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Home My WebLink AboutCO 676• 0 INDEX CONSERVATION ORDER NO. 676 Kenai Loop No. 1-4 Exploratory Gas Well Kenai Peninsula Borough, Alaska 1. June 6, 2013 Buccaneer Alaska Operations, LLC's (Buccaneer) letter to AOGCC requesting a spacing exception for Kenai Loop (KL) No. 1-4 2. June 6, 2013 Buccaneer's letter William Trimmingham and Paul Whiteman, Associated Finance & Assurance Corp., Hilcorp Alaska, LLC, Alaska Mental Health Trust Land Office, State of Alaska — Department of Natural Resources, Cook Inlet Region, Inc. (CIRI), and Buccaneer providing notice that Buccaneer has submitted an application for a spacing exception with the AOGCC for KL No. 1-4 3. June 25, 2013 Buccaneer's letter to AOGCC enclosing the completed return receipts related to the spacing exception for KL No. 1-4 4. July 2, 2013 Emails between Buccaneer and AOGCC regarding KL No. 1-4 permit to Drill Application and Spacing Exception Application 5. July 3, 2013 Notice of Public Hearing, Affidavits of Publication, email distribution, and mailings 6. August 1, 2013 Emails between CIRI and AOGCC regarding confirmation of public hearing 7. -------------------- DNR's denial of Buccaneer's request for the establishment of Kenai Loop Unit 8. August 13, 2013 Public hearing transcript, sign -in sheet, and exhibits (Buccaneer's engineering presentation and pages 10-120 of public hearing transcript held confidential) 9. August 16, 2013 The Trust Land Office's letter to AOGCC regarding support of granting the spacing exceptions requested by Buccaneer for KL No. 1-4 10. August 16, 2013 Documents requested at hearing from Buccaneer (Entire package held confidential for organizational purposes, several documents in package not confidential) 11. August 26, 2013 DNR's letter to AOGCC regarding pending requests to AOGCC for spacing exception for KL No. 1-4 12. August 26, 2013 DNR's letter to Buccaneer regarding pending AOGCC requests for spacing exception for KL No. 1-4 13. August 26, 2013 CIRI's letter to AOGCC regarding requests for information 14. August 27, 2013 Buccaneer's letter to AOGCC regarding DNR's comments on pending requests to AOGCC for spacing exception for KL No. 1-4 15. August 27, 2013 DNR's letter to AOGCC regarding Buccaneer letter of August 27, on DNR objections to pending requests to AOGCC for spacing exception for KL No. 1-4 16. August 27, 2013 CIRI's supplemental letter to AOGCC regarding response for requests for information 17. August 30, 2013 CIRI's letter to AOGCC regarding request to enjoin drilling of KL No. 1-4 18. September 26, 2013 Letter from DNR to Buccaneer regarding well testing 1-4 19. September 27, 2013 Buccaneer's response to DNR's 9/26/13 letter 20. August 9, 2017 AIX request for classification change of well KL 1-4 ORDERS STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage Alaska 99501 Re: THE APPLICATION OF Buccaneer Alaska Operations, LLC (Buccaneer) for an exception to the spacing requirements of 20 AAC 25.055(a)(2) to test and produce gas well Kenai Loop No. 1-4 within 1,500 feet of a property line where the owner and landowner are not the same on both sides of the line. BY THE COMMISSION: Docket Number: CO -13-08 Conservation Order No. 676 Kenai Loop No. 1-4 Exploratory Gas Well Kenai Peninsula Borough, Alaska September 3, 2013 NOTICE CLOSING DOCKET The Commission has the closed the Docket in the above captioned matter. ENTERED AND EFFECTIVE at Anchorage, Alaska and this 3rd day of September, 2013. BY DIRECTION OF THE COMMISSION STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION 333 West 7th Avenue, Suite 100 Anchorage Alaska 99501 Re: THE APPLICATION OF Buccaneer ) Docket Number: CO -13-08 Alaska Operations, LLC (Buccaneer) for an ) Conservation Order No. 676 exception to the spacing requirements of 20 ) AAC 25.055(a)(2) to test and produce gas well ) Kenai Loop No. 1-4 Kenai Loop No. 1-4 within 1,500 feet of a ) Exploratory Gas Well property line where the owner and landowner ) Kenai Peninsula Borough, Alaska are not the same on both sides of the line. ) September 3, 2013 APPEARING THAT: 1. By letter received June 12, 2013, Buccaneer requested the Alaska Oil and Gas Conservation Commission (AOGCC) grant an exception to the spacing requirements of 20 AAC 25.055(a)(2) to test and produce gas well Kenai Loop No. 1-4 within 1,500 feet of a property line where the owner and landowner are not the same on both sides of the line. An exception to the spacing requirements of 20 AAC 25.055(a)(4) is also needed to drill and complete Kenai Loop No. 1-4 (Kenai Loop 1-4) in the same governmental section as, and within 3,000 feet of, wells that are, or may be capable of, producing from the same pool. 2. On June 6, 2013, by certified mail, Buccaneer sent notice of the application to all owners, landowners, and operators of all properties within 3,000' of the planned Kenai Loop 1-4 well. Buccaneer provided AOGCC the notice, dates of mailing, addresses to which the notice was sent, and proof of certified mailing. 3. A public hearing was scheduled for August 13, 2013. On July 3, 2013 AOGCC published notice of that hearing on the State of Alaska's Online Public Notice website and on AOGCC's website, and electronically transmitted the notice to all persons on AOGCC's email distribution list. On July 4, 2013, the notice was published in the ANCHORAGE DAILY NEWS. On July 8, 2013, AOGCC mailed copies of the Notice of Public Hearing to all persons on AOGCC's mailing distribution list. 4. Potentially affected owners, landowners, and operators within a 3,000 -foot radius of Kenai Loop 1-4 are Mental Health Trust (MHT), the State of Alaska, Department of Natural Resources (DNR) and Cook Inlet Region, Inc. (CIRI). 5. On July 30, 2013, CIRI protested Buccaneer's application and requested that the public hearing go forward as scheduled. 6. The public hearing was held on August 13, 2013, and testimony was received from Buccaneer, Cook Inlet Region, Inc. (CIRI), and the Trust Land Office—representatives for MHT. 7. CIRI's representative noted that Section 33 of T6N, R11 W, S.M. (Section 33) is included within the Affected Area of Conservation Order No. 231. On August 16, 2013, the Trust Land Office provided written comments regarding Buccaneer's requested spacing exception and requested clarification regarding Conservation Order No. 231 as it applies to Sections 32, 33, and 34 of T6N, RI 1 W, S.M. CIRI offered testimony that lease C- Order 676 • September 3, 2013 Page 2 of 4 061167 was owned by Buccaneer until January 2013 when CIRI rescinded the lease. Buccaneer claimed that C-061167 remains a valid lease and that Buccaneer is contesting CIRI's rescinding of that lease. CIRI offered testimony that the Kenai Loop 1-4 well will drain lease C-061167. 8. Buccaneer presented testimony and maps concerning the geographic extent of seismic anomalies targeted by Kenai Loop 1-4. Buccaneer's interpretation of seismic evidence suggests that these anomalies are gas -bearing. Several of Buccaneer's maps indicate that these anomalies extend into leases C-061167 and ADL -391094. 9. Buccaneer offered no evidence to dispute CIRI's claim that the Kenai Loop 1-4 well will drain lease C-061167. 10. At the conclusion of the public hearing, the record was left open. AOGCC requested additional information from Buccaneer and CIRI. 11. On August 16, 2013, Buccaneer submitted additional information requested at the public hearing. 12. On August 26, 2013, DNR submitted a protest to Buccaneer's application. DNR contends the spacing exception for the Kenai Loop 1-4 well should not be granted because Buccaneer failed to submit a plan of operations in violation of DNR regulations and because the absence of pool rules jeopardizes DNR's correlative rights. 13. On August 27, 2013 CIRI submitted additional information and reiterated its objection that granting the spacing exception would violate its correlative rights. 14. On August 27, 2013 Buccaneer filed a response to DNR's August 26, 2013 protest. Buccaneer's response sets forth its disagreement with DNR's interpretation of DNR's regulations, its disagreement with DNR's unwillingness to unitize leases, and its claim that "concerns related to pooling and correlative rights are ... being addressed by Buccaneer, the Division and the Mental Health Trust." 15. On August 27, 2013 CIRI filed an additional objection to the spacing exception, reiterating its correlative rights claims.' 16. On August 27, 2013 DNR responded to Buccaneer's August 27, 2013 letter. DNR reiterated its claims that granting the spacing exception would violate DNR's correlative rights. DNR further stated Buccaneer is not in compliance with DNR regulations because it has not filed a plan of operations. FINDINGS: 1. Kenai Loop 1-4 is an onshore, deviated exploratory gas well located in the Kenai Peninsula Borough, Alaska.2 In both its August 26, 2013 and its August 27, 2013 letters, CIRI raises claims that Buccaneer is "illegally draining" CIRI acreage from the Kenai Loop 1-1 and 1-3 wells. Those issues were not a part of the Commission's public notice for the spacing exception and are therefore not before the Commission in this proceeding. In addition, the Commission notes CIRI has not filed any request for relief based upon these claims. 2 Buccaneer testified at the public hearing on August 13, 2013 that Kenai Loop 1-4 has been drilled to surface casing point. Order 676 • September 3, 2013 Page 3 of 4 2. Kenai Loop 1-4 has a surface location 1254' from the west line and 1765' from the north line of Section 33, T6N, R11 W, Seward Meridian (S.M.) and a planned bottom -hole location 2446' from the west line and 2445' from the north line of Section 33, T6N, R11 W, S.M. 3. Kenai Loop 1-4 is located within Mental Health Trust land lease MHT 9300082. Buccaneer is the owner and operator of this lease and Kenai Loop 1-4. 4. Buccaneer selected the bottom hole location for Kenai Loop 1-4 based on interpretation of 2D and 3D seismic data and information from nearby wells. Buccaneer asserts that Kenai Loop 1-4 is necessary to complete, test, and produce natural gas from intervals that do not appear to be open to existing wells. 5. As planned, Kenai Loop 1-4 will lie within 3,000' of existing wells Kenai Loop 1-1 and Kenai Loop No. 1-3 (Kenai Loop 1-3), which are presently on regular gas production. 6. The planned bottom -hole location for Kenai Loop 1-4 lies within about 300' of the property line with State of Alaska lease ADL -391094, which is owned and operated by Buccaneer. 7. The planned bottom -hole location for Kenai Loop 1-4 lies within about 300' of acreage identified on Buccaneer's maps as lease C-061167. CIRI is the landowner of lease C- 061167. 8. Buccaneer's net pay isochore maps indicate that one of the sands targeted by Kenai Loop 1-4 extends into leases C-061167 and ADL -391094. 9. Buccaneer testified that 30' is the minimum thickness of reservoir sand that can be detected using their current 3D seismic survey. CONCLUSIONS: 1. Conservation Order No. 231 remains in effect; Section 33 and Kenai Loop 1-4 and lie with the Affected Area of that Order. However, as owner and operator of Kenai Loop 1-4, Buccaneer bears the burden of proof that this well will not impact the correlative rights of adjacent owners and landowners. 2. Buccaneer did not present convincing evidence that potentially gas -bearing reservoirs targeted by Kenai Loop 1-4 will not drain adjacent leases ADL -391094 and C-061167. 3. AOGCC has a statutory obligation to protect correlative rights. Any issues regarding whether Buccaneer is in compliance with DNR regulations should be adjudicated by DNR, not by AOGCC.NOW THEREFORE IT IS ORDERED: Buccaneer's is authorized to continue drilling the Kenai Loop 1-4 well. No testing of the Kenai Loop 1-4 is allowed without the prior written approval of the Commission after Buccaneer has provided notice to CIRI, DNR and the MHT. Any approval shall be contingent upon Order 676 • September 3, 2013 Page 4 of 4 Buccaneer's agreement to provide all data obtained as a result of the test to both CIRI and DNR. No production may begin from the Kenai Loop 1-4 well absent prior written approval of the Commission and the filing of a pooling agreement. DONE at Anchorage, Alaska and dated September 3, 2013. Cathy . Foerster Chair, Commissioner �M REC APPEAL NOTICE As provided in AS 31.05.080(a), within 20 days after written notice of the entry of this order or decision, or such further time as the AOGCC grants for good cause shown, a person affected by it may file with the AOGCC an application for reconsideration of the matter determined by it. If the notice was mailed, then the period of time shall be 23 days. An application for reconsideration must set out the respect in which the order or decision is believed to be erroneous The AOGCC shall grant or refuse the application for reconsideration in whole or in part within 10 days after it is filed. Failure to act on it within 10 -days is a denial of reconsideration. If the AOGCC denies reconsideration, upon denial, this order or decision and the denial of reconsideration are FINAL and may be appealed to superior court. The appeal MUST be tiled within 33 days after the date on which the AOGCC mails, OR 30 days if the AOGCC otherwise distributes, the order or decision denying reconsideration, UNLESS the denial is by inaction, in which case the appeal MUST be filed within 40 days after the date on which the application for reconsideration was filed. If the AOGCC grants an application for reconsideration, this order or decision does not become final. Rather, the order or decision on reconsideration will be the FINAL order or decision of the AOGCC, and it may be appealed to superior court. 'chat appeal MUST be filed within 33 days after the date on which the AOGCC mails, OR 30 days if the AOGCC otherwise distributes, the order or decision on reconsideration. As provided in AS 31.05.080(b), "[t]he questions reviewed on appeal are limited to the questions presented to the AOGCC by the application for reconsideration." In computing a period of time above, the date of the event or default after which the designated period begins to run is not included in the period; the last day of the period is included, unless it falls on a weekend or state holiday, in which event the period runs until 5:00 p.m. on the next day that does not fall on a weekend or state holiday. Singh, Angela K (DOA) From: Colombie, Jody J (DOA) Sent: Tuesday, September 03, 2013 3:36 PM To: Mark Landt (mlandt@buccaneerenergy.com); Singh, Angela K (DOA); Ballantine, Tab A (LAW); Bettis, Patricia K (DOA); Brooks, Phoebe L (DOA); Colombie, Jody 1 (DOA); Crisp, John H (DOA); Davies, Stephen F (DOA); Ferguson, Victoria L (DOA); Fisher, Samantha J (DOA); Foerster, Catherine P (DOA); Grimaldi, Louis R (DOA); Hunt, Jennifer L (DOA); Johnson, Elaine M (DOA); Jones, Jeffery B (DOA); Laasch, Linda K (DOA); Bender, Makana K (DOA); Mumm, Joseph (DOA sponsored); Noble, Robert C (DOA); Norman, John K (DOA); Okland, Howard D (DOA); Paladijczuk, Tracie L (DOA); Pasqual, Maria (DOA); Regg, lames B (DOA); Roby, David S (DOA); Scheve, Charles M (DOA); Schwartz, Guy L (DOA); Seamount, Dan T (DOA); Wallace, Chris D (DOA); (michael j.nelson@conocophillips.com); AKDCWeIIIntegrityCoordinator; Alexander Bridge; Andrew VanderJack; Anna Raff; Barbara F Fullmer, bbritch; bbohrer@ap.org; Bill Penrose; Bill Walker; Brian Havelock; Burdick, John D (DNR); caunderwood@marathonoil.com; Cliff Posey; Colleen Miller; Crandall, Krissell; D Lawrence; Daryl J. Kleppin; Dave Harbour, Dave Matthews; David Boelens; David Duffy; David Goade; David House; David Scott; David Steingreaber; Davide Simeone; ddonkel@cfl.rr.com; Donna Ambruz; Dowdy, Alicia G (DNR); Dudley Platt; Elowe, Kristin; Evans, John R (LDZX); Francis S. Sommer, Frank Molli; Gary Laughlin; Schultz, gary (DNR sponsored); ghammons; Gordon Pospisil; Gorney, David L.; Greg Duggin; Gregg Nady; Gregory Geddes; gspfoff, Jacki Rose; Jdarlington oarlington@gmail.com); Jeanne McPherren; Jones, Jeffery B (DOA); Jerry McCutcheon; Jim White; Jim Winegarner; Joe Lastufka; news@radiokenai.com; Easton, John R (DNR); John Garing; Jon Goltz; Jones, Jeffrey L (GOV); Juanita Lovett; Judy Stanek; Houle, Julie (DNR); Julie Little; Kari Moriarty; Kaynell Zeman; Keith Wiles; Kelly Sperback; Kiorpes, Steve T; Klippmann; Gregersen, Laura S (DNR); Leslie Smith; Lisa Parker; Louisiana Cutler; Luke Keller; Marc Kovak; Dalton, Mark (DOT sponsored); Mark Hanley (mark.hanley@anadarko.com); Mark P. Worcester, Kremer, Marguerite C (DNR); Michael Jacobs; Mike Bill; mike@kbbi.org; Mikel Schultz; Mindy Lewis; MJ Loveland; mjnelson; mkm7200; knelson@petroleumnews.com; Nick W. Glover; Nikki Martin; NSK Problem Well Supv; Patty Alfaro; Decker, Paul L (DNR); Paul Mazzolini; Pike, Kevin W (DNR); Pioneer; Randall Kanady; Randy L. Skillern; Randy Redmond; Rena Delbridge; Renan Yanish; Robert Brelsford; Robert Campbell; Ryan Tunseth; Sandra Haggard; Sara Leverette; Scott Griffith; Shannon Donnelly; Sharmaine Copeland; Sharon Yarawsky; Shellenbaum, Diane P (DNR); Slemons, Jonne D (DNR); Smith, Kyle S (DNR); Sondra Stewman; Stephanie Klemmer; Moothart, Steve R (DNR); Steven R. Rossberg; Suzanne Gibson; sheffield@aoga.org; Tania Ramos; Ted Kramer; Davidson, Temple (DNR); Terence Dalton; Teresa Imm; Thor Cutler; Tim Mayers; Tina Grovier (tmgrovier@stoel.com); Todd Durkee; Tony Hopfinger, trmjrl; Vicki Irwin; Walter Featherly; yjrosen@ak.net; Aaron Gluzman; Aaron Sorrell; Ajibola Adeyeye; Amanda Dial; Bruce Williams; Bruno, Jeff J (DNR); Casey Sullivan; David Lenig; David Martin; David Ross; Perrin, Don J (DNR); Donna Vukich; Eric Lidji; Erik Opstad; Gary Orr; Smith, Graham 0 (PCO); Greg Mattson; Heusser, Heather A (DNR); Holly Pearen; James Rodgers; Jason Bergerson; Jennifer Starck; jill.a.mcleod@conocophillips.com; Jim Magill; Joe Longo; King, Kathleen J (DNR); Laney Vazquez; Lois Epstein; Marc Kuck; Steele, Marie C (DNR); Matt Armstrong; Matt Gill; Michael Quick; Franger, James M (DNR); Bettis, Patricia K (DOA); Peter Contreras; Pollet, Jolie; Richard Garrard; Ryan Daniel; Sandra Lemke; Pexton, Scott R (DNR); Pollard, Susan R (LAW); Talib Syed; Tim Flynn; Wayne Wooster; Woolf, Wendy C (DNR); William Hutto; William Van Dyke Subject: co676 (Kenai Loop No 1-4) Buccaneer Alaska Operations Attachments: co676.pdf • Jody J. Colombie Special Assistant Alaska Oil and Gas Conservation Commission 333 W. Th Avenue Anchorage, Alaska 99501 (907) 793-1221 (907) 276-754.2 0 Easy Peel® Labels i0 A � genii along line to Use Avery® Template 51600 Feed Paper expose Pop-up Edge'" David McCaleb Penny Vadla IHS Energy Group 399 W. Riverview Ave. GEPS Soldotna, AK 99669-7714 5333 Westheimer, Ste. 100 Houston. TX 77056 Richard Neahring Jerry Hodgden NRG Associates Hodgden Oil Company President 40818`h St. Golden, CO 80401-2433 Post Office Box 1655 Colorado Springs, CO 80901 Bernie Karl CIRI K&K Recycling Inc. Land Department Post Office Box 58055 Post Office Box 93330 Fairbanks, AK 99711 Anchorage, AK 99503 North Slope Borough Planning Department Richard Wagner Post O Post Office Box 69 Office Box 60868 Fairbanks, AK 99706 Barrow, AK 99723 Jack Hakkila Darwin Waldsmith Post Office Box 190083 Post Office Box 39309 Anchorage, AK 99519 Ninilchik, AK 99639 �j v��v`�� 5150rrn George Vaught, Jr. Post Office Box 13557 Denver, CO 80201-3557 Mark Wedman Halliburton 6900 Arctic Blvd. Anchorage, AK 99502 Baker Oil Tools 795 E. 94`h Ct. Anchorage, AK 99515-4295 Gordon Severson 3201 Westmar Cir. Anchorage, AK 99508-4336 James Gibbs Post Office Box 1597 Soldotna, AK 99669 ttiquettes fadles a peterp� ; A Repliez a la hachure afin de ; . ...u___ I_ __a-__ee. Aliu-nuM 0--40--nal)_ Sens de --Al— 4., —k -.A 0 -.,_..-TM www.avery.com ; 9_QAlf_G/1_®DlCQV � INDEXES 20 AIX Energy LLC 2441 High Timbers Drive, Suite 120, The Woodlands, TX 77380 832-813-0900 Phone 832-585-0133 Facsimile August 9, 2017 Alaska Oil & Gas Conservation Commission 333 W. 71h Avenue Anchorage, AK 99501 Attn: Mr. Hollis French, Chairman Dear Mr. French: RECEIVED AUG 16 2017 AIX Energy LLC is requesting approval for a classification change of well KL 1-4 from Suspended to 1 Gas. In accordance with AOGCC Conservation Order (CO) No. 676, the landowners, the State of Alaska, Department of Natural Resources, the Alaska Mental Health Trust, Trust Land Office, and Cook Inlet Region, Inc., have a pooling agreement in place and do not object to bringing KL 1-4 into production. This letter is being presented in lieu of the requirement in CO No. 676 to file a copy of the pooling agreement. State of Alaska, Department of Natural Resources By: Name: V-)aka . Title: '?k V eCJCV 0 ( � bas Date:_ Cook Inlet Region, Inc. By: Name.j Title: Date: �40 Za-ol Manager Alaska Mental Health Trust, Trust Land Office By: C ' Name: LJ `%I Title: 00, Ir'l-0 6.eu Date: !F?' I / 7 #19 A W BUCCANEER \ 1 A 5 EER September 27, 2013 W.C. Barron Department of Natural Resources Director, Division of Oil & Gas 550 W. 7th Avenue, Suite 1100 Anchorage, Alaska 99501 BY: Facsimile and EMAIL Re: Kenai Loop Well # 1-4 Dear Director Barron, Thank -you for letter dated September 26, 2013, above subject, and we appreciate your continued support for testing the subject well. Based on our experience in the area the 9700' sand is the most prospective, and if any sand package would be in communication with existing wells, which would involve correlative rights to the KL 1-1, it would be KL 1-4 9700' equivalent. The planned well test should determine the KL 1-4 initial reservoir pressure, and when compared to the current reservoir pressure in KL 1-1 and KL -3, will likely be able to see if the wells are in communication. If the pressures are close, then a longer term test, or possible monitoring the pressure in KL 1-4 while KL 1-1 and KL 1-3 are on production for any pressure drop. This can be done without the Glacier drilling rig on location. The other zones can always be tested at a later date if the 9700' sand package is not productive. The immediate objectives of this initial test are limited to pressure communication. We need to get the information before we plan/design an additional test if required. A longer term test to provide sufficient data for a definitive reserve analysis would involve long-term flaring of gas, and in the best interest of the royalty owners it would be good to have allowance to produce 952 Echo Lane, Suite 420, Houston, TX 77024 office: (713) 468-1678 Fax: (713)4768-3717 0 • the well. In this regard, we would propose an initial view on mapping for a pooling agreement, and, as appropriate, a redetermination if needed. Regards, Buccaneer Alaska, LLC James S. Watt President & COO CC: Colleen Miller, CIRI Mike Franger, MHT Joe Balash, DNR Acting Commissioner AOGCC 952 Echo Lane, Suite 420, Houston, TX 77024 office: (713)468-1678 Fax: (713)4768-3717 #18 THE STATE °'ALASKA GOVERNOR SEAN PARNELL September 26, 2013 James S. Watt President and Chief Operating Officer Buccaneer Alaska Operations, LLC 952 Echo Lane, Suite 420 Houston, TX 77024 Re: Kenai Loop # 1-4 Well Test Dear Mr. Watt: Department of Natural Resources FACSIMILE and CERTIFIED MAIL RETURN RECEIPT REQUESTED As a result of recent phone discussions with Mark Landt, Vice President of Land & Business Development, Buccaneer Alaska Operations, LLC (Buccaneer), the State of Alaska, Department of Natural Resources (DNR), Division of Oil and Gas (Division) has learned that the well test planned for the Kenai Loop #14 well (KL #1-4) will consist of a twenty-four hour draw -down period followed by a twenty-four hour build-up period. The test will be conducted only for the 9,700' sand. According to the KL #1-4 Drilling Report #6, issued by Buccaneer on September 16, 2013, the KL #1-4 encountered three prospective gas sands. Conservation Order 676 issued by the Alaska Oil and Gas Conservation Commission (AOGCC) on September 3, 2013 approved the testing of the KL#14 contingent upon notice by Buccaneer to Cook Inlet Region, Inc. (CIRI), the Mental Health Trust (MHT) and DNR, and required that no production may begin from the KL #1-4 absent prior written approval of the AOGCC and the filing of a pooling agreement. The Division has serious concerns that the brief test of the single sand is not sufficient to provide adequate data to CIRI, the DNR and the MHT to determine the terms of a pooling agreement. Since the well may not be placed on production without a pooling agreement, Buccaneer's brief test does not protect the interests of the royalty owners. The Division believes that a sustained and thorough test of all three prospective gas sands will best serve the interests of all parties. Sincerely, "`Ccs W.C. Barron Director Cc: Colleen Miller, CIRI Mike Franger, MHT Joe Balash, DNR Acting Commissioner AOGCC Division of Oil & Gas RECEIVED Anchorage Office 550 W. 7+h Avenue Suite 1 100 SEP 21 2013co( Anchorage, Alaska 99501-3560 Main: 907.269.8800 Fax: 907.269.8939 AOGCC FACSIMILE and CERTIFIED MAIL RETURN RECEIPT REQUESTED As a result of recent phone discussions with Mark Landt, Vice President of Land & Business Development, Buccaneer Alaska Operations, LLC (Buccaneer), the State of Alaska, Department of Natural Resources (DNR), Division of Oil and Gas (Division) has learned that the well test planned for the Kenai Loop #14 well (KL #1-4) will consist of a twenty-four hour draw -down period followed by a twenty-four hour build-up period. The test will be conducted only for the 9,700' sand. According to the KL #1-4 Drilling Report #6, issued by Buccaneer on September 16, 2013, the KL #1-4 encountered three prospective gas sands. Conservation Order 676 issued by the Alaska Oil and Gas Conservation Commission (AOGCC) on September 3, 2013 approved the testing of the KL#14 contingent upon notice by Buccaneer to Cook Inlet Region, Inc. (CIRI), the Mental Health Trust (MHT) and DNR, and required that no production may begin from the KL #1-4 absent prior written approval of the AOGCC and the filing of a pooling agreement. The Division has serious concerns that the brief test of the single sand is not sufficient to provide adequate data to CIRI, the DNR and the MHT to determine the terms of a pooling agreement. Since the well may not be placed on production without a pooling agreement, Buccaneer's brief test does not protect the interests of the royalty owners. The Division believes that a sustained and thorough test of all three prospective gas sands will best serve the interests of all parties. Sincerely, "`Ccs W.C. Barron Director Cc: Colleen Miller, CIRI Mike Franger, MHT Joe Balash, DNR Acting Commissioner AOGCC #17 RECEIVED C I R I AUG 302013 -- ----- August 30, 2013 Cathy Foerster, Chair Alaska Oil and Gas Conservation Commission 333 West 7`h Avenue, Suite 100 Anchorage, Alaska 99501 Re: Request to Enjoin Drilling of the Kenai Loop No. 1-4 (KL 1-4) Well Dear Chairperson Foerster: Buccaneer Alaska Operating, LLC (Buccaneer)' has requested a spacing exception under 20 AAC 25.055(a)(4), which regulation expressly prevents the drilling of more than one natural gas well on any governmental section as well as the drilling of a well closer than 3,000 feet to any well drilling to or capable of producing from the same pool. Despite the fact that its request for a spacing exception had not been approved, Buccaneer began drilling the KL 1-4 well on or about August 7, 2013.' Even after learning that CIRI opposed the exceptions, and attending the AOGCC hearing on the matter, Buccaneer has continued to drill the KL 1-4 well.' The drilling of KL 1-4 is a violation of the Commission's regulations. As previously noted by both CIRI and the State of Alaska, the bottom hole location of the KL 1-4 well is extremely problematic for several reasons including its obvious attempt to access potential resources from lands for which it does not have valid leases. Additionally, without a hearing including a proper technical review of available data it is not clear that the proposed bottom hole location of KL 1-4 is appropriately sited from a geological perspective. Given the circumstances and inappropriate actions of Buccaneer in this matter, it is possible if not likely, that the KL 1-4 bottom hole location was sited based upon land control considerations and not upon geology. Allowing a well to be drilled to a bottom hole location on this basis could lead to inefficient and wasteful drilling as well as long-term impairment of the ultimate recovery of the resource. Finally, ' Buccaneer Alaska Operating, LLC requested both the drilling permit and the spacing exception. ' See http://www.buccaneerenergy.com/pdf/07aug2013_Kenai_Loop_Nol-4_Drilling_Commenced.pdf. 3 See http://www.buccaneerenergy.com/pdf/27aug2013_kenai_loop_drilling_update.pdf. 1 2525 "C" STREET, SUITE 500 • P.O. BOX 93330 • ANCHORAGE, ALASKA 99509-3330 (907) 274-8638 • FAX (907) 279-8836 • Web Site: www.ciri.com as noted by Director Barron, it is extraordinarily unfair to CIRI and the State of Alaska, to be put in the spot of attempting to "unring the bell" of Buccaneer's drilling activity performed in flagrant disregard of applicable state statutes and regulations, and the correlative rights of adjacent landowners. CIRI respectfully requests that the Commission immediately bring a suit enjoining Buccaneer from further drilling and completing the KL 1-4 well pursuant to AS 31.05.160(a). We further respectfully suggest that an enforcement action is not likely to be effective here, as Buccaneer's most recent press release, see footnote 3, suggests that drilling will be complete in September. CIRI appreciates the AOGCC's attention to this matter. Please let me know if you have any questions. Sincerely, COOK INLET REGION, INC. Colleen Miller Resource Manager cc: Mark Landt, Buccaneer W. C. Barron, DNR Mike Franger, MHT Richard Todd, State of Alaska PJ #16 �'CIRI August 27, 2013 Cathy Foerster, Chair Alaska Oil and Gas Conservation Commission 333 West 7`h Avenue, Suite 100 Anchorage, Alaska 99501 Re: Docket Numbers CO -13-08 and CO -13-12 Supplemental letter to Response for Requests for Information Dear Chair Foerster: RECEIVED AUG 272013 AOGCC It has come to our attention that Buccaneer continues to actively drill Kenai Loop well #1- 4 (KL#1-4) from the Drilling Pad #1 as is stated within today's enclosed press release issued by Buccaneer Energy Limited. This is a cause of significant concern to Cook Inlet Region, Inc. (CIRI) as the KL#1-4 appears to be progressing despite there being no AOGCC decision granting Buccaneer Alaska Operations, LLC a spacing exception under 20 AAC 25.055(a)(4). The press release also implies that Buccaneer intends to test the well once it has been drilled to its total depth despite there being no AOGCC decision granting Buccaneer Alaska Operations, LLC a spacing exception under 20 AAC 25.055(a)(2). CIRI is and continues to oppose the spacing exceptions requested by Buccaneer for the KL#1-4 well and has expressed this opposition, as well as reasons for this opposition, during the AOGCC hearing on August 13, 2013 and within a follow-up letter to the AOGCC dated August 26, 2013. Additionally, as presented at the hearing and in yesterday's letter, it appears Buccaneer has and is illegally draining CIRI acreage from Kenai Loop #1-1 and the Kenai Loop #1-3 wells. We believe the extent of these financial damages is already in excess of $4 million. The proposed bottom hole location for the KL#1-4 is proposed to be at 10,700' TVD and as indicated by recent drilling reports Buccaneer is drilling approximately 3,000 feet every 7 days. Buccaneer estimates it will hit the target bottom hole location within the next several weeks. CIRI appreciates the AOGCC's attention to these matters. 2525 "C" STREET, SUITE 500 • P.O. BOX 93330 • ANCHORAGE, ALASKA 99509-3330 (907) 274-8638 • FAX (907) 279-8836 • Web Site: www.eiri.com Than -k you, Colleen Miller Resource Manager Enclosure Cc: Mark Landt, Buccaneer Mike Franger, MHT Alicia Dowdy, DNR u Ma CU2 C( 17 • BUCCANEER Li4LOt y ASX RELEASE — 27 AUGUST 2013 KENAI LOOP # 1-4 WELL— DRILLING REPORT # 3 Buccaneer Energy Limited ("Buccaneer' or "the Company") is pleased to provide the following update on the progress of the 100% owned Kenai Loop # 1-4 well: Time: 9.00 am (Sydney) 27 August 2013 / 3.00 pm (Anchorage) 26 August 2013. Depth: 7,541' Measured Depth ("MD") / 7,388' True Vertical Depth ("TVD") Activity: Drilling continues to next planned casing point above the Tyonek Formation at approximately 9,500' MD / 9,300' TVD. Well Plan: The Kenai Loop # 1-4 is being drilled from Drilling Pad # 1 which is the same drilling pad as Buccaneer's other Kenai Loop wells and will be drilled to approximately 10,700' TVD / 10,897' MD. The well will be drilled to a target that appears to be fault separated from the current producing zones in the Kenai Loop # 1 - 1 and Kenai Loop # 1 - 3 wells and is expected to be completed in late September 2013. The current production facilities at Drilling Pad # 1 will need minor upgrades to facilitate production from this new well and preliminary plans have been finalized to perform these upgrades with minimal delays. Yours faithfully BUCCANEER ENERGY LIMITED Mr Dean Gallegos Chairman For further information please contact Dean Gallegos, Executive Director, on 0416 220 007 or 02 9233 2520. Alternatively, visit the Company's website at www.buccaneerenergy.com. Level 9,2S 81igh Street, 9S2 Echo Lane, Suite 420, wwwbuccenergy.com SYDNEY NSW 2000, Australia Houston, Texas 77024, USA + 612 9233 2520 + 612 9233 2530 + 1 713 4681678 +1713 468 3717 ABN 6312S 670 733 BUCCANEER EN6�GY About Buccaneer Buccaneer Energy Limited is an Australian listed company focused on developing its 100% owned oil & gas assets in Alaska. The Company's flagship projects are a series of onshore and offshore developmental and exploration prospects in Alaska's Cook Inlet. Buccaneer Energy has a 3 pronged cash flow strategy: • Developing the 100% owned Kenai Loop onshore gas project with independently assessed 6.4 MMBOE in 2P Reserves; • Operating an offshore jack-up rig for use by third -parties in the Cook Inlet; and • Developing its offshore Cook Inlet projects that have independently assessed 155.3 MMBOE in 2P Reserves / 2C Contingent Resources & P50 Prospective Resources using the acquired jack-up rig. Buccaneer Energy has a 50/50 joint venture with Singaporean -based Ezion, a leader in the development, ownership and chartering of strategic offshore assets, and the Alaskan Industrial Development and Export Authority ('AIDER"). This joint venture has acquired the jack-up rig "Endeavour" which is capable of drilling in all areas of the Cook Inlet, the Beaufort Sea and the Chukchi Sea. Mobilisation of the Endeavour into the Cook Inlet was completed in late August 2012. The Alaskan Government is supportive of oil and gas in the Cook Inlet. There are a number of fiscal incentive programs for exploration and development in the Cook Inlet. Buccaneer Energy has two onshore wells at Kenai Loop producing at a combined rate of 9.5 - 10.0 MMCFD (1,666 BOEPD). The Company expects this to increase to 11 - 12 MMCFD (1,833 — 2,000 BOEPD) if a third gas sales contract con be finalised in the coming months. Buccaneer Energy also has major working interests in Texas and the Gulf of Mexico, USA. #15 THE STATE °fALASKA GOVERNOR SEAN PARNELL 'y CA ., t1l) u� f /"7D- � August 26, 2013 Cathy Foerster, Chair Alaska Oil and Gas Conservation Commission 333 West 7t' Avenue, Suite 100 Anchorage, Alaska 99501 Department of Natural Resources RECEIVED AUG 272013 AOGCC Division of Oil & Gas Anchorage Office 550 W. 7th Avenue Suite 1100 Anchorage, Alaska 99501-3560 Main: 907.269.8800 Fax: 907.269.8939 HAND DELIVERY to AOGCC AND FACSIMILE Re: Buccaneer Letter of August 27 on DNR Objections to Pending Requests to AOGCC for Spacing Exceptions for Proposed Wells Kenai Loop #1-4 and #I 4ST, respectively AOGCC docket # CO -13-08 and CO -13-12. Dear Chair Foerster: The Alaska Department of Natural Resources again requests that Buccaneers application for the above referenced spacing exceptions be denied until it conforms its actions to state law. The exceptions should not be granted until Buccaneer has an approved plan of operations from DNR and until pool rules are in place. Buccaneer's August 27, 2013 letter to you is not well taken. Its actions in this matter jeopardize the correlative rights of the State of Alaska and Cook Inlet Region, Inc. Buccaneer is acting in flagrant disregard of applicable AOGCC and DNR regulations. Buccaneer is not entitled to ignore DNR regulations requiring it to disclose its intended operations on state lease until after it has secured AOGCC authorization for spacing exceptions that will enable it to drill a well that jeopardizes the state's correlative rights. Since the exceptions requested in the current applications for spacing exceptions could directly impact the state's correlative rights, the application process itself should be treated as part of the operations in the state lease area, and the applications should not be granted until Buccaneer has provided the state with information sufficient to understand what it is planning. It was inappropriate for Buccaneer to file the well # 14ST application before it has obtained DNR approval to drill a state lease. The state should not be put in the position of having to try to un -ring the bell after the spacing exception has been granted. Assuming it is true that the well will not be drilled until late 2013 or early 2014 as Buccaneer states those dates are not that far off, and contrary to Buccaneers cavalier statements, it doesn't have "considerable time" to submit a plan. Buccaneer should have obtained DNR approval for the operation before it filed its application for spacing exceptions with the AOGCC. Pending Request OGCC for Spacing Exceptions for Papsed Wells Kenai Loop #1-4 and ai Loop #14ST respectively AOGCcket # CO -13-08 and CO -13-12. August 27, 2013 Page 2 of 3 The state objected to the spacing exception for well # 14ST on the ground of failure to file a plan of operations and not to well # 1-4. Therefore, Buccaneer's first point about why it does not need to file a plan of operations for well # 1-4 is not a response to DNR's position. Buccaneer's second point is equally without merit because a plan of operations is not only for surface uses. Much of DNR regulation 11 AAC 83.158 addresses surface impacts of an operation but the regulation does not say that a plan of operations is only required surface uses. The regulation requires a plan of operations before undertaking operations "on or in" the leased area. The Division of Oil and Gas has previously required a plan of operations for wells that bottomed holed on a state lease even where there were no surface activities on the lease. DNR is entitled to deference on the interpretation of its regulations. Similarly, assuming that Buccaneer is correct that no AGOCC statute or regulation requires an approved plan of operations before one may apply for a spacing exception, does not mean that Buccaneer's actions in this matter have been appropriate. As a matter of comity AOGCC should consider the position of state agencies with regard to the requirements of that agencies regulations and practices. Moreover Buccaneer is out not in compliance with AOGCC requirements. AOGCC regulation 20 AAC 25.55(a) requires compliance with the spacing restrictions unless the Commission has established drilling units or prescribed a spacing pattern for a pool. It was inappropriate for Buccaneer to file for the exceptions for either well # 1-4 or well # 14ST before the Commissioner had established or spacing a pool. Until such time a Buccaneer complies with the section 55(a) requirement, the exceptions should be denied. Buccaneer's attitude towards DNR and mischaracterization of DNR's decision to deny Buccaneer's request to unitize the properties is irrelevant to the issues at hand. DNR's decision is a matter of public record. DNR has not reversed its decision to deny unitization. Buccaneer sought to unitize a large swath of land without meaningful commitments to develop state land and in reliance on discontinuous undefined seismic anomalies as the basis for the unit area. But none of the anomalies covered the entire proposed unit area. That has nothing to do with DNR's right just like any other land owner to insist that Buccaneer comply with AOGCC regulations before seeking the spacing exceptions, and that the state's correlative rights be protected. Regarding the production sharing agreement, it is a stretch to suggest that Buccaneer has fully cooperated with the state's efforts to work out an agreement. But the state is still working towards an agreement. This issue, however, like the unitization issue is a red hearing. The basis for the state's objection is failure to comply with state law. Finally Buccaneer's assertions that it failed to comply with applicable legal requirements because it was only trying to short cut the administrative process in the interest of streamlining the permitting process and saving all parties time, money and resources rings hollow in light of the placement of well # 1-4 and well # 14ST. It is difficult to imagine wells placed in a manner more likely to drain the property of others. The regulatory process must be followed in this matter to ensure the protection of the rights of the state and CIRI. Pending RequestsOGCC for Spacing Exceptions for P sed Wells Kenai Loop #1-4 and w.I.I a -i Loop #14ST respectively AOGC( cket # CO -13-08 and CO -13-12. August 27, 2013 Page 3 of 3 Sincerely, W.C. Barron Director Cc: Colleen Miller, CIRI Mike Franger, MHT Joe Balash, Acting Commissioner DNR #14 � I RECEIVED AUG 2 72013 AOGCC BUCCANEER August 27, 2013 Cathy Foerster, Chair, Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, Suit 100 Anchorage, Alaska 99501 Re: DNB's Comments on Pending Requests to AOGCC for Spacing Exceptions for Proposed Wells Kenai Loop #1-4 and #1-4ST, respectively AOGCC docket #CO -13-08 and CO -13-12 Dear Chair Foerster, On August 26, 2013, the State of Alaska, Department of Natural Resources (DNR), Division of Oil and Gas (Division) filed a letter objecting to Buccaneer Alaska Operations, LLC's (Buccaneer) pending application for well spacing exceptions to Kenai Loop wells #1-4 (KL#1-4) and #14ST (KL#1-4ST). DNR raises seven interrelated grounds for its opposition. All of the reasons provided by the Division are misguided. The Division correctly notes that under state law Buccaneer is required to obtain DNR's approval for activities it conducts on state leases. The Division also correctly notes that Buccaneer proposes to bottom hole KL#1-4ST on state lease ADL -391094, but that it has not submitted a proposed plan of operations to the Division. Buccaneer did not submit a proposed plan of operations to the Division because it will not drill this well until late 2013 or early 2014. Buccaneer therefore has considerable time to submit a proposed plan of operations to the Division before drilling the well. But more importantly, nothing in state law mandates that a lessee secure DNR's approval before filing a request for a well spacing exception. Indeed, the status of an approved plan of operations should have no bearing on the issue before the AOGCC for the following reasons. First, Buccaneer does not need to secure an approved plan of operations from the Division for KL#1-4, because this well is not being drilled on state leases. Second, a plan of operations authorization only addresses surface and environmental considerations; the Division's review of these plans under 11 AAC 83.158 does not address subsurface matters. Therefore the failure to secure an approved plan of operations should have no impact on the AOGCC's evaluation of Buccaneer's request for well spacing exceptions. In fact, nothing in the AOGCC's regulations require an applicant to have an approved DNR plan of operations before submitting a request for a well spacing exception. Third, Buccaneer understands that it cannot operate on its state leases without an approved plan of operations, which is why Buccaneer will seek the Division's approval before drilling KL#1-4ST. Buccaneer, in an attempt to streamline the permitting process and save all parties in interest time, money, and resources, decided to file the pending request for two well spacing exceptions even though it had not secured an approved plan of operations. Buccaneer believes this approach makes the most sense. Given the Parnell Administration's focus on creating a more efficient and timely permitting process, Buccaneer is surprised to see that the Division would prefer Buccaneer to undertake a more irrational and costly approach by having it file two separate requests with the AOGCC for drilling that will occur in the same area and will likely involve the same parties. The Division fails to articulate why proceeding in this manner makes sense. 952 Echo Lane, Suite 420, Houston, TX 77024 Office: (713) 468-1678 Fax: (713) 468-3717 Page 2 Pending AOGCC Requests for Spacing Exceptions for Proposed Wells Kenai Loop #1-4 and Kenai Loop #1-4 (ST) 8/27/2013 In addition to the foregoing, the Division objects to Buccaneer's request for a well spacing exception because Buccaneer has failed to pool these properties and its operations may impact correlative rights. (Objections number 1, 2, and 4.) There is some irony in the Division's objections. Buccaneer filed for a request with the Division to unitize the Kenai Loop leases after it spent in excess of $50 million to assemble a land position, reprocess and reinterpret 2D seismic data, shoot new 3D seismic, obtain exclusive rights to a drill rig, drill three wells, and install production facilities and pipelines. During this period, Buccaneer also identified a reservoir, put two wells onto production over multiple leases, discovered additional "potential hydrocarbon accumulations", and executed a long-term gas supply contract with ENSTAR. After conducting these activities, Buccaneer submitted a unit application and a Plan of Development that committed Buccaneer to continue production from the proven reservoir, form an initial Participating Area ("PA"), and further delineate the potential hydrocarbon accumulations within the unit area by drilling up to 15 wells. Yet Director Barron, in an unprecedented (DNR has never rejected an application to unitize producing leases), arbitrary, and unlawful decision, denied Buccaneer's application on March 15, 2013. In this decision, Director Barron found that unitization at Kenai Loop "is not necessary to allow for joint development." Decision at 16. Director Barron also wrote that denying this application was in the public interest because "[i]f unitization is denied and these leases expire, Buccaneer or other producers can bid on them at a lease sale and conduct exploration activities during the primary term of the lease. That will do more to encourage development competition [sic] than extending the term of the lease by unitization." Decision at 15. Director Barron then concluded that "Buccaneer is the sole working interest owner, therefore it is in their best interest to prevent physical waste through proper and efficient management of reservoir energy, regardless if the area is unitized or is being developed on a lease -by -lease basis. Buccaneer is the sole lessee of the proposed unit area, and unitization is not necessary to protect multiple lessees overlying a common reservoir." Decision at 19 (emphasis added). Director Barron, in other words, rejected the unit application, in part, because he found that lease -by -lease development was in the state's interest. Buccaneer has appealed the Division's denial to Commissioner Sullivan. It is also proceeding with drilling plans that it had committed to in its unit application. Yet, to Buccaneer's surprise, the Division has reversed its prior position regarding unitization. Apparently, the Division now agrees with Buccaneer that unitization is necessary to protect correlative rights and, as Director Barron wrote in his August 26, 2013 letter to the AOGCC, to "ensure orderly oil and gas development with the Division oversight[.]" While Director Barron now believes unitization is required to protect correlative rights and to prevent waste, Buccaneer should not be penalized for the Division's failure to make the correct decision on unitization in the first instance. Moreover, if DNR is concerned about protecting correlative rights and properly managing the affected leases, DNR has the power to reverse its decision and form a unit over the Kenai Loop leases. Raising these objections in the context of a request for well spacing exceptions in an apparent attempt to prevent additional drilling in the Cook Inlet is inappropriate. Worse, it is disingenuous given the Division's rejection of Buccaneer's prior attempt to unitize the Kenai Loop leases. In addition, DNR's concerns related to pooling and correlative rights are also being addressed by Buccaneer, the Division and the Mental Health Trust. All three parties are in the process of finalizing a production allocation agreement for the KL1-1 and KL1-3 Wells. Buccaneer has supported this effort with a detailed technical presentation of the 3D seismic and well data. In fact, Buccaneer received a release of confidentiality from both CHU and the MHT in order to provide the Division and the other party with confidential information. We continue to respond to requests for additional information. Moreover, concern related to the absence of pool rules are premature. Under 20 AAC 25.061(c) a pooling agreement is only required prior to "regular production from the affected property begins." This issue should, therefore, have no bearing on Buccaneer's pending well spacing request. Page 3 Pending AOGCC Requests for Spacing Exceptions for Proposed Wells Kenai Loop #1-4 and Kenai Loop #1-4 (ST) 8/27/2013 Finally, the Division objects to Buccaneer requesting the right to drill wells in close proximity to each other. Specifically, KL#1-4 would be drilled within 3,000 feet of an existing well and, KL#1-4 and KL#I- 4ST, if drilled, would be within 3,000 feet of each other. The Division, however, does not articulate why it opposes Buccaneer drilling these wells in close proximately to each other. It completely fails to explain how granting the well spacing exception will impact correlative rights, damage the reservoir, or cause waste. Sincerely, BUCCANEER ALASKA, LLC Mark R. Landt Vice President, Land & Business Development Cc Colleen Miller, CIRI Mike Franger, MHT Joe Balash, DNR Acting Commissioner #13 August 26, 2013 Cathy Foerster, Chair Alaska Oil and Gas Conservation Commission 333 West 7`h Avenue, Suite 100 Anchorage, AK 99501 RE: Docket Numbers CO -13-08 and CO -13-12 Requests for Information Dear Chairperson Foerster: RECEIVED AUG 2 6 2013 At the August 13, 2013 public hearing on Dockets CO -13-08 and CO -13-12 the Alaska Oil and Gas Conservation Commission (AOGCC or Commission) asked Cook Inlet Region, Inc. (CIRI) to submit certain additional information to the extent it was available. This letter responds to those requests. Request #1 -Please provide any record that CIRI objected to the proposed Kenai Loop unit. Enclosed is an October 23, 2012 letter from CIRI to Buccaneer Alaska, LLC explaining why CIRI was not supportive of the proposed unit. In addition, CIRI did not sign or otherwise approve the proposed unit agreement that Buccaneer Alaska Operations, LLC submitted to the DNR and CIRI. Request #2 -Please identify any confidentiality agreement that CIRI has with Buccaneer that would cover the data submitted by Buccaneer at the hearing that Buccaneer requested be held confidential. Presuming that this Commission means the applicant, Buccaneer Alaska Operations, LLC, when it uses the term "Buccaneer" in this question, CIRI's acreage was never under lease to Buccaneer Alaska Operations, LLC.' Moreover, CIRI's acreage is no longer under lease to Buccaneer Alaska, LLC. Although data relating to the formerly -leased CIRI acreage is now owned by CIRI, Buccaneer Alaska, LLC may use that data for internal purposes, and ' Note that the applicant here is, and for the unit was, Buccaneer Alaska Operating, LLC while CIRI's former lessee was Buccaneer Alaska, LLC, two distinct entities. CIRI has never had a contractual or lease relationship with Buccaneer Alaska Operations, LLC. 1 2525 C STREET, SUITE 500, ANCHORAGE, ALASKA 99503-2633 / PO BOX 93330, ANCHORAGE, ALASKA 99509-3330 907-274-8638 • FAX: 907-279-8836 • www.ciri.com is required to keep that data confidential. CIRI does not have a confidentiality agreement with Buccaneer Alaska Operations, LLC (Buccaneer), in effect that would cover the data related to non-CIRI land that was submitted at the hearing to the extent that a confidentiality agreement is necessary. See AS 31.05.035(f). We also note that the well data from the KL 1-1 well is now available to the public. CIRI is, however, willing to negotiate a reasonable confidentiality agreement that would cover the documents disclosed during the hearing. Request #3 -Please provide any 2a, n t pay maps that CIRI produced covering the affected area. The only gas net pay maps that CIRI has are from Buccaneer and CIRI does not have the ability to produce such maps in-house. In any event, CIRI does not have any maps indicating that CIRI's acreage in governmental section 33 (Section 33) is fault -separated from the existing wells in Section 33 or the proposed wells in Section 33. Nor did Buccaneer provide any evidence at the hearing showing that CIRI's acreage is in any way stratigraphically separated or fault -separated from the two proposed wells or the two currently -producing wells in Section 33. Request #4 -Please explain why CIRI's acreage will be drained by the existing or proposed wells in Section 33 and why CIRI's correlative rights will be violated if the requests for exceptions to the spacing requirements are granted. It appears that 20 AAC 25.055(a)(2) establishes a presumption that a gas well within 1,500 feet of a property line will adversely impact the correlative rights of the adjacent landowner. CIRI's acreage is within hundreds of feet of each of the two proposed wells, Kenai Loop No. 1-4 (KL 1-4) and Kenai Loop No. 14ST (KL 14ST). As discussed above in CIRI's response to Request #3, Buccaneer produced no evidence indicating that CIRI's mineral rights are separate from or isolated from either of the two proposed wells, or explaining why Buccaneer needed to drill those wells so close to CIRI's acreage. Nor has CIRI seen any technical evidence showing that CIRI's acreage will not be drained by either or both of the proposed wells should either or both of the wells prove to be productive. Should either or both of the proposed wells prove to be productive, CIRI's acreage will be drained. With respect to the existing wells, Kenai Loop No. 1-1 (KL 1-1) and Kenai Loop No. 1-3 (KL 1-3), 20 AAC 25.055(b) expressly provides that "[a] well may not ... begin regular production of gas from a property that is smaller than the governmental section upon which the well is located, unless the interests of the persons owning the drilling rights in and the right to share in the production from the ... section, ... have been pooled under AS 31.05.100." Again, this provision exists to protect correlative rights, and suggests a 2 presumption that a gas well drilled within a governmental section will drain all landowners' mineral rights in that section. It certainly indicates an intent that all of the owners of gas rights within a governmental section are entitled to a share of the production from any well producing in that governmental section. Even if geology is relevant to the pooling requirement set forth in 20 AAC 25.055(b), Buccaneer has produced no evidence indicating that CIRI's mineral rights are separate from or isolated from either KL 1-1 or KL 1-3. Nor has CIRI seen any technical evidence showing that CIRI's acreage will not be and has not already been drained by either or both of the existing producing wells. The existence of Conservation Order Nos. 647 and 664 do not change this result. While the Commission granted Buccaneer spacing exceptions under 20 AAC 25.055(a) for the KL 1-1 and KL 1-3 wells, Conservation Order Nos. 647 and 664 did not authorize Buccaneer to produce those wells without a pooling agreement being in place as required by subsection (b) of that same regulation. It does not appear that Buccaneer ever requested, or that the Commission ever authorized, Buccaneer to produce from the existing wells in the absence of a pooling agreement. In fact, in both Conservation Order Nos. 647 and 664, the Commission expressly conditioned Buccaneer's proceeding with regular production from the KL 1-1 and KL 1-3 wells on Buccaneer being "in compliance with ... applicable Alaska Law." Although it appears KL 1-1 began regular production in mid-January of 2012. Buccaneer did not even request unitization until July 19, 2012, and the application was not complete until December 10, 2012. Buccaneer Alaska, LLC was on notice long before the application was complete that CIRI objected to unitization given its concerns with Buccaneer Alaska, LLC. (See attached October 23, 2012 letter.) Under the now - terminated lease, it could not be unitized without CIRI's approval. Moreover, CIRI terminated its lease with Buccaneer Alaska, LLC no later than January 9, 2013, and notified Buccaneer Alaska, LLC by letter that same date. The KL 1-3 well apparently commenced production on February 10, 2013. Yet despite CIRI's objections to unitization and the termination of the lease, neither Buccaneer nor Buccaneer Alaska, LLC has attempted to pool all of the interests of the persons owning the drilling rights and the right to share in the production in Section 33 as required by 20 AAC 25.055(b). Buccaneer's production is not, and has not been, in accordance with applicable Alaska law. The current production from the KL 1-1 and KL 1-3 wells has been and is currently and continuously in violation of the AOGCC regulations, Alaska law and CIRI's private property rights. 3 Request #5 -Would CIRI not protest the drilling of the proposed wells if only drilling and testing of the wells were allowed? No regular production from either well would be permitted. CIRI would consent to drilling, testing, and completion, but not the production, of the KL 1-4 and KL 14ST wells conditioned on Buccaneer's execution of a written binding agreement with CIRI providing that: (1) Buccaneer will give CIRI well and test data, including without limitation, well completion reports, directional surveys, daily well drilling reports, field copy and final copy of all logs, core and side wall sample reports, well cost information and reports, fluid and gas analyses, pressure build up data, check shot surveys, velocity profiles, VSP surveys, well flow test reports and data, etc., as it is made available to Buccaneer whether verbally, electronically or in hard copy format; (2) CIRI has the right to witness all testing of the KL 1-4 and KL 14ST wells; (3) Buccaneer will give CIRI and CIRI may audit all cost information for all wells drilled in Section 33 in addition to the facility and pipeline costs for any facility or pipeline related to the wells in Section 33 or the production from those wells; (4) Should Buccaneer fail to provide the data and information listed in items (1) through (3) above the AOGCC has the authority to require Buccaneer to cease all operations at the KL 1-4 and 14ST wells; (5) Buccaneer Alaska, LLC confirms in writing its acknowledgement that CIRI Lease No. C- 061667 has terminated; and (6) Buccaneer compensates CIRI for the production it has illegally drained from CIRI's acreage from the start of production from the KL 1-1 and 1-3 wells to date and for future production from those wells. See 20 AAC 25.055(b) and AS 31.05.100. Alternatively, an agreed-upon sum of money may be placed in escrow until the parties execute an agreement resolving these issues. Conservation Order No. 231 CIRI would also like to reiterate that Conservation Order No. 231, which was issued over 25 years ago (CO 231), does not apply to the drilling activity Buccaneer has undertaken to date in the Kenai Loop area for the following reasons: (1) by its terms, CO 231 "establishes pool rules to govern the operation of" three defined gas pools "all lying beneath the Cannery Loop Unit," and that unit and its participating areas/pools no longer include Section 33, T 06N, R 011W Seward Meridian, see DNR 4 Cannery Loop Unit Map available at ttp://dog.dnr.alaska.gov/Units/Documents/Unit/Maps/ Can neryLoop_201206.pdf, as well as the map included in CIRI's August 13, 2013, letter to the Commission, which shows the unit in relation to the lands at issue in the above - captioned dockets; (2) if the working interest owners of the Cannery Loop Unit believed that any of the gas pools extended into Section 33, or if the geology demonstrated that any of the three defined gas pools extended onto Section 33, they would not have contracted Section 33 out of the unit; (3) the Buccaneer wells located in Section 33 are either producing from or targeting the deeper Tyonek formation, rather than the shallower Beluga Gas Pool, and the Tyonek participating area in the Cannery Loop Unit does not abut Section 33 (see the DNR map referenced above); (4) Buccaneer's requests for exceptions to the spacing requirements in the Kenai Loop area did not assert that CO 231 applied, nor has Buccaneer requested that the AOGCC apply CO 231; and (5) even if CO 231 applied such that the drilling unit for the Tyonek pool was a quarter - quarter section of Section 33, rather than the entire section, which CIRI does not concede, that does not eliminate CIRI's right to object to Buccaneer's spacing exception. CO 231 contains a section very similar to 20 AAC 25.055(a)(2), which provides that [a] well bore may not expose for the purposes of regular production of any interval of a pool that is located closer than 1,500' to the boundary of the affected area, or closer than 500' to the boundary of the participating area established for that pool. Similarly, while CO 231 prescribes a drilling unit and perhaps a spacing pattern for the Cannery Loop Unit, any such order, even if it applied here, which CIRI does not concede, does not apply to or change the rule set out in 20 AAC 25.055(b). CIRI only mentioned CO 231 at the hearing as a housekeeping matter, in the event the Commission desired to amend that order to delete the Kenai Loop area from the area covered by CO 231 as Section 33 is no longer part of the Cannery Loop Unit. Conclusion The KL 1-4 well is being drilled in violation of the AOGCC regulations. It is within 3000 feet of an existing and currently producing well in Section 33. This well, should it prove to be productive, will be one more producing well in the Section that is draining CIRI 5 0 acreage. Similarly, both the KL 1-4 well and the KL 1-4ST well are well within 1,500 feet of CIRI's property, with bottom hole locations so close to the relevant property lines that they are obviously targeting CIRI resources should they prove successful. Except as set forth in this letter, CIRI is maintaining its objections to Buccaneer's requested exceptions in Docket Nos. CO -13-08 and CO -13-12, for the reasons set forth in this letter and at the hearing. In addition, to the extent the Commission is considering the question of Buccaneer's existing production from KL 1-1 and 1-3, CIRI requests that the Commission issue an order requiring Buccaneer to show cause why its production from those wells is not illegal. CIRI supports exploration and production of natural gas from the Cook Inlet region and from its own private subsurface resources, as long as it is responsible and in compliance with applicable law. The AOGCC statutes and regulations were intended, among other things, to protect correlative rights and given the information presented at the hearing, granting Buccaneer's requested exceptions will not accomplish those objectives. If you have any further questions please contact me at (907) 263-5117. Sincerely, COOK INLET REGION, INC. Colleen Miller Resource Manager Enclosure 0 • A - CENTURY 00 SENVICE 1913 1 2012 October 23, 2012 VIA EMAIL Kyle Parker Crowell & Moring, LLP 1029 W. 3 I Avenue, Suite 402 Anchorage, AK 99501 Re: CIRI/Buccaneer Lease Dear Kyle: s HORSEY MICHAEL A. GRISHAM (907) 257-7829 FAX (907) 2764152 grisham.michael@dorsey.com We appreciate the time you and your clients took to meet with us and discuss Buccaneer's business plans and the issues between CIRI and Buccaneer. Overall it was a positive conversation, and we believe it clarified a path forward that will allow CIRI and Buccaneer to have a continuing and positive business relationship. While the assurances and information provided at the meeting were helpful, repairing CIRI's trust in Buccaneer will require improving its track record over time in compliance with Lease obligations and communication. In a follow up communication after the meeting, Mark Landt indicated that the 3-D seismic mapping would be produced and CIPI has received, in addition to the daily log reports on Kenai Loop #4 well. These efforts, along with receipt of Buccaneer's revised work schedule for drilling on and related to the CIRI lease, are all helpful steps toward that end. Significantly less helpful, however, was a recent representation that CIRI has learned that Buccaneer (through David Mayberry) made to the State, to the effect that CIRI has dropped its objections to unitization and would be joining Buccaneer's unitization request. That representation is incorrect. CIRI has not agreed to unitization. You were specifically informed at our meeting that CIRI would continue to withhold any agreement to unitization until Buccaneer had demonstrated to CIRI's satisfaction that the kind of missteps discussed in our previous correspondence would not recur. This was a step backward from the progress previously made. CIRI trusts that Buccaneer will ensure that the State is informed of CIRI's actual position, and that no further representations of any sort regarding CIRI's position as to any issue will be made without CIRI's prior informed consent. Please note that CIRI does not by this letter or by any statement at our meeting intend to waive or abandon any of its earlier claims of breach by Buccaneer. DORSEY & WHITNEY LLP WWW.DORSEY.COM • T 907.4.'x6.4557 , F 907.276.4152 1031 WEST F=OURTH AVENUE SUITE 600 • ANCHORAGE, ALASKA 99501.5907 LJSA CANAL)A F?LJFQ0Fy E ASIA • Kyle Parker October 23, 2012 Page 2 cc: Dara Glass 4838-5540-7377\11451300\00061 IDORSEY D C)N>I V 8 YPW NE -:Y I.I.II #12 THE STATE 'ALASKA GOvE,R.NOR SEAN PARNF.L 1. August 26, 2013 James S. Watt President and COO Buccaneer Alaska Operations, LLC 952 Echo Lane, Suite 420 Houston, TX 77024 Department of Natural Resources Division of Oil & Gas Anchorage Office RECEIVED550 W.7th Avenue Suite 1100 Anchorage, Alaska 99501-3560 AUG 2 7 2013 Main: 907.269.8800 Fax: 907.269.8939 A(I FACSIMILE and MAIL Re: Pending AOGCC Requests for Spacing Exceptions for Proposed Wells Kenai Loop #1-4 and Kenai Loop #1-4ST. Dear Mr. Watt: State of Alaska (State) regulation 11 AAC 83.158 requires that Buccaneer Alaska Operations, LLC (Buccaneer) obtain approval for a plan of operations from the State of Alaska, Department of Natural Resources (DNR), Division of Oil and Gas (Division) before conducting operations on a State lease. Please submit a plan of operations for my review that addresses proposed operations on ADL 391094 including, but not limited to, drilling operations for the proposed Kenai Loop #14ST (KL #14ST). A plan also needs to be submitted for ADL 391095 if Buccaneer intends to conduct operations on that lease. The Division will notify the Alaska Oil and Gas Conservation Commission (Commission) that it opposes Buccaneer's requests for spacing exceptions for Kenai Loop Wells #14 (KL #1-4) and KL #14ST now pending before the Commission, in part, because Buccaneer has failed to comply with State law because a plan of operations has not been filed for ADL 391094. The Division will also oppose Buccaneer's requests for well spacing exceptions for the drilling, testing, and or production from KL #14 and KL #14ST on the following grounds: (1) failure to pool affected properties, (2) potential violation of correlative rights, (3) attempting to obtain spacing exceptions without first establishing pool rules, (4) KL #1-4 jeopardizes the State's correlative rights because the well would be less than 1,500 feet from State lease ADL 391094, (5) KL #14 would be within 3,000 feet of an existing well, and (6) if KL #14 and KL #14ST are both drilled they would be within 3,000 feet of each other. Sincerely, W.C. Barron Director Cc: Colleen Miller, CIRI Mike Franger, MHT Joe Balash, DNR Acting Commissioner AOGCC #11 THE STATE 'ALASKA GOVERNOR SEAN PARNELL August 26, 2013 Cathy Foerster, Chair Alaska Oil and Gas Conservation Commission 333 West 7ffi Avenue, Suite 100 Anchorage, Alaska 99501 Department of Natural Resources RECEIVED Division Oil & Gas Anchorage Office AUG 26 2013 550 W. 7m Avenue Suite 1 100 Anchorage, Alaska 99501-3560 Main: 907.269.8800 AOGCC Fax: 907.269.8939 HAND DELIVERY to AOGCC AND FACSIMILE Re: Pending Requests to AOGCC for Spacing Exceptions for Proposed Wells Kenai Loop #1-4 and #1-4ST, respectively AOGCC docket # CO -13-08 and CO -13-12. Dear Chair Foerster: The State of Alaska (State), Department of Natural Resources (DNR), Division of Oil and Gas (Division) opposes the pending application of Buccaneer Alaska Operations, LLC (Buccaneer) for well spacing exceptions for Kenai Loop wells #14 (KL #1-4) and #14ST (KL #14ST). State regulation and lease terms require that Buccaneer disclose the details of operations it proposes to conduct on State leases and obtain the approval of the Division for the proposed operations before the operations commence. 11 AAC 83.158; New Form Lease 19. Buccaneer proposes drilling KL #14ST to bottom hole on State lease ADL 391094, but Buccaneer has not submitted a proposed plan of operations to the Division for approval. Buccaneer is therefore not in compliance with State law, and the Division respectfully requests that the Alaska Oil and Gas Conservation Commission (AOGCC) deny Buccaneer's requests for spacing exception for well KL# 14ST. The Division also requests that the application for spacing exceptions for well KL #14 and KL #14ST be denied on the following grounds: (1) failure to pool affected properties, (2) potential violation of correlative rights, (3) attempting to obtain spacing exceptions without first establishing pool rules, (4) KL #1-4 jeopardizes the State's correlative rights because the well would be less than 1,500 feet from State lease ADL 391094, (5) KL# 1-4 would be within 3,000 feet of an existing well, and (6) if KL #1-4 and KL# 1-4ST are both drilled they would be within 3,000 feet of each other. In order to uphold the integrity and to ensure the effectiveness of State laws intended to ensure orderly oil and gas development with the Division oversight of State leases and AOGCC regulation of operations to prevent waste and to protect the public safety and correlative rights, the Division requests that the Commissioner deny Buccaneer's application Pending RequestsOGCC for Spacing Exceptions for P sed Wells Kenai Loop #1-4 and Sai Loop #1-4ST respectively AOGCcket # CO -13-08 and CO -13-12. August 26, 2013 Page 2 of 2 for spacing exceptions until Buccaneer comes into compliance with State law and lease terms. Sincerely, W.C. Barron Director Cc: Colleen Miller, CIRI Mike Franger, MHT Joe Balash, DNR Acting Commissioner #10 • • DOCUMENTS REQUESTED AT HEARING FROM BUCCANEER (ENTIRE PACKAGE HELD IN SECURE STORAGE FOR ORGANIZATIONAL PURPOSES, SEVERAI DOCUMENTS IN PACKAGE NOT CONFIDENTIAL) #9 � RECEIVED AUG 20 2013 AOGCC August 16, 2013 Kathy Foerster Alaska Oil and Gas Conservation Commission 333 West 7t' Avenue, Suite 100 Anchorage, Alaska 99501 E] ''heTRUST LANDOFFICE Re: Docket 4 CO -13-08 and CO 13-12, Application of Buccaneer Alaska for Spacing Exceptions for Kenai Loop Field Well KL 1-4 and KL-14ST (MHT 9300082) Dear Ms. Foerster: The Trust Land Office (TLO), as land manager for the Alaska Mental Health Trust Authority (The Trust), urges the Alaska Oil and Gas Conservation Commission (AOGCC) to grant the spacing exceptions requested by Buccaneer Alaska for Well KL 1-4 and Well KL 1-4ST. These wells would be drilled from an existing well pad that includes two currently producing wells (KL 1-1 and KL 1-3). All of the referenced wells are situated on Trust oil and gas lease MHT 9300082. Royalty payments from these producing wells are an important contribution to The Trust's revenue stream that supports new mental health programs for Alaskans. As outlined by Buccaneer representatives to the AOGCC on August 13, 2013, the overall strongly linear trend of the Tyonek Formation channel sands is north-northeast and trends primarily on The Trust's leases with Buccaneer — comprising approximately 5,000 acres. It is important that this new gas discovery be explored expeditiously so that the overall geometry of the field can be ascertained and that production can contribute revenue to The Trust, as noted above, and to the critical situation faced by consumers with respect to projected gas shortages in the Cook Inlet area. The Alaska legislature and the administration have worked diligently to encourage gas development in Cook Inlet since all projections show a critical gas shortage starting in 2017 to 201.8 if dozens of new producing wells are not brought on line. To that end, companies like Buccaneer Alaska, are spending considerable risk capital on geophysical and drilling programs to discover and develop more gas. It is incumbent upon the AOGCC that the newly discovered Kenai Loop Field be allowed to be fully developed without further delay and that the currently AOGCC Spacing Exceptions • MHT 9300082 Page 2 of 2 collared well (KL 1-4) be completed and allowed to be tested and produced if found to be commercial. Given the land ownership in the area that comprises the Kenai Loop Field, it is understood that some form of allocation agreement will have to be reached among the landowners, in order to provide for orderly development of the field in an expeditious manner. The TLO also requests clarification on the implications of Conservation Order 231 as it applies to the portion of the field in sections 32, 33, and 34 in Township 6 North, Range 11 West, S. M. This order seems to allow for close -space drilling in these sections. Thank you for your consideration. Sincerely, Ak. /A ox' ' reg Jones IExecutive Director cc: Rick Fredericksen Mike Franger Marcie Menefee The Trust Land Office • 2600 Cordova Street, Suite 100 • Anchorage, AK 99503 • 907.269.5758 m • 0 1 ALASKA OIL AND GAS CONSERVATION COMMISSION 2 Before Commissioners: Cathy Foerster, Chair 3 Daniel T. Seamount 4 John K. Norman 5 In the Matter of Buccaneer Alaska ) 6 Operations, LLC's Request for ) 7 an Exception to the Spacing ) 8 Requirements for Kenai Loop 1-4 ) 9 and 1-4 Sidetrack. ) 10 ) 11 Docket No.: CO -13-08 12 CO -13-12 13 ALASKA OIL and GAS CONSERVATION COMMISSION 14 Anchorage, Alaska 15 August 13, 2013 16 9:00 o'clock a.m. 17 VOLUME I 18 PUBLIC HEARING 19 BEFORE: Cathy Foerster, Chair 20 Daniel T. Seamount, Commissioner 21 John K. Norman, Commissioner 1 2 1 TABLE OF CONTENTS 2 Opening remarks by Chair Foerster 03 3 Remarks by Mr. Landt 08 4 Remarks by Mr. Rinehart 16 5 Remarks by Mr. Ramirez 41 6 Remarks by Mr. Hennigan 64 7 Remarks by Mr. Watt 70 8 Remarks by Ms. Miller 85 9 Remarks by Mr. Van Dyke 89 10 Remarks by Mr. Franger 107 11 Remarks by Mr. Mayberry 113 2 1 P R O C E E D I N G S 2 (On record - 9:00 a.m.) 3 CHAIR FOERSTER: I'll call this hearing to 4 order. It's Tuesday, August 13th, 2013, it's a little 5 after 9:00 a.m and we're at 333 West Seventh Avenue, 6 Anchorage, Alaska, the offices of the Oil & Gas 7 Conservation Commission. 8 On my left is Dan Seamount, on my right is John 9 Norman and I'm Cathy Foerster. 10 Computer Matrix will be recording these 11 proceedings and you can get a copy of the transcript 12 from Computer Matrix if you so desire. 13 We just want to remind you guys that if you're 14 testifying make sure that your microphone is turned on 15 and that you speak into both microphones so that the 16 court reporter can capture what you say and so that 17 people in the back of the room can also hear you as 18 well. 19 We -- this is a hearing regarding docket number 20 CO 13-08 and CO 13-12, the application of Buccaneer 21 Alaska Operations, LLC or Buccaneer for an exception to 22 the spacing requirements of 20 AAC 25.055(a)(2) to test 23 and produce gas well Kenai Loop number 1-4 and 1-4 24 sidetrack within 1,500 feet of a property line where 25 the owner and landowner are not the same on both sides 3 0 1 of the line and within 3,000 feet of wells that are or 2 may be capable of producing from the same pool. 3 Let's see the sign up sheet. We've got several 4 people from TLO and Buccaneer that say they are going 5 to testify. What is TLO. 6 UNIDENTIFIED VOICE: Trust Land Office. 7 CHAIR FOERSTER: Oh, okay. Thank you. Thank 8 you. All right. So I see that Buccaneer is teed up to 9 start so let's just start with you guys. Who's going 10 to test -- well, we can swear you all -- all three of 11 you going to testify? 12 UNIDENTIFIED VOICE: I'm with CIRI. 13 CHAIR FOERSTER: You're with CIRI. Oh, okay. 14 Well, then we'll..... 15 UNIDENTIFIED VOICE: (Indiscernible - away from 16 microphone)..... 17 CHAIR FOERSTER: Is CIRI going to testify? 18 UNIDENTIFIED VOICE: (Indiscernible - away from 19 microphone)..... 20 CHAIR FOERSTER: Are you all on this sign up 21 sheet? You might want to..... 22 UNIDENTIFIED VOICE: (Indiscernible - away from 23 microphone)..... 24 CHAIR FOERSTER: Okay. Just -- there's two 25 sheets? Colleen is on this one, but I don't see you on 4 1 it. 2 UNIDENTIFIED VOICE: (Indiscernible - away from 3 microphone)..... 4 CHAIR FOERSTER: So we have representatives 5 from CIRI who intend to test -- I'm going to put a 6 little yes for testify by you guys' name. We got two 7 representatives from CIRI who will test -- who plan to 8 testify, two test -- two representatives from the Land 9 Trust or Trust Land Office and how many CIRI 10 representatives? 11 MR. LANDT: We'll have five from Buccaneer 12 that'll be testifying. 13 CHAIR FOERSTER: Five from Buccaneer. Would 14 you guys like to all be sworn in at the same time? 15 MR. LANDT: Sure. 16 CHAIR FOERSTER: Well, you need to get your 17 folks to come up then and we'll -- what we'll do is you 18 guys take a turn, for the record introduce yourself and 19 the company that you're for and then let the next 20 person do that and when we get all five of you we'll 21 swear all five of you in. 22 MR. LANDT: Okay. 23 COMMISSIONER SEAMOUNT: Swear them first. 24 CHAIR FOERSTER: I swear them in before they 25 identify themselves? 5 1 COMMISSIONER SEAMOUNT: I think so. 2 COMMISSIONER NORMAN: Yes. 3 CHAIR FOERSTER: All right. Well, then let's 4 just -- everybody are you ready? Raise your right 5 hand. 6 (Oath administered) 7 IN UNISON: I do. 8 CHAIR FOERSTER: Okay. Then you're all sworn 9 in, give your five names and then four of you can go 10 sit back down and we'll start with Mr. Landt. Your 11 name? 12 MR. LANDT: My name is Mark Landt, I'm vice 13 president of land and business development for 14 Buccaneer Alaska. 15 CHAIR FOERSTER: Okay. 16 MR. HENNIGAN: Steven Hennigan, consulting 17 drilling engineer for Buccaneer. 18 MR. RAMIREZ: Edward Ramirez with Buccaneer. 19 chief geophysicist. 20 MR. RINEHART: Gary Rinehart with Buccaneer 21 Energy, geologist. 22 MR. WATT: Jim Watt, president and CO up here 23 in Alaska. 24 CHAIR FOERSTER: Thank you. All right. So 25 have a seat and remind everyone of your name and do -- rel I Mr. Landt, give us your name for the record. 2 MR. LANDT: Okay. Mark Landt. 3 CHAIR FOERSTER: And you represent Buccaneer? 4 MR. LANDT: Buccaneer Alaska, LLC, correct. 5 CHAIR FOERSTER: Do you intend to provide 6 expert witness? 7 MR. LANDT: Yes. 8 CHAIR FOERSTER: Okay. And what is your area 9 of expertise, what is the subject of your expertise? 10 MR. LANDT: Land management. 11 CHAIR FOERSTER: Okay. And please give us your 12 qualifications so that we can determine whether we are 13 willing to accept you as an expert. 14 MR. LANDT: Thirty-six years of experience 15 directly in land management including four years now 16 with Buccaneer and prior to that 25 years with ARCO. 17 CHAIR FOERSTER: Commissioner Seamount, do you 18 have any questions or concerns with Mr. Landt? 19 COMMISSIONER SEAMOUNT: I have none. 20 CHAIR FOERSTER: Commissioner Norman. 21 COMMISSIONER NORMAN: I have no concerns. 22 CHAIR FOERSTER: Nor do I. You're recognized 23 as an expert in the area of land management. So please 24 proceed. 25 MARK LANDT 1 previously sworn, stated as follows on: 2 DIRECT EXAMINATION 3 MR. LANDT: Thank you. Appreciate the 4 opportunity to really share with you our Kenai Loop 5 field and what we've done out here as well as what our 6 plans are for the future including obviously 7 specifically the two wells that are proposed, the Kenai 8 Loop 1-4 as well as the Kenai Loop 1-4 sidetrack which 9 are the subject of the request for the spacing 10 exceptions. 11 As many in this room are well aware we drilled 12 the Kenai Loop number 1 well, it's actually been 13 renamed the Kenai Loop number 1-1 back in -- it was a 14 discovery well for the Kenai Loop field back in April 15 of 2011. Subsequent to that we drilled the Kenai Loop 16 number 3 well which has now been renamed the Kenai Loop 17 1-2 and we have drilled the Kenai Loop number 4 well 18 which is now renamed the Kenai Loop 1-3. We did the 19 renumbering really to coincide with the well pads that 20 we have situated in the Kenai Loop field area. And we 21 can go into the location of those pads at a later 22 point. 23 Just, you know, essentially we're -- we have 24 two zones that are being currently produced from the 25 Kenai Loop number 1-1 and the 1-3, it's the 9,700 foot 1 and the 10,000 foot zones. We are producing today 2 approximately 9 million cubic feet a day. And the -- I 3 guess we're -- let's see, cum to date, I think that 4 would be about 3 and a half bcf since we commenced 5 production back in January of 2012. 6 I don't know if it's appropriate to sort of 7 reintroduce the speakers or the individuals that will 8 be testifying today, but where the -- the names are up 9 here we're..... 10 CHAIR FOERSTER: Is that in the record? 11 MR. LANDT: The ending -- the agenda? 12 CHAIR FOERSTER: Yeah, if it's not in the 13 record then you might want to read it into the record. 14 MR. LANDT: Okay. What we have prepared today 15 is an agenda. We're -- by virtue of our testimony on a 16 -- from a G&G and a well design integrity as well as an 17 engineering perspective, we feel the location that 18 we're proposing particularly for the 1-4 well, Kenai 19 Loop, is the only location that will ensure the maximum 20 recovery of the resource. We are requesting an 21 expedited approval of that location exception. This is 22 a well we started -- we commenced drilling, spread the 23 well on August 9th, we have just as of yesterday set 24 surface casing at approximately 3,000 feet and we are 25 prepared to drill out pending the decision coming from 9 • Pages 10-120 of public hearing transcript held confidential 6 STATE OF ALASKA OIL AND GAS CONSERVATION COMMISSION Public Hearing on Kenai Loop No. 1-4, Docket # CO -13-08 Kenai Loop No. 14ST, Docket # CO -13-12 Buccaneer Alaska Operations, LLC 13, 2013 at 9:00 a.m. SIGN IN SHEET NAME AFFILIATION -7-2--6 Gni i s ,Ilr � C"- C c ,on A4) t_ 1� V Q. K-1 -vim (,-)u L' J�) b�-- 1 j DDG) DN � 'y 94V Fyot'l "6cc N • August 13, 2013 Cathy Foerster, Chair Alaska Oil and Gas Conservation Commission 333 West 7`h Avenue, Suite 100 Anchorage, AK 99501 RE: Docket Numbers CO -13-08 and CO -13-12 C: RECEIVED AUG 13 2013 AOGCO Buccaneer Alaska Operations, LLC Requests for Multiple Spacing Exceptions -Proposed Wells Kenai Loop #1-4 and # 1 4S Dear Chairperson Foerster: This letter is submitted to formally notify the Alaska Oil and Gas Conservation Commission (AOGCC) that Cook Inlet Region, Inc. (CIRI) objects to all of Buccaneer Alaska Operations, LLC's (Buccaneer) requests for exceptions for spacing requirements under 20 AAC 25.055 for wells Kenai Loop # 1-4 and #14ST (the "wells"). This objection applies to Buccaneer's requests for both proposed wells including the drilling, testing and producing of each well as stated in the Public Notices issued by the AOGCC for Docket Numbers CO -13-08 and CO -13-12 . The wells are proposed to be drilled in Section 33 of T 06N, R 11 W SM. The CIRI oil and gas ownership interests in Section 33 and in Section 34 are not under lease to Buccaneer. The CIRI oil and gas interests in both Sections are not leased to any third party at this time. Nor have the CIRI oil and gas interests in either Section 33 or Section 34 been pooled with any other oil and gas interests in those sections. Enclosed is a map indicating the CIRI oil and gas interests in Sections 33 and 34. Granting any of the exceptions to the spacing requirements requested by Buccaneer would violate CIRI's correlative rights and potentially cause waste. Regulation 20 AAC 25.055 in this instance specifically disallows the drilling of either of the wells without an exception and again in this instance specifically disallows production from either of the wells without pooling. The CIRI oil and gas interests in Sections 33 and 34 are not 1 2525 C STREET, SUITE 500, ANCHORAGE, ALASKA 99503-2633 / PO BOX 93330, ANCHORAGE, ALASKA 99509-3330 907-274-8638 • FAX: 907-279-8836 • www.ciri.com C I R I pooled. While not a subject of this hearing, the fact the CIRI oil and gas interests in Section 33 are not pooled raises questions about the legitimacy of the past and ongoing production from Buccaneer wells #1-1 and #1-3 also located in Section 33 on a Mental Health Land Trust oil and gas lease. Buccaneer is clearly and unfairly advantaged relative to CIRI as production from these two wells continues. CIRI's oil and gas lease interests in Sections 33 and 34 had been previously leased by Buccaneer Alaska, LLC but that oil and gas lease has terminated. Please see the enclosed recorded release of Oil and Gas lease. But again, the CIRI lease interests were never pooled. To our knowledge there are no individual pool rules established for the gas pool(s) located in Section 33. Hence, we assume that the statewide well spacing rules apply. CIRI objects to the granting of all the requests by Buccaneer for the spacing exceptions for both the wells for the following reasons. 1. CIRI's oil and gas interests located in Section 33 are not pooled at this time. CIRI's correlative rights would be violated if the proposed well #1-4 is drilled. This well is located within 1500 feet of CIRI's oil and gas interests in Section 33. 2. CIRI's oil and gas interests located in Sections 33 and 34 are not pooled at this time. CIRI's correlative rights would be violated if the proposed well #1-4ST is drilled. That well is located within 1500 feet of CIRI's oil and gas interests both in Section 33 and 34. 3. Well #1-4 as proposed would be within 3000 feet of an existing well in Section 33. 4. Assuming that well #1-4 is drilled first then well #14ST as proposed would be within 3000 feet of an existing well in Section 33. 5. There are no individual well spacing or drilling units established for the individual wells in Section 33 that would allow wells #1-4 or #14ST to be drilled, tested or produced as proposed. Other than the statewide rules, there are no applicable individual pool rules that cover Section 33 or Section 34. We do not believe that Conservation Order 231 currently applies to Section 33 or Section 34. That Conservation Order was written to apply to the Cannery Loop Unit Area. 6. There are no individual well spacing or drilling units established for the individual wells in Section 33 that would allow wells #1-1 or #1-3 to be in regular production now or in the past without a pooling agreement. Well #1-3 was brought into production after the CIRI lease terminated and without a pooling agreement. Well #1-1 was brought into 2 2525 C STREET, SUITE 500, ANCHORAGE, ALASKA 99503-2633 / PO BOX 93330, ANCHORAGE, ALASKA 99509-3330 907-274-8638 • FAX: 907-279-8836 • www.ciri.com production while the CIRI/Buccaneer lease was still in effect, but without a pooling agreement. 7. Buccaneer's request to voluntarily unitize the Kenai Loop area was denied by the Department of Natural Resources. The request to voluntarily unitize was not supported by CIRI. The DNR/DOG decision is publically available on the Division of Oil and Gas web site. 8. There are no geologic or geophysical data or evidence in the record (at least as of August 7, 2013) that would support Buccaneer's requests for exceptions, especially given the diverse nature of the oil and gas ownership rights in Sections 33 and 34. 9. There is no evidence on record that Buccaneer has attempted to pool the various ownership interests in Section 33 or Section 34. 10. Buccaneer in its applications acknowledges that it is not the working interest owner for the unleased CIRI acreage in either Section 33 or Section 34. We do not believe that Buccaneer's requests for exceptions to the spacing requirements will promote the goals or provide any of the protections stated in the AOGCC statutes and regulations. They will not protect adjacent property owners; they will clearly violate CIRI's correlative rights; and they may result in waste. We formally ask the AOGCC to deny all the Buccaneer requests. If you have any questions please contact Colleen Miller at (907) 263-5117. Sincerely, Colleen Miller Resources Manager Enclosures 3 2525 C STREET, SUITE 500, ANCHORAGE, ALASKA 99503-2633 / PO BOX 93330, ANCHORAGE, ALASKA 99509-3330 907-274-8638 • FAX: 907-279-8836 • www.ciri.com LJ A 2013-004391-0 A Recording Dist: 302 - Kenai s 5/8/2013 10:32 AM Pages: 1 of 2 ` iuummuaueriuRi�iiisiiuiowumuiiiiia�iiiiro After recording, return to: Cook Inlet Region, Inc. Attn: land & Resources Department 2525 C Street, Suite 500 Anchorage AK 99503 RELEASE OF OIL AND GAS LEASE C-061667 Kenai Recording District ' Orieinal Recordine Information: Title: Memorandum of Oil and Gas Lease C-061667 Recording District: Kenai Serial Number: 2011-002923-0 Recording Date: 3/29/2011 WHEREAS, Cook Inlet Region, Inc. ("CIRI") as LESSOR, entcred into an Oil and Gas Lease C-061667 (the "Lease") with Buccaneer Alaska, LLC ("Buccaneer") as LESSEE, dated March 1, 2011, and covering the subsurface rights in the lands described on EXHIBIT A hereto (the "Lease"); and, WHEREAS, the Lease terminated on January 9, 2013, and Buccaneer did not record a release acknowledging the termination within 90 days as required by Section 3 of the Lease. THEREFORE, CIRI confirms the release of Oil and Gas Lease C-061667 effective January 9, 2013 on behalf of Buccaneer. DATED this 11", day of April, 2013. COOK INLET REGION, INC. �1� By: Ethan G. Schutt Its: Senior Vice President Land and Energy Development STATE OF ALASKA ) ss. THIRD JUDIC1A1�i1rl'S'r�, The fcl ego!n ehhwas acknowledged before me this day of April, 2013, by Ethan G. Scha, S nit iice''lJ sidenl Land and Energy Development, Cook Inlet Region, Inc., an Alaska Nativ¢corj orati'Qtt',-ft behalf cFthe corporation. d,'• AU130 OF P\-PG.�P, Notary Public in and or the State of Alaska My Commission Expires: Q , ;,3) . _U-, I L! tEXHISIT A • SUBJECT LANDS Seward Medd n asks Township 5 N,�f2v 1 1 W. Section 3, tots 1 to 4, inclusive, WAWA, W'A, SW'A, NE'I+SE Y;, Sl/)SEI/-; Section 4, Lots i and 2, 5'/2NE'l4, NEIASEIA. Containing approximately 680.00 acres, more or less. Township 0 N ftan� t 1 W. Section 33, Lots 1, 2, 3, 4, 7, 1o, 11 and 12, N'hNE'14, SE1/4NEI/a, Ny?.SWVoNI_'/4, W'hSW'ASE'/a, E'hSl:'ASE114; Section 34, Lots 1, 2, 3, 4, 5, 9, 10, 12, 13, 14, 37, 58, 54, 56, 72, 76, 93, 94, 96, 97, 99, I(X), 101, 103, 104, 1o8, 109, 118, 120, 121, 126, 1270128, and 179, 142, 143, 145, 147, 150, 153, 154, 160, 162, 163,168, N'/sNW'IANEY4, N'/2SV7NW'/+NE'/4, W'/2W'/aSW'ANE'A, N112NW'14, NW'li5W'ANW'/4, E'/e PANW'/4, N'hNE'/4NF'ASW'/4, SE'ANE14SPA, NPASE114SPI4, S1hSE1145FI/4; Section 35, NW+/4N(:'/a, NEY4NWy4. Containing approximately 595.00 acres, more or less. Aggregating approximately 1,275.00 acres more or less IIIIIIIIIIIIIIIIIII (NON -SCANNABLE) OVERSIZED MAP, CIRI'S BUCCANEER PROPOSED WELL BHL • n u BUCCANEER'S ENGINEERING PRESENTATION HELD IN SECURE STORAGE #7 1029 W. 3rd Avenue, Suite 9402, Anchorage, AK 99501 p907 865.2600 crowellC morin g April 4, 2013 VIA HAND -DELIVERY Daniel S. Sullivan, Commissioner State of Alaska, Dept. of Natural Resources 550 W. 7th Avenue, Suite 1400 Anchorage, Alaska 99501 Re: Buccaneer Alaska Operations, LLC — Kenai Loop Unit Application Denial Appeal of Director's Decision dated March 27, 2013 Request for a Dearing Dear Commissioner Sullivan: This firm represents Buccaneer Alaska Operations, LLC ("Buccaneer"). Pursuant to 11 AAC 02.030, Buccaneer hereby appeals the Decision of Director W.C. Barron ("Director"), Division of Oil and Gas ("Division"), dated March 27, 2013, titled Denial of the Kenai Loop Unit Application (Corrected) ("Decision"), a copy of which is attached hereto. This appeal is timely filed in accordance with 11 AAC 02.040. I. Introduction Buccaneer is an independent oil and gas exploration, development and production company. Buccaneer responded to the call from the Parnell Administration and the Legislature for new companies to come to Alaska to increase exploration and development in the Cook Inlet basin. Since 2010 Buccaneer has built a solid record as a diligent and responsible operator. In this brief time, the company has built a substantial land position in Cook Inlet; identified numerous oil and gas prospects, each with multiple drilling targets; shot new seismic; brought one new field into production (Kenai Loop) and commenced gas sales to ENSTAR; acquired an onshore rig; and partnered with AIDEA to bring a new jack-up rig into Cook Inlet. That -rig, the Endeavour: Spirit of Independence, recently moved onto location at Cosmopolitan where the company plans to drill first for gas, in lieu of its primary oil target, in an effort to help meet the anticipated natural gas deliverability shortfall in Southeentral. Buccaneer, in fact, has ambitious plans for continued work at Kenai Loop and new drilling at the North Crowell & Moring LLP - www.crowett.com - Washington, DC - New York - Los Angeles - Orange County - London - 8russets Daniel S. Sullivan. Cominissi.oner April 4, 2013 Page 2 Cook Inlet, Southern Cross and West Eagle Units, in addition to Cosmopolitan. In sum, Buccaneer is exactly the kind of company the State needs and should be encouraging to invest here. One way of providing that encouragement is by the State approving the creation of a unit when the standards for doing so have been satisfied. On July 19, 2012, Buccaneer filed an application with the Division to form the Kenai Loop Unit ("KXU") on leases issued by the Department of Natural Resources ("DNR"). Mental Health Land Trust ("MHT") and Cook Inlet Region, Inc. ("CIRI"). Buccaneer is the proposed IXU Operator and the sole working interest owner ("WIO") of the proposed unit. The proposed K XU is a textbook case for unitization. DNR will generally form a unit after a lessee (i) acquires a leasehold position; (ii) that the lessee explores and determines Is underlain by a reservoir or potential hydrocarbon accumulation;' (iii) submits a plan to delineate the unit area's resources and move the unit's hydrocarbons into production; and (iv) makes a showing that unitization is in the public interest." Here, Buccaneer met these requirements. Over the last three years, Buccaneer has spent in excess of $50 million to assemble a land position, reprocess ' DNR's regulations provide that a "unit must encompass the minimum areas required to include all or part of one or more oil or gas reservoirs, or all or part of one or more potential hydrocarbon accumulations." 11 AAC 83.356(a). A reservoir is defined by DNR to mean an "oil or gas accumulation which has been discovered by drilling and evaluated by testing and which is separate from any other accumulation of oil and gas." 11 AAC 83.395(6). DNR defines a "potential hydrocarbon accumulation," to mean "any structural or stratigraphic entrapping mechanism which has been reasonably defined and delineated through geophysical, geological, or other means and which contains one or more intervals, zones, strata, or formation having the necessary physical characteristics to accumulate and prevent the escape of oil and gas[.]" 11 AAC 83.395(5). z Under 11 AAC 83.303, DNR will approve a proposed unit agreement for oil and gas leases if such an agreement is found to be necessary to protect the public interest considering the provisions of AS 38.05.180(p) and the relevant unitization regulations (11 AAC 83.301-.395). Alaska Statute 38.05.180(p) gives DNR authority to unitize "all or part of an oil and gas pool, field, or like area" to "conserve the natural resources" of that field or pool when "necessary or advisable in the public interest." Crowell & Moring LLP . www.crowell.com . Washington, DC • New York • Los Angeles - Orange County • London • Brussets Daniel S. Sullivan. Commissioner April 4, 2013 Page 3 and reinterpret 2D seismic data, shoot new 3D seismic, obtain exclusive rights to a drill rig, drill three wells, install production facilities and pipelines, and entered into a gas sales agreement with ENSTAR. During this period, Buccaneer also identified a reservoir, put two wells into production; and. discovered additional potential hydrocarbon accumulations.' After conducting these activities, consistent with DNB's unit regulations, Buccaneer submitted a unit application and a Plan of Development that committed Buccaneer to continue production from the proven reservoir, form an initial Participating Area ("PA"), and further delineate the potential hydrocarbon accumulations within the unit area by drilling up to 15 wells. None of the foregoing facts can be disputed. Nor should it be disputed that, forming the I_YU is in the public and State's interest. In 2010 the Alaska Legislature declared in the Cook Inlet Recovery Act that. the State's interest is best served by facilitating timely and responsible development in the Cook Inlet.; Additionally, the Parnell Administration has repeatedly stated that. the State's interest is best served by attracting investment from new companies and encouraging Cook Inlet development to offset predicted gas shortfalls. Yet, Director Barron found that Buccaneer's unitization application and development plan is not in the public interest. Remarkably, the decision is silent about the immediate need to see additional gas exploration and development activities in the Cook Inlet. Instead, the Director found that the State's interest is better served by allowing leases to terminate so the State can re -lease them. Director Barron wrote: "If unitization is denied and these leases expire, Buccaneer or other producers can bid on them at a lease sale and conduct exploration activities during the primary term of the lease. That will do more to encourage development competition [sic] than extending the term of the lease by unitization." Decision at 15. 3 The Sponsor's Statement to the Cook Inlet Recovery Act (HB 280) provides: "Residents of South Central Alaska are at risk that in the near future there will not be enough natural gas produced in Cook Inlet to heat and light their homes and businesses. Legislative action now can help address this challenge before it becomes a crisis .... South Central ... needs new gas discoveries. [HB 280] increases the incentives for exploration in Cook Inlet and allows explorers and producers to take their full benefit in one year rather than over two years." Crowell & Moring LLP • www.crowell.com . Washington, DC • New York Los Angeles • Orange County • London - Brussels Daniel S. Sullivan, Commissioner April 4, 2013 Page 4 Buccaneer respectfully submits that the Division erred in concluding that. the State's interest is better served through lease sales and theoretical development, that may occur at some unknown point, in the future, particularly given that there is a Cook Inlet gas deliverability shortfall on the horizon. Buccaneer is committed to expediting exploration and development of known gas resources in the unit area. Further, Buccaneer's successful and continued development at EXU will increase competition and serve to ameliorate the high level of market concentration in the Cook Inlet gas supply market. This Decision is not only out of sync with DNR.'s unitization regulations and past. practice, but it also undermines your significant. efforts — through tax reform, permitting reform, and marketing the North Slope and Cook Inlet's enormous: resource potential to world markets — to increase investment and development. in Alaska. Indeed, it is difficult to understand why the Division would reject a unit application that commits to exploring and developing significant gas resources in the near future and how the Division believes its new unitization policy will result in timely development. Decisions like this one also undermine the Parnell Administration's stated goal of working in partnership with the oil and gas industry to facilitate and expedite responsible resource development.. After all, in this instance it is not the federal government or extreme environmental groups hindering oil and gas exploration and development, but the Division. H. Basis for Buccaneer's Appeal (11 AAC 02.030(a)(8)) The Director's surprising and unprecedented Decision relies upon factually incorrect and legally flawed reasons for rejecting formation of the KXU. As explained below, the Director's Decision is not supported by the facts, conflicts with DNR's unitization regulations, subverts the public interest and undermines the Parnell Administration's stated objective of working with industry to encourage responsible and prudent resource development. Your intervention is necessary to correct this erroneous decision. Generally the Division will reject a unit application only when the applicant has failed to show that the unit area is underlain by a reservoir or potential hydrocarbon accumulation, or when the applicant fails to submit an adequate plan to move the field into timely production. For example, the Director recently issued a decision rejecting the formation of the Cohoe. Unit because the applicant did not Crowell & Moring LLP • www.croweit.com - Washington, OC . New York • Los Angeles - Orange County • London • Brussets Daniel S. Sullivan. Commissioner April 4, 2013 Page 5 discover a reservoir or potential hydrocarbon accumulation within the unit area.1 The Director rejected the proposed Donkel Unit because the applicant failed to provide a plan to move the acreage into timely production. , In stark contrast to these decisions, it is undisputed that since acquiring the Kenai Loop acreage, Buccaneer has discovered a reservoir that underlies multiple leases in the proposed unit area, placed the reservoir into commercial production, and identified additional potential hydrocarbon accumulations in the proposed unit area. Director Barron in fact confirmed that Buccaneer is in commercial production from two leases and "has identified additional Kenai Group potential hydrocarbon accumulations ... the geological, geophysical, and engineering analysis demonstrates the existernce of both a producing reservoir and potential hydrocarbon accumulations withthe operator's proposed Kenai Loop Un.it." Decision at 13-14 (emphasis added). It is also undisputed that since acquiring the Kenai Loop leases in 2010, Buccaneer has aggressively and diligently explored and developed these leases. Buccaneer has invested over $50 million drilling three wells, shooting 3D seismic, acquiring and reinterpreting 2D seismic, installing production facilities and pipelines, and entering into a gas sales agreement with ENSTAR. Thus, Buccaneer has more than met the threshold requirements for unitization because it has discovered a reservoir, put the reservoir into production, and submitted plans to expand production and further delineate the unit area. Nevertheless, the Division decided to reject Buccaneer's application to form the KXU for four reasons. None of these reasons provide a legitimate basis to reject Buccaneer's application. (1) Buccaneer's Proposed Unit Application is Designed to Effect Timely and Efficient Development and Exploration of Multiple Leases. Director Barron found that the "application is in effect an effort to extend the primary terms of the leases for the purpose of conducting exploration activities rather than a proposal to effect efficient development of multiple leases." Decision at 3. Director Barron apparently believes that unitizing leases for exploration is See Director Barron's September 28, 2011, Denial of the Application to Form the Cohoe Unit. 5 See Director Barron's August 31, 2011, Denial of the Application to Form the Donkel Oil and Gas Unit. Crowell & Moring LLP - www.crowett.com - Washington, DC • New York Los Angeles . Orange County London , Brussets Miniel S. Sullival3, Commissioner April 4, 2013 Page 6 inappropriate. If so, Director Barron's decision rests on a misapplication of DNR's regulations. DNR's regulations provide that the unit area "must encompass ... reservoirs,, or all or part of one or more potential hydrocarbon accumulations." 11 AAC 83.356(a). Thus, there is nothing improper about using unitization to extend leases so exploration can occur because a unit can contain leases that overlie a '`potential hydrocarbon accumulation." In fact, DNR's regulations expressly authorize the unit operator to develop a reservoir a.rz.d further explore within the unit area. For example, DNR's regulations state that a unit application "must" include a Plan of Development that (i) describes development activities for a reservoir "that has become sufficiently delineated so that a prudent operator would initiate development activities in that reservoir" and (ii) describes the lessee's "plaits for exploration or delineati.ort of an.v land in the unit itot included in a. participating area."(; 11 AAC 83.343(x) (emphasis added). Accordingly, while Director Barron believes that a unit can only contain a reservoir, DNR's regulations provide that the unit area can encompass a reservoir or a potential hydrocarbon accumulation, which the unit operator must commit to exploring and developing. Buccaneer's proposed KXU application is consistent with DNR's regulatory requirements for two reasons. First, it is undisputed that the unit area proposed by Buccaneer encompasses a reservoir. Decision at 13-14. It is also undisputed that the unit area overlies potential hydrocarbon accumulations. Director Barron found: "Buccaneer has identified additional Kenai Group hydrocarbon accumulations in the Lower Sterling, Upper Ty onek, and Hemlock Formations .... most of the amplitude anomalies mapped by Buccaneer have some apparent structural control (anticline, flank or fault closure), indicating a possible hydrocarbon trapping mechanism." Decision at 13. Thus, consistent with 11 AAC 83.356(a), Buccaneer's KXU application only includes acreage that encompasses a reservoir and potential hydrocarbon accumulations. Buccaneer is not seeking to extend leases for rank exploration purposes or "wildcatting." Second, Buccaneer has submitted a plan to develop and explore the unit area. Director Barron acknowledges that Buccaneer's plan commits to continue to 6 An applicant has the option of submitting with its unit application a Plan of Development or, if a reservoir has not been sufficiently delineated, it can submit a Plan of Exploration. 11 AAC 83.341(a). Crowell & Moring LLP • www.croweLt.com • Washington, DC - New York . Los Angeles • Orange County • London - Brussels Daniel S. Sullivan, Commissioner April 4, 2013 Page 7 produce from a reservoir that underlies MHT and DNR leases. Decision at 13-15. Buccaneer's proposed POD also sought to drill wells to expand its gas production, form a PA over multiple leases, and further delineate several potential hydrocarbon accumulations in the proposed KXU area.-, In sum, there is no factual basis for Director Barron finding that "[t]he primary purpose of the Application appears to be extension of the primary terms of the State leases proposed to be included in the unit and not to effect efficient development of proven reservoirs." Decision at. 17. Instead, consistent with 11 AAC 83.343(a) and 11 r'1AC 83.356, the primary purpose of Buccaneer's unit application was not exploration, but to effect efficient. development and production from multiple leases and the delineation of potential gas resources in the proposed unit. Next., Director Barron objects that current production is primarily from lands owned by the MHT and therefore there is no need to unitize State acreage. Decision at 15, 17 ("The application contains no commitment to explore, develop, or produce State land."). As described above, Buccaneer discovered a reservoir that straddles multiple leases owned by MHT and the State and put this reservoir into production. Decision at 15, 17. It has also identified other closely situated reservoirs or potential hydrocarbon accumulations that underlie the unit area, and it has submitted a plan that ensures coordinated and efficient development. Decision at 12-14. The fact that most of the producing reservoir may rest on MHT lands is no reason to deny unitization. To the contrary, Director Barron acknowledges that the purpose of unitization, "is to effect efficient development of multiple leases overlying a common reservoir or closely situated reservoirs." Decision at 15. Buccaneer's KXU application is entirely consistent with the purpose of unitization because it is producing a common reservoir that underlies DNR and MHT leases. Director Barron also finds that unitization at Kenai Loop "is not necessary to allow for joint development." Decision at 16. This finding is not supported by the The POD provides: "Buccaneer agrees to drill 1-3 additional wells within the 1st year. The next well (Kenai Loop No. 4 well) will be drilled to the proposed depth of 11,000 TVD and will attempt to extend the Kenai Loop filed from the Kenai Loop No. 1 well [which is currently in commercial production]. The surface location is on the Kenai Loop No. 1 pad and the final bottom hole location will be determined after final processing and interpretation of the 3D seismic survey." Decision at 14. The Decision later adds that "Buccaneer has ... shown a proven producible formation penetrated by Kenai Loop #1 well and that the proposed unit contains other possible potential hydrocarbon trapping mechanisms." Decision at 17. Crowell & Moring LLP , www.croweLL.com , Washington, OC - New York • Los Angeles - Orange County - London • Brussels Daniel S. Sullivan, Commissioner April 4, 2013 Page 8 record. In addition to CIRI, there are two separate lessors who jointly own, or appear to own, at least one common reservoir and potentially other hydrocarbon accumulations. Further, because the State acreage contains wetlands, an airport. and subdivisions, it will be very difficult for a lessee to obtain access to the surface acreage and drill wells. Unitization, therefore, is required to efficiently develop these resources from Buccaneer's existing pad or from future pads which will need to be strategically placed on the MHT leases. The Division has long issued decisions which state that combining leases in a unit "that overlie a reservoir and potential hydrocarbon accumulations ... increases the likelihood that these leases will be developed jointly with acreage already in the unit, thereby reducing surface impact from development."" It is practically self- evident that forming a reasonably sized unit that encompasses multiple reservoirs and potential hydrocarbon accumulations will increase the likelihood that, these hydrocarbons will be developed jointly and efficiently. Finally, Director Barron believes that Buccaneer is misusing the unitization process to explore leases because he claims Buccaneer has not diligently explored the leases during their primary term. Decision at 3, 18. The Director's criticism, however, conflicts with DNR's regulations.9 This position is also misguided. Since acquiring the Kenai Loop leases in 2010, Buccaneer has diligently and aggressively explored and developed its land position.10 It is unclear what more Buccaneer could have accomplished. To the extent that Director Barron is suggesting that lessees should not purchase leases that only have several years remaining on the primary term, he is effectively condemning State acreage and delaying development of such leases. No company will purchase and invest in exploring these mature leases if the Division's policy is to refuse to unitize them because exploration did not occur earlier in the life of the leases. This is yet another example of the Division pursuing misguided and shortsighted policies that are contrary to State law and the Parnell Administration's directive to partner with industry to ensure timely and responsible resource development. 8 Director's March 15, 2013, Approval, In Part, of the First Expansion of the Badami Unit, Decision at 5. 9 11 AAC 83.343(a) 10 See Decision at 12-14. Crowell & Moring LLP - www.croweti.com - Washington, DC - New York - Los Angeles Orange County - London - Brussels Daniel S. Sullivan. Commissioner April 4, 2013 Page 9 (Z) Buccaneer's Proposed Unit. Plan Complies with DNR's _Rel;ulatory Rec ul irement_s. Director Barron rejected Buccaneer's proposed KXU application in part because he found the proposed POD deficient. Director Barron articulated five reasons, which are scattered throughout. the Decision, in support of this finding. None of these reasons withstand scrutiny. First, Director Barron writes that the POD is deficient. because Buccaneer "is not committing to the development of a proven reservoir. It is offering to drill wells to look for hydrocarbons." Decision at. 14. This finding is fact=ually erroneous. Buccaneer's proposed plan commits to the development and production of a proven reservoir. The POD states: "Buccaneer agrees to drill 1-3 additional wells within the 1st ,year. The next well (Kenai Loop No. 4 well) will be drilled to the proposed depth of 11,000 TVD and will attempt to extend the Kenai Loop field from the Kenai Loop No. 1 well [which is currently in commercial production]." Decision at 14 (emphasis added). The proposed POD also committed to forming an initial PA "for the Tyonek formation to encompass the known producing interval in the Kenai Loop No. 1 Well." Decision at 14. It is undisputed that the Kenai Loop No. 1 well is producing from the Tyonek formation and that production is likely draining "both MHT lease 9300082 and State lease ADL 391094." Decision at 13. It is therefore undisputed that Buccaneer is committing to the development of a proven reservoir. Accordingly, Director Barron's assertion that Buccaneer is merely attempting "to extend leases beyond their primary term for the purpose of drilling exploration wells" is wholly without merit and is unsupported by the record. Second, DNR's unit regulations are in direct conflict with Director Barron's finding that it is improper to propose a unit with a plan "to drill wells to look for hydrocarbons" or "for the purpose of drilling exploration wells." Decision 14, 19. Director Barron adds that the purpose of unitization "is not to indefinitely hold State leases beyond their primary term for the purpose of drilling exploration wells." Decision at 19. Contrary to Director Barron's interpretation of State law, DNR's regulations require a lessee to submit "plans for the exploration or delineation of any land in the unit not included in a participating area."" This is precisely what Buccaneer did here. Moreover, DNR's regulations expressly authorize the Commissioner to form or expand a unit for the express purpose of 11 11 AAC 83.343(a) (emphasis added). Crowell & Moring LLP - www.croweti.com . Washington, DC - New York - Los Angeles . Orange County • London . Brussels Daniel S. Sullivan. Commissioner• April 4, 2013 Page 10 exploration.12 Consequently, not only does Director Barron mischaracterize Buccaneer's plan as a mere "exploration plan," but his finding on the alleged impropriety of conducting exploration activity after unit formation is contrary to DNR.'s unitization regulations. Third, Director Barron stated that the POD is deficient because he found that Buccaneer did not provide a plan that would develop State lands. Decision at 17, 18. This finding is in conflict with other findings made in the Decision. The Decision acknowledges that Buccaneer is, or is likely, producing from a reservoir that underlies a State lease. Decision at 13, 15. Buccaneer also submitted a proposed POD that sought to expand development from this reservoir. Decision at 13. In addition, Buccaneer committed to drilling up to fifteen wells over the next five vears to further explore, delineate, and develop the unit area. Thus, there is no support in the record for the finding that Buccaneer is not committing to develop State resources because Buccaneer (i) is currently developing and producing the State's gas; (ii) committed to forming an initial PA that will include all acreage contributing to production, which means the PA will encompass State acreage; and (iii) committed to drilling additional wells to explore and delineate within the unit area. Fourth, Director Barron found that Buccaneer failed to provide sufficient detail around the surface location and bottom hole location of the POD's proposed wells. Decision at 3, 14, 15, 17. As discussed above, Buccaneer's plan did, in fact, identify the surface location and depth of the next well (Kenai Loop No. 4 well) that it committed to drill. Since initially filing its unit application, Buccaneer has drilled this well and provided information about the final confidential well test results to the Division on January 24, 2013. Kenai Loop No. 4 well is now in commercial production. The proper (and far more productive) response to a proposed POD that the Division believes is deficient is not to reject the unit application. Instead, if a proposed POD is not sufficient, DNR regulations provide that the Commissioner may "propose modifications which, if accepted by the unit operator, would qualify 12 See 11 AAC 83.341(a) and 11 AAC 83.356(a) (providing that a lessee can submit a unit application that merely seeks to explore a potential hydrocarbon accumulation). In fact, on the same day that Director Barron rejected the Kenai Loop Unit application, he authorized the expansion of the Badami unit for the purpose of exploration and delineation. See Director Barron's Approval, in Part, of the First Expansion of the Badami Unit, March 15, 2013 at 8, 12. Crowell & Moring LLP - www.crowell.com • Washington, DC - New York - Los Angeles - Orange County - London . Brussels Daniel S. Sullivan, Commissioner April 4, 2013 Page 11 the plan for approval."':' This has been the Division's practice for decades. Unfortunately, Director Barron did not follow that process here. Finally, Director Barron objects to Buccaneer's proposed five year term for the initial POD. Decision at 15. The Division never notified Buccaneer that the proposed five year term was problematic. If the Division had conveyed its concerns to Buccaneer, consistent with 11 AAC 83.343(b), then Buccaneer could have modified the POD's initial term or the Division could have simply approved the plan for a shorter term. A flat rejection of the POD and KXU is simply not a reasonable approach; nor one that will expedite future drilling and production. (3) Buccaneer's Unit Application Is in the Public Interest Because Buccaneer Is Producing From a Gas Reservoir that Underlies Multiple Leases and Is Committing to Expand Production and Explore and Delineate Additional Potential Hydrocarbon Accumulations. Director Barron properly notes that under AS 38.05.180(a) "the people of Alaska have an interest in the development of the State's oil and gas resources to maximize the economic and physical recovery of the resources and in maximizing competition to develop State resources." Decision at 18. The need to develop gas resources in Cook Inlet is particularly acute given concerns regarding the long term viability of the basin and problems surrounding gas deliverability within the coming years, especially during peak demand. Moreover, given the high level of market concentration, there is also need to ensure additional companies have an opportunity to supply gas to utilities. If there was any doubt about the high priority the State places on Cook Inlet gas exploration, development, and production, the Alaska Legislature recently passed the Cook Inlet Recovery Act, which made it abundantly clear that the public and State's interest are best served by facilitating timely and responsible gas development in the Cook Inlet. None of these factors, however, appear in Director Barron's decision. Instead, when Director Barron's decision focuses on the State or public's interest, he primarily analyzes whether it is "in the public interest to extend leases beyond their primary term to simply drill exploration wells in the absence of a firm development and production commitments." Decision at 18. As discussed above, 13 11 AAC 83.343(b). Crowell & Moring LLP • www.crowelhcom • Washington, DC • New York • Los Angeles - Orange County - London Brussels Daniel S. Sullivan. Commissioner April 4, 2013 Page 12 this assertion is a misebaracterization of Buccaneer's unit application and displays an overly narrow view of the State and public's interest. Based on his Decision, it appears that Director Barron believes the State's interest is better served through lease sales and theoretical development that may occur at some point in the future. Decision at 15, 18. It. is unclear how Director Barron could come to this conclusion given the fact that (i) there is a Cook Inlet gas deliverability shortfall; (ii) there is a need for employment opportunities for Alaskan citizens; (iii) there will be additional revenue generated for the State and local governments through Buccaneer's activities; (iv) Buccaneer is committing to expedite exploration and development of known gas resources in the unit, area; and (v) there is an oligopolly in the Cook Inletgas supply market. This decision also cannot be in the public or State's interest because it will have a chilling effect on attracting new companies and investors to Cook Inlet because the Decision ignores DNR's regulations, is contrary to DNB's past practices and, consequently, introduces substantial uncertainty to the unitization process. (4) The CIRI-Buccaneer Lease Dispute Does Not Provide a Reasonable Basis to Refect Buccaneer's Unit Application. The Division also said it rejected Buccaneer's unit application because CIRI notified the Division that one of the leases in the unit application had been terminated by CIRI, and Buccaneer never amended the unit application to "reflect the termination." Decision at 3. This issue is not a grounds for rejecting a unit application. At most it suggests that the application might have been amended or the Division could have approved the unit but excluded the CIRI lease. Nothing in DNR's regulations requires that a unit application be rejected if there is a dispute between a lessor and lessee over the status of a lease. Further, the Division did not contact Buccaneer to discuss any concerns it might have about the status of the CIRI lease. If it had, it would have learned that the termination of the lease by CIRI is disputed by Buccaneer. At bottom, the status of the CIRI lease is an issue that will be resolved over time; but it is not a reason for denying formation of a unit completely. III. Material Facts Disputed by Buccaneer (11 AAC 02.030(a)(9)) Buccaneer identifies the following material facts and mixed statements of fact and law disputed by Buccaneer. Crowell & Moring LLP www.croweii.com • Washington, DC , New York • Los Angeles • Orange County - London - Brussels Daniel S. Sullivan, Commissioner April 4, 2013 Page 13 • .,It is not apparent from the Application, however, how formation of the KXU would generate significant environmental benefits .... The proposal does not set forth enough information to support a conclusion that unitization will generate a significant environmental benefit." Decision at 11. • "The proposed formation of the unit will not provide a significant joint development benefit of pulling different lessees together in a common development .... Buccaneer does not, need to unitize the property in order to effect joint development." Decision at 11. • "The Kenai Loop #4 well was completed in fall 2011 by Buccaneer .. . Buccaneer has not, provided the Division with data for this well or indicated that the well encountered hvdrocarbons."'' • "There is no commitment to develop State land." Decision at 14. • "In substance the proposed plan is more like a POE than a POD." Decision at 14 "Buccaneer is not committing to the development of a proven reservoir." Decision at 14. • "[UJnitization of the proposed area would not enhance competition or effect development. To the contrary, it would automatically extend the primary term of the leases; deprive other potential lessees of the opportunity to develop the property; and work to reduce competition." Decision at 15. • "If unitization is denied and these leases expire, Buccaneer or other producers can bid on them at a lease sale and conduct exploration activities during the primary term of the lease. That will do more to encourage development competition [sic) than extending the term of the leases by unitization." Decision at 15. 11 Buccaneer delivered confidential test data to DNR by email on January 24, 2013. This data is confidential data from an MHT lease that Buccaneer obtained a waiver from MHT to disclose to DNR (i.e., the Division). Crowell & Moring LLP . www.croweti.com . Washington, OC - New York - Los Angeles r Orange County • London • Brussels • Daniel S. Sullivan. Commissioner April 4, 2013 Page 14 • "The application does development activities granted." Decision at 15. • not specifically outline the exploration or that. Buccaneer will pursue if unitization is • "Unitization of the proposed unit area is not necessary to allow for joint. development." Decision at 16. • "The Application contains no commitments for new development of or new production from the proposed unit area.*" Decision at 17. • "The Application ... does not show that unitization would affect efficient. recovery of oil or gas." Decision at 17. • "The Application contains no commitment to explore, develop, or produce State land." Decision at 17. • "Unitization is not necessary to reconcile the competing interests of multiple lessees in the proposed unit area to avoid excessive or redundant development. The Application also fails to provide for joint development of multiple leases." Decision at 17. • "No coherent exploration or development plan is offered. Instead, Buccaneer simply asserts that it will drill one to three wells a year. Decision at 17. • "The primary purpose of the Application appears to be extension of the primary terms of the State leases proposed to be included in the unit and not to effect efficient development of proven reservoirs." Decision at 17. • "The Application does not show how unitization would result in coherent and efficient development of and production from the unit area through unified reservoir [sic) plan." Decision at 17. • "[I]t is not necessary to unitize the leases to achieve coordinated development." Decision at 18. • "If unitization is granted for the proposed area, Buccaneer will continue to hold State acreage with no firm commitment to develop any of it for at least a five year period and potentially much longer." Decision at 18. • "The Application makes no showing that unitization would work to maximize economic or physical recovery from the area or would enhance Crowell & Moring LLP . www.crowell.com - Washington, DC . New York - Los Angeles - Orange County • London • Brussels Daniel S. Sullivan, Commissioner April 4, 2013 Page 1,5 competition. The Application contains no commitment to increase production or to do additional development in the unit area." Decision at 18. IV. Remedy Requested by Buccaneer (I1 AAC 02.030(a)(10)) Buccaneer requests that the Commissioner vacate the Director's decision and remand the matter with directions for the Director to form the KXU and work with Buccaneer to develop a new POD with a shorter term and more specific work commitments for the diligent exploration and development. of the unit area. Further, Buccaneer requests that. the Commissioner direct. the Director to simply exclude the CIRI acreage if he determines that the CIRI lease is indeed terminated. Buccaneer also requests that the Commissioner clarify DNR's unitization policy. As identified above, Director Barron disregarded DNR's unitization regulations and DNR's past practice. Accordingly. Buccaneer requests that the Commissioner issue a decision making clear that: • Exploration is permitted within a unit area; • A unit area can encompass a reservoir and/or a potential hydrocarbon accumulation; Before rejecting a unit application because it has perceived deficiencies, the Division will confer with the unit applicant and attempt to resolve outstanding issues; • DNR's regulations do not require a lessee to show that unitization will provide "significant" environmental benefits; • The purpose of unitization can be served even if there is only one lessee; and o DNR's decision to allow a lessee, actively engaged in production, delineation, and exploration activities, to pursue an active drilling and development program on unitized acreage is more in the State's interest than terminating leases so the acreage can be re-leased with the hope that another company may purchase the leases and decide to drill wells at an unknown point in the future. Crowell & Mioring LLP - www.croweti.com . Washington, DC • New York • Los Angeles - Orange County - London - Brussels Daniel S. Sullivan. Commissioner April 4, 2013 Page 16 V. Reguest for a Hearin 11 AAC 02.030(a)(13)) Buccaneer requests that you convene a hearing to aid your decision making in this appeal. Buccaneer identifies the following issues to be considered at the hearing: • Whether there is a sound factual basis supporting the Director's Decision to deny the unit application. • Whether the Director's Decision to deny the unitapplication is consistent with DNR's unitization regulations. • Whether the Director's Decision to deny the unit application is in the State's and public's interest. VI. Single Point of Contact (11 AAC 02.030 11 Pursuant to 11 AAC 02.030(11), Buccaneer identifies the following single point of contact to which any decision, notice or other communication concerning this appeal may be addressed: Mark Landt, Vice President, Land & Business Development Buccaneer Alaska Operations, LLC 952 Echo Lane, Suite 420 Houston, TX 77024 Ofe. (713) 468-1678 Cell (214) 738-6945 mlandt@buccaneeralaska.com Sincerely, CROWELL & MORING LLP David J. Mayberry Enclosure 22865.203 Crowed & Moring LLP • www.croweti.com . Washington, DC • New York . Los Angeles • Orange County London erussets itil: S'lAll -: "'ALASKA March 27, 2013 Mau -k R. Land-, Vice President, Land &', Business Developmcnt liuccanc:er Alaska. 1,LC 952 Lcho Lane, Suite 420 1louston, Mesas 77024 DUpa1"l..jiitt. ui' �at,l. rai Resoul'Ces Division of Oil & Gas knchorage Office �,5{) W 7�, nvulue 5";ll.te : 109 A:uhmnge, A.k"SkO 9i'SUl- 560 Main: 907.269.83UJ Fcx: 4Ci.?6S G93S' CERTIFIED MAIL RETURN RF.CFIPT REQUESTED Rc: Findings and Decision of the Director, Denial of the Application to Form the Kenai Loop Unit: Errata, page 19 Dear Mr. Landt: The State of Alaska, Department of Natural Resources, Division of Oil and Gas (Dn ision) issued the Findings and Decision of the Director, Denial of the Application to form the Kenai Loop Unit on March 15, 2013. The decision contained a printing error which omitted the first two lines on page 19. For the unit decision, please insert the following two lines on page 19 with the following: The sentence begins on page 18: "Simply extending leases bej,-ond their primal,, term in the absence of development commitments does not result in realization of'the purposes of unirrzatlon or the The sentence should continue onto page 19: ''Stute oil and gas leasing program. Approval of the Application is not necessary or- udvisuble in the public interest. The Applicution does not promote the public interest. " The Division has issued this corrected decision titled, "Kenai Loop Unit, Corrected Denial of the Kenai Loop Unit Application, Findings and Decision of the Director, Division of Oil and Gas, Under Delegation of Authority from the Commissioner, Department of Natural Resources, State of Alaska, March 27, 2013". The appeal period will begin with the issuance of the corrected decision. The corrected decision is enclosed with this letter. Findings and Decision of the Direcurr, Denial of the Application to Form the Kenai Loop l'nit: Ccn-ection, page 19 March 27, 2013 Page 2 of 2 If you have questions regarding this decision, please do not hesitate to contact Alicia Dowdy at (907) 269-8799 or \-ia email at Alicia.Dowdy@alaska.gov. Sincerely, W.C. Ban -on Director Enclosure cc: DUI, KENAI LOOP UNIT CORRECTED DENIAI, OF THE KENAI LOOP UNIT APPLICATION FINDINGS AND DECISION OF THE DIRECTOR DIVISION OF OIL AND GAS UNDER DELEGATION OF AUTHORI'T'Y FROM THE COMMISSIONER DEPARTMENT OF NATURAL RESOURCES STATE OF ALASKA MARCH 27, 2013 TABLE OF CONTENTS 1. I,IVI R OD UCTION AND DE C'ISION S UR,IMAR Y 3 11. HISTORY OF PROPOSED UNITAREA. 3 111. STATUTORYAA'D REGULATORY PROVISIONS RELEVANT TO THE APPLICATION. 6 IK DISCUSSION OF DECISION CRITERIA. I U A. 11 AAC 83.303(b) Decision Considerations_________________ 11 1. 303(b)(1) -Environmental Costs and Benefits _ _ 11 2. 303(b)(2) — Geological, Geophysical, and Engineering Characteristics 12 4. 303(h)(4) - Applicant's Plans for Development ofthe proposed Kenai Loop Unit _ 14 5. 303(b)(5) - The Economic Costs and Benefits to the State _ 15 6. 303(b)(6) - Other Relevant Factors _ ______ _ _ 15 B. I l AAC 83.303(a) Decision Criteria _ _ 16 1. 303(x)(1) — Promote the Conservation of all ?natural Resources 16 2. 303(a)(2) - Prevention of Economic and Physical Waste 17 3. 303(x)(3) - Protection of all Parties of Interest, including the State 18 4. 303(a) — Necessary and Advisable in the Public Interest _ _ l8 K FINDINGS AND DECISION. 19 1. Findings 19 2. Decision ._ 19 ATTA CHMEArT ONE: Exhibit A 21 ATTACHMENT TJVO: Exhibit B 22 Corrected Denial of the Kenai Loop Unit Application - Page 2 I. INTRODUCTION AND DECISION SUMMARY. This is the decision of the Director of the State of' Alaska (State) Department of Natural Resources (DNR), Division of Oil and Gas (Division) pursuant to a September 30, 1999 delegation of authority fiom tine DNR Commissioner on the July 19, 2012, application of Buccaneer Alaska Operations, LLC (Buccaneer) to form the Kenai Loop Unit (KXU) out of teases issued by Cook Inlet Region, Incorporated (CIRI), Mental Health Land Trust (MHT), and the DNR. (Application). Buccaneer is the proposed KXU Operator and sole working interest owner (W1O) of the proposed unit area. The request to farm the unit is denied: (1) CIRI has notified the Division that it has tcrminated Buccaneer's interest in the CIRI lease proposed to be included in the unit. Buccaneer has not notified the state of the lease termination, and it did not amend its Application to reflect the termination. The proposed unit agreement and other aspects of the Application are based on C.'IRI's acrccincni to unitization. (2) the Application is in effect an effort to extend the primary tern, of the leases fOr the purpose of conducting exploration activities nether than a proposal to cffcct efficient development of' multiple leases. (3) Fhe proposed unit plan is deficient because it is u simple assertion that Buccaneer will drill one to three uncharacterized wells a year zit ui,spccificd locations in the proposed unit.' (4) Formation ofthe KXU as proposed by Buccaneer is not in the public interest. State lease ADL 391094 may be being drained by the Kenai Loop #1 well drilled on an MHT lease. ADL 391094 is extended by production until such time as the Division can issue a decision on the drainage issue:. II. HISTORY OF PROPOSED UNIT AREA. On July 19, 2012, Buccaneer submitted an application to the Division to approve formation of the: KXU and simultaneously paid the $5,000.00 unit formation application filing fee, in accordance with I1 AAC 83.306 and I1 AAC 05.010(a)(10)(D), respectively. The Application included: the unit operating agreement; the multiple royalty ownership state unit agreement form including CIRI, the MHT, and the DNR as royalty owners; Exhibit A which is a map of the proposed unit; Exhibit B which is a description of the proposed unit area, its leases, and ownership interests; and Exhibit G which is an initial unit Plan of Development. Buccaneer is the only WIO. The Application also included confidential economic and technical data. The Division notified Buccaneer by letter dated August 10, 2012, that the Application was incomplete. The initial Application did not include the following items required under 11 AAC 83.306: (1) the unit agreement executed by the proper parties, submitted on the most current ' The State received notice on January 9, 2013, from Cook Inlet Region, Inc. (CIRI) that they had terminated their lease, C-061667, with Buccaneer. Development and drilling activities to date in the proposed unit area has been on MHT land. The development plan submitted with the Application does not indicate if and when development will occur on State land. Corrected Denial of the Kenai Loop Unit Application - Page 3 standard state unit agreement form for multiple royalty owners; (2) the executed unit operating agreement; (3) all pertinent geological, geophysical. engineering and well data, and interpretations of those data to support the application (l 1 AAC 83.306(4). The Division deemed the; Application complete on December 10, 2012. 'I he Division published a public notice in the ",4nehorage Daily N,-ws*', the "Peninsula Clarion", and the "Hrnner i1'c>w.+ ' on December 13, 2012, under 11 AAC 83.311. Copies of the Application and the public notice were provided to interested parties. The Division provided public notice to, among others, the Alaska Department of Environmental Conservation, the Kenai Peninsula Borough, the City of Kenai, the Village of Tyonck, the Salamatof Native Association, Cook Inlet Region, Incorporated; the Soldotna Postmaster; and the radio station KDLL in Kenai. The notice was also published on the State of Alaska Public Notice ,vebsite and the Division's Nvebsitc. The public notices invited interested parties and nivmbers of the public to submit comments by January 14; 2013. 'The Division received comments regarding the Application from the Kachemak Bay Conservation Society (KBCS) and The Center for W`atcr Aoivocacy ( 1'CWA). "I hc: Division received both comments on January 14. 2012. The Division considered the comment in the evaluation of the Application and the issuance of this decision. Topics of concern related to putcntial environmental impacts from the formation of the unit and any oil and gas development in the State ,and Buccaneer as a company and operator. The comments included: 1. Objections to water use for oil and gas development by KBCS and TCWA; 2. Buccaneer lacks sufficient experience to tnanagc the unit by KBCS; 3. Buccaneer lacks sufficient financial stability to qualify for a unit by KBCS.- 4. BCS;4. Buccaneer takes a shotgun approach to permit applications by KBCS; 5. Adverse effects of oil development on the surrounding landscape by: KBCS; and 6. The state's "Drill Baby Drill" attitude towards oil development in the face of ocean acidification, climate change, and global warning, including reopening Drift River facility is reckless by KBCS. Buccaneer began acquiring leases in the proposed unit area with two MHT leases in December 2010, the four State leases were acquired through assignments in Januaiy 2011, and a CIRI lease was acquired in February 2011. These seven leases cover approximately 7,499.64 acres. A map of the area proposed to be unitized is found in Attachment 1, details of the ]cases are found in Attachment 2, and the leases are summarized in Table 1. 4 Corrected Denial of the Kenai Loop Unit Application - Page 4 Table 1 — .9DLs Prnposed for Formation of `Kenai Loop Unit T0,10Acreoge 7,499.64 The primary tcim of CIRI lease C-061667 expires on March 1, 2016. For reasons undisclosed to the State. CIRI notified the State on January 9, 2013, that it ter►ninated the lease effective .January 9. 2013. In 2011 Buccaneer drilled thu Kenai Loop d,'1 well based, on 2-D seismic dmn. The well was tested and found to be successful. Buccaneer drilled the Kenai Loup #3 \veli in August of 201 1. It was not productive. The Alaska Oil and Gas Conservation Commission (AOCiCC) issued a well spacing exception to allow Buccaneer to drill the Kenai Loop #4 well, It was completed in Fall 2012. Buccaneer has not provided the Division with data frons Kenai loop #4 well or indicated that it encuuntered hydrocarbons. Beginning in December 2011 and finishing in April 2012 Buccaneer successfully completed a 3-D seismic shoot of the proposed unit arca. Buccaneer completed the installation of the production facilities for the Kenai Loop #1 well on the Kenai Loop 41 pad and the City Gate pad in January 2012. Buccaneer has also secured gas sales contracts and is now selling the gas that is being produced. The City Gate facility is the point of custody transfer of Kenai Loop #1 well gas into the Kenai Nikiski Pipeline. Buccaneer's unit formation application included the following initial Plan of Development (POD): In the l" Year: 1. Buccaneer agrees to drill 1-3 additional wells within the l" year. The next well (Kenai Loop #4 well) will be drilled to the proposed depth of 11,000 true vertical depth (TVD) and will attempt to extend the Kenai Loop field from the Kenai Loop #1 well. The surface location is on the Kenai Loop #1 pad and the final bottom hole location will be determined after final processing and interpretation of the 3-D seismic survey. 2. Buccaneer will propose the initial Participating Area (PA) for the Tyonek formation to encompass the known producing interval in the Kenai Loop #1 well. In the 2nd through 51h Year: Buccaneer agrees to drill 1-3 wells per year to drill additional wells in the Kenai Loop Unit. Corrected Denial of the Kenai Loop Unit Application - Page 5 Lease Lease Effective Expiration Lcasc No. Acres Royalty Date WI0 Date h1ll"1' 9300082 1050 Confidential 2!1/2011 I3uc:caneer Alaska. LLC 100% 2/1/2016 1 MHT 930007!) 3r 747.50Conlidential 1/11/2011 Buccaneer Alaska, LLC 100% 1/1/2016 C-061667 1275 _ Confidential 3/1/2011 Buccaneer Alaska, LLC 100% 3/1/2016 AUL 391094 750.37 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30i2012 ADL 391092 186.77 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391091 160 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391095 300 12.5% 10/1/2007 Buccaneer Alaska, 1.1:C IM,(, 9/30/2012 T0,10Acreoge 7,499.64 The primary tcim of CIRI lease C-061667 expires on March 1, 2016. For reasons undisclosed to the State. CIRI notified the State on January 9, 2013, that it ter►ninated the lease effective .January 9. 2013. In 2011 Buccaneer drilled thu Kenai Loop d,'1 well based, on 2-D seismic dmn. The well was tested and found to be successful. Buccaneer drilled the Kenai Loup #3 \veli in August of 201 1. It was not productive. The Alaska Oil and Gas Conservation Commission (AOCiCC) issued a well spacing exception to allow Buccaneer to drill the Kenai Loop #4 well, It was completed in Fall 2012. Buccaneer has not provided the Division with data frons Kenai loop #4 well or indicated that it encuuntered hydrocarbons. Beginning in December 2011 and finishing in April 2012 Buccaneer successfully completed a 3-D seismic shoot of the proposed unit arca. Buccaneer completed the installation of the production facilities for the Kenai Loop #1 well on the Kenai Loop 41 pad and the City Gate pad in January 2012. Buccaneer has also secured gas sales contracts and is now selling the gas that is being produced. The City Gate facility is the point of custody transfer of Kenai Loop #1 well gas into the Kenai Nikiski Pipeline. Buccaneer's unit formation application included the following initial Plan of Development (POD): In the l" Year: 1. Buccaneer agrees to drill 1-3 additional wells within the l" year. The next well (Kenai Loop #4 well) will be drilled to the proposed depth of 11,000 true vertical depth (TVD) and will attempt to extend the Kenai Loop field from the Kenai Loop #1 well. The surface location is on the Kenai Loop #1 pad and the final bottom hole location will be determined after final processing and interpretation of the 3-D seismic survey. 2. Buccaneer will propose the initial Participating Area (PA) for the Tyonek formation to encompass the known producing interval in the Kenai Loop #1 well. In the 2nd through 51h Year: Buccaneer agrees to drill 1-3 wells per year to drill additional wells in the Kenai Loop Unit. Corrected Denial of the Kenai Loop Unit Application - Page 5 The Application does not describe the types of wells Buccaneer plans to drill or where in the proposed unit area the wells will be located. Regarding unit forination, tl,c Application states: "'I he proposed 7500 acre Buccaneer Kenai Loop project area is located on the northern Kenai Peninsula on a ridge between Cannery Loop Field (200BCFG) and Deaver Creek Gas Field (6MMBO, 2_SO BCFG) and has productive inter%als and seismic amplitude anomalies in the same productive intervals as these fields. Several control wells and two hundred miles of 2-D seismic were used to map Kenai Loop and. similar to the surrounding fields, there are multiple stacked pay zone possibilities between 5,000 and 11,000 foct in the Beluga and Tyonek Formations. The Beluga sands consist of fluvial channels oriented in a northeast -southwest direction. Such channels in the Beluga & Tyonek formations are productive in the Cannery Loop field." (Application at 2) "The Kenai Loop i;1 (KL41) discovery well was connpleie.d in Ma) 2011 N,ith 9V of pay m the 9700' and 10.1100' 'l yonck spas sands. The combined flow rate v:as I0 MMCFGPD and the ;'\OF was 33 MMCFGPD. KL41 has been in production at w constant rate of 5MMCFGPD since mid -,January 2012 and has produced .613CFG throuth the end of Nla\,. 2012." tApplication at 2) "11 AAC 53.356(a) provides that a unit must encompass the mininium area required to include all or a part of one or more reservoir or potential hydrocarbon accumulations. Consequently, Buccaneer proposes that only seven (7) Leases be included in the Kenai Loop Unit at this time to cover the proven productive area of the Tvonek sands and multiple potential hydrocarbon accumulations in the Sterling, Beluga, Tyonek and Hemlock formations." (Application at 2) 111. STATUTORY AND REGULATORY PRO'V'ISIONS RELEVANT TO THE APPLICATION. The statutory standard for unitization is whether it is necessary or advisable in the public interest: "To conserve the natural resources of all or a part of an oil or gas pool, field, or like area, the lessees and their representatives may unite with each other, or jointly or separately with others, in collectively adopting or operating under a cooperative or a unit plan of development or operation of the pool, field, or like area, or a part of it, when determined and certified by the commissioner to be necessary or advisable in the public interest." AS 38,05.180(p); (emphasis added). The legislature has also identified several aspects of the public interest with regard to the state oil and gas leasing program: -'(a) The legislature finds that (1) the people of Alaska have an interest in the development of the state's oil and gas resources to Corrected Denial of the Kenai Loop Unit Application - Page 6 C • (A) maximize the economic and physical recovery of the resources; (B) competition among parties seeking to explore and develop the resources; (C) maximize use of Alaska's human resources in the developnient of the resources; (2) it is in the best interests of the state (A) to encourage an assessment of its oil and gas resources and to allow the maximum flexibility in the methods of issuing leases to (i) rcc.ovnize flit many varied geographical regions of the state; end 'the dificrent costs of exploring !or oil and gas in these regions, (ii) minimize the adverse impact of exploration, development, production, and transportation activity; and (B) to offer acreage for oil and gas leases, specifically including (i) state acreage that has been the subject of a best interest finding at annual areawide lease sales; and (ii) land in areas that, under (d) of this section, may be leased without having been included in the leasing program prepared and submitted under (b) of this section." AS 38.05.180. Unitization extends the primary term of a lease. Alaska statute 38.05.180(m) provides in relevant part: "An oil and gas lease shall be automatically extended if and for so long thereafter as oil or gas is produced in paying quantities from the lease or if the lease is committed to a unit approved by the commissioner, and a gas only lease shall be automatically extended if and for so long thereafter as gas is produced in paying quantities from the lease or if the lease is committed to a unit approved by the commissioner." DNR has set forth unitization decision criteria in regulation that retain the public interest as the primary criterion: "11 AAC 83.303. Criteria. (a) The commissioner will approve a proposed unit agreement for state oil and gas leases if he makes a written finding that the agreement is necessary or advisable to protect the public interest considering the provisions of AS 38.05.180 (p) and this section. The commissioner will approve a proposed unit agreement upon a written finding that it will (1) promote conservation of all natural resources, including all or part of an oil or gas pool, field, or like area; Corrected Denial of the Kenai Loop Unit Application - Page 7 (2) promote the prevention of economic and physical waste; and (3) provide for the protection of all parties of interest, including the state. (b) In evaluating the above criteria, the commissioner will consider (1) the environmental costs and benefits of unitized exploration or development; (2) the geological and engineering characteristics of the potential hydrocarbon accumulation or mservoir proposed for unitization; (3) prior exploration activities in the proposed unit area; (4) the applicant's plans for exploration or development of the unit arca: (5) the economic costs and benefits to the state; and (6) any other relevant factors, including measures to mitigate impacts identified above, the commissioner determines necessary or advisable to protect the public interest. (c) The commissioner will consider the criteria in (a) and (b) of this section when evaluating each requested authorization or approval under i 1 AAC 83.301 - 11 AAC 83.395, including (1) an approval of a unit agreement; (2) an extension or amendment of a unit agreement; (3) a plan or amendment of a plan of exploration, development or operations; (4) a participating area; or (5) a proposed or revised production or cost allocation formula." Potential "hydrocarbon reservoir." "reservoir," and "unit" are defined by regulation as follows: `11 AAC 83.395. Definitions. Unless the context clearly requires a different meaning, in I1 AAC 83.301 - 11 AAC 83.395 and in the applicable unit agreements (5) "potential hydrocarbon accumulation" means any structural or stratigraphic entrapping mechanism which has been reasonably defined and delineated through geophysical, geological, or other means and which contains one or more intervals, zones, r_ rrr ri Corrected Denial of the Kenai Loop Unit Application - Page 8 strata, or formations having the necessary physical characteristics to accumulate and prevent the escape of oil and gas; (6) "reservoir" means an oil or gas accumulation which has been discovered by drilling and evaluated by testing and which is separate frons any other- accumulation of oil and gas, (7) "unit" means a group of leases covering all or part of one or more potential hydrocarbon accumulations, or all or part of one or more adjacent or vertically separate oil or gas reservoirs, which are subject to a unit agreement". State regulation also sets out the requirements fbr acceptable plans of exploration and development in l l AAC 83.341 (a) and 343(x): "I 1 AAC 83.34 t. Unit plan of exploration. (a) Unless a unit plan of development is filed under 11 AAC 83.343, a unit plan of cxplcuation must he filed for approval by the commissioner as an exhibit to the unit �grcemcni under l l AAC 83.306. The plan must describe the applicant's proposed exploration activities, including the bottom -hole locations and depths of proposed we11s, and the estimated date drilling will commence. All exploration operations must be conducted under an approved plan of exploration. The coinmis-,ioner will approve a unit plan of exploration if it complies with the provisions of I I AAC 83.303. If the Proposed unit plan of exploration is disapproved, the commissioner will, in his discretion, propose modifications which, if accepted by the unit operator, would qualify the plan for approval." "11 AAC 83.343. Unit plan of development. (a) A unit plan of development must be filed for approval as an exhibit to the unit agreement if a participating area is proposed for the unit area under 11 AAC 83.351, or when a reservoir has become sufficiently delineated so that a prudent operator would initiate development activities in that reservoir. All development operations must be conducted under an approved plan of development. A unit plan of development must contain sufficient information for the commissioner to determine whether the plan is consistent with the provisions of 11 AAC 83.303. The plan must include a description of the proposed development activities based on data reasonably available at the time the plan is submitted for approval as well as plans for the exploration or delineation of any land in the unit not included in a participating area. The plan must include, to the extent available information exists (1) long-range proposed development activities for the unit, including plans to delineate all underlying oil or gas reservoirs, bring the reservoirs into production, and maintain and enhance production once established; (2) plans for the exploration or delineation of any land in the unit not included in a participating area; Corrected Denial of the Kenai Loop Unit Application - Page 9 (3) details of the proposed operations for at least one year following submission of -the plan, and (4) the Surfiice location of proposed facilities, drill pads, noads, clocks, causeways, material sites, base camps, waste disposal sites, water supplies, airstrips, and any other operation or facility necessary for unit operations." The DNR Commissioner is responsible for determining whether a proposed allocation of production is appropriate: I I AAC 83.371. Allocation of production and costs. (a) The proposed or revised division of' interest or forniula allocating hydrocarbon p3xlue11,011 rind unit operating costs among the leases in the unit area may not take effect until approved by the commissioner in writing. When requested by the commissioner, the ICSSiCC5 or unit operator shall promptly file with the commissioner all data that relates to the proposed or revised division of interests or allocation formula for all leases in the participating area. Before any disapproval of the proposed or revised division of interest or Allocation formula, the commissioner will give the working interest and royalty owners reasonable notice and an opportunity to he heard. After the hearing, the commissioner will approve the proposed or revised division of interest or allocation ibrmula as submitted unless the commissioner finds in writing that the formula does not equitably allocate production and costs among the leases. (b) If there is a separate division of interest or allocation formula among any of the parties holding an interest in the unit that is different from the division of interest or allocation formula approved by the commissioner, the parties to the separate division of interest or allocation formula not approved by the commissioner shall submit a copy of that formula to the commissioner and a statement explaining the: reasons for the difference. W. ]DISCUSSION OF DECISION CRITERIA. The primary statutory decision criterion for unitization is whether approval is necessary or advisable in the public interest to conserve oil and gas resources. (AS 38.05,180(p)). Conservation of the natural resources of all or part of an oil or gas pool, field or like area means "maximizing the efficient recovery of oil and gas and minimizing the adverse impacts on the surface and other resources." 11 AAC 83.395(1). The primary regulatory decision criterion for a unitization application is also the public interest. 11 AAC 83.303(a). The Commissioner will approve a proposed unit if he finds that it necessary and advisable in the public interest and unitization will (1) promote conservation of all natural resources, including all or part of an oil or gas pool, field, or like area; (2) promote the prevention of economic: and physical waste; and (3) provide for the protection of all parties of Corrected Denial of the Kenai Loop Unit Application - Page 10 interest including the state. l I AAC 83.303(a). In evaluating the 1 I AAC 83.303(a) criteria, the Commissioner will consider (l) the environmental costs and benefits of unitizcd exploration or dcvelopmrnt; (2) the gco>lugical and engineering characteristics of the potential hydrocarbon accumulation or reservoir proposed for unitization; (3) prior exploration activities in the proposed unit area; (4) ;hc applicant's plans for exploration or development of the unit area: (5) the economic costs and benefits to the state; and (6) any other relevant factors, including measures to mitigate impacts identified above, the commissioner determines necessary or advisable to protect the public interest. 1 I AAC 83.303(b). A. I I AAC 83.303(b) Decision Considerations This section discusses the 11 AAC 83.303(b) factors that should be considered before applying, the decision criteria under 1 I AAC 83.303(x). 1. 303(h)(1) - l nvironmuntal Costs and Benefits In response to the public notice of' the Application. the Division received several public comnncnis expressing concern for the environment from oil and gas development of the unit arca. These include an ( I) an objection to issuance of a Temporary Water Usc Permit by the State of Alaska Division of' Mining Land and Water; (2) adverse effects to the landscape; and (3) the state's reckless encouragement of oil and gas development given ocean acidification, climate change, and global warming. Any development including oil and gas development will have some impact on the environment. The State oil and gas leases proposed to be included in the unit were issued after public notice that the Division proposed to offer the property for oil and gas lease and after the Division issued a best interest finding that the property was appropriate for oil and gas development. The right to develop property for oil and gas was conveyed by the State at the time of lease issuance, and the right to develop the leases is not dependent on unitization. But unitization can reduce the environmental impact of oil and gas development of multiple leases. Unitization may provide an environmental benefit by enabling joint development of multiple lessees thereby reducing redundant development. Unitization may reduce the need to drill a well or to build production facilities on every lease overlying common reservoir or closely situated reservoirs. Less development may benefit the environment by reducing surface impacts. It is not apparent from the Application, however, how formation of the KXU would generate significant environmental benefits. Production facilities are already in place. The proposed unit plan is to drill one to three uncliaracterized wells at unspecified locations each year over the next five years. The proposal does not set forth enough information to support a conclusion that unitization will generate a significant environmental benefit. The proposed formation of the unit will not provide a significant joint development benefit of pulling different lessees together in a common development. Buccaneer is the single WIO of the leases in the proposed unit area. Thus Buccaneer does not need to unitize the property in order to effect joint development. Rather the purpose of the Application appears to be extension of the primary terms of the leases. Buccaneer must obtain approval in the plan and permitting process Corrected Denial of the Kenai Loop Unit Application - Page 11 before it can engage in any on -the -ground operations and environmental concerns will be addressed there. Buccaneer must obtain the Division approval of a unit plan and obtain permits from various agencies bet' re drilling a well or wells or initiating development activities to produce reservoirs within the unit area. 1 1 AAC 83.346. But the five year proposed duration of the initial unit plan together with the lack of detail of the proposed operations undercuts the State's ability to manage the unit through the plan process. Buccaneer will also need to obtain permits from various agencies before drilling a well or wells. or initiating development activities to produce reservoirs within the unit area. 1 1 AAC 83.346. The potential environmental effects of proposed on -the -ground activities are analyzed in the permitting and plan review processes. This includes consideration terms of State oil and gas leases that are designed to protect the environment, should development occur, and to address concerns regarding potential impact to fish and game, wildlife habitats, ;and subsistence. Per niis have to be obtained before development activity can occur, and they typically set additional conditions designed to protect the environment. Buccaneer will be required to obtain additional approvals betbrc conducting operations on the leases regardless of whether the properties are unitized. This is not the appropriate forum to challenge issuance of the "temporary Water Use permit. This is the decision of the DNR Division of Oil and Gas regardinb unitization of existing State oil and gas leases. The permit was issued by a different DNR division. Objections to the permit need to be directed to the DNR Division of Mining, Land and Water as the pen -nit issuing entity or to the DNR Commissioner who is responsible for deciding appeals from decisions of that DNR division. 2. 303(b)(2) — Geolouical, Geophysical, and Engineering eering Characteristics Some of the information and data Buccaneer submitted in support of its 2012 application to form the Kenai Loop Unit is accorded confidentiality protection under AS 38.05.035(a)(8)(C) and 11 AAC 96.220. Confidential information is not disclosed in this decision. Geologic and geophysical data submitted by Buccaneer in support of the application includes: original 3-D seismic sections and interpretations, seismic amplitude interpretations, mapped seismic horizons, geologic cross sections, well log displays, magnetic maps and interpretations, and regional magnetic, seismic and geologic maps. The proposed KXU is located on the Kenai Peninsula north of the Cannery Loop Unit. Three exploration wells have been drilled in the proposed KXU area. The Kenai Loop #1, Kenai Loop #3, and Kenai Loop 44 wells were drilled in 2011 and 2012 on land owned by the MHT under lease MHT 9300082, covering 1,080 acres. Regional seismic data indicate that these wells are located on the structural ridge of the Cannery Loop anticline. The Kenai Loop project was mapped by Buccaneer using 200 miles of 2-D seismic data tied to existing wells. Corrected Denial of the Kenai Loop Unit Application - Page 12 ]'he Kenai Loop #1 well was completed in June 2011 by Buccaneer as a slightly deviated hole to L total depth of 10,680 feet measured depth (MD) on 4II1' lease 9300082, located in NW ;-i Sec 33, T6N, R 11 W, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. Gas was discovered in the Kenai Loop #1 well tivithin the Tertiary age Kenai Group Upper Tyonek Formation and is currently being produced from the 0,700 feet and 10,000 feet ,YID zones. The Kenai Loop #1 well had a combined flow rate of 10 million cubic feet per day (MMCFD) and an absolute open flow (AOF) potential of 33 MMCFD. Production data indicates that from January 2012 through November 2012, the Kenai Loop 41 well produced at a nearly constant average daily rate of 5.14 MMCFD, and the well has produced approximately 1.5 billion cubic feet (RCF) as of November 2012. A drainage radius ranging from 0.22 to 0.29 miles (1.170 feet to 1,534 feet) was calculated at the Kenai Loop 91 well butiorn hole location, indicating that both MHT lease 9300082 and State lease ADL 391094 are 11kcly being drained. -f he Kenai Loop #3 well, drilled based on 2-D seismic mapping to test the tipper Tyonek zones up -dip (south) from Kenai Loop #1, was completed in October 2011 as a deviated hole by Buccaneer to a total depth of 11368 feet MD on MI I'V lease 9300082. located in NW Sec 33. 'f6N, R 1 W, Seward Meridian, within Kenai City limits, approximately twa miles northeast of the Kenai River mouth. A moderately thicker Tertiary section is present in this well than in the Menai Loop #1 well. Potential reservoir zones in Kenai Loop #3 well showed high water saturation and did not produce gas, which Buccaneer interprets as reservoir depletion due to production fi-om the Cannery Loop Unit south of Kenai Loop #3 well. Regardless, Kenai Loop #3 was not a productive well. The Kenai Loop #4 well was completed in fall 2012 by Buccaneer to a total depth of 13,083 feet MD on MHT lease 9300082, located in NW 11 Sec 33, T6N, R1 I W, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. Buccaneer has not provided the Division with data for this well or indicated that the well encountered hydrocarbons. In April of 2012 Buccaneer completed a 23.4 square mile 3-D seismic survey covering the leases within the proposed KXU and tying into the existing 3-D data over the Cannery Loop field. Buccaneer has completed an initial interpretation of the new 2012 3-D data which provides the basis of the proposed KXU. In addition to 3-D mapping of the structure tested by the Kenai Loop #1 and Kenai Loop #3 wells Buccaneer has identified additional Kenai Group potential hydrocarbon accumulations in the Lower Sterling, Upper Tyonek, and Hemlock Formations. All of these prospects are based on amplitude anomalies, which Buccaneer interprets as gas-filled sand reservoirs. But seismic surveys do not necessarily indicate the presence of hydrocarbons, and the amplitude anomalies in these three formations could be caused by lithological factors rather than the presence of gas. For example, the acoustic contrast between siltstones and coals in the Kenai Group commonly causes strong amplitudes. However most of the amplitude anomalies mapped by Buccaneer have some apparent structural control (anticline, flank or fault closure), indicating a pussible hydrocarbon trapping mechanism. Con-ected Denial of the Kenai Loop Unit Application - Page 13 Division review of the Kenai Loop 3-D survey shows that there is a producing structure tested by Kenai Loop #1 well, as well as amplitude -based potential hydrocarbon accumulations. The n1-.1plitude-based potential hydrocarbon accumulations are high risk, but the+ geological, geophysical, and engineering analysis demonstrates the existence of both a producing reservoir and potential hydrocarbon accumulations within the operator's proposed Kenai Loop Unit. 3. 303(b)(3) — Prior Exploration Activities Buccaneer licensed and reinterpreted data from six 2-D seismic surveys prior to drilling Kenai Locp 91 well. The 2-D data were acquired between 1974 and 1982 by various companies exploring, the area. Prior to Buccaneer drilling the three Kenai Loop wells, the must proximal well was the Cannery Loop Unit #3 well, drilled approximately one mile southwest by Union Oil Company of California (UNOCAL) in 1981. UNOCAL drilled this well on the north side of the northeast plunging anticline over which the Cannery Loop Unit was formed. The Cannery Loop t%nit -""3 well cumulatively produced nearly 350 MMCF of has during one year of production in 198f+. 4. 303(b)(4) - Applicani's Plans for Development of the proposed Kenai Loop Unit 1'he terms of the proposed Initial POD are: In the I" Year: "Buccaneer agrees to drill 1-3 additional wells within the I" year. The next well (Kenai Loop No. 4 well) will be drilled to the proposed depth of'] 1,000 TVD and will attempt to extend the Kenai Loop field fi•om the Kenai Loop No. 1 well. The surface location is on the Kenai Loop No. 1 pad and the final bottom hole location will be determined after final processing and interpretation of the 3D seismic survey. Buccaneer will propose the initial Participating Area for the Tyonek formation to encompass the known producing interval in the Kenai Loop No. 1 Well." (Plan at 5). In the 2"a through 5°i Year: "Buccaneer agrees to drill 1-3 wells per year to drill additional wells in the Kenai Loop Unit." (Plan at 5). Buccaneer's POD does not state where the additional wells will be drilled. The State acreage accounts for 1,397.14 acres (approximately 19%) of the proposed unitized area. Granting unitization would extend the term of the State leases; however there is no specific plan of exploration or development on the State land. There is no commitment to develop State land. In substance the proposed plan is more like a Plan of Exploration than a Plan of Development. Buccaneer is not committing to the development of a proven reservoir. It is offering to drill wells to look for hydrocarbons. The plan does not provide enough information to meet the requirements of 11 AAC 83.341 on Plans of Exploration or 11 AAC 83.343 on Plans of Corrected Denial of the Kenai Loop Unit Application - Page 14 Development. The unit plan is therefore inadequate, and the proposed five year duration of the plan without bench marks exposes the State to significant risk that the unit %vII1 be granted and Ica:,cs extended without meaningful development. 5. 303(b)(5) - The Economic Costs and Benefits to the State DNR has an obligation to protect the public's interest in maximizing economic and physical recovery from the State's oil and gas resources. AS 38.05.180(a)(1)(A). Maximizing economic recovery of hydrocarbons ensures royalty revenues and increased employment opportunities over the long-term. Realization of these potential benefits requires exploration and development of State oil and bas properties. Although Buccaneer has included several one line assertions that it will drill one to three additional uncharacterized wells in unspecified locations each year over the proposed five year plan, no surface or bottom hole locations are specified. And there is no indication of whether or when a well will be drilled on State land. Granting a unit and extending the primary term of the State leases does not maximize the economic or physical recovery from State leases or the public interest if there is no commitment to develop State land. The State is also required to maximize competition among parties in oil and pas development. AS 38.05 180(a)(1)(B). Without firm development proposals, unitization of the proposed area would not enhance competition or effect development. To the contrary, it would automatically extend the primary term of the leases; deprive other potential lessees of the opportunity to develop the property; and work to reduce competition. The reservoir confirmed by the Kenai Loop 41 well is in production. MHT lease 9300082 is extended by production and State lease ADL 391094 is extended by production until the Division issues a decision on the drainage issue. Extending the term of the other leases proposed to be included in the unit for the purpose of drilling additional exploration wells does not encourage competition to develop State resources. If unitization is denied and these leases expire,3 Buccaneer or other producers can bid on them at a lease sale and conduct exploration activities during the primary term of the lease. That will do more to encourage development competition than extending the term of the leases by unitization. 6. 303(b)(6) - Other Relevant Factors Public comments were received expressing concern about Buccaneer's lack of experience, its financial stability, and its alleged shotgun approach to permitting. But Buccaneer is qualified to do business in the State of Alaska and to hold a State oil and gas lease. And it has drilled a successful well in the proposed unit area. Buccaneer is qualified to apply for formation of the KXU unit. But the Application is not consistent with the purpose of unitization. The purpose of unitization is to effect efficient development of multiple leases overlying a common reservoir or closely situated reservoirs. But, the Application does not specifically outline the exploration or development activities Buccaneer will pursue if unitization is granted. No commitment is made to do any work on State leases. Therefore the Application does not propose efficient development of State land. $ The leases without production (ADL 391091, ADL 391092, and ADL 391095) which have reached the end of their primary term, will expire. Corrected Denial of the Kenai Loop Unit Application - Page IS Unitization of the proposed unit area is not necessary to allow for joint development. Buccaneer is the sole lessee of the proposed unit area. The primary tenn of the State leases has expired, unitization would extend the lease primary term without a clear plan of development. The purpose of unitization is development, not lease extension to accomplish exploration that should have been conducted during the primary term of they ]case. The Division was notified by C IRI on January 9, 2013, that they had terminated lease C-061667. Buccaneer has neither modified the Application to reflect termination of the C.IRI lease nor otherwise communicated with the Division about the CIRI termination. It is not clear whether the proposed unit would include the C1R1 lease or not. ThC unit plan is deficient because it does not meet the requirement of 11 AAC 83.341 or I 1 AAC 83.343 respectively unit Plans of' Exploration or Development because only cursory statements are provicled esscntially proposing to drill three; to fivr. wells each year of the live year plan. No well or bottom hole locations are proposed. No additional development targets are identified, and no additional development activities are proposed. The five year teen cvis�:cratc;s the Division's ability to ensure unit development through the plan process. Over 60% of the acreage proposed tur the KXU is MHT leased lands. MHT may issue its own decision on unitization of MHT leases. Section 2(b) of the MHT oil and gas lease states MHT has the; authority to extend a lease that is committed to a unit agreement approved or consented to by Lessor. B. 11 AAC 83.303(x) Decision Criteria State regulation provides that the DNIR Commissioner will approve a unit agreement or unit plan if he finds that it will promote the conservation of natural resources, that it will prevent economic and physical waste, that it will provide for the protection of all parties in interest including the state, and that it is necessary and advisable in the public interest. 11 AAC 83.303(a). This section addresses those decision criteria. 1. 303(x)(1) — Promote the Conservation of all Natural Resources Alaska statute authorizes the DNR Commissioner to approve an agreement among multiple lessees that hold separate leases overlying a common reservoir to jointly develop the leases for the purpose of conserving the natural resources of all or a part of an oil or gas pool, field, or like area. AS 38.05.180(p). In this context, "conservation" means"maximizing the efficient recovery of oil and gas and minimizing the adverse impacts on the surface and other resources." I 1 AAC 83.395(9). Buccaneer has shown that a productive reservoir was penetrated by Kenai Loop #1 well within the proposed unit area. Division review of the Kenai Loop 3-D survey also shows amplitude based anomalies that could indicate additional potential hydrocarbon accumulations. But the Kenai Loop #3 well shows that another portion of the proposed unit is not underlain by Corrected Denial of the Kenai Loop Unit Application - Pagc 16 hydrocarbons. Buccaneer has not provided the State with any data from Kenai Loop #t4 well or indicated to the State that this well completed in 2012, encountered hydrocarbons. While the seismic testing suggests the: proposed unit area might include additional hydrocarbons, such testing does not Confirm the presence of hydrocarbons. Buccaneer has not shown that the entire proposed unit area has been proven productive, but it has shown a proven producible fon-nation penetrated by Kenai Loop �r l well and that the proposed unit contains other possible potential hydrocarbon trapping mechanisms. Still, the Application contains no commitments for new development of or new production from the proposed unit area. Buccaneer plans on applying for a PA on the reservoir being produced by Kenai Loop M well, but otherwise the plan proposes that one to three wells will be drilled a year over a five year period. The Application includes no information on well location or additional development activities, and it does not show that unitization would affect efficient recovery of oil or gas. All of the wells in the proposed unit area were drilled on MHT lards. The Application contains no comnlitn-lent to explore, develop, Or produce State land. The Application does not set out a detailed developmum plan or contain meaningful commitments for new production of de\ clopinew In return to]- lease extension till'ough unitlzatloll. The unitization of oil and gas reservoirs or accumulations and the fonnation of unit areas to devc1op hydrocarbon -bearing reservoirs or accumulations may work to conserve the reservoir when leases overlying a common reservoir are owned by different parties. Diligent exploration and development under a single approved unit plan without the complications of competing leasehold interests promotes the State's interest. But in this case, the proposed KXU leases have a single leasee, Buccaneer. There are no complicating factors from competing leaseholder interests that prevent Buccaneer from diligently exploring and developing the proposed KXU arca and adjoining leases. Unitization is not necessary to reconcile the competing interests of multiple lessees in the proposed unit area to avoid excessive or redundant development. The Application also fails to provide for joint development of multiple leases. The Application does not propose activities that would be conducted differently under unitization than they would be on an individual lease basis. No coherent exploration or development plan is offered. Instead, Buccaneer simply asserts that it will drill one to three wells a year. The primary purpose of the Application appears to be extension of the primary terms of the State leases proposed to be included in the unit and not to effect efficient development of proven reservoirs. That is not the purpose of unitization. 2. 303(a)(2) - Prevention of Economic and Physical Waste Unitization, as opposed to activity on a lease -by -lease basis, may prevent economic and physical waste by preventing the drilling of wells in excess of the number necessary for the efficient recovery of hydrocarbons or drilling in a manner that results in the improper use of or unnecessary dissipation of reservoir energy through adoption of a unified reservoir management plan. And unitization may otherwise reduce redundant expenditures. But the Application does not show how unitization would produce these benefits. It does not show that unitization would result in coherent and efficient development of and production from the unit area through unified reservoir management plan. The Application simply asserts that one to three wells will be drilled Corrected Denial of the Kenai Loop Unit Application - Page 17 in each of the five years of the initial plan. Buccaneer is the sole working interest owner of the leases proposed for unitization, and it is not necessary to unitize the leases to achieve coordinated development. The primary purpose of the Application appears to be lease extension rot efficient development. 3. 303(a)(3) - Protection of all Parties of Interest, including the State Unit formation would protect the interests of Buccaneer by extending the term of the leases. But this would not necessarily protect the State's interest. If unitization is granted for the proposed area, Buccaneer will continue to hold State acreage with no firm commitment to develop any of it for at least a five year period and potentially a much longer period. If unitization is not granted, the State leases will expire, with the exception of the ADL 391094. That lease will be held by production from the Kenai Loop #1 well until Such a time: as the Division can issue a decision on the drainage; issue. Allowing the remaining State leases to return to the State gives Buccaneer and potential new lessees ;in opportunity to bid on them at a lease sale thereby protecting the State's interest by encouraging competition. State oil and -as leases arc issued for a fixed term of fivc to ten Years after which they come hack to the State to be reofi-kwlred for bid unless they are in production or certain other limited conditions are met to extend the lease terns. Unitization is one of the conditions that allow a lessee to hold a lease beyond its primary term. AS 38.05.180(m). But the purpose of unitization is to effect efficient production and to minimize adverse impacts of oil and gas development. 1 I AAC 83.395(1). While exploration can be done after a lease is committed to a unit, lease exploration is more properly an activity that should occur during the primary term of a lease. Unitization is primarily intended to enable development of multiple lessees overlying a common reservoir that was discovered during the primary term of the lease. The State leases proposed for unitization have a term of five years. Buccaneer knew, or should have known, what the primary term was when it acquired the leases. It is not in the public interest to extend leases beyond their primary tern to simply drill exploration wells in the absence of firm development and production commitments. The proposed plan does not protect the State interest. No detail of exploration or development activities is provided other than the assertion that one to three wells will be drilled a year. The five year duration of the plan hinders the State's ability to ensure unit development through the plan process. 4. 303(x) — Necessary and Advisable in the Public Interest The people of Alaska have an interest in the development of the State's oil and gas resources to maximize the economic and physical recovery of the resources and in maximizing competition to develop State resources. AS 38.05.180(a). The Application makes no showing that unitization would work to maximize economic or physical recovery from the area or would enhance competition. The Application contains no commitment to increase production or to do additional development in the unit area. Simply extending leases beyond their primary term in the absence of development commitments does not result in realization of the purposes of unitization or the Corrected Denial of the Kenai Loop Unit Application - Page 18 • • State oil and gas leasing program. Approval of the Application is not necessary cr advisable in the public interest. The; Application does not promote the public interest. V. FINDINGS AND DECISION. 1. Findings 1. The Application does not show how unitization would provide significant environment costs or benefits. 2. Buccaneer is the sole working interest owner so it is not necessary to unitize in order to obtain coordinated development of the leases proposed to be included in the unit. 3. The primary purpose of the Application appears to be lease extension and not efficient development of the unit area. 4. Lease extension with no production or development commitments ensures that the lack of, coin pet Itlon for development of the leases to be included in the unit x ill eonttnue. 5. The Application does not maximize development ol' State resources as locations are not given fir the wells proposed. 6. Exploration may be a component of unit activity but the primary purpose of unitization is development of reserves proven during the primary teen of a lease and the Application makes no development commitments. 7. Buccaneer is the sole working interest owner, therefore it is in their best interest to prevent physical waste through proper and efficient management of reservoir energy, regardless if the area is unitized or is being developed on a lease -by -lease basis. S. Buccaneer is the sole lessee of the proposed unit area, and unitization is not necessary to protect multiple lessees overlying a common reservoir. 9. The only interest that would be protected through grant of the Application is Buccaneer's interest in continuing to retain the State leases beyond their primary term. 10. Granting the Application would not protect the State's interest in developing the State's oil and gas resources to maximize the economic and physical recovery. 11. The plan does not provide sufficient information to meet the requirements of 1 I AAC 83.341 or 11 AAC 83.343, and the five year duration of the plan without milestones, undercuts the State's ability to manage the unit. 2. Decision It is not necessary or advisable in the State's or the public's interest to grant the Application. The Application, as submitted, does not further the purposes of unitization or the public interest in oil and gas leasing. Formation of the unit protects Buccaneer's interest, but not the State's interest. The purpose of unitization is to effect efficient development and production of multiple State leases especially where they are owned by multiple lessees. it is not to indefinitely hold State leases beyond their primary term for the purpose of drilling exploration wells. The Application to form the Kenai Loop Unit is denied because it does not serve to protect the State or public interest. Corrected Denial of the Kenai Loop Unit Application - Page 19 This decision denies Bucancet's Application with regard to State leases. It does not affect the authority ofthe MHT or CIRI to unitize their leases. The MHT leases that Buccaneer proposes to include provide that the MHT makes management decisions regarding them. Notwithstanding this Decision denying unitization of' State leases, MHT and CIRI could exercise their discretion to unitize their leases. The Division will issue a separate decision extending the primary teen for ADL 391094 under the extension by production provision in the lease (Lease Tenn 4) until the Division issues a decision on the issue of drainage of the State lease by Kenai Loop #1 well. A person affected by this decision may appeal it, in accordance with 1 I AAC 02.010 through I 1 AAC 02.900. Any appeal in ust 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 Daniel S. Sullivan, Commissioner; DNR; 550 W. 71" Avenue, Suite 1400, Anchorage, Alaska 99501; faxed to (907) 269-8918, or sent by electronic mail to dnr.appcals(�ualask a.gov. This decision takes effect immediately. An eligible person must first appeal this decision in accordance with 11 AAC 02.010 through I I AAC 02.900 before appealing this decision to Superior Court. A copy of I 1 AAC 02.010 through I 1 AAC 02.900 may be obtained from any regional information office of the Department of Natural Resources. W.C. Baron Date Director Division of Oil and Gas ATTACHMENTS 1) Proposed Kenai Loop Unit — Proposed Exhibit A Map of Proposed Unit Area (July 19, 2012) 2) Proposed Kenai Loop Unit — Proposed Exhibit B Leases Proposed in Unit Area (July 19, 2012) Corrected Denial of the Kenai Loop Unit Application - Page 20 0 0 ATTACHMENT ONE: Exhibit A Proposed Kcnai Loop Unit -- Exhibit A: Mal) of Proposed Unit Area (Jul); 19, 2012) EXHIBITA KENAI LOOP UNIT BUCCANEER ALASKA, LLC Corrected Denial of the Kenai Loop Unit Application - Page 21 IL lkb WIL'H!, a " r —fir I Iran rj_ --------- — ----------------- -- -ul MH fU R I 1,rN R 11l T(,NP.::I\ TiIN 2W :r r. — — ---------------- T�NFMV TAN Ez LF EXHIBITA KENAI LOOP UNIT BUCCANEER ALASKA, LLC Corrected Denial of the Kenai Loop Unit Application - Page 21 IL lkb WIL'H!, a " r —fir I Iran MH fU i4 t Imm I EXHIBITA KENAI LOOP UNIT BUCCANEER ALASKA, LLC Corrected Denial of the Kenai Loop Unit Application - Page 21 0 ATTACHMENT TWO: Exhibit B Proposed Kenai Loop Unit — Exhibit B: Requested Leases to Form Unit Area (July 19,2012) Corrected Denial of the Kenai Loop Unit Application - Page 22 }}(\�\\]j \\\ re \/\\\\\} k) \ ) ! |) \- kfCU Uj Z; V v k: 1, r 9 [� (� #7!#[ § r X f k\ §f»(;§ ! �( r 4i Ir :9 A A ;I A 4 A 4 4 A\%�{/ F \\(�\\§�tt�|$�n;2[,�s��I�� !!�&�� { 2/ . , Corrected Denial of the Kenai Loop Unit Application - Page 22 Corrected Denial of the Kenai Loop Unit Application - Page 23 u ll O w w � • V � r..'a. n d .y ::. ;� O y 0� 1 G r T' �• Y' � � O p '.• C i� � 0 0 t) 41 y Y♦ „ YI h n n N 9 t] • T s eI D u al L - � rr C � i C fir• YI YI ?YI � �^,'• 57 �. a• Y � J t. J m n Z 41 N ft C v i s r i] •i � P u • r. Corrected Denial of the Kenai Loop Unit Application - Page 23 L ;� •` � � � lllY W G W1 M 0 t) 41 y Y♦ „ YI h n n N 9 t] • T l] q ti ' II W �i Y C - � rr C � fir• YI YI ?YI � �^,'• 57 �. a• Y � Z 41 N ft �t It r i] •i � P u • r. •a � � pi � P ♦i 1: n n v Y' q h /' •r T• r pj .�Vit. � ��-,ya(y �•INri(yty� , t) 7 tf 7 t, 1- ] 11 t] t ,7 ] m .: 7 7. a] t] !- tt w H •� W sI w S b_1 s 61 (a b 4 C n q Corrected Denial of the Kenai Loop Unit Application - Page 23 0 •• t. U u a. a ai c1 L I o Cntj •. c1 t, En P 6 f. V CoTTvcted Denial of the Kenai Loop Unit Application - Page 24 a THE STATE 'ALASKA (30V1{RNOR SPAN PARIV'F.!,1 March 27, 2013 Mark R. Landt Vice President, Land & Business Development Buccaneer Alaska, LLC 952 Echo Lane, Suite 420 Houston, Texas 77024 Department of Natural Resources Division of Oil & Gas Anchorage Office 550 W_ 711 Avenue 5uite 1100 Anchorage, Alosko 99501-3560 Main: 907.269.8800 Fax: 907.269.8939 CERTIFIED MAIL RETURN RECEIPT REQUESTED Re: Findings and Decision of the Director, Denial of the Application to Form the Kenai Loop Unit: Errata, page 19 Dear Mr. Landt: The State of Alaska, Department of Natural Resources, Division of Oil and Gas (DiN ision) issued the Findings and Decision of the Director, Denial of the Application to Form the Kenai Loop Unit on March 15, 2013. The decision contained a printing error which omitted the first two lines on page 19. For the unit decision, please insert the following two lines on page 19 with the following: The sentence begins on page 18: "Simply extending leases beyond their primary term in the absence of development commitments does not result in realization of*the purposes of unitization or the" The sentence should continue onto page 19: "State oil and gas leasing program. Approval of the Application is not necessary or advisable in the public interest. The Application does not promote the public interest. " The Division has issued this corrected decision titled, "Kenai Loop Unit, Corrected Denial of the Kenai Loop Unit Application, Findings and Decision of the Director, Division of Oil and Gas, Under Delegation of Authority from the Commissioner, Department of Natural Resources, State of Alaska, March 27, 2013". The appeal period will begin with the issuance of the corrected decision. The corrected decision is enclosed with this letter. MAR 2 8 2013 AO V Findings and Decision of the Director. Denial of the Application to Fonn the Kenai Loop Unit: Con-ection, page 19 March 27, 2013 Page 2 of 2 If you have questions regarding this decision, please do not hesitate to contact Alicia Dowdy at (907) 269-8799 or via email at Alicia.DowdyCo;alaska.gov. Sincerely, W.C. Barron Director Enclosure cc: DOL 0 KENAI LOOP UNIT CORRECTED DENIAL OF THE KENAI LOOP UNIT APPLICATION FINDINGS AND DECISION OF THE DIRECTOR DIVISION OF OIL AND GAS UNDER DELEGATION OF AUTHORITY FROM THE COMMISSIONER DEPARTMENT OF NATURAL RESOURCES STATE OF ALASKA MARCH 27, 2013 TABLE OF CONTENTS I. INTROD UCTION AND DECISION SUMMAR Y. 3 IL HISTORY OF PROPOSED UNIT AREA. 3 III. STA TUTOR YAND REG ULA TOR Y PRO VISIONS RELEVANT TO THE A PPLICA TION. 6 IV. DISCUSSION OF DECISION CRITERIA. 10 A. 11 AAC 83.303(b) Decision Considerations 11 1. 303(b)(1) - Environmental Costs and Benefits _ 11 2. 303(b)(2) — Geological, Geophysical, and Engineering Characteristics 12 4. 303(b)(4) - Applicant's Plans for Development of the proposed Kenai Loop Unit 14 5. 303(b)(5) - The Economic Costs and Benefits to the State 15 6. 303(b)(6) - Other Relevant Factors 15 B. 11 AAC 83.303(a) Decision Criteria 16 1. 303(a)(1) — Promote the Conservation of all Natural Resources 16 2. 303(a)(2) - Prevention of Economic and Physical Waste 17 3. 303(a)(3) - Protection of all Parties of Interest, including the State 18 4. 303(a) — Necessary and Advisable in the Public Interest 18 V. FINDINGS AND DECISION. 19 1. Findings 19 2. Decision 19 ATTACHMENT ONE: Exhibit A 21 ATTACHMENT TWO: Exhibit B 22 Corrected Denial of the Kenai Loop Unit Application - Page 2 I. INTRODUCTION AND DECISION SUMMARY. This is the decision of the Director of the State of Alaska (State) Department of Natural Resources (DNR), Division of Oil and Gas (Division) pursuant to a September 30, 1999 delegation of authority from the DNR Commissioner on the July 19, 2012, application of Buccaneer Alaska Operations, LLC (Buccaneer) to form the Kenai Loop Unit (KXU) out of leases issued by Cook Inlet Region, Incorporated (CIRI), Mental Health Land Trust (MHT), and the DNR. (Application). Buccaneer is the proposed KXU Operator and sole working interest owner (WIO) of the proposed unit area. The request to form the unit is denied: (1) CIRI has notified the Division that it has terminated Buccaneer's interest in the CIRI lease proposed to be included in the unit'. Buccaneer has not notified the state of the lease termination, and it did not amend its Application to reflect the termination. The proposed unit agreement and other aspects of the Application are based on CIRI's agreement to unitization. (2) The Application is in effect an effort to extend the primary term of the leases for the purpose of conducting exploration activities rather than a proposal to effect efficient development of multiple leases. (3) The proposed unit plan is deficient because it is a simple assertion that Buccaneer will drill one to three uncharacterized wells a year at unspecified locations in the proposed unit.2 (4) Formation of the KXU as proposed by Buccaneer is not in the public interest. State lease ADL 391094 may be being drained by the Kenai Loop #1 well drilled on an MHT lease. ADL 391094 is extended by production until such time as the Division can issue a decision on the drainage issue. II. HISTORY OF PROPOSED UNIT AREA. On July 19, 2012, Buccaneer submitted an application to the Division to approve formation of the KXU and simultaneously paid the $5,000.00 unit formation application filing fee, in accordance with 11 AAC 83.306 and 11 AAC 05.0 1 0(a)(1 0)(D), respectively. The Application included: the unit operating agreement; the multiple royalty ownership state unit agreement form including CIRI, the MHT, and the DNR as royalty owners; Exhibit A which is a map of the proposed unit; Exhibit B which is a description of the proposed unit area, its leases, and ownership interests; and Exhibit G which is an initial unit Plan of Development. Buccaneer is the only WIO. The Application also included confidential economic and technical data. The Division notified Buccaneer by letter dated August 10, 2012, that the Application was incomplete. The initial Application did not include the following items required under 11 AAC 83.306: (1) the unit agreement executed by the proper parties, submitted on the most current 1 The State received notice on January 9, 2013, from Cook Inlet Region, Inc. (CIRI) that they had terminated their lease, C-061667, with Buccaneer. Z Development and drilling activities to date in the proposed unit area has been on MHT land. The development plan submitted with the Application does not indicate if and when development will occur on State land. Corrected Denial of the Kenai Loop Unit Application - Page 3 standard state unit agreement form for multiple royalty owners; (2) the executed unit operating agreement; (3) all pertinent geological, geophysical, engineering and well data, and interpretations of those data to support the application (11 AAC 83.306(4). The Division deemed the Application complete on December 10, 2012. The Division published a public notice in the "Anchorage Daily News", the "Peninsula Clarion", and the "Homer News " on December 13, 2012, under 11 AAC 83.311. Copies of the Application and the public notice were provided to interested parties. The Division provided public notice to, among others, the Alaska Department of Environmental Conservation, the Kenai Peninsula Borough, the City of Kenai, the Village of Tyonek, the Salamatof Native Association, Cook Inlet Region, Incorporated, the Soldotna Postmaster, and the radio station KDLL in Kenai. The notice was also published on the State of Alaska Public Notice website and the Division's website. The public notices invited interested parties and members of the public to submit comments by January 14, 2013. The Division received comments regarding the Application fi•om the Kachemak Bay Conservation Society (KBCS) and The Center for Water Advocacy (TCWA). The Division received both comments on January 14, 2012. The Division considered the comment in the evaluation of the Application and the issuance of this decision. Topics of concern related to potential environmental impacts from the formation of the unit and any oil and gas development in the State and Buccaneer as a company and operator. The comments included: 1. Objections to water use for oil and gas development by KBCS and TCWA; 2. Buccaneer lacks sufficient experience to manage the unit by KBCS; 3. Buccaneer lacks sufficient financial stability to qualify for a unit by KBCS; 4. Buccaneer takes a shotgun approach to permit applications by KBCS; 5. Adverse effects of oil development on the surrounding landscape by: KBCS; and 6. The state's "Drill Baby Drill" attitude towards oil development in the face of ocean acidification, climate change, and global warming, including reopening Drift River facility is reckless by KBCS. Buccaneer began acquiring leases in the proposed unit area with two MHT leases in December 2010, the four State leases were acquired through assignments in January 2011, and a CIRI lease was acquired in February 2011. These seven leases cover approximately 7,499.64 acres. A map of the area proposed to be unitized is found in Attachment 1, details of the leases are found in Attachment 2, and the leases are summarized in Table 1. Corrected Denial of the Kenai Loop Unit Application - Page 4 Table I — ADLs Proposed for Formation of Kenai Loop Unit Lease No. Acres Royalty Lease Effective Date WIO Lease Expiration Date MHT 9300082 1080 Confidential 2/1/2011 Buccaneer Alaska, LLC 100% 2/1/2016 MHT 9300070 3747.50 Confidential 1/11/2011 Buccaneer Alaska, LLC 100% 1/1/2016 C-061667 1275 Confidential 3/1/2011 Buccaneer Alaska, LLC 100% 3/1/2016 ADL 391094 750.37 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391092 186.77 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391091 160 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391095 300 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 Total Acreage 7,499.64 The primary term of CIRI lease C-061667 expires on March 1, 2016. For reasons undisclosed to the State, CIRI notified the State on January 9, 2013, that it terminated the lease effective January 9, 2013. In 2011 Buccaneer drilled the Kenai Loop #1 well based on 2-D seismic data. The well was tested and found to be successful. Buccaneer drilled the Kenai Loop #3 well in August of 2011. It was not productive. The Alaska Oil and Gas Conservation Commission (AOGCC) issued a well spacing exception to allow Buccaneer to drill the Kenai Loop #4 well. It was completed in Fall 2012. Buccaneer has not provided the Division with data from Kenai Loop #4 well or indicated that it encountered hydrocarbons. Beginning in December 2011 and finishing in April 2012 Buccaneer successfully completed a 3-D seismic shoot of the proposed unit area. Buccaneer completed the installation of the production facilities for the Kenai Loop #1 well on the Kenai Loop #1 pad and the City Gate pad in January 2012. Buccaneer has also secured gas sales contracts and is now selling the gas that is being produced. The City Gate facility is the point of custody transfer of Kenai Loop #1 well gas into the Kenai Nikiski Pipeline. Buccaneer's unit formation application included the following initial Plan of Development (POD): In the I" Year: 1. Buccaneer agrees to drill 1-3 additional wells within the V' year. The next well (Kenai Loop #4 well) will be drilled to the proposed depth of 11,000 true vertical depth (TVD) and will attempt to extend the Kenai Loop field from the Kenai Loop #1 well. The surface location is on the Kenai Loop 41 pad and the final bottom hole location will be determined after final processing and interpretation of the 3-D seismic survey. 2. Buccaneer will propose the initial Participating Area (PA) for the Tyonek formation to encompass the known producing interval in the Kenai Loop #1 well. In the 2"a through 51h Year: Buccaneer agrees to drill 1-3 wells per year to drill additional wells in the Kenai Loop Unit. Corrected Denial of the Kenai Loop Unit Application - Page 5 • 0 The Application does not describe the types of wells Buccaneer plans to drill or where in the proposed unit area the wells will be located. Regarding unit formation, the Application states: "The proposed 7500 acre Buccaneer Kenai Loop project area is located on the northern Kenai Peninsula on a ridge between Cannery Loop Field (200BCFG) and Beaver Creek Gas Field (6MMBO, 250 BCFG) and has productive intervals and seismic amplitude anomalies in the same productive intervals as these fields. Several control wells and two hundred miles of 2-D seismic were used to map Kenai Loop and, similar to the surrounding fields, there are multiple stacked pay zone possibilities between 5,000 and 11,000 feet in the Beluga and Tyonek Formations. The Beluga sands consist of fluvial channels oriented in a northeast -southwest direction. Such channels in the Beluga & Tyonek formations are productive in the Cannery Loop field." (Application at 2) "The Kenai Loop #1 (KL#1) discovery well was completed in May 2011 with 81' of pay in the 9700' and 10,000' Tyonek gas sands. The combined flow rate was 10 MMCFGPD and the AOF was 33 MMCFGPD. KL#1 has been in production at a constant rate of 5MMCFGPD since mid-January 2012 and has produced .6BCFG through the end of May, 2012." (Application at 2) "11 AAC 83.356(a) provides that a unit must encompass the minimum area required to include all or a part of one or more reservoir or potential hydrocarbon accumulations. Consequently, Buccaneer proposes that only seven (7) Leases be included in the Kenai Loop Unit at this time to cover the proven productive area of the Tyonek sands and multiple potential hydrocarbon accumulations in the Sterling, Beluga, Tyonek and Hemlock formations." (Application at 2) III. STATUTORY AND REGULATORY PROVISIONS RELEVANT TO THE APPLICATION. The statutory standard for unitization is whether it is necessary or advisable in the public interest: "To conserve the natural resources of all or a part of an oil or gas pool, field, or like area, the lessees and their representatives may unite with each other, or jointly or separately with others, in collectively adopting or operating under a cooperative or a unit plan of development or operation of the pool, field, or like area, or a part of it, when determined and certified by the commissioner to be necessary or advisable in the public interest." AS 38.05.180(p); (emphasis added). The legislature has also identified several aspects of the public interest with regard to the state oil and gas leasing program: "(a) The legislature finds that (1) the people of Alaska have an interest in the development of the state's oil and gas resources to Corrected Denial of the Kenai Loop Unit Application - Page 6 (A) maximize the economic and physical recovery of the resources; (B) maximize competition among parties seeking to explore and develop the resources; (C) maximize use of Alaska's human resources in the development of the resources; (2) it is in the best interests of the state (A) to encourage an assessment of its oil and gas resources and to allow the maximum flexibility in the methods of issuing leases to (i) recognize the many varied geographical regions of the state and the different costs of exploring for oil and gas in these regions; (ii) minimize the adverse impact of exploration, development, production, and transportation activity; and (B) to offer acreage for oil and gas leases, specifically including (i) state acreage that has been the subject of a best interest finding at annual areawide lease sales; and (ii) land in areas that, under (d) of this section, may be leased without having been included in the leasing program prepared and submitted under (b) of this section." AS 38.05.180. Unitization extends the primary term of a lease. Alaska statute 38.05.180(m) provides in relevant part: "An oil and gas lease shall be automatically extended if and for so long thereafter as oil or gas is produced in paying quantities from the lease or if the lease is committed to a unit approved by the commissioner, and a gas only lease shall be automatically extended if and for so long thereafter as gas is produced in paying quantities from the lease or if the lease is committed to a unit approved by the commissioner." DNR has set forth unitization decision criteria in regulation that retain the public interest as the primary criterion: "11 AAC 83.303. Criteria. (a) The commissioner will approve a proposed unit agreement for state oil and gas leases if he makes a written finding that the agreement is necessary or advisable to protect the public interest considering the provisions of AS 38.05.180 (p) and this section. The commissioner will approve a proposed unit agreement upon a written finding that it will (1) promote conservation of all natural resources, including all or part of an oil or gas pool, field, or like area; Corrected Denial of the Kenai Loop Unit Application - Page 7 • • (2) promote the prevention of economic and physical waste; and (3) provide for the protection of all parties of interest, including the state. (b) In evaluating the above criteria, the commissioner will consider (1) the environmental costs and benefits of unitized exploration or development; (2) the geological and engineering characteristics of the potential hydrocarbon accumulation or reservoir proposed for unitization; (3) prior exploration activities in the proposed unit area; (4) the applicant's plans for exploration or development of the unit area; (5) the economic costs and benefits to the state; and (6) any other relevant factors, including measures to mitigate impacts identified above, the commissioner determines necessary or advisable to protect the public interest. (c) The commissioner will consider the criteria in (a) and (b) of this section when evaluating each requested authorization or approval under l l AAC 83.301 - 11 AAC 83.395, including (1) an approval of a unit agreement; (2) an extension or amendment of a unit agreement; (3) a plan or amendment of a plan of exploration, development or operations; (4) a participating area; or (5) a proposed or revised production or cost allocation formula." Potential "hydrocarbon reservoir." "reservoir," and "unit" are defined by regulation as follows: "11 AAC 83.395. Definitions. Unless the context clearly requires a different meaning, in 11 AAC 83.301 - 11 AAC 83.395 and in the applicable unit agreements (5) "potential hydrocarbon accumulation" means any structural or stratigraphic entrapping mechanism which has been reasonably defined and delineated through geophysical, geological, or other means and which contains one or more intervals, zones, Corrected Denial of the Kenai Loop Unit Application - Page 8 strata, or formations having the necessary physical characteristics to accumulate and prevent the escape of oil and gas; (6) "reservoir" means an oil or gas accumulation which has been discovered by drilling and evaluated by testing and which is separate from any other accumulation of oil and gas; (7) "unit" means a group of leases covering all or part of one or more potential hydrocarbon accumulations, or all or part of one or more adjacent or vertically separate oil or gas reservoirs, which are subject to a unit agreement". State regulation also sets out the requirements for acceptable plans of exploration and development in 11 AAC 83.341(a) and 343(a): "11 AAC 83.341. Unit plan of exploration. (a) Unless a unit plan of development is filed under l 1 AAC 83.343, a unit plan of exploration must be filed for approval by the commissioner as an exhibit to the unit agreement under 11 AAC 83.306. The plan must describe the applicant's proposed exploration activities, including the bottom -hole locations and depths of proposed wells, and the estimated date drilling will commence. All exploration operations must be conducted under an approved plan of exploration. The commissioner will approve a unit plan of exploration if it complies with the provisions of 11 AAC 83.303. If the proposed unit plan of exploration is disapproved, the commissioner will, in his discretion, propose modifications which, if accepted by the unit operator, would qualify the plan for approval." "11 AAC 83.343. Unit plan of development. (a) A unit plan of development must be filed for approval as an exhibit to the unit agreement if a participating area is proposed for the unit area under 11 AAC 83.351, or when a reservoir has become sufficiently delineated so that a prudent operator would initiate development activities in that reservoir. All development operations must be conducted under an approved plan of development. A unit plan of development must contain sufficient information for the commissioner to determine whether the plan is consistent with the provisions of 11 AAC 83.303. The plan must include a description of the proposed development activities based on data reasonably available at the time the plan is submitted for approval as well as plans for the exploration or delineation of any land in the unit not included in a participating area. The plan must include, to the extent available information exists (1) long-range proposed development activities for the unit, including plans to delineate all underlying oil or gas reservoirs, bring the reservoirs into production, and maintain and enhance production once established; (2) plans for the exploration or delineation of any land in the unit not included in a participating area; Corrected Denial of the Kenai Loop Unit Application - Page 9 (3) details of the proposed operations for at least one year following submission of the plan; and. (4) the surface location of proposed facilities, drill pads, roads, docks, causeways, material sites, base camps, waste disposal sites, water supplies, airstrips, and any other operation or facility necessary for unit operations." The DNR Commissioner is responsible for determining whether a proposed allocation of production is appropriate: 1.1 AAC 83.371. Allocation of production and costs. (a) The proposed or revised division of interest or formula allocating hydrocarbon production and unit operating costs among the leases in the unit area may not take effect until approved by the commissioner in writing. When requested by the commissioner, the lessees or unit operator shall promptly file with the commissioner all data that relates to the proposed or revised division of interests or allocation formula for all leases in the participating area. Before any disapproval of the proposed or revised division of interest or allocation formula, the commissioner will give the working interest and royalty owners reasonable notice and an opportunity to be heard. After the hearing, the commissioner will approve the proposed or revised division of interest or allocation fonnula as submitted unless the commissioner finds in writing that the formula does not equitably allocate production and costs among the leases. (b) if there is a separate division of interest or allocation formula among any of the parties holding an interest in the unit that is different from the division of interest or allocation formula approved by the commissioner, the parties to the separate division of interest or allocation formula not approved by the commissioner shall submit a copy of that formula to the commissioner and a statement explaining the reasons for the difference. IV. DISCUSSION OF DECISION CRITERIA. The primary statutory decision criterion for unitization is whether approval is necessary or advisable in the public interest to conserve oil and gas resources. (AS 38.05.180(p)). Conservation of the natural resources of all or part of an oil or gas pool, field or like area means "maximizing the efficient recovery of oil and gas and minimizing the adverse impacts on the surface and other resources." 11 AAC 83.395(1). The primary regulatory decision criterion for a unitization application is also the public interest. 11 AAC 83.303(a). The Commissioner will approve a proposed unit if he finds that it necessary and advisable in the public interest and unitization will (1) promote conservation of all natural resources, including all or part of an oil or gas pool, field, or like area; (2) promote the prevention of economic and physical waste; and (3) provide for the protection of all parties of Corrected Denial of the Kenai Loop Unit Application - Page 10 interest including the state. 11 AAC 83.303(a). In evaluating the 11 AAC 83.303(a) criteria, the Commissioner will consider (1) the environmental costs and benefits of unitized exploration or development; (2) the geological and engineering characteristics of the potential hydrocarbon accumulation or reservoir proposed for unitization; (3) prior exploration activities in the proposed unit area; (4) the applicant's plans for exploration or development of the unit area; (5) the economic costs and benefits to the state; and (6) any other relevant factors, including measures to mitigate impacts identified above, the commissioner determines necessary or advisable to protect the public interest. l 1 AAC 83.303(b). A. 11 AAC 83.303(b) Decision Considerations This section discusses the 11 AAC 83.303(b) factors that should be considered before applying the decision criteria under 11 AAC 83.303(a). 1. 303(b)(1) - Environmental Costs and Benefits In response to the public notice of the Application, the Division received several public comments expressing concern for the environment from oil and gas development of the unit area. These include an (1) an objection to issuance of a Temporary Water Use Permit by the State of Alaska Division of Mining Land and Water; (2) adverse effects to the landscape; and (3) the state's reckless encouragement of oil and gas development given ocean acidification, climate change, and global warming. Any development including oil and gas development will have some impact on the environment. The State oil and gas leases proposed to be included in the unit were issued after public notice that the Division proposed to offer the property for oil and gas lease and after the Division issued a best interest finding that the property was appropriate for oil and gas development. The right to develop property for oil and gas was conveyed by the State at the time of lease issuance, and the right to develop the leases is not dependent on unitization. But unitization can reduce the environmental impact of oil and gas development of multiple leases. Unitization may provide an environmental benefit by enabling joint development of multiple lessees thereby reducing redundant development. Unitization may reduce the need to drill a well or to build production facilities on every lease overlying common reservoir or closely situated reservoirs. Less development may benefit the environment by reducing surface impacts. It is not apparent from the Application, however, how formation of the KXU would generate significant environmental benefits. Production facilities are already in place. The proposed unit plan is to drill one to three uncharacterized wells at unspecified locations each year over the next five years. The proposal does not set forth enough information to support a conclusion that unitization will generate a significant environmental benefit. The proposed formation of the unit will not provide a significant joint development benefit of pulling different lessees together in a common development. Buccaneer is the single WIO of the leases in the proposed unit area. Thus Buccaneer does not need to unitize the property in order to effect joint development. Rather the purpose of the Application appears to be extension of the primary terms of the leases. Buccaneer must obtain approval in the plan and permitting process Corrected Denial of the Kenai Loop Unit Application - Page 11 before it can engage in any on -the -ground operations and environmental concerns will be addressed there. Buccaneer must obtain the Division approval of a unit plan and obtain permits from various agencies before drilling a well or wells or initiating development activities to produce reservoirs within the unit area. 11 AAC 83.346. But the five year proposed duration of the initial unit plan together with the lack of detail of the proposed operations undercuts the State's ability to manage the unit through the plan process. Buccaneer will also need to obtain permits from various agencies before drilling a well or wells, or initiating development activities to produce reservoirs within the unit area. 11 AAC 83.346. The potential environmental effects of proposed on -the -ground activities are analyzed in the permitting and plan review processes. This includes consideration terms of State oil and gas leases that are designed to protect the environment, should development occur, and to address concerns regarding potential impact to fish and game, wildlife habitats, and subsistence. Permits have to be obtained before development activity can occur, and they typically set additional conditions designed to protect the environment. Buccaneer will be required to obtain additional approvals before conducting operations on the leases regardless of whether the properties are unitized. This is not the appropriate forum to challenge issuance of the Temporary Water Use permit. This is the decision of the DNR Division of Oil and Gas regarding unitization of existing State oil and gas leases. The permit was issued by a different DNR division. Objections to the permit need to be directed to the DNR Division of Mining, Land and Water as the permit issuing entity or to the DNR Commissioner who is responsible for deciding appeals from decisions of that DNR division. 2. 303(b)(2) — Geological, Geophysical, and Engineering Characteristics Some of the information and data Buccaneer submitted in support of its 2012 application to form the Kenai Loop Unit is accorded confidentiality protection under AS 38.05.035(a)(8)(C) and 11 AAC 96.220. Confidential information is not disclosed in this decision. Geologic and geophysical data submitted by Buccaneer in support of the application includes: original 3-D seismic sections and interpretations, seismic amplitude interpretations, mapped seismic horizons, geologic cross sections, well log displays, magnetic maps and interpretations, and regional magnetic, seismic and geologic maps. The proposed KXU is located on the Kenai Peninsula north of the Cannery Loop Unit. Three exploration wells have been drilled in the proposed KXU area. The Kenai Loop #1, Kenai Loop #3, and Kenai Loop #4 wells were drilled in 2011 and 2012 on land owned by the MHT under lease MHT 9300082, covering 1,080 acres. Regional seismic data indicate that these wells are located on the structural ridge of the Cannery Loop anticline. The Kenai Loop project was mapped by Buccaneer using 200 miles of 2-D seismic data tied to existing wells. Corrected Denial of the Kenai Loop Unit Application - Page 12 The Kenai Loop #I well was completed in June 2011 by Buccaneer as a slightly deviated hole to a total depth of 10,680 feet measured depth (MD) on MHT lease 9300082, located in NW % Sec 33, T6N, RI IW, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. Gas was discovered in the Kenai Loop #1 well within the Tertiary age Kenai Group Upper Tyonek Formation and is currently being produced from the 9,700 feet and 10,000 feet MD zones. The Kenai Loop #1 well had a combined flow rate of 10 million cubic feet per day (MMCFD) and an absolute open flow (AOF) potential of 33 MMCFD. Production data indicates that from January 2012 through November 2012, the Kenai Loop #1 well produced at a nearly constant average daily rate of 5.14 MMCFD, and the well has produced approximately 1.5 billion cubic feet (BCF) as of November 2012. A drainage radius ranging from 0.22 to 0.29 miles (1,170 feet to 1,534 feet) was calculated at the Kenai Loop #1 well bottom hole location, indicating that both MHT lease 9300082 and State lease ADL 391094 are likely being drained. The Kenai Loop #3 well, drilled based on 2-D seismic mapping to test the Upper Tyonek zones up -dip (south) from Kenai Loop #1, was completed in October 2011 as a deviated hole by Buccaneer to a total depth of 11,368 feet MD on MHT lease 9300082, located in NW '/ Sec 33, T6N, RIIW, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. A moderately thicker Tertiary section is present in this well than in the Kenai Loop #1 well. Potential reservoir zones in Kenai Loop #3 well showed high water saturation and did not produce gas, which Buccaneer interprets as reservoir depletion due to production from the Cannery Loop Unit south of Kenai Loop #3 well. Regardless, Kenai Loop #3 was not a productive well. The Kenai Loop #4 well was completed in fall 2012 by Buccaneer to a total depth of 13,083 feet MD on MHT lease 9300082, located in NW % Sec 33, T6N, RI I W, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. Buccaneer has not provided the Division with data for this well or indicated that the well encountered hydrocarbons. In April of 2012 Buccaneer completed a 23.4 square mile 3-D seismic survey covering the leases within the proposed KXU and tying into the existing 3-D data over the Cannery Loop field. Buccaneer has completed an initial interpretation of the new 2012 3-D data which provides the basis of the proposed KXU. In addition to 3-D mapping of the structure tested by the Kenai Loop #1 and Kenai Loop #3 wells Buccaneer has identified additional Kenai Group potential hydrocarbon accumulations in the Lower Sterling, Upper Tyonek, and Hemlock Formations. All of these prospects are based on amplitude anomalies, which Buccaneer interprets as gas-filled sand reservoirs. But seismic surveys do not necessarily indicate the presence of hydrocarbons, and the amplitude anomalies in these three formations could be caused by lithological factors rather than the presence of gas. For example, the acoustic contrast between siltstones and coals in the Kenai Group commonly causes strong amplitudes. However most of the amplitude anomalies mapped by Buccaneer have some apparent structural control (anticline, flank or fault closure), indicating a possible hydrocarbon trapping mechanism. Corrected Denial of the Kenai Loop Unit Application - Page 13 Division review of the Kenai Loop 3-D survey shows that there is a producing structure tested by Kenai Loop #1 well, as well as amplitude -based potential hydrocarbon accumulations. The amplitude -based potential hydrocarbon accumulations are high risk, but the geological, geophysical, and engineering analysis demonstrates the existence of both a producing reservoir and potential hydrocarbon accumulations within the operator's proposed Kenai Loop Unit. 3. 303(b)(3) — Prior Exploration Activities Buccaneer licensed and reinterpreted data from six 2-13 seismic surveys prior to drilling Kenai Loop #1 well. The 2-D data were acquired between 1974 and 1982 by various companies exploring the area. Prior to Buccaneer drilling the three Kenai Loop wells, the most proximal well was the Cannery Loop Unit #3 well, drilled approximately one mile southwest by Union Oil Company of California (UNOCAL) in 1981. UNOCAL drilled this well on the north side of the northeast plunging anticline over which the Cannery Loop Unit was formed. The Cannery Loop Unit #3 well cumulatively produced nearly 350 MMCF of gas during one year of production in 1988. 4. 303(b)(4) - Applicant's Plans for Development of the proposed Kenai Loop Unit The terms of the proposed Initial POD are: In the 1st Year: "Buccaneer agrees to drill 1-3 additional wells within the ls' year. The next well (Kenai Loop No. 4 well) will be drilled to the proposed depth of 11,000 TVD and will attempt to extend the Kenai Loop field from the Kenai Loop No. 1 well. The surface location is on the Kenai Loop No. I pad and the final bottom hole location will be determined after final processing and interpretation of the 3D seismic survey. 2. Buccaneer will propose the initial Participating Area for the Tyonek formation to encompass the known producing interval in the Kenai Loop No. 1 Well." (Plan at 5). In the 2nd through 5"' Year: "Buccaneer agrees to drill 1-3 wells per year to drill additional wells in the Kenai Loop Unit." (Plan at 5). Buccaneer's POD does not state where the additional wells will be drilled. The State acreage accounts for 1,397.14 acres (approximately 19%) of the proposed unitized area. Granting unitization would extend the term of the State leases; however there is no specific plan of exploration or development on the State land. There is no commitment to develop State land. In substance the proposed plan is more like a Plan of Exploration than a Plan of Development. Buccaneer is not committing to the development of a proven reservoir. It is offering to drill wells to look for hydrocarbons. The plan does not provide enough information to meet the requirements of 11 AAC 83.341 on Plans of Exploration or 11 AAC 83.343 on Plans of Corrected Denial of the Kenai Loop Unit Application - Page 14 Development. The unit plan is therefore inadequate, and the proposed five year duration of the plan without bench marks exposes the State to significant risk that the unit will be granted and leases extended without meaningful development. 5. 303(b),5) - The Economic Costs and Benefits to the State DNR has an obligation to protect the public's interest in maximizing economic and physical recovery from the State's oil and gas resources. AS 38.05.180(a)(1)(A). Maximizing economic recovery of hydrocarbons ensures royalty revenues and increased employment opportunities over the long-term. Realization of these potential benefits requires exploration and development of State oil and gas properties. Although Buccaneer has included several one line assertions that it will drill one to three additional uncharacterized wells in unspecified locations each year over the proposed five year plan, no surface or bottom hole locations are specified. And there is no indication of whether or when a well will be drilled on State land. Granting a unit and extending the primary term of the State leases does not maximize the economic or physical recovery from State leases or the public interest if there is no commitment to develop State land. The State is also required to maximize competition among parties in oil and gas development. AS 38.05.180(a)(1)(B). Without firm development proposals, unitization of the proposed area would not enhance competition or effect development. To the contrary, it would automatically extend the primary term of the leases; deprive other potential lessees of the opportunity to develop the property; and work to reduce competition. The reservoir confirmed by the Kenai Loop #1 well is in production. MHT lease 9300082 is extended by production and State lease ADL 391094 is extended by production until the Division issues a decision on the drainage issue. Extending the term of the other leases proposed to be included in the unit for the purpose of drilling additional exploration wells does not encourage competition to develop State resources. If unitization is denied and these leases expire,3 Buccaneer or other producers can bid on them at a lease sale and conduct exploration activities during the primary term of the lease. That will do more to encourage development competition than extending the term of the leases by unitization. 6. 303(b)(6) -Other Relevant Factors Public comments were received expressing concern about Buccaneer's lack of experience, its financial stability, and its alleged shotgun approach to permitting. But Buccaneer is qualified to do business in the State of Alaska and to hold a State oil and gas lease. And it has drilled a successful well in the proposed unit area. Buccaneer is qualified to apply for formation of the KXU unit. But the Application is not consistent with the purpose of unitization. The purpose of unitization is to effect efficient development of multiple leases overlying a common reservoir or closely situated reservoirs. But, the Application does not specifically outline the exploration or development activities Buccaneer will pursue if unitization is granted. No commitment is made to do any work on State leases. Therefore the Application does not propose efficient development of State land. 3 The leases without production (ADL 391091, ADL 391092, and ADL 391095) which have reached the end of their primary term, will expire. Corrected Denial of the Kenai Loop Unit Application - Page 15 Unitization of the proposed unit area is not necessary to allow for joint development. Buccaneer is the sole Lessee of the proposed unit area. The primary term of the State leases has expired, unitization would extend the lease primary term without a clear plan of development. The purpose of unitization is development, not lease extension to accomplish exploration that should have been conducted during the primary term of the lease. The Division was notified by CIRI on January 9, 2013, that they had terminated lease C-061667. Buccaneer has neither modified the Application to reflect termination of the CIRI lease nor otherwise communicated with the Division about the CIRI termination. It is not clear whether the proposed unit would include the CIRI lease or not. The unit plan is deficient because it does not meet the requirement of I 1 AAC 83.341 or 11 AAC 83.343 respectively unit Plans of Exploration or Development because only cursory statements are provided essentially proposing to drill three to five wells each year of the five year plan. No well or bottom hole locations are proposed. No additional development targets are identified, and no additional development activities are proposed. The five year term eviscerates the Division's ability to ensure unit development through the plan process. Over 60% of the acreage proposed for the KXU is MHT leased lands. MHT may issue its own decision on unitization of MHT leases. Section 2(b) of the MHT oil and gas lease states MHT has the authority to extend a lease that is committed to a unit agreement approved or consented to by Lessor. B. 11 AAC 83.303(a) Decision Criteria State regulation provides that the DNR Commissioner will approve a unit agreement or unit plan if he finds that it will promote the conservation of natural resources, that it will prevent economic and physical waste, that it will provide for the protection of all parties in interest including the state, and that it is necessary and advisable in the public interest. 11 AAC 83.303(a). This section addresses those decision criteria. 1. 303(a)(1) — Promote the Conservation of all Natural Resources Alaska statute authorizes the DNR Commissioner to approve an agreement among multiple lessees that hold separate leases overlying a common reservoir to jointly develop the leases for the purpose of conserving the natural resources of all or a part of an oil or gas pool, field, or like area. AS 38.05.180(p). In this context, "conservation" means "maximizing the efficient recovery of oil and gas and minimizing the adverse impacts on the surface and other resources." 11 AAC 83.395(9). Buccaneer has shown that a productive reservoir was penetrated by Kenai Loop #1 well within the proposed unit area. Division review of the Kenai Loop 3-D survey also shows amplitude based anomalies that could indicate additional potential hydrocarbon accumulations. But the Kenai Loop #3 well shows that another portion of the proposed unit is not underlain by Corrected Denial of the Kenai Loop Unit Application - Page 16 hydrocarbons. Buccaneer has not provided the State with any data from Kenai Loop #4 well or indicated to the State that this well completed in 2012, encountered hydrocarbons. While the seismic testing suggests the proposed unit area might include additional hydrocarbons, such testing does not confirm the presence of hydrocarbons. Buccaneer has not shown that the entire proposed unit area has been proven productive, but it has shown a proven producible formation penetrated by Kenai Loop #1 well and that the proposed unit contains other possible potential hydrocarbon trapping mechanisms. Still, the Application contains no commitments for new development of or new production from the proposed unit area. Buccaneer plans on applying for a PA on the reservoir being produced by Kenai Loop #1 well, but otherwise the plan proposes that one to three wells will be drilled a year over a five year period. The Application includes no information on well location or additional development activities, and it does not show that unitization would affect efficient recovery of oil or gas. All of the wells in the proposed unit area were drilled on MHT lands. The Application contains no commitment to explore, develop, or produce State land. The Application does not set out a detailed development plan or contain meaningful commitments for new production or development in return for lease extension through unitization. The unitization of oil and gas reservoirs or accumulations and the formation of unit areas to develop hydrocarbon -bearing reservoirs or accumulations may work to conserve the reservoir when leases overlying a common reservoir are owned by different parties. Diligent exploration and development under a single approved unit plan without the complications of competing leasehold interests promotes the State's interest. But in this case, the proposed KXU leases have a single lessee, Buccaneer. There are no complicating factors from competing leaseholder interests that prevent Buccaneer from diligently exploring and developing the proposed KXU area and adjoining leases. Unitization is not necessary to reconcile the competing interests of multiple lessees in the proposed unit area to avoid excessive or redundant development. The Application also fails to provide for joint development of multiple leases. The Application does not propose activities that would be conducted differently under unitization than they would be on an individual lease basis. No coherent exploration or development plan is offered. Instead, Buccaneer simply asserts that it will drill one to three wells a year. The primary purpose of the Application appears to be extension of the primary terms of the State leases proposed to be included in the unit and not to effect efficient development of proven reservoirs. That is not the purpose of unitization. 2. 303(a)(2) - Prevention of Economic and Physical Waste Unitization, as opposed to activity on a lease -by -lease basis, may prevent economic and physical waste by preventing the drilling of wells in excess of the number necessary for the efficient recovery of hydrocarbons or drilling in a manner that results in the improper use of or unnecessary dissipation of reservoir energy through adoption of a unified reservoir management plan. And unitization may otherwise reduce redundant expenditures. But the Application does not show how unitization would produce these benefits. It does not show that unitization would result in coherent and efficient development of and production from the unit area through unified reservoir management plan. The Application simply asserts that one to three wells will be drilled Corrected Denial of the Kenai Loop Unit Application - Page 17 in each of the five years of the initial plan. Buccaneer is the sole working interest owner of the leases proposed for unitization, and it is not necessary to unitize the leases to achieve coordinated development. The primary purpose of the Application appears to be lease extension not efficient development. 3. 303(a)3) - Protection of all Parties of Interest, including the State Unit formation would protect the interests of Buccaneer by extending the term of the leases. But this would not necessarily protect the State's interest. If unitization is granted for the proposed area, Buccaneer will continue to hold State acreage with no firm commitment to develop any of it for at least a five year period and potentially a much longer period. If unitization is not granted, the State leases will expire, with the exception of the ADL 391094. That lease will be held by production from the Kenai Loop #1 well until such a time as the Division can issue a decision on the drainage issue. Allowing the remaining State leases to return to the State gives Buccaneer and potential new lessees an opportunity to bid on them at a lease sale thereby protecting the State's interest by encouraging competition. State oil and gas leases are issued for a fixed term of five to ten years after which they come back to the State to be reoffered for bid unless they are in production or certain other limited conditions are met to extend the lease term. Unitization is one of the conditions that allow a lessee to hold a lease beyond its primary term. AS 38.05.180(m). But the purpose of unitization is to effect efficient production and to minimize adverse impacts of oil and gas development. 1 I AAC 83.395(1). While exploration can be done after a lease is committed to a unit, lease exploration is more properly an activity that should occur during the primary term of a lease. Unitization is primarily intended to enable development of multiple lessees overlying a common reservoir that was discovered during the primary term of the lease. The State leases proposed for unitization have a term of five years. Buccaneer knew, or should have known, what the primary term was when it acquired the leases. It is not in the public interest to extend leases beyond their primary term to simply drill exploration wells in the absence of firm development and production commitments. The proposed plan does not protect the State interest. No detail of exploration or development activities is provided other than the assertion that one to three wells will be drilled a year. The five year duration of the plan hinders the State's ability to ensure unit development through the plan process. 4. 303(x) —Necessary and Advisable in the Public Interest The people of Alaska have an interest in the development of the State's oil and gas resources to maximize the economic and physical recovery of the resources and in maximizing competition to develop State resources. AS 38.05.180(a). The Application makes no showing that unitization would work to maximize economic or physical recovery from the area or would enhance competition. The Application contains no commitment to increase production or to do additional development in the unit area. Simply extending leases beyond their primary term in the absence of development commitments does not result in realization of the purposes of unitization or the Corrected Denial of the Kenai Loop Unit Application - Page 18 State oil and gas leasing program. Approval of the Application is not necessary or advisable in the public interest. The Application does not promote the public interest. V. FINDINGS AND DECISION. 1. Findings 1. The Application does not show how unitization would provide significant environment costs or benefits. 2. Buccaneer is the sole working interest owner so it is not necessary to unitize in order to obtain coordinated development of the leases proposed to be included in the unit. 3. The primary purpose of the Application appears to be lease extension and not efficient development of the unit area. 4. Lease extension with no production or development commitments ensures that the lack of competition for development of the leases to be included in the unit will continue. 5. The Application does not maximize development of State resources as locations are not given for the wells proposed. 6. Exploration may be a component of unit activity but the primary purpose of unitization is development of reserves proven during the primary term of a lease and the Application makes no development commitments. 7. Buccaneer is the sole working interest owner, therefore it is in their best interest to prevent physical waste through proper and efficient management of reservoir energy, regardless if the area is unitized or is being developed on a lease -by -lease basis. 8. Buccaneer is the sole lessee of the proposed unit area, and unitization is not necessary to protect multiple lessees overlying a common reservoir. 9. The only interest that would be protected through grant of the Application is Buccaneer's interest in continuing to retain the State leases beyond their primary tern. 10. Granting the Application would not protect the State's interest in developing the State's oil and gas resources to maximize the economic and physical recovery. 11. The plan does not provide sufficient information to meet the requirements of l 1 AAC 83.341 or 11 AAC 83.343, and the five year duration of the plan without milestones, undercuts the State's ability to manage the unit. 2. Decision It is not necessary or advisable in the State's or the public's interest to grant the Application. The Application, as submitted, does not further the purposes of unitization or the public interest in oil and gas leasing. Formation of the unit protects Buccaneer's interest, but not the State's interest. The purpose of unitization is to effect efficient development and production of multiple State leases especially where they are owned by multiple lessees. It is not to indefinitely hold State leases beyond their primary term for the purpose of drilling exploration wells. The Application to form the Kenai Loop Unit is denied because it does not serve to protect the State or public interest. Corrected Denial of the Kenai Loop Unit Application - Page 19 This decision denies Bucaneer's Application with regard to State leases. It does not affect the authority of the MHT or CIRI to unitize their leases. The MHT leases that Buccaneer proposes to include provide that the MHT makes management decisions regarding them. Notwithstanding this Decision denying unitization of State leases, MHT and CIRI could exercise their discretion to unitize their leases. The Division will issue a separate decision extending the primary tern for ADL 391094 under the extension by production provision in the lease (Lease Term 4) until the Division issues a decision on the issue of drainage of the State lease by Kenai Loop #1 well. A person affected by this decision may appeal it, in accordance with 11 AAC 02.010 through 11 AAC 02.900. 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 Daniel S. Sullivan, Commissioner, DNR, 550 W. 7"' Avenue, Suite 1400, Anchorage, Alaska 99501; faxed to (907) 269-8918, or sent by electronic mail to dnr. appeal s@alaska. gov. This decision takes effect immediately. An eligible person must first appeal this decision in accordance with 11 AAC 02.010 through l I AAC 02.900 before appealing this decision to Superior Court. A copy of I 1 AAC 02.010 through 11 AAC 02.900 may be obtained from any regional information office of the Department of Natural Resources. W.C. Barron Director Division of Oil and Gas ATTACHMENTS Date 1) Proposed Kenai Loop Unit — Proposed Exhibit A Map of Proposed Unit Area (July 19, 2012) 2) Proposed Kenai Loop Unit — Proposed Exhibit B Leases Proposed in Unit Area (July 19, 2012) Corrected Denial of the Kenai Loop Unit Application - Page 20 • • ATTACHMENT ONE: Exhibit A Proposed Kenai Loop Unit — Exhibit A: Map of Proposed Unit Area (July 19, 2012) Tract s � M1193fAf1J0 I SAL EXHIBITA KENAI LOOP UNIT Corrected Denial of the Kenai Loop Unit Application - Page 21 CD61667 tram Avi391m T6N R I I W UN Titi R I I W TSS; I I II t i i i2 1: iI' M Y� BUCCANEER ALASKA, LLC I lnct I 1NB118,3pp070 MHi9ilY)(fl WOW TSa4 r �• ---------------- -ALA W batt 1 I � tratt 3 G►a L MUM% 2 "'Hu" I Lbb16G7 a lout 1 j a2iuw sous Ri2w T1iNRI1W I i { RIM TSNRIIW Indo ----------------------- AD139109t Old J -cft1bbl tnd 6 -=L7, ADL39IMS —�—F I SAL EXHIBITA KENAI LOOP UNIT Corrected Denial of the Kenai Loop Unit Application - Page 21 CD61667 tram Avi391m T6N R I I W UN Titi R I I W TSS; I I II t i i i2 1: iI' M Y� BUCCANEER ALASKA, LLC WWI 1NB118,3pp070 WOW TSa4 r .... ADL3910V4, 4 G►a L MUM% AM"1094 hK1 hyo a lout 1 NW m W4�! W61wa I SAL EXHIBITA KENAI LOOP UNIT Corrected Denial of the Kenai Loop Unit Application - Page 21 CD61667 tram Avi391m T6N R I I W UN Titi R I I W TSS; I I II t i i i2 1: iI' M Y� BUCCANEER ALASKA, LLC • • ATTACHMENT TWO: Exhibit B Proposed Kenai Loop Unit — Exhibit B: Requested Leases to Fortn Unit Area (July 19, 2012) U 9' J 4 O C O n 0 0 M w U < n t po.r3 o a F 7i xu to%"un O m ei A v n t3 c �yy �7Pr a Y d t J m U 9' J a O G p v�1 O N vi N h h N Y� h t� D O C Ci O O 9 1• < t po.r3 o a F 7i xu to%"un O t3 c �yy �7Pr a Y d t J m 6 1 Si P 1 w �) Y c ;U�b�� avZ [i$3xw�4 ii 4 6g$ U 9' a O G p v�1 O N vi N h h N Y� h t� D O C Ci O O 9 1• H t po.r3 7i xu to%"un O t3 c �yy �7Pr Xo� 6 1 Si P 13 �) Y ;U�b�� avZ [i$3xw�4 ii 6g$ gX l t t O 14 Corrected Denial of the Kenai Loop Unit Application - Page 22 Corrected Denial of the Kenai Loop Unit Application - Page 23 �1 Y o V M S h Noo 1 e n 0 d ii .itiaoo,. ft 000000Yio 3 � � Q U W Lp V Lop xr !J � ir $ o Ir a �' ¢¢ p q Cr ky '• �' m s rc ot°�3m1�$rib $ 5 oua � u Y J R Ir is n a t t d S Y r < o m m t s C ty t) k J tO w o ^f n w nl q t;," o at i b O yt1 4f M 41 1b O r q ^ t 7� e1pp�i kM H ' % Gi n R YV. ff CFr _—. R „ F. 'L S C T'h Ci iri � .• � [ .5y' a. tf �i a) W M yyg►k yyyy kn R 7 t) t) ►� t) 49 W 4• G1 C) '� t) 7 Corrected Denial of the Kenai Loop Unit Application - Page 23 �1 Y 1 3 � � Corrected Denial of the Kenai Loop Unit Application - Page 23 O S $ 6, D O S P O Q S p S O y Dy,, S Sz,S� 4• S S Qi ✓ .7i 4 0 .m � r �i7` a� �' b .� 7i 5; � H u � � o n ri ci c o 0 o p o o n r, ci o ci o 0 0 0 U u � V K t m o v $ o�' iw iinAt,3 Ov rix�, Ar F P u u Corrected Denial of the Kenai Loop Unit Application - Page 24 KENAI LOOP UNIT DENIAL OF THE KENAI LOOP UNIT APPLICATION FINDINGS AND DECISION OF THE DIRECTOR DIVISION OF OIL AND GAS UNDER DELEGATION OF AUTHORITY FROM THE COMMISSIONER DEPARTMENT OF NATURAL RESOURCES STATE OF ALASKA MARCH 15, 2013 TABLE OF CONTENTS I. INTRODUCTION AND DECISION SUMMARY. 3 11. HISTORY OF PROPOSED UNIT AREA. 3 111. STATUTORY AND REG ULA TOR Y PRO VISIONS RELEVANT TO THE APPLICATION 6 IV DISCUSSION OF DECISION CRITERIA, 10 A. 11 AAC 83.303(b) Decision Considerations I I 1. 303(b)(1) - Environmental Costs and Benefits 11 2. 303(b)(2) — Geological, Geophysical, and Engineering Characteristics 12 4. 303(b)(4) - Applicant's Plans for Development of the proposed Kenai Loop Unit _ 14 5. 303(b)(5) - The Economic Costs and Benefits to the State 15 6. 303(b)(6) - Other Relevant Factors 15 B. 11 AAC 83.303(a) Decision Criteria 16 1. 303(a)(1) — Promote the Conservation of all Natural Resources 16 2. 303(a)(2) - Prevention of Economic and Physical Waste 17 3. 303(a)(3) - Protection of all Parties of Interest, including the State 18 4. 303(a) —Necessary and Advisable in the Public Interest 18 V. FINDINGS AND DECISION. 19 1. Findings 19 2. Decision 19 ATTACHMENT ONE: Exhibit A 21 ATTACHMENT TWO: Exhibit B 22 Denial of the Kenai Loop Unit Application - Page 2 I. INTRODUCTION AND DECISION SUMMARY. This is the decision of the Director of the State of Alaska (State) Department of Natural Resources (DNR), Division of Oil and Gas (Division) pursuant to a September 30, 1999 delegation of authority from the DNR Commissioner on the July 19, 2012, application of Buccaneer Alaska Operations, LLC (Buccaneer) to form the Kenai Loop Unit (KXU) out of leases issued by Cook Inlet Region, Incorporated (CIRI), Mental Health Land Trust (MHT), and the DNR. (Application). Buccaneer is the proposed KXU Operator and sole working interest owner (WIO) of the proposed unit area. The request to form the unit is denied: (1) CIRI has notified the Division that it has terminated Buccaneer's interest in the CIRI lease proposed to be included in the unit'. Buccaneer has not notified the state of the lease termination, and it did not amend its Application to reflect the termination. The proposed unit agreement and other aspects of the Application are based on CIRI's agreement to unitization. (2) The Application is in effect an effort to extend the primary term of the leases for the purpose of conducting exploration activities rather than a proposal to effect efficient development of multiple leases. (3) The proposed unit plan is deficient because it is a simple assertion that Buccaneer will drill one to three uncharacterized wells a year at unspecified locations in the proposed unit.2 (4) Formation of the KXU as proposed by Buccaneer is not in the public interest. State lease ADL 391094 may be being drained by the Kenai Loop #1 well drilled on an MHT lease. ADL 391094 is extended by production until such time as the Division can issue a decision on the drainage issue. II. HISTORY OF PROPOSED UNIT AREA. On July 19, 2012, Buccaneer submitted an application to the Division to approve formation of the KXU and simultaneously paid the $5,000.00 unit formation application filing fee, in accordance with 11 AAC 83.306 and 11 AAC 05.010(a)(10)(D), respectively. The Application included: the unit operating agreement; the multiple royalty ownership state unit agreement form including CIRI, the MHT, and the DNR as royalty owners; Exhibit A which is a map of the proposed unit; Exhibit B which is a description of the proposed unit area, its leases, and ownership interests; and Exhibit G which is an initial unit Plan of Development. Buccaneer is the only WIO. The Application also included confidential economic and technical data. The Division notified Buccaneer by letter dated August 10, 2012, that the Application was incomplete. The initial Application did not include the following items required under 11 AAC 83.306: (1) the unit agreement executed by the proper parties, submitted on the most current 1 The State received notice on January 9, 2013, from Cook Inlet Region, Inc. (CIRI) that they had terminated their lease, C-061667, with Buccaneer. 2 Development and drilling activities to date in the proposed unit area has been on MHT land. The development plan submitted with the Application does not indicate if and when development will occur on State land. Denial of the Kenai Loop Unit Application - Page 3 standard state unit agreement form for multiple royalty owners; (2) the executed unit operating agreement; (3) all pertinent geological, geophysical, engineering and well data, and interpretations of those data to support the application (11 AAC 83.306(4). The Division deemed the Application complete on December 10, 2012. The Division published a public notice in the "Anchorage Daily News", the "Peninsula Clarion", and the "Homer News" on December 13, 2012, under 11 AAC 83.311. Copies of the Application and the public notice were provided to interested parties. The Division provided public notice to, among others, the Alaska Department of Environmental Conservation, the Kenai Peninsula Borough, the City of Kenai, the Village of Tyonek, the Salamatof Native Association, Cook Inlet Region, Incorporated, the Soldotna Postmaster, and the radio station KDLL in Kenai. The notice was also published on the State of Alaska Public Notice website and the Division's website. The public notices invited interested parties and members of the public to submit comments by January 14, 2013. The Division received comments regarding the Application from the Kachemak Bay Conservation Society (KBCS) and The Center for Water Advocacy (TCWA). The Division received both comments on January 14, 2012. The Division considered the comment in the evaluation of the Application and the issuance of this decision. Topics of concern related to potential environmental impacts from the formation of the unit and any oil and gas development in the State and Buccaneer as a company and operator. The comments included: 1. Objections to water use for oil and gas development by KBCS and TCWA; 2. Buccaneer lacks sufficient experience to manage the unit by KBCS; 3. Buccaneer lacks sufficient financial stability to qualify for a unit by KBCS; 4. Buccaneer takes a shotgun approach to permit applications by KBCS; 5. Adverse effects of oil development on the surrounding landscape by: KBCS; and 6. The state's "Drill Baby Drill" attitude towards oil development in the face of ocean acidification, climate change, and global warming, including reopening Drift River facility is reckless by KBCS. Buccaneer began acquiring leases in the proposed unit area with two MHT leases in December 2010, the four State leases were acquired through assignments in January 2011, and a CIRI lease was acquired in February 2011. These seven leases cover approximately 7,499.64 acres. A map of the area proposed to be unitized is found in Attachment 1, details of the leases are found in Attachment 2, and the leases are summarized in Table 1. Denial of the Kenai Loop Unit Application - Page 4 Table I — ADLs Proposed for Formation of Kenai Loop Unit Lease No. Acres Royalty Lease Effective Date WIO Lease Expiration Date MHT 9300082 1080 Confidential 2/1/2011 Buccaneer Alaska, LLC 100% 2/1/2016 MHT 9300070 3747.50 Confidential 1/11/2011 Buccaneer Alaska, LLC 100% 1/1/2016 C-061667 1275 Confidential 3/1/2011 Buccaneer Alaska, LLC 100% 3/1/2016 ADL 391094 750.37 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391092 186.77 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391091 160 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 ADL 391095 300 12.5% 10/1/2007 Buccaneer Alaska, LLC 100% 9/30/2012 Total Acreage 7,499.64 The primary term of CIRI lease C-061667 expires on March 1, 2016. For reasons undisclosed to the State, CIRI notified the State on January 9, 2013, that it terminated the lease effective January 9, 2013. In 2011 Buccaneer drilled the Kenai Loop 41 well based on 2-D seismic data. The well was tested and found to be successful. Buccaneer drilled the Kenai Loop #3 well in August of 2011. It was not productive. The Alaska Oil and Gas Conservation Commission (AOGCC) issued a well spacing exception to allow Buccaneer to drill the Kenai Loop #4 well. It was completed in Fall 2012. Buccaneer has not provided the Division with data from Kenai Loop #4 well or indicated that it encountered hydrocarbons. Beginning in December 2011 and finishing in April 2012 Buccaneer successfully completed a 3-D seismic shoot of the proposed unit area. Buccaneer completed the installation of the production facilities for the Kenai Loop #1 well on the Kenai Loop #1 pad and the City Gate pad in January 2012. Buccaneer has also secured gas sales contracts and is now selling the gas that is being produced. The City Gate facility is the point of custody transfer of Kenai Loop #1 well gas into the Kenai Nikiski Pipeline. Buccaneer's unit formation application included the following initial Plan of Development (POD): In the 1" Year: 1. Buccaneer agrees to drill 1-3 additional wells within the I" year. The next well (Kenai Loop #4 well) will be drilled to the proposed depth of 11,000 true vertical depth (TVD) and will attempt to extend the Kenai Loop field from the Kenai Loop #1 well. The surface location is on the Kenai Loop #1 pad and the final bottom hole location will be determined after final processing and interpretation of the 3-D seismic survey. 2. Buccaneer will propose the initial Participating Area (PA) for the Tyonek formation to encompass the known producing interval in the Kenai Loop #1 well. In the 2nd through 5`h Year: Buccaneer agrees to drill 1-3 wells per year to drill additional wells in the Kenai Loop Unit. Denial of the Kenai Loop Unit Application - Page 5 The Application does not describe the types of wells Buccaneer plans to drill or where in the proposed unit area the wells will be located. Regarding unit formation, the Application states: "The proposed 7500 acre Buccaneer Kenai Loop project area is located on the northern Kenai Peninsula on a ridge between Cannery Loop Field (200BCFG) and Beaver Creek Gas Field (6MMBO, 250 BCFG) and has productive intervals and seismic amplitude anomalies in the same productive intervals as these fields. Several control wells and two hundred miles of 2-D seismic were used to map Kenai Loop and, similar to the surrounding fields, there are multiple stacked pay zone possibilities between 5,000 and 11,000 feet in the Beluga and Tyonek Formations. The Beluga sands consist of fluvial channels oriented in a northeast -southwest direction. Such channels in the Beluga & Tyonek formations are productive in the Cannery Loop field." (Application at 2) "The Kenai Loop 41 (KL# 1) discovery well was completed in May 2011 with 81 " of pay in the 9700' and 10,000' Tyonek gas sands. The combined flow rate was 10 MMCFGPD and the AOF was 33 MMCFGPD. KL#1 has been in production at a constant rate of 5MMCFGPD since mid-January 2012 and has produced .6BCFG through the end of May, 2012." (Application at 2) "11 AAC 83.356(a) provides that a unit must encompass the minimum area required to include all or a part of one or more reservoir or potential hydrocarbon accumulations. Consequently, Buccaneer proposes that only seven (7) Leases be included in the Kenai Loop Unit at this time to cover the proven productive area of the Tyonek sands and multiple potential hydrocarbon accumulations in the Sterling, Beluga, Tyonek and Hemlock formations." (Application at 2) III. STATUTORY AND REGULATORY PROVISIONS RELEVANT TO THE APPLICATION. The statutory standard for unitization is whether it is necessary or advisable in the public interest: "To conserve the natural resources of all or a part of an oil or gas pool, field. or like area, the lessees and their representatives may unite with each other, or jointly or separately with others, in collectively adopting or operating under a cooperative or a unit plan of development or operation of the pool, field, or like area, or a part of it, when determined and certified by the commissioner to be necessary or advisable in the public interest." AS 38.05.180(p); (emphasis added). The legislature has also identified several aspects of the public interest with regard to the state oil and gas leasing program: "(a) The legislature finds that (1) the people of Alaska have an interest in the development of the state's oil and gas resources to Denial of the Kenai Loop Unit Application - Page 6 (A) maximize the economic and physical recovery of the resources; (B) maximize competition among parties seeking to explore and develop the resources; (C) maximize use of Alaska's human resources in the development of the resources; (2) it is in the best interests of the state (A) to encourage an assessment of its oil and gas resources and to allow the maximum flexibility in the methods of issuing leases to (i) recognize the many varied geographical regions of the state and the different costs of exploring for oil and gas in these regions; (ii) minimize the adverse impact of exploration, development, production, and transportation activity; and (B) to offer acreage for oil and gas leases, specifically including (i) state acreage that has been the subject of a best interest finding at annual areawide lease sales; and (ii) land in areas that, under (d) of this section, may be leased without having been included in the leasing program prepared and submitted under (b) of this section." AS 38.05.180. Unitization extends the primary term of a lease. Alaska statute 38.05.180(m) provides in relevant part: "An oil and gas lease shall be automatically extended if and for so long thereafter as oil or gas is produced in paying quantities from the lease or if the lease is committed to a unit approved by the commissioner, and a gas only lease shall be automatically extended if and for so long thereafter as gas is produced in paying quantities from the lease or if the lease is committed to a unit approved by the commissioner." DNR has set forth unitization decision criteria in regulation that retain the public interest as the primary criterion: "11 AAC 83.303. Criteria. (a) The commissioner will approve a proposed unit agreement for state oil and gas leases if he makes a written finding that the agreement is necessary or advisable to protect the public interest considering the provisions of AS 38.05.180 (p) and this section. The commissioner will approve a proposed unit agreement upon a written finding that it will (1) promote conservation of all natural resources, including all or part of an oil or gas pool, field, or like area; Denial of the Kenai Loop Unit Application - Page 7 (2) promote the prevention of economic and physical waste; and (3) provide for the protection of all parties of interest, including the state. (b) In evaluating the above criteria, the commissioner will consider (1) the environmental costs and benefits of unitized exploration or development; (2) the geological and engineering characteristics of the potential hydrocarbon accumulation or reservoir proposed for unitization; (3) prior exploration activities in the proposed unit area; (4) the applicant's plans for exploration or development of the unit area; (5) the economic costs and benefits to the state; and (6) any other relevant factors, including measures to mitigate impacts identified above, the commissioner determines necessary or advisable to protect the public interest. (c) The commissioner will consider the criteria in (a) and (b) of this section when evaluating each requested authorization or approval under 11 AAC 83.301 - 11 AAC 83.395, including (1) an approval of a unit agreement; (2) an extension or amendment of a unit agreement; (3) a plan or amendment of a plan of exploration, development or operations; (4) a participating area; or (5) a proposed or revised production or cost allocation formula." Potential "hydrocarbon reservoir," "reservoir," and "unit" are defined by regulation as follows: "11 AAC 83.395. Definitions. Unless the context clearly requires a different meaning, in 11 AAC 83.301 - 11 AAC 83.395 and in the applicable unit agreements (5) "potential hydrocarbon accumulation" means any structural or stratigraphic entrapping mechanism which has been reasonably defined and delineated through geophysical, geological, or other means and which contains one or more intervals, zones, Denial of the Kenai Loop Unit Application - Page 8 strata, or formations having the necessary physical characteristics to accumulate and prevent the escape of oil and gas; (6) "reservoir" means an oil or gas accumulation which has been discovered by drilling and evaluated by testing and which is separate from any other accumulation of oil and gas; (7) "unit" means a group of leases covering all or part of one or more potential hydrocarbon accumulations, or all or part of one or more adjacent or vertically separate oil or gas reservoirs, which are subject to a unit agreement". State regulation also sets out the requirements for acceptable plans of exploration and development in 11 AAC 83.341(a) and 343(a): "I I AAC 83.341. Unit plan of exploration. (a) Unless a unit plan of development is filed under 11 AAC 83.343, a unit plan of exploration must be filed for approval by the commissioner as an exhibit to the unit agreement under 11 AAC 83.306. The plan must describe the applicant's proposed exploration activities, including the bottom -hole locations and depths of proposed wells, and the estimated date drilling will commence. All exploration operations must be conducted under an approved plan of exploration. The commissioner will approve a unit plan of exploration if it complies with the provisions of 11 AAC 83.303. If the proposed unit plan of exploration is disapproved, the commissioner will, in his discretion, propose modifications which, if accepted by the unit operator, would qualify the plan for approval." "II AAC 83.343. Unit plan of development. (a) A unit plan of development must be filed for approval as an exhibit to the unit agreement if a participating area is proposed for the unit area under l 1 AAC 83.351, or when a reservoir has become sufficiently delineated so that a prudent operator would initiate development activities in that reservoir. All development operations must be conducted under an approved plan of development. A unit plan of development must contain sufficient information for the commissioner to determine whether the plan is consistent with the provisions of 11 AAC 83.303. The plan must include a description of the proposed development activities based on data reasonably available at the time the plan is submitted for approval as well as plans for the exploration or delineation of any land in the unit not included in a participating area. The plan must include, to the extent available information exists (1) long-range proposed development activities for the unit, including plans to delineate all underlying oil or gas reservoirs, bring the reservoirs into production, and maintain and enhance production once established; (2) plans for the exploration or delineation of any land in the unit not included in a participating area; Denial of the Kenai Loop Unit Application - Page 9 (3) details of the proposed operations for at least one year following submission of the plan; and (4) the surface location of proposed facilities, drill pads, roads, docks, causeways, material sites, base camps, waste disposal sites, water supplies, airstrips, and any other operation or facility necessary for unit operations." The DNR Commissioner is responsible for determining whether a proposed allocation of production is appropriate. I I AAC 83.371. Allocation of production and costs. (a) The proposed or revised division of interest or formula allocating hydrocarbon production and unit operating costs among the leases in the unit area may not take effect until approved by the commissioner in writing. When requested by the commissioner, the lessees or unit operator shall promptly file with the commissioner all data that relates to the proposed or revised division of interests or allocation formula for all leases in the participating area. Before any disapproval of the proposed or revised division of interest or allocation formula, the commissioner will give the working interest and royalty owners reasonable notice and an opportunity to be heard. After the hearing, the commissioner will approve the proposed or revised division of interest or allocation formula as submitted unless the commissioner finds in writing that the formula does not equitably allocate production and costs among the leases. (b) if there is a separate division of interest or allocation formula among any of the parties holding an interest in the unit that is different from the division of interest or allocation formula approved by the commissioner, the parties to the separate division of interest or allocation formula not approved by the commissioner shall submit a copy of that formula to the commissioner and a statement explaining the reasons for the difference. IV. DISCUSSION OF DECISION CRITERIA. The primary statutory decision criterion for unitization is whether approval is necessary or advisable in the public interest to conserve oil and gas resources. (AS 38.05.180(p)). Conservation of the natural resources of all or part of an oil or gas pool, field or like area means "maximizing the efficient recovery of oil and gas and minimizing the adverse impacts on the surface and other resources." 11 AAC 83.395(1). The primary regulatory decision criterion for a unitization application is also the public interest. 11 AAC 83.303(a). The Commissioner will approve a proposed unit if he finds that it necessary and advisable in the public interest and unitization will (1) promote conservation of all natural resources, including all or part of an oil or gas pool, field, or like area; (2) promote the prevention of economic and physical waste; and (3) provide for the protection of all parties of Denial of the Kenai Loop Unit Application - Page 10 interest including the state. I 1 AAC 83.303(a). In evaluating the I 1 AAC 83.303(a) criteria, the Commissioner will consider (1) the environmental costs and benefits of unitized exploration or development; (2) the geological and engineering characteristics of the potential hydrocarbon accumulation or reservoir proposed for unitization; (3) prior exploration activities in the proposed unit area; (4) the applicant's plans for exploration or development of the unit area; (5) the economic costs and benefits to the state; and (6) any other relevant factors, including measures to mitigate impacts identified above, the commissioner determines necessary or advisable to protect the public interest. 11 AAC 83.303(b). A. 11 AAC 83.303(b) Decision Considerations This section discusses the I 1 AAC 83.303(b) factors that should be considered before applying the decision criteria under I 1 AAC 83.303(a). 1. 303(b)(1) - Environmental Costs and Benefits In response to the public notice of the Application, the Division received several public comments expressing concern for the environment from oil and gas development of the unit area. These include an (1) an objection to issuance of a Temporary Water Use Permit by the State of Alaska Division of Mining Land and Water; (2) adverse effects to the landscape; and (3) the state's reckless encouragement of oil and gas development given ocean acidification, climate change, and global warming. Any development including oil and gas development will have some impact on the environment. The State oil and gas leases proposed to be included in the unit were issued after public notice that the Division proposed to offer the property for oil and gas lease and after the Division issued a best interest finding that the property was appropriate for oil and gas development. The right to develop property for oil and gas was conveyed by the State at the time of lease issuance, and the right to develop the leases is not dependent on unitization. But unitization can reduce the environmental impact of oil and gas development of multiple leases. Unitization may provide an environmental benefit by enabling joint development of multiple lessees thereby reducing redundant development. Unitization may reduce the need to drill a well or to build production facilities on every lease overlying common reservoir or closely situated reservoirs. Less development may benefit the environment by reducing surface impacts. It is not apparent from the Application, however, how formation of the KXU would generate significant environmental benefits. Production facilities are already in place. The proposed unit plan is to drill one to three uncharacterized wells at unspecified locations each year over the next five years. The proposal does not set forth enough information to support a conclusion that unitization will generate a significant environmental benefit. The proposed formation of the unit will not provide a significant joint development benefit of pulling different lessees together in a common development. Buccaneer is the single WIO of the leases in the proposed unit area. Thus Buccaneer does not need to unitize the property in order to effect joint development. Rather the purpose of the Application appears to be extension of the primary terms of the leases. Buccaneer must obtain approval in the plan and permitting process Denial of the Kenai Loop Unit Application - Page 11 before it can engage in any on -the -ground operations and environmental concerns will be addressed there. Buccaneer must obtain the Division approval of a unit plan and obtain permits from various agencies before drilling a well or wells or initiating development activities to produce reservoirs within the unit area. 11 AAC 83.346. But the five year proposed duration of the initial unit plan together with the lack of detail of the proposed operations undercuts the State's ability to manage the unit through the plan process. Buccaneer will also need to obtain permits from various agencies before drilling a well or wells, or initiating development activities to produce reservoirs within the unit area. 11 AAC 83.346. The potential environmental effects of proposed on -the -ground activities are analyzed in the permitting and plan review processes. This includes consideration terms of State oil and gas leases that are designed to protect the environment, should development occur, and to address concerns regarding potential impact to fish and game, wildlife habitats, and subsistence. Permits have to be obtained before development acti,,ity can occur, and they typically set additional conditions designed to protect the environment. Buccaneer will be required to obtain additional approvals before conducting operations on the leases regardless of whether the properties are unitized. This is not the appropriate forum to challenge issuance of the Temporary Water Use permit. This is the decision of the DNR Division of Oil and Gas regarding unitization of existing State oil and gas leases. The permit was issued by a different DNR division. Objections to the permit need to be directed to the DNR Division of Mining, Land and Water as the permit issuing entity or to the DNR Commissioner who is responsible for deciding appeals from decisions of that DNR division. 2. 303(b)(2) — Geological, Geophysical, and Engineering Characteristics Some of the information and data Buccaneer submitted in support of its 2012 application to form the Kenai Loop Unit is accorded confidentiality protection under AS 38.05.035(a)(8)(C) and 11 AAC 96.220. Confidential information is not disclosed in this decision. Geologic and geophysical data submitted by Buccaneer in support of the application includes: original 3-D seismic sections and interpretations, seismic amplitude interpretations, mapped seismic horizons, geologic cross sections, well log displays, magnetic maps and interpretations, and regional magnetic, seismic and geologic maps. The proposed KXU is located on the Kenai Peninsula north of the Cannery Loop Unit. Three exploration wells have been drilled in the proposed KXU area. The Kenai Loop #l, Kenai Loop #3, and Kenai Loop #4 wells were drilled in 2011 and 2012 on land owned by the MHT under lease MHT 9300082, covering 1,080 acres. Regional seismic data indicate that these wells are located on the structural ridge of the Cannery Loop anticline. The Kenai Loop project was mapped by Buccaneer using 200 miles of 2-1) seismic data tied to existing wells. Denial of the Kenai Loop Unit Application - Page 12 The Kenai Loop #1 well was completed in June 2011 by Buccaneer as a slightly deviated hole to a total depth of 10,680 feet measured depth (MD) on MHT lease 9300082, located in NW '/ Sec 33, T6N, R11 W, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. Gas was discovered in the Kenai Loop #1 well within the Tertiary age Kenai Group Upper Tyonek Formation and is currently being produced from the 9,700 feet and 10,000 feet MD zones. The Kenai Loop #1 well had a combined flow rate of 10 million cubic feet per day (MMCFD) and an absolute open flow (AOF) potential of 33 MMCFD. Production data indicates that from January 2012 through November 2012, the Kenai Loop #1 well produced at a nearly constant average daily rate of 5.14 MMCFD, and the well has produced approximately 1.5 billion cubic feet (BCF) as of November 2012. A drainage radius ranging from 0.22 to 0.29 miles (1,170 feet to 1,534 feet) was calculated at the Kenai Loop #1 well bottom hole location, indicating that both MHT lease 9300082 and State lease ADL 391094 are likely being drained. The Kenai Loop #3 well, drilled based on 2-D seismic mapping to test the Upper Tyonek zones up -dip (south) from Kenai Loop 41, was completed in October 2011 as a deviated hole by Buccaneer to a total depth of 11,368 feet MD on MHT lease 9300082, located in NW '/ Sec 33, T6N, R1 1 W, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. A moderately thicker Tertiary section is present in this well than in the Kenai Loop 41 well. Potential reservoir zones in Kenai Loop #3 well showed high water saturation and did not produce gas, which Buccaneer interprets as reservoir depletion due to production from the Cannery Loop Unit south of Kenai Loop #3 well. Regardless, Kenai Loop #3 was not a productive well. The Kenai Loop #4 well was completed in fall 2012 by Buccaneer to a total depth of 13,083 feet MD on MHT lease 9300082, located in NW '/ Sec 33, T6N, R11W, Seward Meridian, within Kenai City limits, approximately two miles northeast of the Kenai River mouth. Buccaneer has not provided the Division with data for this well or indicated that the well encountered hydrocarbons. In April of 2012 Buccaneer completed a 23.4 square mile 3-D seismic survey covering the leases within the proposed KXU and tying into the existing 3-D data over the Cannery Loop field. Buccaneer has completed an initial interpretation of the new 2012 3-D data which provides the basis of the proposed KXU. In addition to 3-D mapping of the structure tested by the Kenai Loop #1 and Kenai Loop #3 wells Buccaneer has identified additional Kenai Group potential hydrocarbon accumulations in the Lower Sterling, Upper Tyonek, and Hemlock Formations. All of these prospects are based on amplitude anomalies, which Buccaneer interprets as gas-filled sand reservoirs. But seismic surveys do not necessarily indicate the presence of hydrocarbons, and the amplitude anomalies in these three formations could be caused by lithological factors rather than the presence of gas. For example, the acoustic contrast between siltstones and coals in the Kenai Group commonly causes strong amplitudes. However most of the amplitude anomalies mapped by Buccaneer have some apparent structural control (anticline, flank or fault closure), indicating a possible hydrocarbon trapping mechanism. Denial of the Kenai Loop Unit Application - Page 13 Division review of the Kenai Loop 3-D survey shows that there is a producing structure tested by Kenai Loop #1 well, as well as amplitude -based potential hydrocarbon accumulations. The amplitude -based potential hydrocarbon accumulations are high risk, but the geological, geophysical, and engineering analysis demonstrates the existence of both a producing reservoir and potential hydrocarbon accumulations within the operator's proposed Kenai Loop Unit. 3. 303(b)(3) — Prior Exploration Activities Buccaneer licensed and reinterpreted data from six 2-D seismic surveys prior to drilling Kenai Loop #1 well. The 2-D data were acquired between 1974 and 1982 by various companies exploring the area. Prior to Buccaneer drilling the three Kenai Loop wells, the most proximal well was the Cannery Loop Unit #3 well, drilled approximately one mile southwest by Union Oil Company of California (UNOCAL) in 1981. UNOCAL drilled this well on the north side of the northeast plunging anticline over which the Cannery Loop Unit was formed. The Cannery Loop Unit #3 well cumulatively produced nearly 350 MMCF of gas during one year of production in 1988. 4. 303(b)(4) - Applicant's Plans for Development of the proposed Kenai Loop Unit The terms of the proposed Initial POD are: In the I" Year: 1. "Buccaneer agrees to drill 1-3 additional wells within the I" year. The next well (Kenai Loop No. 4 well) will be drilled to the proposed depth of 11,000 TVD and will attempt to extend the Kenai Loop field from the Kenai Loop No. 1 well. The surface location is on the Kenai Loop No. 1 pad and the final bottom hole location will be determined after final processing and interpretation of the 3D seismic survey. 2. Buccaneer will propose the initial Participating Area for the Tyonek formation to encompass the known producing interval in the Kenai Loop No. 1 Well." (Plan at 5). In the 2nd through 5"' Year: "Buccaneer agrees to drill 1-3 wells per year to drill additional wells in the Kenai Loop Unit." (Plan at 5). Buccaneer's POD does not state where the additional wells will be drilled. The State acreage accounts for 1,397.14 acres (approximately 19%) of the proposed unitized area. Granting unitization would extend the term of the State leases; however there is no specific plan of exploration or development on the State land. There is no commitment to develop State land. In substance the proposed plan is more like a Plan of Exploration than a Plan of Development. Buccaneer is not committing to the development of a proven reservoir. It is offering to drill wells to look for hydrocarbons. The plan does not provide enough information to meet the requirements of 11 AAC 83.341 on Plans of Exploration or 11 AAC 83.343 on Plans of Denial of the Kenai Loop Unit Application - Page 14 Development. The unit plan is therefore inadequate, and the proposed five year duration of the plan without bench marks exposes the State to significant risk that the unit will be granted and leases extended without meaningful development. 5. 303(b)(5) - The Economic Costs and Benefits to the State DNR has an obligation to protect the public's interest in maximizing economic and physical recovery from the State's oil and gas resources. AS 38.05.180(a)(1)(A). Maximizing economic recovery of hydrocarbons ensures royalty revenues and increased employment opportunities over the long-term. Realization of these potential benefits requires exploration and development of State oil and gas properties. Although Buccaneer has included several one line assertions that it will drill one to three additional uncharacterized wells in unspecified locations each year over the proposed five year plan, no surface or bottom hole locations are specified. And there is no indication of whether or when a well will be drilled on State land. Granting a unit and extending the primary term of the State leases does not maximize the economic or physical recovery from State leases or the public interest if there is no commitment to develop State land. The State is also required to maximize competition among parties in oil and gas development. AS 38.05.180(a)(1)(B). Without firm development proposals, unitization of the proposed area would not enhance competition or effect development. To the contrary, it would automatically extend the primary term of the leases; deprive other potential lessees of the opportunity to develop the property; and work to reduce competition. The reservoir confirmed by the Kenai Loop #1 well is in production. MHT lease 9300082 is extended by production and State lease ADL 391094 is extended by production until the Division issues a decision on the drainage issue. Extending the term of the other leases proposed to be included in the unit for the purpose of drilling additional exploration wells does not encourage competition to develop State resources. If unitization is denied and these leases expire,3 Buccaneer or other producers can bid on them at a lease sale and conduct exploration activities during the primary term of the lease. That will do more to encourage development competition than extending the term of the leases by unitization. 6. 303(b)(6) - Other Relevant Factors Public comments were received expressing concern about Buccaneer's lack of experience, its financial stability, and its alleged shotgun approach to permitting. But Buccaneer is qualified to do business in the State of Alaska and to hold a State oil and gas lease. And it has drilled a successful well in the proposed unit area. Buccaneer is qualified to apply for formation of the KXU unit. But the Application is not consistent with the purpose of unitization. The purpose of unitization is to effect efficient development of multiple leases overlying a common reservoir or closely situated reservoirs. But, the Application does not specifically outline the exploration or development activities Buccaneer will pursue if unitization is granted. No commitment is made to do any work on State leases. Therefore the Application does not propose efficient development of State land. 3 The leases without production (ADL 391091, ADL 391092, and ADL 391095) which have reached the end of their primary term, will expire. Denial of the Kenai Loop Unit Application - Page 15 Unitization of the proposed unit area is not necessary to allow for joint development. Buccaneer is the sole Lessee of the proposed unit area. The primary term of the State leases has expired, unitization would extend the lease primary term without a clear plan of development. The purpose of unitization is development, not lease extension to accomplish exploration that should have been conducted during the primary term of the lease. The Division was notified by CIRI on January 9, 2013, that they had terminated lease C-061667. Buccaneer has neither modified the Application to reflect termination of the CIRI lease nor otherwise communicated with the Division about the CIRI termination. It is not clear whether the proposed unit would include the CIRI lease or not. The unit plan is deficient because it does not meet the requirement of 1 I AAC 83.341 or 11 AAC 83.343 respectively unit Plans of Exploration or Development because only cursory statements are provided essentially proposing to drill three to five wells each year of the five year plan. No well or bottom hole locations are proposed. No additional development targets are identified, and no additional development activities are proposed. The five year term eviscerates the Division's ability to ensure unit development through the plan process. Over 60% of the acreage proposed for the KXU is MHT leased lands. MHT may issue its own decision on unitization of MHT leases. Section 2(b) of the MHT oil and gas lease states MHT has the authority to extend a lease that is committed to a unit agreement approved or consented to by Lessor. B. 11 AAC 83.303(x) Decision Criteria State regulation provides that the DNR Commissioner will approve a unit agreement or unit plan if he finds that it will promote the conservation of natural resources, that it will prevent economic and physical waste, that it will provide for the protection of all parties in interest including the state, and that it is necessary and advisable in the public interest. l 1 AAC 83.303(a). This section addresses those decision criteria. 1. 303(a)(1) —Promote the Conservation of all Natural Resources Alaska statute authorizes the DNR Commissioner to approve an agreement among multiple lessees that hold separate leases overlying a common reservoir to jointly develop the leases for the purpose of conserving the natural resources of all or a part of an oil or gas pool, field, or like area. AS 38.05.180(p). In this context, "conservation" means "maximizing the efficient recovery of oil and gas and minimizing the adverse impacts on the surface and other resources." 1 l AAC 83.395(9). Buccaneer has shown that a productive reservoir was penetrated by Kenai Loop #1 well within the proposed unit area. Division review of the Kenai Loop 3-D survey also shows amplitude based anomalies that could indicate additional potential hydrocarbon accumulations. But the Kenai Loop #3 well shows that another portion of the proposed unit is not underlain by Denial of the Kenai Loop Unit Application - Page 16 hydrocarbons. Buccaneer has not provided the State with any data from Kenai Loop #4 well or indicated to the State that this well completed in 2012, encountered hydrocarbons. While the seismic testing suggests the proposed unit area might include additional hydrocarbons, such testing does not confirm the presence of hydrocarbons. Buccaneer has not shown that the entire proposed unit area has been proven productive, but it has shown a proven producible formation penetrated by Kenai Loop #1 well and that the proposed unit contains other possible potential hydrocarbon trapping mechanisms. Still, the Application contains no commitments for new development of or new production from the proposed unit area. Buccaneer plans on applying for a PA on the reservoir being produced by Kenai Loop 41 well, but otherwise the plan proposes that one to three wells will be drilled a year over a five year period. The Application includes no information on well location or additional development activities, and it does not show that unitization would affect efficient recovery of oil or gas. All of the wells in the proposed unit area were drilled on MHT lands. The Application contains no commitment to explore, develop, or produce State land. The Application does not set out a detailed development plan or contain meaningful commitments for new production or development in return for lease extension through unitization. The unitization of oil and gas reservoirs or accumulations and the formation of unit areas to develop hydrocarbon -bearing reservoirs or accumulations may work to conserve the reservoir when leases overlying a common reservoir are owned by different parties. Diligent exploration and development under a single approved unit plan without the complications of competing leasehold interests prornotes the State's interest. But in this case, the proposed KXU leases have a single lessee, Buccaneer. There are no complicating factors from competing leaseholder interests that prevent Buccaneer from diligently exploring and developing the proposed KXU area and adjoining leases. Unitization is not necessary to reconcile the competing interests of multiple lessees in the proposed unit area to avoid excessive or redundant development. The Application also fails to provide for joint development of multiple leases. The Application does not propose activities that would be conducted differently under unitization than they would be on an individual lease basis. No coherent exploration or development plan is offered. Instead, Buccaneer simply asserts that it will drill one to three wells a year. The primary purpose of the Application appears to be extension of the primary terms of the State leases proposed to be included in the unit and not to effect efficient development of proven reservoirs. That is not the purpose of unitization. 2. 303(x)(2) - Prevention of Economic and Physical Waste Unitization, as opposed to activity on a lease -by -lease basis, may prevent economic and physical waste by preventing the drilling of wells in excess of the number necessary for the efficient recovery of hydrocarbons or drilling in a manner that results in the improper use of or unnecessary dissipation of reservoir energy through adoption of a unified reservoir management plan. And unitization may otherwise reduce redundant expenditures. But the Application does not show how unitization would produce these benefits. It does not show that unitization would result in coherent and efficient development of and production from the unit area through unified reservoir management plan. The Application simply asserts that one to three wells will be drilled Denial of the Kenai Loop Unit Application - Page 17 in each of the five years of the initial plan. Buccaneer is the sole working interest owner of the leases proposed for unitization, and it is not necessary to unitize the leases to achieve coordinated development. The primary purpose of the Application appears to be lease extension not efficient development. 3. 303(a)(3) - Protection of all Parties of Interest, including the State Unit formation would protect the interests of Buccaneer by extending the term of the leases. But this would not necessarily protect the State's interest. If unitization is granted for the proposed area, Buccaneer will continue to hold State acreage with no firm commitment to develop any of it for at least a five year period and potentially a much longer period. If unitization is not granted, the State leases will expire, with the exception of the ADL 391094. That lease will be held by production from the Kenai Loop #1 well until such a time as the Division can issue a decision on the drainage issue. Allowing the remaining State leases to return to the State gives Buccaneer and potential new lessees an opportunity to bid on them at a lease sale thereby protecting the State's interest by encouraging competition. State oil and gas leases are issued for a fixed term of five to ten years after which they come back to the State to be reoffered for bid unless they are in production or certain other limited conditions are met to extend the lease term. Unitization is one of the conditions that allow a lessee to hold a lease beyond its primary term. AS 38.05.180(m). But the purpose of unitization is to effect efficient production and to minimize adverse impacts of oil and gas development. 11 AAC 83.395(1). While exploration can be done after a lease is committed to a unit, lease exploration is more properly an activity that should occur during the primary term of a lease. Unitization is primarily intended to enable development of multiple lessees overlying a common reservoir that was discovered during the primary term of the lease. The State leases proposed for unitization have a term of five years. Buccaneer knew, or should have known, what the primary term was when it acquired the leases. It is not in the public interest to extend leases beyond their primary term to simply drill exploration wells in the absence of fine development and production commitments. The proposed plan does not protect the State interest. No detail of exploration or development activities is provided other than the assertion that one to three wells will be drilled a year. The five year duration of the plan hinders the State's ability to ensure unit development through the plan process. 4. 303(a) —Necessary and Advisable in the Public Interest The people of Alaska have an interest in the development of the State's oil and gas resources to maximize the economic and physical recovery of the resources and in maximizing competition to develop State resources. AS 38.05.180(a). The Application makes no showing that unitization would work to maximize economic or physical recovery from the area or would enhance competition. The Application contains no commitment to increase production or to do additional development in the unit area. Simply extending leases beyond their primary term in the absence of development commitments does not result in realization of the purposes of unitization or the Denial of the Kenai Loop Unit Application - Page 18 V. FINDINGS AND DECISION. 1. Findings 1. The Application does not show how unitization would provide significant environment costs or benefits. 2. Buccaneer is the sole working interest owner so it is not necessary to unitize in order to obtain coordinated development of the leases proposed to be included in the unit. 3. The primary purpose of the Application appears to be lease extension and not efficient development of the unit area. 4. Lease extension with no production or development commitments ensures that the Iack of competition for development of the leases to be included in the unit will continue. 5. The Application does not maximize development of State resources as locations are not given for the wells proposed. 6. Exploration may be a component of unit activity but the primary purpose of unitization is development of reserves proven during the primary term of a lease and the Application makes no development commitments. 7. Buccaneer is the sole working interest owner, therefore it is in their best interest to prevent physical waste through proper and efficient management of reservoir energy, regardless if the area is unitized or is being developed on a lease -by -lease basis. 8. Buccaneer is the sole lessee of the proposed unit area, and unitization is not necessary to protect multiple lessees overlying a common reservoir. 9. The only interest that would be protected through grant of the Application is Buccaneer's interest in continuing to retain the State leases beyond their primary term. 10. Granting the Application would not protect the State's interest in developing the State's oil and gas resources to maximize the economic and physical recovery. 11. The plan does not provide sufficient information to meet the requirements of 11 AAC 83.341 or 11 AAC 83.343, and the five year duration of the plan without milestones, undercuts the State's ability to manage the unit. 2. Decision It is not necessary or advisable in the State's or the public's interest to grant the Application. The Application, as submitted, does not further the purposes of unitization or the public interest in oil and gas leasing. Formation of the unit protects Buccaneer's interest, but not the State's interest. The purpose of unitization is to effect efficient development and production of multiple State leases especially where they are owned by multiple lessees. It is not to indefinitely hold State leases beyond their primary term for the purpose of drilling exploration wells. The Application to form the Kenai Loop Unit is denied because it does not serve to protect the State or public interest. This decision denies Bucaneer's Application with regard to State leases. It does not affect the authority of the MHT or CIRI to unitize their leases. The MHT leases that Buccaneer proposes to Denial of the Kenai Loop Unit Application - Page 19 include provide that the MHT makes management decisions regarding them. Notwithstanding this Decision denying unitization of State leases, MHT and CIRI could exercise their discretion to unitize their leases. The Division will issue a separate decision extending the primary term for ADL 391094 under the extension by production provision in the lease (Lease Term 4) until the Division issues a decision on the issue of drainage of the State lease by Kenai Loop #1 well. A person affected by this decision may appeal it, in accordance with 11 AAC 02.010 through 11 AAC 02.900. Any appeal must be received within 20 calendar days after the date of "issuance" of this decision, as defined in I 1 AAC 02.040 (c) and (d), and may be mailed or delivered to Daniel S. Sullivan, Commissioner, DNR, 550 W. 70' Avenue, Suite 1400, Anchorage, Alaska 99501; faxed to (907) 269-8918, or sent by electronic mail to dm.appealsAalaska. ov. This decision takes effect immediately. An eligible person must first appeal this decision in accordance with 1 I AAC 02.010 through 11 AAC 02.900 before appealing this decision to Superior Court. A copy of 1 l AAC 02.010 through 11 AAC 02.900 may be obtained from any regional information office of the Department of Natural Resources. .C. Barron Director Division of Oil and Gas ATTACHMENTS Date 1) Proposed Kenai Loop Unit — Proposed Exhibit A Map of Proposed Unit Area (July 19, 2012) 2) Proposed Kenai Loop Unit — Proposed Exhibit B Leases Proposed in Unit Area (July 19, 2012) Denial of the Kenai Loop Unit Application - Page 20 • • ATTACHMENT ONE: Exhibit A Proposed Kenai Loop Unit — Exhibit A: Map of Proposed Unit Area (July 19, 2012) )rat �rHr9svnra 't Ira" i Wj94fl.7W3t rl ------------- irarr4YYY+ AR11.1J1@'i4 { )rsss tram W6161+7 !i COi14i1 i fEl' NX3910 q R 12W T6,X R 1l 11'� ;" r/ t 1 I Atis..4VIM WN iR I I T(N R I -W T5,N R I I K' RLSY10i ----------------------- --- --' T5N R t 111' TSN tract 3 asci b WbibbI ALI392MI ( S, y �� EXHIBITA KENAI LOOP UNIT Denial of the Kenai Loop Unit Application - Page 21 N a} BUCCANEER ALASKA, LLC 11W Y iM'tiFB3�diy tragi A , trac.7 ,,,, H1F�41CkS z had) 13rr04 AW3yItt9S 04M t..., had ,Frit 1' WIN RD F1 M"60 ( S, y �� EXHIBITA KENAI LOOP UNIT Denial of the Kenai Loop Unit Application - Page 21 N a} BUCCANEER ALASKA, LLC ATTACHMENT TWO: Exhibit B Proposed Kenai Loop Unit — Exhibit B: Requested Leases to Form Unit Area (July 19, 2012) s , � u u � a n +i0000Gio o riM yi J 4A u , y ^ tIr j t4 a or F QS GL � L r � f 3r�',�iwo,ova 3 rc i S i•W G) Gt G) 'Gi i:9 O i'as s , � u u � a o - J Y d K D4 � ]cis QS GL � L r � f rc i S i•W G) Gt G) 'Gi i:9 G� i'as SC N k; V. a L is h 6 �I `N de Grry�. opii L M Q OI - N N s , ? "' � a o - J % N Y u� �D D4 � ]cis i S i•W G) Gt G) 'Gi i:9 } ti i'as OI W N h 6 �I `N de Grry�. opii L OI - N N tsaouwh � uG,00a `ci G'�., Biu �'u'ff "' GV i`Y M N h N V IV e4 N N fV •, .1 [)4 ry N b f� V N Y u� �D rr ry T e! 4�� h V aD iG i'as h � 7RK ry r uG', � ��•�;G; w w w P� opii L C o Denial of the Kenai Loop Unit Application - Page 22 i• Pi Ii O Q rJ 1] t] d O O ri al Z7 C P C C Q C f a ir K O xa�.¢CiiAO Oxn°•Cw� W p ® C t) D e ^I d Ldn' Of ii Cq N O u gR `a i � x�a c5 �• ti m n u � ti 8 SC i•ua �.. o o g u u u a � CD W m 01 n , -guy 2 r: Y V �v y � •_ 16b A I iy o cnC a r R q `1 ii b'42 M ;J to F tts ��r! IL7 r i'i p r e1 t a) th f X 7t 0 a) i= a) 0 41 t a7 c) Z a1 y • W J � g C � 4ar n n Denial of the Kenai Loop Unit Application - Page 23 OOPR111' U etui �' in n vai e n vi yin. t't ♦i ri a a a a a 0 0 0 ;" wf Mi a a a a a a a , ` 4 Ir r;n>�-i8�.fi iso�sm81 g � 0 1D h 47 G ll ad'i n Denial of the Kenai Loop Unit Application - Page 24 • #6 Colombie, Jody J (DOA) From: Davies, Stephen F (DOA) Sent: Thursday, August 01, 2013 2:29 PM To: Colleen Miller Cc: Colombie, Jody J (DOA) Subject: RE: Request for a Hearing - Buccaneer spacing exception Colleen, This hearing is still listed on the AOGCC's calendar, which is available online at http://doa.alaska.gov/ogc/hear/hear.htmi. Please let me know if you have any other questions. Regards, Steve Davies Sr. Petroleum Geologist Alaska Oil and Gas Conservation Commission (AOGCC) Phone: 907-793-1224 Fax: 907-276-7542 From: Colleen Miller [mailto:cmiller(&ciri.com] Sent: Thursday, August 01, 2013 2:06 PM To: Davies, Stephen F (DOA) Cc: Colombie, Jody J (DOA) Subject: Request for a Hearing - Buccaneer spacing exception Re: Request for a hearing Buccaneer Energy Docket# CO -13-08; Kenai Loop 1-4 Docket # CO -13-12; Kenai Loop 1-4st Application for Spacing Exception to Spacing Requirements Good afternoon, Steve. I know we confirmed the hearing over the phone, but I wanted to confirm via email as well that the hearing will take place on Tuesday, August 13'1' at 9:00am. Thank You. Colleen Miller Resources Manager Cook Inlet Region, Inc. (CIRI) PO Box 93330, Anchorage, Ak. 99509-3330 907-263-5117 (phone) 1 #5 r s STATE OF ALASKA ADVERTISING ORDER lqw NOTICE TO PUBLISHER 'mvADVERTISING INVOICE MUST BE IN TRIPLICATE SHOWING ADVERTISING ORDER NO., CERTIFIED AFFIDAVIT OF PUBLICATION (PART2 OF THIS FORM) WITH ATTACHED COPY OF ADVERTISEMENT MUST BE SUBMITTED WITH INVOICE ORDER NO. V AO -02-3-14-046 ��2�3� 1 A`'F�O�C A L SEE BOTTOM FOR INVOICE ADDRESS F R ° M AOGCC 333 W 7th Ave, Ste 100 Anchorage, AK 99501 AGENCY CONTACT Jody Colombie DATE OF A.O. July'), 2013 PHONE 907 793 —1221 PCN DATES ADVERTISEMENT REQUIRED: July 4, 2013 THE MATERIAL BETWEEN THE DOUBLE LINES MUST BE PRINTED IN ITS ENTIRETY ON THE DATES SHOWN. T Anchorage Daily News PO Box 149001 Anchorage, AK 99514 g SPECIAL INSTRUCTIONS: Type of Advertisement Legal® ❑ Display Classified ❑Other (Specify) SEE ATTACHED SEND INVOICE IN TRIPLICATE TO AOGCC, 333 W. 7th Ave., Suite 100 Anchorage, AK 99501 PAGE 1 OF 12PAGES TOTAL OF ALL PAGES $ REF TYPE I NUMBER AMOUNT DATE COMMENTS 1 1 VEN JARDI 02910 FIN AMOUNT SY CC PGM LC ACCT FY NMR M,uo 1 13 02140100 73451 2 REQUISITIONED B i ((k�(ANi DIVISION APPROVAL: 02-902 (Rev. 3/94) Publisher/Original Copies: Department Fiscal, Department, Receiving AO.FRM Notice of Public Hearing STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION Re: Docket # CO -13-08. The application of Buccaneer Alaska Operations, LLC (Buccaneer) for an exception to the spacing requirements of 20 AAC 25.055(a)(2) to test and produce gas well Kenai Loop No. 1-4 within 1,500 feet of a property line where the owner and landowner are not the same on both sides of the line and within 3,000' of wells that are, or may be capable of, producing from the same pool. Bucaneer by letter received June 12, 2013, requests the Alaska Oil and Gas Conservation Commission (AOGCC) issue an order for an exception to the spacing requirements of 20 AAC 25.055(a)(2) to test and produce gas well Kenai Loop No. 1-4 within 1,500 feet of a property line where the owner and landowner are not the same on both sides of the line. An exception to the spacing requirements of 20 AAC 25.055(a)(4) is also needed to drill and complete Kenai Loop No. 1-4 in the same governmental section as, and within 3,000 feet of, wells that are, or may be capable of, producing from the same pool. Kenai Loop No. 1-4 Surface Location: 1254' from the west line and 1765' from the north line of Section 33, T06N, R11 W, Seward Meridian (S.M.) Bottomhole Location: 2446' from the west line and 2445' from the north line of Section 33, T06N, RI I W, S.M. The AOGCC has tentatively scheduled a public hearing on this application for August 13, 2013 at 9:00 a.m. at 333 W. 7th Ave., Ste 100, Anchorage, Alaska 99501. To request that the tentatively scheduled hearing be held, a written request must be filed with the AOGCC no later than 4:30 p.m. on July 19, 2013. If a request for a hearing is not timely filed, the AOGCC may consider the issuance of an order without a hearing. To learn if the AOGCC will hold the hearing, call 793-1221 after July 25, 2013. In addition, written comments regarding this application may be submitted to the AOGCC, at 333 W. 7th Ave., Ste 100, Anchorage, Alaska 99501. Comments must be received no later than 4:30 p.m. on August 5, 2013, except that, if a hearing is held, comments must be received no later than the conclusion of the August 13, 2013 hearing. If, because of a disability, special accommodations may be needed to comment or attend the hearing, contact the AOGCC's Special Assistant, dy olombie, at 793-1221, no later than August 11, 2013. STOF0330 #218260 $249.00 RECEIVED JUL 12 2013 AOGCC AFFIDAVIT OF PUBLICATION STATE OF ALASKA THIRD JUDICIAL DISTRICT Joleesa Stepetin being first duly sworn on oath deposes and says that he is a 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 July 4, 2013 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. aVATIZii 'iM,MEN Subscribed and sworn to before me this day of I I Ulm 20 I \ Notary Public in and for The State of Alaska. Third Division Anchorage, Alaska MY COMMISSION EXPIRES Notice of Public Hearing STATE OF ALASKA ALASKA OIL AND GAS CONSERVATION COMMISSION Re: Docket # CO -13-08. The application of Buccaneer Alaska Operations, LLC (Buccaneer) for an exception to the spacing requirements of 20 AAC 25.055(a)(2)to test and producegas well Kenai Loop No. 1-4within 1,500 feet of a property line where the owner and landowner are not the same on both sides of the line and within 3,000' of wells that are, or may be capable of, producing from the same pool. Bucaneer by letter received June 12, 2013, requests the Alaska Oil and Gas Conservation Commission (AOGCC) issue an order for an exception to the spacing requirements of 20 AAC 25.055(a)(2) to test and produce gas well Kenai Loop No. 1-4 within 1,500 feet of a property line where the owner and landowner are not the same on both sides of the line. An exception to the spacing requirements of 20 AAC 25.055(a)(4) is also needed to drill and complete Kenai Loop No. 1-4 in the same governmental section as, and within 3,000 feet of, wells that are, or may be capable of, producing from the same pool. Kenai Loop No. 1-4 Surface Location: 1254' from the west line and 1765' from the north line of Section 33, T06N, R11 W, Seward Meridian (S.M.) Bottomhole Location: 2446' from the west line and 2445' from the north line of Section 33, T06N, R11 W, S.M. The AOGCC has tentatively scheduled a public hearing on this application for August 13, 2013 at 9:00a.m. at 333 W. 7th Ave., Ste 100, Anchorage, Alaska 99501. To request that the tentatively scheduled hearing be held, a written request must be filed with the AOGCC no later than 4:30 p.m. on July 19, 2013. If a request for a hearing is not timely filed, the AOGCC may consider the issuahce of an order without a hearing. To learn if the AOGCC will hold the hearing, call 793-1221 after July 25, 2013. In addition, written comments regarding this application may be submitted to the AOGCC, at 333 W. 7th Ave., Ste 100, Anchorage, Alaska 99501. Comments must be received no later than 4:30 p.m. on August 5, 2013, except that, if a hearing is held, comments must be received no later than the conclusion of the August 13, 2013 hearing. If, because of a disability, special accommodations may be needed to comment or attend the hearing, contact the AOGCC's Special Assistant, Jody Colombie, at 793-1221, no later than August 11, 2013. AO -02-3-14-046 Published: July 4, 2013 John K. Norman J Commissioner I STATE OF ALASKA NOTICE TO PUBLISHER ADVERTISING ORDER NO. ADVERTISING INVOICE MUST BE IN TRIPLICATE SHOWING ADVERTISING ORDER NO., CERTIFIED w O�OL��n4�oAC ORDER AFFIDAVIT OF PUBLICATION (PART 2 OF THIS FORM) WITH ATTACHED COPY OF A `'FV ADVERTISEMENT MUST BE SUBMITTED WITH INVOICE SEE I' AOGCC R 333 West 7`" Avenue. Suite 100 o Anchorage. AK 99501 M o Anchorage Daily News PO Box 149001 Anchorage, AK 99514 United states of America State of AGENCY CONTACT I DATE OF A.O. PHONE IPCN WI V / 7J - ' " " 1 DATES ADVERTISEMENT REQUIRED: July 4, 2013 THE MATERIAL BETWEEN THE DOUBLE LINES MUST BE PRINTED IN ITS ENTIRETY ON THE DATES SHOWN. SPECIAL INSTRUCTIONS: Account # STOF0330 AFFIDAVIT OF PUBLICATION REMINDER ss INVOICE MUST BE IN TRIPLICATE AND MUST REFERENCE THE ADVERTISING ORDER NUMBER. division. A CERTIFIED COPY OF THIS AFFIDAVIT OF PUBLICATION MUST BE SUBMITTED WITH THE INVOICE. Before me, the undersigned, a notary public this day personally appeared ATTACH PROOF OF PUBLICATION HERE. 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 2013, and thereafter for consecutive days, the last publication appearing on the day of , 2013, 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 2013, Notary public for state of My commission expires _ Colombie, Jody J (DOA) From: Colombie, Jody J (DOA) Sent: Wednesday, July 03, 2013 10:29 AM To: Ballantine, Tab A (LAW); 'Salena'; Singh, Angela K (DOA); Bettis, Patricia K (DOA); Brooks, Phoebe L (DOA); Colombie, Jody J (DOA); Crisp, John H (DOA); Davies, Stephen F (DOA); Ferguson, Victoria L (DOA); Fisher, Samantha J (DOA); Foerster, Catherine P (DOA); Grimaldi, Louis R (DOA); Hunt, Jennifer L (DOA); Johnson, Elaine M (DOA); Jones, Jeffery B (DOA); Laasch, Linda K (DOA); Bender, Makana K (DOA); Mumm, Joseph (DOA sponsored); Noble, Robert C (DOA); Norman, John K (DOA); Okland, Howard D (DOA); Paladijczuk, Tracie L (DOA); Pasqual, Maria (DOA); Regg, James B (DOA); Roby, David S (DOA); Scheve, Charles M (DOA); Schwartz, Guy L (DOA); Seamount, Dan T (DOA); Wallace, Chris D (DOA);(michael.j.nelson @conocophi IIips.com); AKDCWellIntegrityCoordinator; alaska@petrocalc.com; Alexander Bridge; Andrew VanderJack; Anna Raff; Barbara F Fullmer; bbritch; bbohrer@ap.org; Bill Penrose; Bill Walker; Brian Havelock; Burdick, John D (DNR); caunderwood@marathonoil.com; Cliff Posey; Colleen Miller; Crandall, Krissell; D Lawrence; Daryl J. Kleppin; Dave Harbour; Dave Matthews; David Boelens; David Duffy; David Goade; David House; David Scott; David Steingreaber; Davide Simeone; ddonkel@cfl.rr.com; Donna Ambruz; Dowdy, Alicia G (DNR); Dudley Platt; Elowe, Kristin; Evans, John R (LDZX); Francis S. Sommer; Gary Laughlin; schultz, gary (DNR sponsored); ghammons; Gordon Pospisil; Gorney, David L.; Greg Duggin; Gregg Nady; Gregory Geddes; gspfoff; Jdarlington oarlington@gmail.com); Jeanne McPherren; Jones, Jeffery B (DOA); Jerry McCutcheon; Jim White; Jim Winegarner; Joe Lastufka; news@radiokenai.com; Easton, John R (DNR); John Garing; Jon Goltz; Jones, Jeffrey L (GOV); Juanita Lovett; Judy Stanek; Houle, Julie (DNR); Julie Little; Kari Moriarty; Kaynell Zeman; Keith Wiles; Kelly Sperback; Kiorpes, Steve T; Gregersen, Laura S (DNR); Leslie Smith; Louisiana Cutler; Luke Keller; Marc Kovak; Dalton, Mark (DOT sponsored); Mark Hanley (mark.hanley@anadarko.com); Mark P. Worcester; Kremer, Marguerite C (DNR); Michael Jacobs; Mike Bill; mike@kbbi.org; Mikel Schultz; Mindy Lewis; MJ Loveland; mjnelson; mkm7200; knelson@petroleumnews.com; Nick W. Glover; Nikki Martin; NSK Problem Well Supv; Patty Alfaro; Decker, Paul L (DNR); Paul Mazzolini; Pike, Kevin W (DNR); Pioneer; Randall Kanady; Randy L. Skillern; Randy Redmond; Rena Delbridge; Renan Yanish; Robert Brelsford; Robert Campbell; Ryan Tunseth; Sandra Haggard; Sara Leverette; Scott Cranswick; Scott Griffith; Shannon Donnelly; Sharmaine Copeland; Sharon Yarawsky; Shellenbaum, Diane P (DNR); Slemons, Jonne D (DNR); Smith, Kyle S (DNR); Sondra Stewman; Stephanie Klemmer; Moothart, Steve R (DNR); Steven R. Rossberg; Suzanne Gibson; sheffield@aoga.org; Tania Ramos; Ted Kramer; Davidson, Temple (DNR); Terence Dalton; Teresa Imm; Thor Cutler; Tim Mayers; Tina Grovier (tmgrovier@stoel.com); Todd Durkee; Tony Hopfinger; trmjrl; Vicki Irwin; Walter Featherly; yjrosen@ak.net; Aaron Gluzman; Aaron Sorrell; Ajibola Adeyeye; Bruce Williams; Bruno, Jeff J (DNR); Casey Sullivan; David Lenig; David Martin; Donna Vukich; Eric Lidji; Erik Opstad; Franger, James M (DNR); Gary Orr; Smith, Graham O (PCO); Greg Mattson; Heusser, Heather A (DNR); Holly Pearen; James Rodgers; Jason Bergerson; Jennifer Starck; jill.a.mcleod@conocophillips.com; Jim Magill; Joe Longo; King, Kathleen J (DNR); Laney Vazquez; Lois Epstein; Marc Kuck; Steele, Marie C (DNR); Matt Armstrong; Matt Gill; Bettis, Patricia K (DOA); Perrin, Don J (DNR); Peter Contreras; Pexton, Scott R (DNR); Pollard, Susan R (LAW); Pollet, Jolie; Richard Garrard; Ryan Daniel; Sandra Lemke; Talib Syed; Terence Dalton; Wayne Wooster; Woolf, Wendy C (DNR); William Hutto; William Van Dyke Subject: Public Notice Attachments: Kenai Loop No 1-4 Public Notice.pdf C Jody J. Colombie Special Assistant Alaska Oil and Gas Conservation Commission 333 W. 71" Avenue Anchorage, Alaska 99501 (907) 793-1221 (907) 276-7542 • Easy Peel® Labels Use Avery® Template 51600 Mark R. Landt Vice President, Permitting & Regulatory Buccaneer Alaska, LLC 952 Echo Lane, Ste. 420 Houston, TX 77024 Bend along line to AVERY@ 5960TM � �. Feed Paper expose Pop-up EdgeTM ttiquettes faciles a peler I A Repliez a la hachure afin de ; www.avery.com I ItHico7 is -1 ..;t A\/FRV® rirn@ 1 Sens de . .._..,_ I_ — .._MC [ I_RM-Gn-A)/FRv ! Easy Peel® Labels Use Avery® Template 51604D Penny Vadla 399 W. Riverview Ave. Soldotna, AK 99669-7714 Jerry Hodgden Hodgden Oil Company 408 18t° St, Golden, CO 80401-2433 Bernie Karl K&K Recycling Inc. Post Office Box 58055 Fairbanks, AK 99711 North Slope Borough Planning Department Post Office Box 69 Barrow, AK 99723 Jack Hakkila Post Office Box 190083 Anchorage, AK 99519 Bend slang line to 0 16 Feed Paper exposepose Pop-up EdgeTM David McCaleb IHS Energy Group GEPS 5333 Westheimer, Ste. 100 Houston, TX 77056 Richard Neahring NRG Associates President Post Office Box 1655 Colorado Springs, CO 80901 CIRI Land Department Post Office Box 93330 Anchorage, AK 99503 Richard Wagner Post Office Box 60868 Fairbanks, AK 99706 Darwin Waldsmith Post Office Box 39309 Ninilchik, AK 99639 AVERY@ 5960TIa i I t� George Vaught, Jr. Post Office Box 13557 Denver, CO 80201-3557 Mark Wedman Halliburton 6900 Arctic Blvd. Anchorage, AK 99502 Baker Oil Tools 795 E. 94`h Ct. Anchorage, AK 99515-4295 Gordon Severson 3201 Westmar Cir. Anchorage, AK 99508-4336 James Gibbs Post Office Box 1597 Soldotna, AK 99669 ttiquettes faciles a peler ; A Flepliez a la hachure afin de ; elvww avery.cam I Itilica7 Ila nnhnrit ®\/FRV® 060 Sens de r4u4IPr IP rPhnrfl Pnn.l1„767 9.RM.GfI.dV�RV #4 • Davies, Stephen F (DOA) • From: Davies, Stephen F (DOA) Sent: Tuesday, July 02, 2013 4:54 PM To: 'Stephen Hennigan'; 'Mark Landt' Cc: Schwartz, Guy L (DOA); Colombie, Jody J (DOA) Subject: RE: Kenai Loop No. 1-4 Permit to Drill Application and Spacing Exception Application Your phone message is correct, the Spacing Exception application for Kenai Loop No. 1-4 does not need to be redone. incorrectly used the bottom -hole location footages from the Permit to Drill application as I was drafting the Notice for Spacing Exception. Please accept my apologies Regards, Steve Davies Sr. Petroleum Geologist Alaska Oil and Gas Conservation Commission (AOGCC) Phone: 907-793-1224 Fax: 907-276-7542 From: Davies, Stephen F (DOA) Sent: Tuesday, July 02, 2013 3:39 PM To: 'Stephen Hennigan'; 'Mark Landt' Cc: Schwartz, Guy L (DOA); Colombie, Jody J (DOA) Subject: Kenai Loop No. 1-4 Permit to Drill Application and Spacing Exception Application Steve and Mark, Because of the location corrections for Kenai Loop No. 1-4, Buccaneer should resubmit both the Permit to Drill application (Form 10-401) and the Spacing Exception application. On the Permit to Drill application form, please include corrected values for the footages for surface hole location, top of productive horizon, and bottom hole location; KB elevation; ground level elevation; maximum surface pressure; and downhole pressure. Please redo the Spacing Exception application with the correct footages for surface hole location, top of productive horizon, and bottom hole location. Follow all application requirements specified in 20 AAC 25.055. Thanks for your help, Steve Davies AOGCC 907-793-1224 #3 JUN 2 e ZU 3 BUCCANEER June 25, 2013 CERTIFIED RETURN RECEIPT REQUESTED Steve Davies Alaska Oil and Gas Conservation Commission 333 West 7 1 Avenue, Suite 100 Anchorage, Alaska 99501 Re: Kenai Loop No. 1-4 Well Location Exception Gentlemen: Enclosed are the completed return receipts from the State of Alaska, Cook Inlet Region, Inc., Buccaneer Alaska, LLC, Alaska Mental Health Trust Land Office, Hilcorp Alaska, LLC, William Trimmingham/Paul Whiteman, Associated Finance & Assurance Corp, related to the Location Exception for the Kenai Loop No. 1-4 well. Please call me at (214) 738-6945 if you have any questions. Sincerely, 4)0 - Mark R. Landt Vice President, Permitting & Regulatory 952 Echo Lane, Suite 420, Houston, T% 77024 Office: (713)468-1678 Fax: (713)468-3717 U.S. Postal Service,,, CERTIFIED MAILT. RECEIPT (Domestic Mail Only; No Insurance Coverage Provided) -I- El Se To C3 _SSDQ_.!._ax.�4. _ ... -.-----.-•--- r- Street, Apt. No.; I or PO Box No. 1 la -----------------------•---- Ci State, ZIP+4 A v Ly 6) SO PS Form 3800, June 2002 See Reverse for Instructions ■ Com0f'A ems 1, 2, and 3. Also complete item 4 if Restricted Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: Alaska Mental Health Trust Land Office Rke Franger, Land Manager 2600 Cordova Street, Ste. 100 Anchorage, AK 99503 A. Signa ure X , � ❑Agent (/ ❑ Addressee B. R ei ed b (Pr' ted Na e) C Date of Del'v ry D. Is delivery address different from item 1? ❑ Yes If YES, enter delivery address below: ❑ No `1 Oil 3 m r. a 3. Se Ice Type rc.rtlfled Mail ❑1prpress Mail ❑ Registered Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number -?004 :3 r; !, x 0000 6114 5 4 3 7 eA (Transfer from service label) _ I �r L, PS Form 3811, February 2004 Domestic R(;n -n Receipt 102595-02-M-1540 ■ Complete items and 3. Also complete item 4 if'Restrictdd Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: Steve Davies AOGCC 333 West 7th Avenue, Suite 100 Anchorage, AK 99501 A. Signature X 0 F �,- � ❑ Addressee ra C. Date of Delivery 41,-te. z )l;-, � -� Postage $ C3 Certified Fee E3 t7 Return Receipt Fee Postmark Here C3 (Endorsement Required) ' p Restricted Delivery Fee r -j (Endorsement Required) Lrl nJ L; Total Postage & Fees $ -I- El Se To C3 _SSDQ_.!._ax.�4. _ ... -.-----.-•--- r- Street, Apt. No.; I or PO Box No. 1 la -----------------------•---- Ci State, ZIP+4 A v Ly 6) SO PS Form 3800, June 2002 See Reverse for Instructions ■ Com0f'A ems 1, 2, and 3. Also complete item 4 if Restricted Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: Alaska Mental Health Trust Land Office Rke Franger, Land Manager 2600 Cordova Street, Ste. 100 Anchorage, AK 99503 A. Signa ure X , � ❑Agent (/ ❑ Addressee B. R ei ed b (Pr' ted Na e) C Date of Del'v ry D. Is delivery address different from item 1? ❑ Yes If YES, enter delivery address below: ❑ No `1 Oil 3 m r. a 3. Se Ice Type rc.rtlfled Mail ❑1prpress Mail ❑ Registered Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number -?004 :3 r; !, x 0000 6114 5 4 3 7 eA (Transfer from service label) _ I �r L, PS Form 3811, February 2004 Domestic R(;n -n Receipt 102595-02-M-1540 ■ Complete items and 3. Also complete item 4 if'Restrictdd Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: Steve Davies AOGCC 333 West 7th Avenue, Suite 100 Anchorage, AK 99501 A. Signature X F Agent ❑ Addressee B. Received by (Printed Name) C. Date of Delivery 41,-te. z )l;-, � C1/3 //3 D. Is delivery address different from item 1? LJ Yes If YES, enter delivery address below: Fi-K. es 3. Syivice Type El Certified Mail ❑xpress Mail ❑ Registered Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number 7004 2 510 0000 6114 5 413 (Transfer from service label _. M L PS Form 3811, February 2004 Domestic Return Receipt 102595-02-M-1540 ■ Complete items 1, 2, and 3. Also complete item 4 if Restricted Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Arti,1- Addressed to: Ms. Cathy Foerster, Chair Alaska Oil & Gas Conservation Commission 333 West 7th Avenue, Suite 100 Anchorage, AK 99501 A. Signature Agent X ❑ Addressee B. Received by ( Printed Name) C. Date of Delivery D. Is delivery address different from item 1? � ElY If YES, enter delivery address below: No 3. Service Type ❑ Certified Mail ❑ Express Mail ❑ Registered ❑ Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number (Transfer from service label) 7004 2 510 0000 6114 5420 {� PS Form 3811, February 2004 Domestic Return Receipt 102595-02-M-1540 ■ Complete items 1, 2, and 3. Also complete item 4 if Restricted Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: Buccaneer Alaska LLC Mark Landt 952 Echo Lane, Suite 420 Houston, TX 77024 A. X ❑ Agent B. Received by (Printed Name) C Date of Delivery D. --F- . elivery address different from item 1? ❑ Yes If YES, enter delivery address below: ❑ No 3. Service Type ❑ Certified Mail ❑ Express Mail ❑ Registered ❑ Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. _ 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number (Transfer from service label) 7004 2 510 0000 6114 5406 PS Form 3811, February 2004 Domestic Return Receipt 102595-02-M-1540 ■ Complete items 1, 2, and 3. Also complete item 4 if Restricted Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: Cook Inlet Region, Inc. Ethan Schutt, Sr VP Land & Energy P.O. Box 93330 Anchorage AK 99509-3330 A. ❑ Addressee Ry Printed N e) C. Date of Delivery f: / _ %_.?- i7 D. Is delivery address different from item 1? ❑ Yes If YES, enter delivery address below: ❑ No 3. Service Type ®-Certified Mail ❑ Express Mail ❑ Registered O'Peturn Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number (Transfer from service label) 7004 2 510 0000 6114 5383 ML PS Form 3811, February 2004 Domestic Return Receipt 102595-02-M-1540 ■ Complete items 1, 2, and 3. Also complete item 4 if Restricted', Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: Statrt�-off Alaska Dept of Natural Resources Wiliam Barron, Director 550 West Seventh Ave., Suite 800 Anchorage, AK 99501 A. Signature _, �t J1 j n ('y ❑ Agent Addressee Addressee B. Received by (Printed Name) CD e of Olivery Jennifer A. DUVaii , D. Is delivery address different from item ? es If YES, enter delivery address belo No 3. Service Type ❑ Certified Mail ❑ Express Mail ❑ Registered ❑ Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number (Transfer from service label) 7004 2 510 0000 6114 5468 a. PS Form 3811, February 2004 Domestic Return Receipt 102595-02-M-1540 ■ Complete items 1, 2, and 3. Also complete item 4 if Restricted Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: gIIcorp iqI&S1ccL LLC, suf�-e too An---Ao co.5e , A iQ s ko- a q!5-0 3 2. Article Number (Transfer from service label) PS Form 3811, February 2004 i A. Signature ❑ Agent ('� ❑Addressee B. eived ( rinted Name) C CAe f Delivery D. Is delivery address different from item 1? L/J Ye! If YES, enter delivery address below: ❑ No 3. ma Type Se Certified Mail ❑ press Mail ❑ Registered L Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes -1nn4 2510 000n 6114 5390 ■ Complete items 1, 2, and 3. Also complete Item 4 if Restricted Delivery is desired. ■ Print your name and address on the reverse so that we can return the card to you. ■ Attach this card to the back of the mailpiece, or on the front if space permits. 1. Article Addressed to: 102595-02 r . t3c-x_ 4k99G0 3. Service Type ❑ Certified Mail ❑ Express Mail ❑ Registered ❑ Return Receipt for Merchandise ❑ Insured Mail ❑ C.O.D. 4. Restricted Delivery? (Extra Fee) ❑ Yes 2. Article Number (Transfer from service label) ?004 2 510 0000 6114 5451 t - PS Form 3811, February 2004 Domestic Return Receipt 102595 -o2 -M-1540 USPS.com® - Track & Confi0 English Customer Service USPS Mobile AUSPSct m, Quick TOOM Track & Confirm GET EMAIL UPDATES PRINT DETAILS YOUR LABEL NUMBER 70042510000061145475 Check on Another Item What's your label (or receipt) number? LEGAL Privacy Policy > Terms of Use > FOIA, No FEAR Act EEO Data > Copyright© 2013 USPS. All Rights Reserved. Ship a PWkepe Send Mil Manape Your Mal • Page 1 of 1 Register I Sign In Search USPS.com or Track Packages Shop BuS111=3 SOklow SERVICE STATUS OF YOUR ITEM DATE 8 TIME LOCATION FEATURES Delivered June 13, 2013, 3:35 pm ANCHORAGE, AK 99507 Certified Mail - Arrival at Unit June 13, 2013, 6:59 am ANCHORAGE, AK 99507 Depart USPS Sort June 13, 2013 ANCHORAGE, AK 99530 Facility Processed through June 13, 2013, 3:38 am ANCHORAGE, AK 99530 USPS Sort Facility Processed through June 12, 2013, 7:24 pm ANCHORAGE, AK 99530 USPS Sort Facility Depart USPS Sort June 10, 2013 NORTH Facility HOUSTON, TX 77315 Processed through June 10, 2013, 7:28 pm NORTH USPS Sort Facility HOUSTON, TX 77315 Find ON USPS.COM Government Services > Buy Stamps & Shop > Print a Label with Postage > Customer Service > Delivering Solutions to the Last Mile > Site Index > ON ABOUT.USPS.COM About USPS Home > Newsroom > Mail Service Updates > Forms & Publications > Careers > OTHER USPS SITES Business Customer Gateway > Postal Inspectors > Inspector General > Postal Explorer > https://tools.usps.com/go/TrackConfirmAction_input?gtc_tLabels 1=700425100000611454... 6/20/2013 #2 • BUCCANEER June 6, 2013 WILLIAM TRIMMINGHAM PAUL WHITEMAN P.O. Box 32 Hope, Ak 99605 RECEIVED JUN 13 2013 �[i1ffi�3 ASSOCIATED FINANCE & ASSURANCE CORP 8604 Swiss Place Anchorage, Alaska 99507 HILCORP ALASKA, LLC 3800 Centerpoint Drive, Suite 100 Anchorage, Alaska 99503 ALASKA MENTAL HEALTH TRUST LAND OFFICE Alaska Department of Natural Resources 2600 Cordova Street, Suite 100 Anchorage, AK 99503 Attn: Mike Franger, Land Manager STATE OF ALASKA DEPARTMENT OF NATURAL RESOURCES 550 West Seventh Avenue, Suite 800 Anchorage, Alaska 99501 Attn: William Barron Director COOK INLET REGION, INC. P.O. Box 93330 Anchorage AK 99509-3330 Attn: Ethan Schutt Senior Vice President, Land and Energy BUCCANEER ALASKA, LLC 952 Echo Lane, Suite 420 Houston, TX 77024 Attn: Mark R Landt Vice President, Land and Business Development CERTIFIED RETURN RECEIPT REQUESTED 952 Echo Lane, Suite 420, Houston, TX 77024 Office: (713) 468-1678 Fax: (713) 468-3717 • Page 2 Kenai Loop No. 1-4 Well Location Exception June 6, 2013 Re: Kenai Loop No. 1-4 Well Location Exception Gentlemen: • Notice is hereby provided that Buccaneer Alaska Operations, LLC (Buccaneer) has submitted an application for a Location Exception with the Alaska Oil and Gas Conservation Commission for the Kenai Loop No. 1-4 Well. The bottomhole location of the well is 2466' FWL, 2445' FNL, Sec. 33, T06N, R11W, S.M. and surface location is 1254' FWL and 1765' FNL, Sec. 33, T06N, R11W, S.M. Please call me at (214) 738-6945 if you have any questions. Sincerely, I PQ' "YEA T Mark R. Landt Vice President, Permitting & Regulatory Cc V/ Steve Davies AOGCC 333 West 7th Avenue, Suite 100 Anchorage, Alaska 99501 #1 • BUCCANEER A I A V K A June 6, 2013 Ms. Cathy Foerster, Chair Alaska Oil and Gas Conservation Commission 333 West 7th Avenue, Suite 100 Anchorage, AK 99501 Re: Spacing Exception Kenai Loop No. 1-4 Well Dear Commissioner Foerster, Ei JUN 13 2013 AOGCC`i Buccaneer Alaska Operations, LLC hereby requests a spacing exception in accordance with 20 AAC 25.055(a)(2). The bottomhole location of the well is 2446' FWL, 2445' FNL, Sec. 33, T06N, R11W, S.M. and surface location is 1254' FWL and 1765' FNL, Sec. 33, T06N, R11W, S.M. The spacing exception is requested for the following reasons: a) the projected bottomhole location of the Kenai Loop No. 1-4 Well falls within 1,500 feet of the property line and less than 3000 feet of the Kenai Loop No. 1 (renamed Kenai Loop 1-1) and 4 (renamed Kenai Loop 1-3) wells that are currently producing from the Upper Tyonek Formation, b) the surface and bottomhole location is owned by the Mental Health Trust Authority (MHT 9300082), c) Cook Inlet Region, Inc. owns the subsurface in portions of Section 33, T06N, R11W, S.M. to the east of MHT -9300082, d) the State of Alaska owns the subsurface in a portion of Section 32 and Section 33, T06N, R11W, S.M. to the west and east of MHT -9300082 (ADL 391094), e) Buccaneer Alaska, LLC is the sole working interest owner of both oil and gas leases from the Mental Health Trust and State of Alaska, and t) the bottomhole location was determined to test potential discontinuous sands in the Upper Tyonek Formation. Your consideration of this request is appreciated. Sincerely, 40� Mark R. Landt Vice President, Permitting & Regulatory 952 Echo Lane, Suite 420, Houston, TX 77024 Office: (713) 468-1678 Fax: (713) 468-3717 • AFFIDAVIT • Comes now Mark R. Landt, and first being sworn upon his oath, states and deposes the following: 1. That I am over the age of 21 years and mentally competent to make this affidavit. 2. That I am knowledgeable and fully informed concerning the facts contained in the affidavit. 3. That for approximately the past 3 years I have worked for Buccaneer Alaska, LLC as the Vice President, Land and Business Development. 4. That I assisted in preparing a notification list for a Location Exception application for the Kenai Loop No. 1-4 Well with a surface location 1254' FWL, 1765' FNL, Section 33, T06N, R11W, S.M. and a bottomhole location of 2446' FWL. 2445' FNL Section 33, T06N, R11W, S.M. 5. That on or about June 6, 2013 Buccaneer Alaska Operations, LLC employees mailed notice of the Kenai Loop No. 1-4 Well Location Exception application to the owners and landowners within a 3,000 foot radius of the proposed well location by certified mail, return receipt requested. A list of these noticed owners is attached to this affidavit as Exhibit "B". These notices were mailed to their last known address or record address, and I believe that we have mailed the notice letter to good current addresses. When available, a copy of the notice letter and postal return receipts will be provided. In view of the forgoing facts, affiant herein states and deposed that Buccaneer Alaska Operations, LLC, as operator of the Kenai Loop No. 1-4 Well has made a reasonable and diligent effort to identify, locate and contact all parties' legally due notice of the said Location Exception application. Further affiant sayeth not. Mark R. Landt, Atfiant ************************************************************************************ State of Texas County of Harris This certifies that on June 6, 2013, before me, a notary public in and for the State of Texas, duly commissioned and sworn, personally appeared Mark R. Landt of Buccaneer Alaska Operations, LLC, known to tree to be the person described in, and who executed the foregoing affidavit, 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 write: KATHY O11S01S My Comftssioa Expir" NOTARY PUBLIC in and for Texas April S, 2017 My Commission Expires: 7 ************************************************************************************ EXHIBIT A XY Fee, 285000 24051DO I 2405100 wausoca ussa. etc Hrankx. 'Kt. e,.a. ... Sudace Location: TON RIM Sec. 33 •'~'•Y• 1254FWL, 1765' FNL Section 33 rre,4. US Sbte Bane 19P — zore w X•279736.28' LAT -60 deg 34' 12.708'N Ki4m,4ai 2715664E 2a6BN>e Y=2402387.93' LON•-151 dog 13' 27.893"W i FxW Propoaoo Woe Lpctlion Pial Kende Topp i i4 4 51 1 Proposod Bollom Hole Location r _ <_ aw r� rr 2N5' FNL. 2445' FWL Section 33 280935.0' LAT -60 dog 5.119485" X 34' 1 t —'- j Y•2401680. 0' LAT=151 deg 13'3.64849* j 1 Proposed TD 11.200' MD 1 NL1 1 1 l 2446 FWL bu,canw hututu l K 1 l arw LIS: v y ADL3k1pN Aa)p 1t1 &varier A'aa,� il,. A911a10w - KLJ ,- Ir Cal. Su6a,✓tacr 05 13 16 1909 F 285000 Buccaneer Alosko kanatmq Cook Inlet, Alaska rre,4. US Sbte Bane 19P — zore w >aa Daus NAf - n'AM:ON ALASKA) EaYpa�s� CarKt 1808 Ki4m,4ai 2715664E 2a6BN>e l �twMMn�.6�ay11-1�51Moot � s°t 1�x+ FxW Propoaoo Woe Lpctlion Pial Kende Topp i i4 05 13 16 1909 Exhibit B Landowners and Owners within 3000 foot radius of Kenai Loop No. 1-5 BHL: WILLIAM TRIMMINGHAM PAUL WHITEMAN P.O. Box 32 Hope, Ak 99605 ASSOCIATED FINANCE & ASSURANCE CORP 6604 Swiss Place Anchorage, Alaska 99507 HILCORP ALASKA, LLC 3800 Centerpoint Drive, Suite 100 Anchorage, Alaska 99503 ALASKA MENTAL HEALTH TRUST LAND OFFICE Alaska Department of Natural Resources 2600 Cordova Street, Suite 100 Anchorage, AK 99503 Attn: Mike Franger Land Manager STATE OF ALASKA DEPARTMENT OF NATURAL RESOURCES 550 West Seventh Avenue, Suite 800 Anchorage, Alaska 99501 Attn: William Barron Director COOK INLET REGION, INC. P.O. Box 93330 Anchorage AK 99509-3330 Attn: Ethan Schutt Senior Vice President, Land and Energy • BUCCANEER ALASKA, LLC 952 Echo Lane, Suite 420 Houston, TX 77024 Attn: Mark R Landt Vice President, Land and Business Development CATHEY FOERSTER, CHAIR ALASKA OIL AND GAS CONSERVATION COMMISSIONER 333 West 7`h Avenue, Suite 100 Anchorage, Alaska 99501