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

Re: APPLICATION OF FORCENERGY, INC.        )  Conservation Order No. 450 
for an order granting an exception         )
to the spacing requirements of 20 AAC      )  West Foreland Field
25.055 to allow for production from the    )
West Foreland #1 gas well                  )
                                              July 24, 2000

IT APPEARING THAT:

1. Forcenergy, Inc. (Forcenergy) submitted an application dated April 20, 2000, requesting an exception to 20 AAC 25.055 to allow for gas production from the Forcenergy West Foreland #1 well (WF #1), which is closer than 1500 feet from the lease boundary.

2. Notice of hearing was published in the Anchorage Daily News on April 29, 2000, pursuant to 20 AAC 25.540. The applicant also mailed written notice to the landowners of the tract on which the well is located (Lease A-035017), namely Cook Inlet Region, Inc., and Bureau of Land Management (BLM), and to the landowner of the adjoining affected tract (Lease ADL-359112), namely the Alaska Department of Natural Resources (DNR). BLM is administering lease A-035017 on behalf of Cook Inlet Region, Inc.

3. No protests to the application were received.

4. A hearing was convened in conformance with 20 AAC 25.540 on May 31, 2000, at the Commission's offices, at which representatives of the applicant, BLM, and DNR appeared.

5. The hearing record was held open until July 11, 2000, to receive additional information from the parties.

FINDINGS:

1. WF #1 has a surface location of 910' FSL and 4669' FWL of Section 21 in T08N and R14W of the Seward Meridian. It was originally drilled in 1962 to search for oil. No regular production of oil or gas has occurred from the well.

2. Forcenergy proposes to initiate gas production from WF #1 from a Tyonek reservoir between the measured depths of 9336' to 9352'. The wellbore in this interval is located approximately 384' from the boundary between Leases ADL-359112 and A-035017.

3. Under 20 AAC 25.055(a)(2), for a well drilling for gas, a wellbore may be open for test or regular production within 1500' of a property line only if the owner is the same and the landowner is the same on both sides of the line. No order has been issued by the Commission establishing drilling units or a spacing pattern for the reservoir that differ from the statewide spacing requirements.

4. Forcenergy is the sole working interest owner of both leases. The two leases have different landowners.

5. Forcenergy, BLM, and DNR have expressed an interest in negotiating a compensatory royalty agreement (CRA) under which a share of the gas production from WF #1 would, in effect, be allocated to Lease ADL-359112. Forcenergy's application states that the CRA "is in the process of being drafted with anticipation that it will be executed before production commences from the WF #1 well." At the hearing DNR's representative confirmed that DNR conceptually agreed to the idea of a CRA but had not seen an example of one yet.

6. By letter dated July 11, 2000, Forcenergy agreed to continue negotiating as a willing party to the CRA. No CRA has been entered into yet.

7. Forcenergy proposes to establish an escrow account into which sufficient payments would be made to protect the interests of all royalty owners of both leases until a CRA is executed.

8. The Commission does not currently have enough information to determine how much, if any, of the gas production from WF #1 would represent drainage from Lease ADL-359112.

9. Lease ADL-359112 currently carries a 5% royalty obligation to the landowner. According to Forcenergy's July 11, 2000 letter, there are overriding royalty interests (ORRI's) burdening the lease totaling 12.5%, of which Forcenergy re-acquired a 0.65625% interest.

10. Lease A-035017 carries a 12 1/2% royalty obligation to the landowners. According to Forcenergy's July 11, 2000 letter, there are ORRI's burdening the lease totaling 5%.

11. Appropriate production testing for a period of approximately 12 months is likely to yield sufficient information to determine the relative contributions of the two leases to gas production from WF #1.

12. The Alaska Department of Revenue publishes quarterly calculations of the prevailing value of Cook Inlet gas under 15 AAC 55.173(b).

13. By letter dated June 20, 2000, DNR stated that it conditioned its approval of a plan of development for the West McArthur River Unit on Forcenergy's negotiating a production allocation and royalty payment agreement before producing gas from the WF #1 well and that Forcenergy has assured DNR that it will not produce gas from the well until Forcenergy, BLM, and DNR have a compensatory royalty agreement in place.

CONCLUSIONS:

1. An exception to 20 AAC 25.055(a)(2) is necessary to allow production of gas from the Tyonek reservoir in WF #1.

2. Producing from the proposed exception location would potentially harm the interests of royalty owners of Lease ADL-359112 in the absence of conditions to protect them from the effects of drainage.

3. Until allocation of production between the leases is determined either by agreement among the interested parties or by the Commission, the interests of the royalty owners will be adequately protected by requiring Forcenergy to escrow an amount equal to the volume of gas produced from WF #1 times the maximum sum of the royalty percentages in the leases times the applicable prevailing value of Cook Inlet gas published under 15 AAC 55.173(b).

NOW, THEREFORE, IT IS ORDERED:

1. Forcenergy's application for a spacing exception to allow for gas production from the WF #1 well from the 9336' to 9352' interval is granted subject to the following terms and conditions:

a. The spacing exception expires on November 1, 2001, without prejudice to Forcenergy's right to apply for a permanent spacing exception after it has entered into a CRA or equivalent agreement or after it has acquired sufficient information to enable the Commission to determine the proportion of gas production from the WF #1 well that is attributable to each of Lease A-035017 and Lease ADL-359112.

b. Forcenergy shall establish an interest-bearing escrow account (Escrow Account) in a financial institution located in this state and (a) whose deposits are insured by an agency of the federal government or (b) that is subject to regulation by the Division of Banking, Securities, and Corporations in the Department of Community and Economic Development. Forcenergy shall pay all fees and costs associated with the Escrow Account. The Escrow Account shall be subject to the condition that no funds may be disbursed from the account except by written order of this Commission. Before commencing production from the WF #1 well, Forcenergy shall provide the Commission with documentation sufficient to show that the Escrow Account has been established in accordance with the requirements of this order.

c. No later than the 10th day of each month (or the next business day if the 10th day falls on a weekend or legal holiday), Forcenergy shall deposit in the Escrow Account an amount equal to 17-1/2 percent of the total gas production from the WF #1 well during the previous month multiplied by the prevailing value for Cook Inlet gas published for that month's quarter by the Alaska Department of Revenue under 15 AAC 55.173(b); except that if the Commission determines that the total overriding royalty interests in either of the leases exceed the respective percentage set out in Findings 9 and 10 above, the Commission will require Forcenergy to deposit a correspondingly higher amount.

d. If at any time the Commission is provided with a CRA or other agreement specifying how gas production from the WF #1 well is to be allocated between Lease A-035017 and Lease ADL 359111, the Commission will order the funds in the Escrow Account to be disbursed in accordance with such agreement and will terminate Forcenergy's obligation to maintain and pay into the Escrow Account. However, if such agreement is executed by fewer than all royalty owners in both leases, the Commission will first provide royalty owners with an opportunity to be heard (after personal notice served by Forcenergy) on the disposition of the escrowed funds as between the two leases and on the termination of Forcenergy's escrow obligation. If no such agreement has been provided to the Commission before the temporary spacing exception expires, the Commission will determine how the funds in the Escrow Account will be disbursed based on the information available to the Commission and in accordance with the Commission's estimate of the proportions of the well's gas production attributable to the respective leases.

e. Forcenergy shall conduct appropriate production testing and provide the Commission with geologic and geophysical data and the results of the production testing to support a reasonable inference as to what proportions of the gas reserves producible from the 9336' to 9352' measured depth interval of the WF #1 well underlie Lease A-035017 and Lease ADL 359111.

2. The spacing exception granted by this order does not affect any limitations on production from the WF #1 well to which Forcenergy may be subject under contractual or regulatory provisions administered by DNR.

DONE at Anchorage, Alaska and dated July 24, 2000.

Camillé Oechsli Taylor, Commissioner
Alaska Oil and Gas Conservation Commission

Daniel T. Seamount, Jr., Commissioner
Alaska Oil and Gas Conservation Commission

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