STATE OF ALASKA

ALASKA OIL AND GAS CONSERVATION COMMISSION

333 West Seventh Avenue, Suite 100

Anchorage Alaska 99501

Re:

APPLICATION OF FOREST OIL CORPORATION for an order granting an exception to the spacing requirements of 20 AAC 25.055 to allow for the drilling and operation of the West Foreland #2 gas production well.

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Conservation Order No. 532

West Foreland Field
West Foreland Undefined Gas Pool

September 16, 2004

IT APPEARING THAT:

1. Forest Oil Corporation (“Forest”), by letter dated July 2, 2004 and received by the Alaska Oil and Gas Conservation Commission (“Commission”) that same day, requests exception to the well spacing provisions of regulation 20 AAC 25.055 to allow for the drilling and operation of the West Foreland #2 gas production well (“WF #2”), which is closer than 1,500 feet to a property line and within the same governmental section as, and less than 3,000 feet from, a well capable of producing from the same gas pool.

2. Notice of opportunity for public hearing was published in the Anchorage Daily News on July 12, 2004, pursuant to regulation 20 AAC 25.540.

3. On July 21, 2004, Forest requested the public hearing be rescheduled.

4. Subsequent notice of opportunity for public hearing was published in the Anchorage Daily News on July 23, 2004.

5. On August 11, 2004, Forest submitted documentation that a notice had been sent to all known royalty interest owners in the affected leases.

6. All owners, landowners and operators within 3,000 feet of the anticipated productive interval have been notified.

7. No protests to the application were received.

8. A hearing was held in conformance with 20 AAC 25.540 on August 26, 2004 at the Commission’s offices. Representatives from Forest, the Bureau of Land Management (“BLM”), and the Alaska Department of Natural Resources (“DNR”) attended.

FINDINGS:

1. The record for this order includes the records for Conservation Orders 450, 450-A and 450B.

2. WF #2 will be drilled as a deviated well. The surface location of the well is onshore, 886 feet from the south line and 571 feet from the east line of Section 21, T08N, R14W, Seward Meridian (“SM”). The proposed bottom hole location of the well lies offshore beneath the western side of the Cook Inlet, 1,365 feet from the north line and 1,105 feet from the east line of Section 21, T08N, R14W, SM.

3. WF #2 will lie entirely within Section 21, T8N, R14W, SM, which also contains the existing West Foreland #1 gas production well (“WF #1”).

4. The affected leases are onshore Federal Lease A-035017 and offshore State of Alaska Lease ADL-359112.

5. Testimony in the record of CO 450 established that:

a. Lease ADL-359112 currently carries a 5% royalty obligation to the landowner. According to Forest’s July 11, 2000 letter, overriding royalty interests (ORRI’s) burden the lease by 12.5%, of which Forest re-acquired a 0.65625% interest.

b. Lease A-035017 carries a 12-1/2% royalty obligation to the landowners. According to Forest’s July 11, 2000 letter, ORRI’s burden the lease by 5%.

6. WF #1 is located entirely within Federal Lease A-035017. This well drilled and tested two gas-bearing sands, informally known as the “9200-foot sand” and the “9400-foot sand.”

7. As presently equipped, WF #1 produces gas from only the 9200-foot sand. A bridge plug in the wellbore of WF #1 prevents production from the 9400-foot sand.

8. Recompletion of WF #1 to allow production from the 9400-foot sand may jeopardize the well.

9. Forest testified that a steady fuel gas supply is critical to maintaining uninterrupted oil and gas production operations in this portion of the Cook Inlet Basin.

10. Forest utilized well data and 3D seismic data to map the West Foreland structure, including faulting that traps the gas accumulation being produced by WF #1 (CO 450B, Finding 5).

11. WF #2 is targeting the 9200-foot and 9400-foot sands updip of WF #1 on the same structure.

12. In WF #2, the top of the 9200-foot sand will be located within State Lease ADL-359112, approximately 242’ east of the boundary with Federal Lease A-035017. The top of the 9400-foot sand will also located within State Lease ADL-359112, approximately 293’ east of the boundary with Federal Lease A-035017.

13. Forest proposes to equip WF #2 to allow gas production from the 9200-foot and 9400-foot sands, using either a single or dual completion.

14. Forest has identified additional, shallower prospective intervals that may also be encountered while drilling WF #2. The top of the potential shallow pay intervals lies within the Federal Lease A-035017, about 216’ west of the common lease boundary.

15. If the shallower, prospective intervals contain sufficient pay, Forest may equip WF #2 to allow gas production from them.

16. WF #1 and WF #2 may both produce from the 9200-foot sand at take points approximately 2,685’ apart within the same governmental section.

17. In order to drill and operate WF #2 as planned, the following exceptions to statewide spacing regulations are needed:

a. Under 20 AAC 25.055(a)(2): “for a well drilling for gas, a wellbore may be open for test or regular production within 1,500’ of a property line only if the owner is the same and the landowner is the same on both sides of the line.”

b. Under 20 AAC 25.055(a)(4): “if gas has been discovered … not more than one well may be drilled to and completed in that pool on any governmental section; a well may not be drilled or completed closer than 3,000 feet to any well drilling to or capable of producing from the same pool.”

c. Under 20 AAC 25.055(b): “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 quarter section or section, respectively, have been pooled under AS 31.05.100.”

18. No order has been issued by the Commission establishing drilling units or a spacing pattern for the reservoir that differ from the statewide requirements.

19. Forest is the sole working interest owner of both leases for all intervals including, and shallower than, the 9400-foot sand.

20. Phillips Petroleum Company, or a successor or affiliate, has an interest in zones below 9,527 feet (measured depth) in the WF #1 well (CO 450A, Finding 4).

21. Landowners of Federal Lease A-035017 are Cook Inlet Region, Inc. and the U.S. Government. The State of Alaska is the landowner of Lease ADL-359112. The DNR administers State Lease ADL-359112. The BLM administers Federal Lease A-035017 on behalf of Cook Inlet Region, Inc. In addition to the landowners, there are numerous Overriding Royalty Interest Owners (“ORRIs”).

22. On August 11, 2004, Forest submitted documentation to the Commission indicating that notice had been sent via certified mail to all known royalty interest owners in the affected leases and all owners, landowners and operators within 3,000 feet of the anticipated productive interval.

23. In response to Forest’s notice, evidence was presented indicating all but one of the notices had been successfully delivered. In response to the notices, only one comment had been received regarding drilling and producing WF #2. That comment supported granting the requested spacing exception.

24. Due to non-compliant spacing, the Commission issued CO 450 on July 24, 2000 granting a temporary spacing exception to allow the regular production of WF #1 from the 9200-foot sand. The performance terms of CO 450 were extended by CO 450A, issued April 23, 2001.

25. CO 450 required that Forest establish an escrow account and make sufficient payments to protect the interests of all royalty owners caused by differing landownership and uncertain production allocation. Forest was further required complete negotiations with BLM and DNR to establish a compensatory royalty agreement (“CRA”).

26. Forest, BLM, and DNR negotiated a CRA to allocate production from WF #1 to each lease. Pursuant to that agreement, all parties agreed to an allocation of 58% to Federal Lease A-035017 and 42% to State Lease ADL-359112 of all gas reserves producible from any interval not deeper than 9,527’ from the West Foreland #1 well. The allocation percentages were determined based on analysis of seismic information, production history and formation pressure data using accepted geological and petroleum engineering methods.

27. The Commission issued CO 450B on September 29, 2003. CO 450B granted a permanent spacing exception for WF #1, approved the allocation factors from the CRA and ordered disbursement of the escrow funds.

28. The CRA applies to portions of the 9200-foot and 9400-foot sands that lie within Federal Lease A-035017 or State Lease ADL-359112 and are in hydraulic communication with those same sands in WF #1. The CRA is valid until the Federal and the State leases have terminated and all wells producing gas from the 9200-foot and 9400-foot sands are plugged and abandoned.

29. The CRA does not apply to sands other than the 9200-foot and 9400-foot sands. The CRA did not include a provision to adjust the allocation interests if new information were to be developed.

30. Forest desires a permanent spacing exception for drilling and production of the 9200-foot and 9400-foot sands within WF #2, and proposes to allocate any production from those sands according to the existing CRA. The notice described in Finding No. 23 informed recipients of this proposed allocation.

31. Forest recognizes there is a possibility that the 9200-foot and 9400-foot sands in WF#1 and WF #2 may not be in hydraulic communication within the 9200-foot sand, and that if there is no hydraulic communication, a revised allocation formula may be required to ensure fair allocation of production.

32. Forest desires a temporary spacing exception for drilling and production of gas-bearing sands within WF #2 that are stratigraphically shallower than the 9200-foot sands. If the prospective shallow sand(s) are capable of producing gas, Forest proposes to establish a separate escrow account and deposit sufficient royalty payments to protect the interests of all royalty owners of both leases until an additional CRA is executed. A new CRA would include a provision to adjust the allocation interests if new information is developed.

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

34. Both the BLM and DNR representatives present at the public hearing agreed to the facts presented in the hearing and support granting the spacing exception.

CONCLUSIONS:

1. Exceptions to 20 AAC 25.055(a)(2), (a)(4), and (b) are necessary to allow drilling and operation of WF #2.

2. Ensuring a steady fuel gas supply is key to maintaining uninterrupted oil and gas production in this portion of the Cook Inlet Basin.

3. WF #1 only produces from the 9200-foot sand, and that production is allocated according to the CRA executed between the operator and landowners on April 20, 2001.

4. Drilling and operation of WF #2 will allow production from the 9400-foot sand without jeopardizing WF #1.

5. The CRA, which governs production from the 9200-foot and 9400-foot sands, provides for additional wells.

6. Since the 9200-foot sand will be opened by WF #1 and WF #2 closer than 3,000’ and on the same structure, this sand can be reasonably assumed to be in hydraulic communication between the two wells.

7. The Commission does not expect production from the 9200-foot sand at the proposed exception location to cause waste or adversely affect ultimate recovery.

8. Regular production of WF #2 for a period of approximately 24 months is likely to yield sufficient information to confirm whether the 9200-foot sand within WF #1 and WF #2 is in hydraulic communication and that the previously agreed allocation percentages are valid.

9. In the absence of formal pooling of the two affected lease tracts, the purposes of AS 31.05.100 require that allocation of production from sands stratigraphically shallower than the 9200-foot sand either be agreed on by all interest owners or be approved by the Commission after notice to all interest owners.

10. If sands in addition to the 9200-foot and 9400-foot sands are produced, until an appropriate allocation of production is established, a separate escrow account should be established and Forest should deposit funds equal to the volume of gas produced from those other sands 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. Forest's application for a spacing exception to allow for drilling and initiating gas production from the WF #2 well from any interval not stratigraphically deeper than the 9400-foot sand is temporarily granted. This spacing exception expires 30 months after Forest completes WF #2, without prejudice to Forest's right to apply for an extension of this temporary spacing exception or for a permanent spacing exception.

2. Until it is otherwise ordered by the Commission or it is otherwise agreed by all interest owners in Lease A-035017 and Lease ADL 359111, including overriding royalty owners, Forest shall allocate WF #2 production from the 9200-foot and 9400-foot sands in accordance with the allocation percentages established in the CRA.

3. Promptly after the WF #2 well has been produced from the 9200-foot and 9400-foot sands for 24 months, Forest shall provide the Commission geologic and geophysical data and the results of the production pertinent to establishing

a. whether hydraulic communication exists between WF #1 and WF #2 in the 9200-foot sand; and

b. what proportions of the gas reserves producible from WF #1 and WF #2 underly Lease A-035017 and Lease ADL 359111.

4. Before regular production of gas commences from any sands stratigraphically shallower than the 9200-foot sand, Forest shall establish a separate escrow account for royalties on such production, substantially similar to the account required under Conservation Order No. 450.

Forest shall fund this escrow account on the same basis as that set out in Conservation Order No. 450 as amended by Conservation Order No. 450-A, except that the funding obligation applies to production from any sands stratigraphically shallower than the 9200-foot sand. No funds may be disbursed from the new escrow account except by order of the Commission, after Forest provides at least 30 days notice prior to hearing to all royalty owners in both leases.

DONE at Anchorage, Alaska and dated September 16, 2004.

John K. Norman, Chair
Alaska Oil and Gas Conservation Commission

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


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