In an interview published in this week’s Petroleum News (“Wielechowski remains critical of HB 110“), Senator Bill Wielechowski argues that, under their state oil & gas leases, producers are required to undertake additional drilling when they can make a “reasonable profit.” (“I think you need to look at the legal obligation the companies incur when they take out a lease. Their obligations require them to develop the lease when they can make a reasonable profit.”).
This repeats an argument I first heard the Senator make repeatedly at a debate earlier this month with Senator Cathy Giessel and which he then repeated in a subsequent, extended exchange on Facebook following that debate. (“The leases … say they must produce, drill, develop when they can make a reasonable profit.”)
The problem? The leases which cover the vast majority of the existing North Slope fields don’t say what Senator Wielechowski says they do.
During the debate, the Senator referred to the following language: “Upon discovery of oil or gas on the leased area in quantities that would appear to a reasonable and prudent operator to be sufficient to recover ordinary costs of drilling, completing, and producing an additional well in the same geologic structure at another location with a reasonable profit to the operator, the lessee must drill those wells as a reasonable and prudent operator would drill, having due regard for the interest of the state as well as the interest of the lessee.”
That language, however, has only recently appeared in state oil & gas lease forms (see, e.g., Lease Form #DOG201112, the lease form used in this year’s North Slope oil & gas lease sale).
The older leases that cover most of the existing fields on the North Slope — including Prudhoe and Kuparuk, the largest two — include significantly different terms. Indeed, those leases don’t include the word “profit” at all. Instead, the closest provision to that relied on by Senator Wielechowski is in paragraph 19, which provides only as follows: “This lease contemplates the reasonable development of said land for oil and gas as the facts may justify. Upon discovery of oil or gas in paying quantities on said land, Lessee shall drill such wells as a reasonably prudent operator would drill having due regard for the interests of the Lessor as well as the interests of the Lessee.”
Those that practice oil & gas law regularly know that the “reasonably prudent operator” standard establishes a far different obligation than the “reasonable profit” standard the Senator suggests.
During the Facebook exchange I pointed the issue out to the Senator. (“The ‘reasonable prudent operator’ standard is a far cry from the ‘reasonable profit’ standard you suggested in your presentation and above. … I suggest that you may want to discuss your views with the officials actually in charge of administering [the leases] — none of whom, to my knowledge have raised the issues you suggest ….”)
The Senator’s response? “Thanks Brad. And Gary and others for the discussion. I’m running around today trying to get my car on the ferry to Juneau. Would love to continue the discussion another time either in Anchorage or Juneau.” Then, over the weekend I read the Senator’s Petroleum News interview and noted that the Senator continued to misapply the new form language to the old leases.
In the interview — as in the earlier debate — Senator Wielechowski says that the state needs “to act with our oil resources like any business, or any oil company, would.” The first rule of any business is to be familiar with and comply with the actual terms of its contracts. The Senator should start there.