STATE OF ALASKA

ALASKA OIL AND GAS CONSERVATION COMMISSION
3001 Porcupine Drive
Anchorage , Alaska 99501-3192

Re:REQUEST OF ARCO ALASKA INC.                   )  Conservation Order No. 278
   for involuntary expansion of the Kuparuk      )
   Participating Area of the Kuparuk River       )  Kuparuk River Field
   Unit to include portions of tracts 25 and 28  )  Kuparuk River Oil Pool
   Alaska Oil and Gas Leases ADL #25546          )
   and ADL #25549, respectively.                 )  October 25, 1991

IT APPEARING THAT:

1. ARCO Alaska, Inc. (ARCO) by petition dated April 30, 1991 requested the Alaska Oil and Gas Conservation Commission take the steps necessary to expand the Kuparuk Participating Area of the Kuparuk River Unit to include portions of tracts 25 and 28 of the Kuparuk River Unit.

2. Notice of a public hearing was published in the Anchorage Times and Anchorage Daily News on May 17, 1991.

3. Union Oil Company of California (Unocal) protested the ARCO petition in a document filed with the Commission on May 31, 1991.

4. A public hearing was held July 10 through July 12, 1991 at the Assembly Chambers of the Loussac Library, 3600 Denali Street, Anchorage, Alaska. Testimony was presented and oral and written statements were accepted.

5. The hearing was held open until 4:30 PM on September 13, 1991. Post hearing briefs were submitted by ARCO and Unocal.

FINDINGS

1. State leases ADL #25546 and ADL #25549 were awarded under state competitive lease sale number 13, through a 50/50 partnership of the corporate predecessors of ARCO and BP Exploration (Alaska) Inc. (BPX) on February 1, 1965.

2. ARCO and BPX each sold a portion of their working interest in both leases to Unocal on January 25, 1972. The present working interests for both ADL #25546 and ADL #25549 are ARCO 33-1/3%, BPX 33-1/3%, and Unocal 33-1/3%.

3. ARCO, BPX and Unocal are among those companies who committed themselves to the terms and conditions of the Kuparuk River Unit Agreement and the Kuparuk River Unit Operating Agreement on December 1, 1981.

4. The Kuparuk River Unit Agreement states that it unitizes the oil and gas rights of each tract in the unit area so that unit operations may be conducted as if the unit area had been included in a single lease executed by the State of Alaska. The Kuparuk River Unit Agreement was approved by the Alaska Department of Natural Resources on March 26, 1982 under the authority of AS 38.05.180(p).

5. The Kuparuk River Unit Operating Agreement provides, among other things, for unit operations, allocation of unitized substances, allocation of unit expenses and the establishment, enlargement, and contraction of participating areas. The Kuparuk River Unit Operating Agreement governs the respective rights and obligations of the working interest owners and of the royalty owners other than the State of Alaska.

6. ARCO, BPX and Unocal are currently included among the working interest owners of the Kuparuk River Unit.

7. ARCO is the operator of the Kuparuk River Unit as provided by Article 4 of the Kuparuk River Unit Agreement.

8. State leases ADL #25546 and ADL #25549 have been committed to the Kuparuk River Unit by mutual consent of 100% of the working interest owners of those leases, the working interest owners of the Kuparuk River Unit and the State of Alaska, Department of Natural Resources.

9. State leases ADL #25546 and ADL #25549 are identified in Exhibit A of the Kuparuk River Unit Agreement as tract 25 and tract 28, respectively.

10. Tracts 25 and 28 lie outside the boundary of the Kuparuk Participating Area. Tracts 25 and 28 also lie outside the participating limit established by the Settlement of Final Redetermination, dated May 7, 1990, under the terms of the Kuparuk River Unit Operating Agreement.

11. ARCO, as unit operator and as tract representative for tracts 25 and 28, obtained authorization under Ballot 173A, dated October 9, 1990, to use unit equipment to drill and complete from one to three wells on tracts 25 and 28.

12. ARCO drilled wells 3G-21 and 3G-22 to bottom hole locations on tract 28. Logging and production testing of the two wells demonstrate that tract 28 is underlain by oil bearing strata of the Kuparuk River formation which is capable of producing hydrocarbons in paying quantities and which is contiguous with the Kuparuk River Oil Pool. Well 3G-21 tested at 1650 barrels of oil per day, well 3G-22 tested at 990 barrels of oil per day. Both wells have been conditioned for future use and shut-in.

13. ARCO and BPX proposed to expand the boundary of the Kuparuk Participating Area under Article 6 of the Unit Agreement and Article 4 of the Operating Agreement to include portions of tracts 25 and 28 prior to conducting development and production activities on those tracts, with allocation of production and costs at Kuparuk Participating Area decimals.

14.Unocal protested the inclusion of any portion of tracts 25 and 28 in the Kuparuk Participating Area. Unocal exercised its rights under Article 4 of the Operating Agreement to reject voluntary expansion of the Kuparuk Participating Area to include portions of tracts 25 and 28 by refusing to approve Ballot 181 regarding the fifth expansion of the Kuparuk Participating Area.

15.Unocal proposed tracts 25 and 28 be developed and produced as tract operations under Article 16 of the Kuparuk River Unit Operating Agreement, with allocation of production and costs based on the working interest ownerships of the tracts.

16. ARCO's reservoir management plan for tracts 25 and 28 contemplates waterflooding commencing after six months of primary recovery. Its optimum waterflood configuration for the 3G pad area requires the conversion of 3G-21 to injector status. In determining the optimum reservoir management plan, ARCO studied three development scenarios: a) no wells on tracts 25 and 28, b) optimum waterflood case and c) competitive waterflood case. Predicted recovery for each case is 9.4 million barrels of oil, 10.9 million barrels of oil, and 9.8 million barrels of oil, respectively.

17. ARCO witnesses testified that unitized management of tracts 25 and 28 is necessary in order to effectively carry out waterflooding operations, that waterflooding of tracts 25 and 28 is feasible and will prevent waste and will result in increased recovery of substantially more oil and gas from the 3G pad area, that the additional cost of conducting waterflooding operations will not exceed the value of the additional oil and gas so recovered, and that waterflooding operations on tracts 25 and 28 is for the common good.

18. Unocal witnesses did not dispute the ARCO analyses nor propose a competitive plan for optimizing recovery and preventing waste. Unocal witnesses testified that the tracts should not be developed as independent, entirely separate Non-Unit operations, but rather cooperatively as tract operations under the Kuparuk River Unit Operating Agreement in concert with tracts within the Kuparuk Participating Area in order to optimize recovery from all tracts.

19. Unocal stated that the Commission lacks jurisdiction, power or authority to add tracts 25 and 28 to the Kuparuk Participating Area because AS 31.05.110(a) grants jurisdiction to the Commission only in cases where the parties have not agreed to integrate their interests. Unocal characterized this matter as a dispute over the contract provision of a voluntary agreement.

20. ARCO asserted that the Commission has jurisdiction to add tracts 25 and 28 to the Kuparuk Participating Area because it alleged that waste will occur if the tracts are not developed on an integrated basis.

21. After December 1, 1991, the Kuparuk River Unit will contract to the existing Kuparuk Participating Area. Tracts not included in the participating area at that time will be excluded from the unit.

CONCLUSIONS:

1. The Commission's authority applies to all lands at issue in this matter, as provided by AS 31.05.027.

2. The Commission has jurisdiction and authority in this matter under AS 31.05.030 to investigate to determine whether or not waste is occurring or is imminent, correlative rights are being violated, or if ultimate recovery of oil and gas is being impeded. Under AS 31.05.110, the Commission has authority to hear and decide ARCO's petition as a request to involuntarily unitize tracts 25 and 28 with the Kuparuk Participating Area or to involuntarily expand the Kuparuk Participating Area.

3. The Kuparuk River Unit Agreement and the Kuparuk River Unit Operating Agreement integrate, at least partially, the interests of owners of tracts within the Kuparuk River Unit, including tracts 25 and 28. These agreements provide for the unitized management, development and operations of tracts within the Kuparuk River Unit. Under these agreements, unitized management may occur as either part of a participating area or as tract operations. To the extent that integration may not be complete with respect to interests in tracts outside the Kuparuk Participating Area, the Commission has the authority to order complete integration under AS 31.05.110.

4. Competitive development among portions of the Kuparuk River Oil Pool which are in effective pressure communication may cause physical waste, violate correlative rights, and impede optimal recovery of oil and gas. Oil bearing strata underlying tracts 25 and 28 are in pressure communication with the Kuparuk River Oil Pool. Competitive development of tracts 25 and 28 will cause waste, violate correlative rights, and impede optimal recovery of oil and gas from the 3G pad area.

5. Unitized management of tracts 25 and 28 is necessary in order to effectively carry out waterflooding operations. Waterflooding of tracts 25 and 28 is feasible and will prevent waste and will result in increased recovery of substantially more oil and gas from the 3G pad area. The additional cost of conducting waterflooding operations will not exceed the value of the additional oil and gas so recovered, and waterflooding operations on tracts 25 and 28 is for the common good.

6. Regular production from tracts 25 and 28 has not commenced. No production from tracts 25 and 28 has been proposed in other than a cooperative manner with the Kuparuk Participating Area.

7. Optimal development of the 3G pad area is not precluded by current or proposed operations on tracts 25 and 28. The tracts will undergo primary depletion for at least six months prior to initiation of waterflood operations. Physical waste of hydrocarbons has not occurred from the 3G pad area nor can it be deemed imminent, correlative rights are not being violated, nor is ultimate recovery being impeded.

8. The dispute between ARCO and Unocal does not involve disagreement over the efficient development of tracts 25 and 28, but rather a disagreement regarding the allocation of produced fluids and costs.

9. Because all parties before the Commission propose unitized management of tracts 25 and 28 with the Kuparuk Participating Area under the Kuparuk River Unit Agreement and the Kuparuk River Unit Operating Agreement, and because waste has not occurred nor is imminent, correlative rights have not been violated, and ultimate recovery has not been impeded, the issue of the involuntary inclusion of tracts 25 and 28 into the Kuparuk Participating Area is not ripe for Commission action at this time.

10. Tracts not included in the Kuparuk Participating Area will no longer be subject to the Kuparuk River Unit Agreement or the Kuparuk River Unit Operating Agreement following contraction of the Kuparuk River Unit on December 1, 1991. Interests in those tracts will no longer be considered integrated by those agreements at that time.

NOW, THEREFORE, IT IS ORDERED THAT

The petition of ARCO Alaska, Inc. to involuntarily expand the Kuparuk River Unit Participating Area to include portions of tracts 25 and 28 is hereby denied without prejudice to the right of ARCO or any other interest owner, or the Commission itself, to petition the Commission for involuntary unitization respecting tracts 25 and 28 after contraction of the Kuparuk River Unit

DONE at Anchorage, Alaska, October 25,1991

David W. Johnston, Chairman
Alaska Oil and Gas Conservation Commission

Lonnie C. Smith, Commissioner
Alaska Oil and Gas Conservation Commission

Russell A. Douglass, Commissioner
Alaska Oil and Gas Conservation Commission

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