M. 1.70 0.1719464% Marcellus John Stark 75% 12.50% Chevron USA, Inc. 6.5% x 100% Marathon Oil Company 60% 13 40 Homer See 6: Those parts of Clamrners Haven Addition Michael & Ma~orie Barry 25% (See ORRI Note #1, following) Union Oil Co. of California 40% 63 None No.1 (plat H-78-25), described as all of Block2 Lot 4 (a part of GLO Lot 4) Schedule of Leases State: Alaska Ninilchik Original Falls DESCRIPTION OF PROPERTY Unit Tract Creek Unit No. Tract No. 64 None GROSS TRACT LESSOR! ROYALTY OWNERS ACRES PARTICIPATIO N FACTOR T 1N, R 12W, S.M. 1.74 0.1759922% Marcellus John Stark 75% Sec 6: Those parts of Clammers Haven Addition Michael & Marjorie Barry 25% No.1 (plat H-78-25), described as all of Block 2, Lot 3 (a part of GLO Lot 4) T 1N, R 12W, S.M. 1.57 0.1587976% Marcellus John Stark 75% Sec 6: Those parts of Clammers Haven Addition Corey Kruse 12.5% NO.1 (plat H-78-25), described as all of Block 1, James Kruse 12.5% Lot 9 (a part of GLO Lot 4) 988.68 100.0000000% 65 None Total: NINILCHIK UNIT FALLS CREEK PARTICIPATION AREA EXHIBIT "C" JULY 1,2003 Page 3 of 3 ROYALTY RECORDING DA~ WI % BOOK PAGE DISTRICT ORRIS LESSEE! WI OWNER 12.50% Chevron USA, Inc. 6.5% x 100% Marathon Oil Company 60% 13 40 Horner (See ORRI Note #1, following) Union Oil Co. of California 40% 12.50% Chevron USA, Inc. 6.5% x 100% Marathon Oil Company 60% 13 40 Homer (See ORRI Note #1, following) Union Oil Co. of California 40% TRACT NOTE: The first column represents the Ninilchik Unit Tract Number. The second column represents the tract number assigned under the former Falls Creek Unit. *ROY AL TV NOTE #1: Royalty subject to AS 38.05.180 (f)(5). TRACT NOTE: Because some of the sections included in this participating area are correction sections, the participation area contains only 988.68 acres, rather than the expected 1000 acres. *ORRI NOTE##:1: Chevron USA, Inc. owns a 6.5% overriding royalty burdening Marathon Oil Company and Union Oil Company of California only. **NOTE: The heirs of William Wade Thebaut, deceased are apparently JoAnn Steik, James Thebaut and Shirley Cox. RECAPITULATION BY LAND CATEGORIES: ***NOTE: The heirs of Ruth Udelhoven, deceased, are apparently the following: Ashley Udelhoven, Jesse Udelhoven, Jennifer Wiederspohn, Ann Davis, Dawn Dutton and Sandra Udelhoven-Taylor. 1 2 3 U.S. Public Domain Lands State of Alaska Lands Patented Fee Lands TOTAL: 10.23 Acres 836.3 Acres 142.15 Acres 988.68 Acres 1 Tract 2 Tracts 15 Tracts WORKING INTEREST RECAPITULATION 1 2 3 Marathon Oil Company Union Oil Company of California ConocoPhillips Alaska, Inc. TOTAL: 498.6855 Acres 332.457 Acres 157.5375 Acres 988.68 Acres 1.0347130% 84.5875308% 14.3777562% 100.0000000% 50.4395254% 33.6263503% 15.9341243% 100.0000000% ) ,---------,----------,-- I 17-tN-t3W I t6-tN-13W : ,. I I : I I I I L______--_J_------ I 20-1N-13W I I I I I I I I I I - 29-1N-~ - I - ~-I::V - - - I I I I I I I L - - - - -L - - - - _1- 21-1N-13W TRACT # 6 ADL 389180 ) 15-1N-13W TRACT # 3 ADL 389737 22-1N-13W I I I I I I I I I --..L I I I I I I I I I I -----1-- TRACT # 4 ADL 384305 27-1N-13W MARATHON OIL COMPANY NINILCHIK UNIT OSKOLKOFF P ARTICIP ATION AREA July 1, 2003 -----------, 14-1N-13W I I I I I I I I I I ---------, 23-1N-13W I I I I I I I I I ------1 I I I I I I I I I I ---_--.J 26-1N-13W Schedule of Leases Sta1e: Alaska Ninilchik DESCRIPTION OF PROPERTY Unit Tract No. GROSS TRACT ACRES PARTICIPATION FACTOR LESSOR! ROYALTY OWNERS STATE OF ALASKA LANDS T1N, R 13W, S.M. 680.00 35.4166667% State of Alaska 3 Sec. 14: S/2NW/4 & NW/4SW/4 ADL #389737 Sec. 15: All of section, except the W/2NW/4 T1N, R 13W, S.M. 520.00 27.0833333% State of Alaska 4 Sec. 22: W/2 & W/2NEl4 ADL #384305 Sec. 27: W/2NW/4 & NW/4SW/4 T1N, R 13W, S.M. 720.00 37.5000000% State of Alaska Sec. 21: NEl4NEl4 & S/2NEl4 & SE/4 & ADL #389180 6 SEl4SW/4 Sec. 28: N/2S/2 & NE/4 & El2NW/4 RECAPITULATION BY LAND CATEGORIES: State of Alaska Tracts 3 Tracts 1920.00 Acres WORKING INTEREST RECAPITULATION 1 2 1152.00 Acres 768.00 Acres 1920.00 Acres Marathon Oil Company Union Oil Company of California NINILCHIK UNIT GRASSIM OSKOLKOFF PARTICIPATION AREA EXHIBIT "C" JULY 1, 2003 ROYALTY 12.50% 12.50% 12.50% ORRIS Chevron USA, Inc. 6.5% x 100% 100.0000000% 60.0000000% 40.0000000% 100.0000000% Page 1 of 1 LESSEE! WI OWNER RECORDING DATA WI % BOOK PAGE DISTRICT Marathon Oil Company 60% Union Oil Co. of California 40% Marathon Oil Company 60% Union Oil Co. of California 40% ) Marathon Oil Company 60% Union Oil Co. of California 40% ) ') r---3~1~1~---l----31-t~1~---T---~1~13;---¡---33-l~l~---l I I I I I I I I I I I I I I I I I I I TRACT # 6 I I I I I ADL389180 : : I I r-J----___¡__l___- I ----¡-_J I 2-1S-14W I 1-IS-14W 6-1S-13W ~S_IS-13W I I I RACT# 123 I TRACT # 10 I I ADL 359242 T CT #124 I I I Ir¡ TRACT # 125 I ...., I I ;; . I I I t; I I I TRACT # 8 l I I ADL 384372 ""-............ I I TRACT #144 I I I 1---ll-1S-1~--- I ~-IS:;-------- ----~-lS-13;---1 I I I I I I ,. I I I i I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I L______---~---,-------~----______L______---~ MARATIlON OIL COMIPANY NINILCffiK UNIT DIONNE PARTICIPATION AREA July 1, 2003 Schedule of Leases State: Alaska Ninilchik DESCRIPTION OF PROPERTY Unit Tract No. STATE OF ALASKA LANDS 6 T1N, R 13W, S.M. Sec. 32: SE/4 & E/2SW/4 & SW/4SW/4 Sec. 33: W/2SW/4 T1S, R 14W, S.M. Sec. 1: NE/4NE/4 & S/2NE/4 & SE/4 & NE/4SW/4 & S/2SW/4 Sec. 12: N/2NE/4 & NE/4NW/4 8 10 T1S, R 13W, S.M. Sec. 5: All tide and submerged land Sec. 6: All tide and submerged land Sec. 7: All tide and submerged land lying within the N/2NW/4 (56.72 acres) State Total: NINILCHIK UNIT SUSAN DIONNE PARTICIPATION AREA EXHIBIT "C" JULY 1, 2003 Page 1 of 2 GROSS TRACT ACRES PARTICIPATION FACTOR LESSOR! ROYALTY OWNERS ROYALTY ORRIS LESSEE! WI OWNER RECORDING DATA WI % BOOK PAGE DISTRICT 360.00 20.4479231% State of Alaska ADL #389180 522.57 29.6818644% State of Alaska ADL #384372 708.72 40.2551446% State of Alaska ADL #359242 1591.29 Marathon Oil Company 60% Union Oil Co. of California 40% 12.50% 12.50% Marathon Oil Company 60% Union Oil Co. of California 40% ) 12.50% James W. White 3.5% James L. Thurman 1/3 x 3% Tucson, Ltd. 1/3 x 3% Metro National Bank and/or V. Paul Gavora 1/3 x 3% Marathon Oil Company 60% Union Oil Co. of California 40% COOK INLET REGION INC. (CIRI) TRACTS IT 1 S, R 13W, S.M. 53.52 \ 3.0399246% ¡COOk Inlet Region, Inc. 20.00% IMarathon Oil Company 160% I I 30 See 7: GLO Lot 1 Union Oil Co. of California 40% CIRI Total: 53.52 PATENTED FEE LANDS T1S, R 13W, S.M. 0.01 0.0005680% Richard L. Millett 50% 12.50% Marathon Oil Company 60% 311 541 Homer See- 5: That part of Lot 6 of Sunset Bluffs Arthur T. Maze 50% Union Oil Co. of California 40% 321 654 123 Subdivision (Plat # H-79-5) that lies within the NE/4NW/4, a part of GLO Lot 2 (estimated 0.01 acres) T1S, R 13W, S.M. 0.30 0.0170399% Richard L. Millett & Juanita J. Millett 12.50% Marathon Oil Company 60% 311 541 Homer Sec. 5: That part of Lot 7 of Sunset Bluffs 100% Union Oil Co. of California 40% 124 Subdivision (Plat # H-79-5) that lies within the NE/4NW/4, a part of GLO Lot 2 (estimated 0.01 acres) T1S. R 13W, S.M. 9.67 0.5492539% Richard L. Millett 50% 12.50% Marathon Oil Company 60% 311 541 Homer Sec. 5: That part of Lots 8, 9 & 10 of Sunset Arthur T. Maze 50% Union Oil Co. of California 40% 321 654 125 Bluffs Subdivision (Plat # H- 79-5) that lies within the NEl4NW/4, a part of GLO Lot 2 (estimated 9.67 acres) Schedule of Leases State: Alaska Ninilchik DESCRIPTION OF PROPERTY Unit Tract No. PATENTED FEE LANDS (continued) T1S, R 13W, S.M. Sec. 5: That part of GLO Lot 3 lying within the 135 SWJ4NW/4 (estimated 8.0 acres and all of GLO Lot 4 (38.2 acres) T1S, R 13W, S.M. Sec. 6: GLO Lot 1 144 T1S, R 13W, S.M. Sec. 6: GLO Lot 2 145 Fee Land Total: Total of all Tracts: RECAPITULATION BY LAND CATEGORIES: 1 2 3 State of Alaska Tracts Cook Inlet Region, Inc. Tracts Fee Tracts TOTAL: WORKING INTEREST RECAPITULATION 1 2 Marathon Oil Company Union Oil Company of California Note: NINILCHIK UNIT SUSAN DIONNE PARTICIPATION AREA EXHIBIT "C" JULY 1, 2003 Page 2 of 2 GROSS TRACT ACRES PARTICIPATION FACTOR ORRIS LESSEE! WI OWNER RECORDING DATA WI % BOOK PAGE DISTRICT LESSOR! ROYAL TV OWNERS ROYALTY 46.20 2.6241501% Wayne Findley & E. Irene Findley 100% 16.67% Marathon Oil Company 60% 247 322 Homer Union Oil Co. of California 40% 10.06 0.5714059% Bea Bachner 100% 12.50% Marathon Oil Company 60% 250 399 Homer Union Oil Co. of California 40% 49.52 2.8127254% Paul H. & Susan M. Dionne 100% 16.67% Intrepid Production Company 5.33333% Marathon Oil Company 60% 243 195 Homer Union Oil Co. of California 40% 115.76 1760.57 100.0000000% ) 3 Tracts 1 Tract 6 Traèts 1591.29 Acres 53.52 Acres 115.76 Acres 1760.57 Acres 90.3849322% 3.0399246% 6.5751433% 100.0000000% 1056.34 Acres 704.23 Acres 1760.57 Acres 60.0000000% 40.0000000% 100.0000000% Because several sections contained in this Participation Area are correction sections, this PA contains 1760.57 acres, ratherthan the expected 1800 acres. ) ) Amended Ninilchik Unit Agreement Effective July 1, 2003 NINILCHIK UNIT AGREEMENT Table of Contents RECITALS.. ........ ........... .... ....... ... ........ ... ............ ............ ......... ........ ...... ...... .......... ....... ............ ........ ............ ......... ... ... 1 AGREEMENT ........ .... ........................................................... ....................................................................................... 1 ARTICLE 1: DEFINITIONS............. ................................................................... ........ ............................................... 1 ARTICLE 2: EXHIBITS........................... ..... ....................................... ..................... ....................................... .......... 3 ARTICLE 3: CREATION AND EFFECT OF UNIT .................................................................................................. 4 ARTICLE 4: DESIGNATION OF UNIT OPERATOR ..... ......................................................................................... 5 ARTICLE 5 : RESIGNATION OR REMOVAL OF UNIT OPERATOR ................................................................... 5 ARTICLE 6: SUCCESSOR UNIT OPERATOR ............ ............................................................................................ 6 ARTICLE 7: UNIT OPERATING AGREEMENT........................................................... .......................................... 6 ARTICLE 8: PLANS OF EXPLORATION, DEVELOPMENT AND OPERATIONS.............................................. 7 ARTICLE 9: PARTICIPATING AREAS ................................................................................................................... 8 ARTICLE 10: OFFSET WELLS. .... .... ............................................. ..... ............................ ........... ............................. 10 ARTICLE 11 : ALLOCATION OF PRODUCTION ................................................................................................. 10 ARTICLE 12: LEASES, RENTALS AND ROYALTY PAYMENTS ....... ........... ........ ........ ......... .......................... 11 ARTICLE 13: UNIT EXPANSION AND CONTRACTION ................................................................................... 14 ARTICLE 14: UNIT EFFECTIVE DATE, TERM AND TERMINATION ............................................................. 15 ARTICLE 15: EFFECT OF CONTRACTION AND TERMINATION ................................................................... 15 ARTICLE 16: COUNTERPARTS................ ............. ................................................................................ ............... 16 ARTICLE 17 : LAWS AND REGULATIONS........... ............................... .......... .................. ............................... ..... 16 ARTICLE 18: APPEARANCES AND NOTICES.................................................................................................... 16 ARTICLE 19 : JOINDER..... '"'''.''''''''''''''''''' .............."................. .............................. ....................................... ...... 17 ARTICLE 20: DEFAULT............. ...................................................... ........... .............. ............................................. 17 Amended Ninilchik Unit Agreement ) ') NINILCHIK UNIT AGREEMENT RECITALS All record owners of any right, title, or interest in the oil or gas reservoirs or potential hydrocarbon accumulations to be included in this Unit have been invited to join this Agreement. The Commissioner of the Department of Natural Resources, State of Alaska, is authorized by Alaska Statute 38.05.180(p) and (q) and applicable regulations to consent to and approve oil and gas unit agreements to explore, develop and produce state oil and gas resources. AGREEMENT In consideration of the mutual promises in this Agreement, the parties commit their respective interests in the Unit Area defined in Exhibit A and depicted in Exhibit B to this Agreement, and agree as follows: ARTICLE 1: DEFINITIONS 1.1 Alaska Oil and Gas Conservation Commission (AOGCC) means the independent quasi-judicial agency of the State of Alaska established by the Alaska Oil and Gas Conservation Act, AS 31.05. 1.2 Approved Unit Plan means a Unit Plan that has been approved by the Commissioner. 1.3 Commissioner means the Commissioner of the Department of Natural Resources, State of Alaska, or the Commissioner's authorized representative. 1.4 Effective Date means the time and date this Agreement becomes effective. (~' \ 1.5 Lease or Leases means one or more oil and gas lease subject to this Agreement. " ~ 1.6 ------Substances. Oil and Gas Rights means the rights to explore, develop, and produce Unitized Amended Ninilchik Unit Agreement Page 1 ') ~) 1.7 Outside Substances means oil, gas, and other hydrocarbons and non-hydrocarbon substances obtained from outside the Unit Area and injected into a Reservoir in the Unit Area. 1.8 Outside P A Substances means oil, gas, and other hydrocarbons and non- hydrocarbon substances obtained from one Participating Area in the Unit Area and injected into a Reservoir in a different Participating Area in the Unit Area. 1.9 Participating Area means all Unit Tracts and parts of Unit Tracts designated as a Participating Area under Article 9. 1.10 Participating Area Expense means all costs, expenses or indebtedness, which are incurred by the Unit Operator for production from or operations in a Participating Area and allocated to the Unit Tracts in that Participating Area. 1.11 Paying Quantities means a quantity of Unitized Substances sufficient to yield a return in excess of operating costs, even if drilling and equipment costs will never be repaid and the undertaking considered as a whole will ultimately result in a loss. The quantity is insufficient to yield a return in excess of operating costs unless it will produce sufficient revenue, not considering transportation and marketing, to induce a prudent operator to produce it. 1.12 Reservoir means that part of the Unit Area containing an accumulation of Unitized Substances which has been discovered by drilling and evaluated by testing a well or wells, and which is geologically separate from and not in hydrocarbon communication with any other oil and gas accumulation. 1.13 State means the State of Alaska acting in this Agreement through the Commissioner. 1.14 Sustained Unit Production means continuing production of Unitized Substances from a well in the Unit Area into production facilities and transportation to market. 1.15 Unit Area means the lands subject to this Agreement, described in Exhibit A and depicted in Exhibit B to this Agreement, submerged or not. 1.16 Unit Equipment means all personal property, Lease and well equipment, plants, platforms and other facilities and equipment used, taken over or otherwise acquired for use in Unit Operations. 1.17 Unit Expense means all costs, expenses or indebtedness incurred by the Unit Operator for Unit Operations, except for Participating Area Expense. 1.18 Unit Operating Agreement means the agreement(s) entered into by the Unit Operator and the Working Interest Owners, as described in Article 7. 1.19 U nit Operations means all operations conducted in accordance with an Approved Unit Plan or Approved Unit Plans. Amended Ninilchik Unit Agreement Page 2 ) 1.20 Unit Operator means the party designated by the Working Interest Owners and approved by the Commissioner to conduct Unit Operations. 1.21 Unit Plan means a unit plan of exploration or development as described in Article 8. 1.22 Unit Tract means each separate parcel that is described in Exhibit A and given a Unit Tract number. 1.23 Unit Tract Participation means the percentage allocation credited to a Unit Tract in a Participating Area to allocate Unitized Substances. 1.24 Unitized Substances means all oil, gas and associated substances, as those terms are defined in the Leases, within or produced from the Unit Area. 1.25 Working Interest means the right to explore for, develop or produce Unitized Substances, or cause Unitized Substances to be explored for, developed or produced. 1.26 Working Interest Owner means a party who owns a Working Interest. ARTICLE 2: EXHIBITS 2.1 The following Exhibits are to be attached to and made a part of this Agreement. When this Agreement is approved, only Exhibits A, B, and G are required. Exhibit F is also required when this Agreement is approved, if the Unit Area includes Net Profit Share Leases. The Unit Operator shall supply all Exhibits. 2.2 Exhibit A is a table that displays for each Unit Tract: the Unit Tract number, the Lease number, the Working Interest ownership, and the applicable royalty and net profit share rates. 2.3 Exhibit B is a map that shows the boundary lines of the Unit Area and of each Unit Tract, identified by Unit Tract number and Lease number. 2.4 Exhibit C is comprised of a table for each Participating Area established under this Agreement. The Exhibit C table for each Participating Area must display the Unit Tract numbers, legal descriptions, Lease numbers, Working Interest ownership, and Unit Tract Participation for that Participating Area. 2.5 Exhibit D is comprised of a map for each Participating Area. Each Exhibit D map must show the boundary lines of a Participating Area and the Unit Tracts in that Participating Area, identified by Unit Tract number and Lease number. Amended Ninilchik Unit Agreement Page 3 ') ') 2.6 Exhibit E is comprised of a table for each Participating Area that displays the allocation of Participating Area Expense to each Unit Tract in the Participating Area, identified by Unit Tract number and Lease number. 2.7 Exhibit F is a table that displays the allocation of Unit Expense to each Unit Tract in the Unit Area, identified by Unit Tract number and Lease number. 2.8 Exhibit G is the unit plan of exploration or unit plan of development required by the regulations, and this Agreement. ARTICLE 3: CREATION AND EFFECT OF UNIT 3.1 All Oil and Gas Rights in and to the lands described in Exhibit A and shown in Exhibit B are subject to this Agreement so that Unit Operations will be conducted as if the Unit Area was a single Lease. 3.2 in effect. So long as this unit remains in effect, each Lease in the Unit Area shall continue 3.3 Except as otherwise provided in this Agreement, where only a portion of a Lease is committed to this Agreement, that commitment constitutes a severance of the Lease as to the unitized and nonunitized portions of the Leased area. The portion of the Leased area not committed to this Agreement will be treated as a separate and distinct Lease having the same effective date and term as the Lease and may be maintained only in accordance with the terms and conditions of the Lease, statutes, and regulations. Any portion of the Leased area not committed to this Agreement will not be affected by the unitization, by operations in the Unit Area, or by a suspension approved or ordered by the Commissioner. If a Lease has a well certified as capable of production in paying quantities on it before commitment to this Agreement, the Lease will not be severed. If any portion of the Lease is included in a participating area formed under this Agreement, the entire Lease will remain committed to this Agreement and the Lease will not be severed. 3.4 Production of Unitized Substances in Paying Quantities from any part of a Participating Area shall be considered production from each Unit Tract in the Participating Area. It shall cause the portion of each Lease that is wholly or partially within the Participating Area to continue in effect as if a well were producing from each Unit Tract in the Participating Area. 3.5 The provisions of the various Leases and agreements pertaining to the respective Leases or production from those Leases are amended only to the extent necessary to make them conform to the written provisions of this Agreement. Otherwise, those Leases and agreements shall remain in full force and effect. 3.6 This Agreement shall not be construed to transfer title to Oil and Gas Rights by any party to any other party or to the Unit Operator. Amended Ninilchik Unit Agreement Page 4 ') ') 3.7 Except as otherwise provided in this Agreement and subject to the terms and conditions of Approved Unit Plans, the exclusive rights and obligations of the Working Interest Owners to conduct operations to explore for, develop and produce Unitized Substances in the Unit Area are delegated to and shall be exercised by the Unit Operator. This delegation does not relieve a lessee of the obligation to comply with all Lease terms. The Unit Operator shall notify the other Working Interest Owners and the Commissioner of actions taken by the Unit Operator under this Agreement. The Unit Operator shall minimize and consolidate surface facilities to minimize surface impacts 3.8 All data and information determined by the Commissioner to be necessary for the administration of this Agreement or for the performance of statutory responsibilities shall be provided by the Unit Operator, or Working Interest Owners, or both upon written request. All data and information provided to the Commissioner shall be protected from disclosure pursuant to the Lease, governing law, and regulations. ARTICLE 4: DESIGNATION OF UNIT OPERATOR 4.1. Marathon Oil Company is designated as the Unit Operator. Marathon Oil Company agrees to accept the rights and obligations of the Unit Operator to conduct Unit Operations and to explore for, develop and produce Unitized Substances as provided in this Agreement. ARTICLE 5: RESIGNATION OR REMOVAL OF UNIT OPERATOR 5.1 The Unit Operator shall have the right to resign at any time. The Unit Operator's resignation shall not become effective until: 1) sixty days have passed since the Unit Operator delivers a written notice of an intention to resign to the Working Interest Owners and the Commissioner; and 2) all artificial islands, installations and other devices, including wells, used for operations in the Unit Area are in a condition satisfactory to the Commissioner for suspension or abandonment of operations. However, if a successor Unit Operator is designated and approved under Article 6, the resignation is effective when approved by the Commissioner. 5.2 The Unit Operator may be removed as provided in the Unit Operating Agreement. This removal shall not be effective until: 1) the Working Interest Owners notify the Commissioner and the Unit Operator; and 2) the Commissioner approves a successor Unit Operator. 5.3 The resignation or removal of the Unit Operator shall not release it from liability for any failure to meet obligations that accrued before the effective date of the resignation or removal. Amended Ninilchik Unit Agreement Page 5 ') ') 5.4 The resignation or removal of the Unit Operator does not terminate its rights, title or interest or obligations as a Working Interest Owner or other interest in the Unit Area. A termination of the Unit Operator's rights, title or interest may occur independently under the terms of the Leases and governing law. When the resignation or removal of the Unit Operator becomes effective, the Unit Operator shall relinquish possession of all Unit Equipment, artificial islands, wells, installations, devices, records, and any other assets used for conducting Unit Operations, whether or not located in the Unit Area, to the successor Unit Operator. ARTICLE 6: SUCCESSOR UNIT OPERATOR 6.1. Whenever the Unit Operator tenders its resignation as Unit Operator or is removed as provided in Article 5, a successor Unit Operator may be designated as provided in the Unit Operating Agreement. The successor Unit Operator must accept the rights and obligations of a Unit Operator in writing. The successor Unit Operator shall file an executed copy of the designation of successor with the Commissioner. The designation of successor Unit Operator will not become effective until approved by the Commissioner. 6.2. If no successor Unit Operator is designated within sixty days after notice to the Commissioner of the resignation or removal of a Unit Operator, the Commissioner will, in his or her discretion, designate another Working Interest Owner as successor Unit Operator, or declare this Agreement terminated. ARTICLE 7: UNIT OPERATING AGREEMENT 7.1 The Working Interest Owners and the Unit Operator shall enter into a Unit Operating Agreement. It will apportion all costs and liabilities incurred in maintaining or conducting Unit Operations among the Working Interest Owners. The Unit Operating Agreement will also apportion the benefits, which will accrue from Unit Operations among the Working Interest Owners. 7.2 Any allocation described in the Unit Operating Agreement will not bind the State in determining or settling royalties and net profit share payments. Allocations of Unit Expense, Participating Area Expense, or Unitized Substances for determining, settling and paying royalties and net profit share payments will be based on Exhibits C, E and F of this Agreement, and must be approved by the Commissioner in writing before taking effect. An original or revised conforming Exhibit C and F shall be submitted to the Commissioner within thirty days of: any change in the division of interest or allocation fonnula establishing or revising the Unit Tract Participation of any Unit Tract or Unit Tracts in a Participating Area. 7.3 The Working Interest Owners and the Unit Operator may establish, through one or more Unit Operating Agreements and amendments, other rights and obligations between the Unit Operator and the Working Interest Owners. The Unit Operating Agreement will not modify any Amended Ninilchik Unit Agreement Page 6 ~) ') term or obligation of this Agreement. If the terms of this Agreement and the Unit Operating Agreement conflict, this Agreement will prevail. 7.4 Any Working Interest Owner is entitled to drill a well on the unitized portion of its Lease when the Unit Operator declines to drill that well. A Working Interest Owner must have an approved permit to drill and the well must be part of an Approved Unit Plan. If the Commissioner determines any such well to be capable of producing Unitized Substances in Paying Quantities, the land upon which that well is situated will be included in a Participating Area. The Participating Area will be formed or an existing Participating Area enlarged as provided in this Agreement. The Unit Operator will thereafter operate the well in accordance with this Agreement and the Unit Operating Agreement. 7.5 The Unit Operator shall file a copy of the Unit Operating Agreement with the Commissioner when this Agreement is filed for approval. The copy of the Unit Operating Agreement is for informational purposes only. Approval of the Unit Agreement is not approval of the Unit Operating Agreement. Complete copies of all other Unit Operating Agreements and any amendments to them will also be filed with the Commissioner within thirty days of execution and at least thirty days before their effective dates. ARTICLE 8: PLANS OF EXPLORATION, DEVELOPMENT AND OPERATIONS 8.1. Any Unit Plan and any amendment to a Unit Plan will not be effective until the Commissioner approves it. Approved Unit Plans are incorporated into this Agreement and become effective on the date of their approval. 8.1.1. A unit plan of exploration ("Plan of Exploration") shall describe the proposed exploration and delineation activities for any land in the Unit Area that is not in a Participating Area. Plans of Exploration shall comply with 11 AAC 83.341 and any successor regulation. The Unit Operator shall submit updated Plans of Exploration to the Commissioner for approval at least sixty days before the current Plan of Exploration expires. 8.1.2. A unit plan of development ("Plan of Development") shall include a description of the proposed development activities based on data available when the plan is submitted. Plans of Development shall comply with 11 AAC 83.343 and any successor regulation. The Unit Operator shall submit updated Plans of Development to the Commissioner for approval at least ninety days before the current Plan of Development expires. 8.1.3. When this Agreement is submitted to the Commissioner for approval, an initial Plan of Development or an initial Plan of Exploration (collectively called the "Initial Unit Plan") shall be submitted for approval by the Commissioner. Amended Ninilchik Unit Agreement Page 7 ) ') 8.2. The Unit Operator shall not explore, develop or produce on the Unit Area except in accordance with an Approved Unit Plan. The Unit Operator shall obtain a plan of operations approval, and any other permits and approvals required before operations begin. A plan of operations approval must be consistent with the mitigation measures and lessee advisories developed for the most recent Lease within the Unit Area as deemed necessary by the Commissioner to protect the resources of the State. The Unit Operator shall submit a complete copy of all such applications to the Commissioner. 8.3. After Sustained Unit Production in Paying Quantities begins, Unit Operations shall be maintained, with lapses of no more than ninety days per lapse between operations. The lapse may be longer if suspension of operations or production has been ordered or approved by the Commissioner. Approved Unit Plans may call for a suspension of Unit Operations. 8.4. After giving written notice to the Unit Operator and an opportunity to be heard, the Commissioner may require the Unit Operator to modify from time to time the rate of prospecting and development and the quantity and rate of production. 8.5. If a well has been drilled in the Unit Area prior to the Effective Date of this Unit Agreement or is being drilled within the Unit Area on the Effective Date, that well will be considered a Unit Well as of the Effective Date of this Agreement. 8.6. The Commissioner will, in the agency's discretion, approve any injection of Outside Substances or Outside P A Substances within the Unit Area. Any injection of Outside Substances or Outside PA Substances within the Unit Area must be part of an Approved Unit Plan. ARTICLE 9: PARTICIPATING AREAS 9.1. The Unit Operator shall submit a request for approval of the proposed initial Participating Area to the Commissioner at least six months before Sustained Unit Production from a Reservoir in the Unit Area. A Participating Area shall include only land that is reasonably known to be underlain by Unitized Substances and known or reasonably estimated through the use of geological, geophysical and engineering data to be capable of producing or contributing to production of Unitized Substances in Paying Quantities. The Unit Operator shall notify the Commissioner when Sustained Unit Production begins from each Participating Area. 9.2. Each application for approval of a Participating Area shall include Exhibits C, D, E and F. If approved by the Commissioner, the area described in Exhibit C and depicted in Exhibit D shall be a Participating Area, and the allocation of Participating Area Expenses and Unit Expenses described in Exhibits E and F shall be effective on the effective date of the Participating Area. 9.3. A separate Participating Area shall be established for each Reservoir in the Unit Area. If one Reservoir underlies another Reservoir in whole or in part, separate Participating Amended Ninilchik Unit Agreement Page 8 ') Areas may be created for each Reservoir. Any two or more Reservoirs or Participating Areas may be combined into one Participating Area if approved by the Commissioner. 9.4. At the Unit Operator's election or if so directed by the Commissioner, the Unit Operator shall apply to expand or contract the Participating Area if expansion or contraction is warranted by geological, geophysical, or engineering data. Each application for expansion or contraction shall include Exhibits C, D, E, and F. The application must be submitted to the Commissioner for approval. Before any directed expansion or contraction of the Participating Area, the Commissioner will give the Unit Operator reasonable notice and an opportunity to be heard. 9.5. The Commissioner will establish the effective date of the initial Participating Area. That effective date shall be no later than the date of the first Sustained Unit Production. The Commissioner will establish the effective date of each later Participating Area. 9.6. Land in a Participating Area shall remain in that Participating Area even if its Unitized Substances are depleted. 9.7. If the Working Interest Owners cannot agree on the fair, reasonable and equitable allocation of production or costs, the Commissioner shall prescribe an allocation. 9.8. A Unitized Substance produced from one Participating Area ("Originating Participating Area") may be used as an Outside P A Substance ("Injected Substance") for repressuring, recycling, storage or enhanced recovery purposes in another Participating Area ("Receiving Participating Area") only if the State is paid royalty as if the Unitized Substance was sold by the Working Interest Owners, except as follows: 9.8.1. If the Commissioner consents to the transfer of Unitized Substances between Participating Areas without immediate payment of royalties, the Unit Operator shall provide monthly reports to the State. These monthly reports shall reflect the volumes of any Unitized Substance transferred and the British thermal units ("Btus") in any natural gas Unitized Substance transferred as an Outside P A Substance during the preceding month. 9.8.2. If the Commissioner consents to the transfer of Unitized Substances between Participating Areas without immediate payment of royalties, the royalties shall be paid when the Injected Substances are produced and sold from the Receiving Participating Area. The first natural gas Unitized Substances produced and sold from the Receiving Participating Area shall be considered to be the Injected Substances until a volume of natural gas containing Btus equal to the Btus contained in the Injected Substances is produced and sold from the Receiving Participating Area. All the Unitized Substances produced and sold from a Receiving Participating Area that are considered to be the Injected Substance shall be allocated to the Originating Participating Area. The Working Interest Owners shall pay the State royalties on Injected Substances produced and sold from a Receiving Participating Area as if those Amended Ninilchik Unit Agreement Page 9 ') ) Injected Substances were produced and sold from the Originating Participating Area when they were produced from the Receiving Participating Area. 9.9. All liquid hydrocarbons removed in any equipment or facility in Alaska from produced Injected Substances and not used for fuel shall be allocated to the Receiving Participating Area. If liquid hydrocarbons are removed from the natural gas, the Btu content of the natural gas shall be measured after liquid hydrocarbons are removed. 9.10. The Commissioner must approve the deemed recovery rate and commencement date for recovery before any Outside Substance is injected within the Unit Area. 9.11. After giving written notice to the Unit Operator and an opportunity to be heard, the Commissioner will, in his or her discretion, require the Unit Operator to modify from time to time the rate of prospecting and development and the quantity and rate of production from a Participating Area. ARTICLE 10: OFFSET WELLS 10.1. The Unit Operator shall drill such wells as a reasonable and prudent operator would drill to protect the State from loss by reason of drainage resulting from production on other land. Without limiting the generality of the foregoing sentence, if oil or gas is produced in a well on other land not owned by the State or on which the State receives a lower rate of royalty than under any Lease in the Unit Area, and that well is within 500 feet in the case of an oil well or 1,500 feet in the case of a gas well of lands then subject to this Agreement, and that well produces oil or gas for a period of 30 consecutive days in quantities that would appear to a reasonable and prudent operator to be sufficient to recover ordinary costs of drilling, completing, and producing an additional well in the same geological structure at an offset location with a reasonable profit to the operator, and if, after notice to the Unit Operator and an opportunity to be heard, the Commissioner finds that production from that well is draining lands then subject to this Agreement, the Unit Operator shall within 30 days after written demand by the Commissioner begin in good faith and diligently prosecute drilling operations for an offset well on the Unit Area. In lieu of drilling any well required by this paragraph, the Working Interest Owners may, with the Commissioner's consent, compensate the State in full each month for the estimated loss of royalty through drainage in the amount determined by the Commissioner. ARTICLE 11: ALLOCATION OF PRODUCTION 11.1 Production and costs will be allocated according to 11 AAC 83.371 and any successor regulation. The Unit Operator shall submit a proposed allocation plan, with supporting data, to the Commissioner for approval. The Commissioner will, in his or her discretion, revise the proposed. allocation plan if it does not equitably allocate production and costs from the Reservoir. The Commissioner will give the Working Interest Owners reasonable notice and an Amended Ninilchik Unit Agreement Page 10 ) ') opportunity to be heard before revising the Unit Operator's proposal. The allocation plan must be revised whenever a Participating Area is expanded or contracted. Within thirty days after approval by the Commissioner of any division of interest or allocation formula establishing or revising the Unit Tract Participation of any Unit Tract or Unit Tracts in a Participating Area, the Unit Operator shall submit revised Exhibits C and F to the Commissioner. The Unit Operator may submit a revised Exhibit F anytime, but any revisions to Exhibit F are not effective until approved by the Commissioner. 11.2 The Working Interest Owners shall pay royalties for each Unit Tract in proportion to each Working Interest Owner's ownership in that Unit Tract. The amount of Unitized Substances allocated to each Unit Tract shall be deemed to have been produced from that Unit Tract. 11.3 The Working Interest Owners may allocate Unitized Substances, Participating Area Expense, and Unit Expense differently than described in Exhibits C, E and F. However, that allocation shall not be effective for determining royalty or net profit share payments. The Unit Operator shall submit any allocation which is different than the allocations required in Exhibit C, E or F to the Commissioner under 11 AAC 83.371(b) for the State's information within ten days of its effective date with a statement explaining the reason for the different allocation. 11.4 Royalties shall not be due or payable to the State for the portion of Unitized Substances unavoidably lost or used in the Unit Area for development and production in accordance with prudent industry practices. Gas that is flared for any reason other than safety purposes as allowed by the AOGCC shall not be deemed to be unavoidably lost, and the Working mterest Owners shall pay royalties for such flared gas as if it had been produced. This exemption does not apply to Unitized Substances that are sold, traded or assigned, including sales, transactions, or assignments among the Working Interest Owners. 11.5 If a State Lease committed to this Agreement provides for a discovery royalty rate reduction for the first discovery of oil or gas, that Lease provision shall not apply to a well spudded after the Effective Date. ARTICLE 12: LEASES, RENTALS AND ROYALTY PAYMENTS 12.1. The Working Interest Owners shall pay rentals and royalty payments due under the Leases. Those payments must be made to any depository designated by the State with at least sixty days notice to the Unit Operator and the Working Interest Owners. 12.2. Each month, the Unit Operator shall furnish a schedule to the Commissioner. That schedule shall specify, for the previous month: 1) the total amount of Unitized Substances produced; 2) the amount of Unitized Substances used for development and production or unavoidably lost; 3) the total amount of Unitized Substances allocated to each Unit Tract; 4) the amount of Unitized Substances allocated to each Unit Tract and delivered in kind as royalty to Amended Ninilchik Unit Agreement Page 11 ') ) the State; and 5) the amount of Unitized Substances allocated to each Unit Tract for which royalty is to be or has been paid to the State. 12.3. Each Working Interest Owner shall pay its share of royalties to the State on Unitized Substances as provided in the Lease, except "leased area" shall mean Unit Area, and "oil, gas, or associated substances" shall mean Unitized Substances. 12.4. Notwithstanding any contrary Lease term, royalties and the share of Unitized Substances attributable to royalties and any payment due must be paid free and clear of all Lease expenses, Unit Expenses and Participating Area Expenses. These excluded expenses include, but are not limited to, separating, cleaning, dehydration, saltwater removal, processing, and manufacturing costs. These excluded expenses also include the costs of preparing the Unitized Substances for transportation off the Unit Area and gathering and transportation costs incurred before the Unitized Substances are delivered to a common carrier pipeline. No lien for any of the excluded expenses shall attach to royalty Unitized Substances. The royalty share shall bear a proportionate part of any gas shrinkage that occurs during gas processing and blending. 12.4.1 Notwithstanding any contrary Lease term or provision in 11 AAC 83.228-11 AAC 83.229, all royalty deductions for transportation, including marine and pipeline transportation, :ITom the Unit Area to the point of sale are limited to the actual and reasonable costs incurred by the Working Interest Owners. These transportation costs must be determined by taking into account all tax benefits applicable to the transportation 12.5. The Unit Operator shall give the Commissioner notice of the anticipated date for commencement of production at least six months before the commencement of Sustained Unit Production :ITom a Participating Area. Within ninety days of receipt of that notice, the Commissioner will give the Working Interest Owners written notice of its elections to take in kind all, none, a specified percentage, or a specified quantity of its royalties in any Unitized Substances produced from the Participating Area. The Commissioner will, in his or her discretion, increase or decrease (including ceasing to take royalty Unitized Substances in kind) the amount of royalty Unitized Substances the State takes in kind. The Commissioner shall give written notice to the Working Interest Owners ninety days before the first day of the month in which an increase or decrease is to be effective. 12.5.1. The Commissioner will, in his or her discretion, elect to specify the Unit Tracts from which royalty Unitized Substances taken in kind are to be allocated. 12.5.2. The Unit Operator shall deliver the State's royalty Unitized Substances at the custody transfer meter at a common carrier pipeline capable of carrying those substances, or at any other place mutually agreeable place. The State will, in its discretion, designate any individual, f1ffi1 or corporation to accept delivery. 12.5.3. Royalty Unitized Substances delivered in kind shall be delivered in good and merchantable condition and be of pipeline quality. If a Working Interest Owner processes the Unitized Substances to separate, extract or remove liquids from a Amended Ninilchik Unit Agreement Page 12 ) ') Working Interest Owner's share of natural gas Unitized Substances, the State will, in its discretion, require that a Working Interest Owner also process the State's share of natural gas being taken in kind in the same manner without cost to the State. Under these circumstances, the State, or its buyer, shall only pay any tariffed transportation costs and shrinkage of the volume of gas resulting from processing. 12.5.4. Each Working Interest Owner shall furnish storage in or near the Unit Area for the State's share of Unitized Substances to the same extent that the Working Interest Owner provides storage for its own share of Unitized Substances. 12.6. If a purchaser of the State's royalty Unitized Substances does not take delivery of Unitized Substances, the State will, in its discretion elect, without penalty, to underlift for up to six months. The State will, in its discretion, underlift all or a portion of those substances. The State's right to underlift is limited to the portion of those substances that the purchaser did not take delivery of or what is necessary to meet an emergency condition. The State shall give the Unit Operator written notice thirty days before the first day of the month in which the underlifted royalty Unitized Substances are to be recovered. The State will, in its discretion, recover at a daily rate not exceeding 25 percent (250/0) of its share of daily production, unless otherwise agreed. 12.7. The Unit Operator shall keep and have in its possession books and records showing the exploration, development, production and disposition of all Unitized Substances produced from the Unit Area. The Unit Operator shall permit the State or its agents to examine these books and records at all reasonable times. Upon request by the State, the Unit Operator's books and records shall be made available to the State at the State office designated by the State. These books and records of exploration, development, production, and disposition must employ methods and techniques that will ensure the most accurate figures reasonably available. The Unit Operator shall use generally accepted accounting procedures consistently applied. 12.8. If a Lease committed to this Agreement specifies the amount of rent due, that Lease is amended to require that rentals due be calculated under A.S. 38.05.180(n), as amended. If a Lease committed to this Agreement requires payment of minimum royalty, that Lease is amended to delete that minimum royalty obligation. The rental due under State law, as amended, must be paid in lieu of minimum royalty. 12.9. All rights and obligations relating to the State's net profit share will be determined in accordance with 11 AAC 83.201 - 11 AAC 83.295, as amended, notwithstanding any contrary Lease term. The State will, in its discretion, audit the net profit share reports or payments due for any Lease within ten years of the date of production. The period of limitations for the State to file a lawsuit relating to an audit of a net profit share report or payment shall be three years longer than the audit period. The Working Interest Owners holding interests in net profit share Leases shall maintain the records relevant to determination of net profit share until the audit period has expired. Amended Ninilchik Unit Agreement Page 13 ') ) ARTICLE 13: UNIT EXPANSION AND CONTRACTION 13.1. The Unit Operator, at its own election may, or at the direction of the Commissioner shall, apply to expand the Unit Area to include any additional lands determined to overlie a Reservoir that is . at least partially within the Unit Area, or to include any additional lands that facilitate production. The Unit Operator shall notify the Working Interest Owners of the proposed expansion. Any unit expansion shall not be effective until approved by the Commissioner. 13.2. Ten years after Sustained Unit Production begins, the Unit Area must be contracted to include only those lands then included in an approved Participating Area and lands that facilitate production including the immediately adjacent lands necessary for secondary or tertiary recovery, pressure maintenance, reinjection, or cycling operations. The Commissioner will, in the Commissioner's discretion, after considering the provisions of 11 AAC 83.303, delay contraction of the Unit Area if the circumstances of a particular unit warrant. If any portion of a Lease is included in the Participating Area, the portion of the Lease outside the Participating Area will neither be severed nor will it continue to be subject to the terms and conditions of the unit. The portion of the Lease outside the Participating Area will continue in full force and effect so long as production is allocated to the unitized portion of the Lease and the lessee satisfies the remaining terms and conditions of the Lease. 13.3. Not sooner than 10 years after the effective date of this Agreement, the Commissioner will, in the Commissioner's discretion, contract the Unit Area to include only that land covered by an approved unit plan of exploration or development, or that area underlain by one or more oil or gas reservoirs or one or more potential hydrocarbon accumulations and lands that facilitate production. Before any contraction of the Unit Area under this Section, the Commissioner will give the Unit Operator, the Working Interest Owners, and the royalty owners of the Leases or portions of Leases being excluded reasonable notice and an opportunity to be heard. 13.4. The Commissioner will give the Unit Operator and the Working Interest Owners of the affected Leases reasonable notice and an opportunity to be heard before any directed contraction or expansion of the Unit Area. 13.5. The Unit Area may be contracted with the Commissioner's approval and an affirmative vote of the Working Interest Owners. 13.6. Within thirty days after approval by the Commissioner of any expansion or contraction of the Unit Area, the Unit Operator shall submit revised Exhibits A and B to the Commissioner. Amended Ninilchik Unit Agreement Page 14 ') ) ARTICLE 14: UNIT EFFECTIVE DATE, TERM AND TERMINATION 14.1. This Agreement is effective as of 12:01 a.m. on the day after the Commissioner approves it. At least one copy of this Agreement shall be filed with the Department of Natural Resources, Anchorage, Alaska and one copy shall be filed with the AOGCC. This Agreement is binding upon each party who signs any counterpart. 14.2. Subject to the terms and conditions of the Approved Unit Plan, this Agreement terminates five years from the Effective Date unless: 14.2.1. A unit well in the Unit Area has been certified as capable of producing Unitized Substances in Paying Quantities; or 14.2.2. The unit term is extended with the approval of the Commissioner. An extension shall not exceed five years. 14.3. If the Commissioner orders or approves a suspension of production or other Unit Operations, this Agreement shall continue in force during the authorized suspension. 14.4. Nothing in this Article holds in abeyance the obligations to pay rentals, royalties, or other production or profit-based payments to the State from operations or production in any part of the Unit Area. Any seasonal restriction on operations or production or other condition required in the Lease is not a suspension of operations or production required by law or Force Maj eure. 14.5. This Agreement may be terminated by an affirmative vote of the Working Interest Owners and the Commissioner's approval. ARTICLE 15: EFFECT OF CONTRACTION AND TERMINATION 15.1. If a Lease or portion of a Lease is contracted out of the Unit Area under this Agreement, then it will be maintained only in accordance with State law and the Lease. 15.2. Each Lease committed to this Agreement on the day that this Agreement terminates shall remain in force for an extension period of ninety days, or any longer period which may be approved by the Commissioner. After the extension period expires, the Lease will be maintained only in accordance with State law and the Lease. 15.3. Upon the expiration or earlier termination of the unit, the Unit Operator will be directed in writing by the Commissioner and will have the right at any time within a period of one year after the termination, or any extension of that period as may be granted by the Commissioner, to remove from the Unit Area all machinery, equipment, tools, and materials. Upon the expiration of that period or extension of that period and at the option of the Amended Nini1chik Unit Agreement Page 15 ) ') Commissioner, any machinery, equipment, tools, and materials that the Unit Operator has not removed from the Unit Area become the property of the State or may be removed by the State at the Working Interest Owners' expense. At the option of the State, all improvements such as roads, pads, and wells must either be abandoned and the sites rehabilitated by the Unit Operator to the satisfaction of the State, or be left intact and the Unit Operator absolved of all further responsibility as to their maintenance, repair, and eventual abandonment and rehabilitation. Subject to the above conditions, the Unit Operator shall deliver up the Unit Area in good condition. ARTICLE 16: COUNTERPARTS 16.1. The signing öf counterparts of this Agreement shall have the same effect as if all parties had signed a single original of this Agreement. Within thirty days after approval by the Commissioner of any change of the Working Interest ownership of Oil and Gas Rights in any Unit Tract, the Unit Operator shall submit a revised Exhibits A and C to the Commissioner. ARTICLE 17: LAWS AND REGULATIONS 17.1. This Agreement is subject to all applicable State and federal statutes and regulations in effect of the Effective Date of this Agreement, and insofar as is constitutionally permissible, to all statues and regulations placed in effect after the Effective Date of this Agreement. A reference to a statute or regulation in this Agreement includes any change in that statute or regulation whether by amendment, repeal and replacement, or other means. This Agreement does not limit the power of the State of Alaska or the United States of America to enact and enforce legislation or to promulgate and enforce regulations affecting, directly or indirectly, the activities of the parties to this Agreement or the value of interests held under this Agreement. In case of conflicting provisions, statutes and regulations take precedence over this Agreement. ARTICLE 18: APPEARANCES AND NOTICES 18.1. If the State gives the Unit Operator a notice or order relating to this Agreement it shall be deemed given to all Working Interest Owners and all persons whose interest in the Unit Area derived from a Working Interest. All notices required by this Agreement shall be given in writing and delivered personally, or by United States mail or by facsimile machine to the Unit Operator at the address or facsimile number listed below. All notices actually received will also be deemed properly given. The Unit Operator will change its notice address by giving thirty days written notice to the State and the other Working Interest Owners. The State will change its notice address by giving thirty days written notice to the Unit Operator. Amended Nini1chik Unit Agreement Page 16 ) ) Address of the Unit Operator: Fax: Address of the State: Commissioner, Department of Natural Resources 550 West Seventh Avenue, Suite 1400 Anchorage, Alaska 99501-3554 Fax: (907) 269-8918 with a copy to: Director, Division of Oil and Gas 550 West Seventh Avenue, Suite 800 Anchorage, Alaska 99501-3560 Fax: (907) 269-8938 ARTICLE 19: JOINDER 19.1. The Commissioner will, in his or her discretion, order or, upon request, approve a joinder to this Agreement under the expansion provisions of Article 12. The Unit Operator shall submit a request for joinder with a signed counterpart of this Agreement and a notice of proposed expansion under Article 12. A joinder is subject to the requirements of the Unit Operating Agreement. However, the Commissioner will, in his or her discretion, modify any provision in a Unit Operating Agreement, which the Commissioner finds discriminates against parties who request joinder. The Commissioner shall give notice and an opportunity to be heard to the Unit Operator before modifying the Unit Operating Agreement. ARTICLE 20: DEFAULT 20.1 The Commissioner will, in his or her discretion, determine that failure of the Unit Operator or the Working Interest Owners to comply with any of the terms of this Agreement, including any Approved Unit Plan, is a default under this Agreement. The failure to comply because of Force Majeure is not a default. Amended Ninilchik Unit Agreement Page 17 ) ') 20.2 The Commissioner will give notice to the Unit Operator and the Working Interest Owners of the default. The notice will describe the default, and include a demand to cure the default by a certain date. The cure period shall be at least thirty days for a failure to pay rentals or royalties and ninety days for any other default. 20.3 If there is no well certified as capable of producing Unitized Substances in Paying Quantities and a default is not cured by the date indicated in the demand, the Commissioner will, in his or her discretion, terminate this Agreement after giving the Unit Operator notice and an opportunity to be heard. The Commissioner will give notice, by mail, of the termination, which is effective upon mailing the notice. 20.4 If there is a well capable of producing Unitized Substances in Paying Quantities and the operations to cure the default are not completed by the date indicated in the demand, the Commissioner will terminate this Agreement by judicial proceedings. 20.5 This Article's remedies are in addition to any other administrative or judicial remedy provided for by Lease, this Agreement, or federal or State law. IN WITNESS OF THE FOREGOING, the parties have executed this Unit Agreement on the dates opposite their respective signatures. WORKING INTEREST OWNERS By: Date: (Company Name, signatory's printed name and title) STATE OF ALASKA ) )ss. ) THIRD JUDICIAL DISTRICT This certifies that on November -' 2000, before me, a notary public in and for the State of Alaska, duly commissioned and sworn, personally appeared , known to me to be the person described in, and who executed the foregoing agreement, who then after being duly sworn according to law, acknowledged to me under oath that he executed same freely and voluntarily for the uses and purposes therein mentioned. WITNESS my hand and official seal the day and year in this certificate fIrst above written. NOTARY PUBLIC in and for Alaska My Commission Expires: Amended Ninilchik Unit Agreement Page 18