MEMORANDUM

TO: Pete Sprague, Assembly President

Kenai Peninsula Borough Assembly Members

THRU: Dale Bagley, Mayor

THRU: Max Best, Planning Director

Paul Ostrander, Land Management Officer

FROM: Roy E. Dudley, Land Management Agent

DATE: October 14, 2004

SUBJECT: Ordinance 2004-37, An ordinance authorizing the negotiated lease at fair market value of Government Lots 5 and 8, Section 34, T1N, R13W, S.M. Alaska containing approximately 10 acres to Marathon Oil Company for a natural gas drilling/production pad

Marathon Oil Company ("MOC") has submitted an application to lease the subject 10-acre site in the event commercial quantities of natural gas are discovered. Production facilities will be installed, including but not limited to heater treaters, separators, dehydrators, meters, tanks, generators, safety and control systems lateral pipelines, and wellhead equipment.  The lateral pipelines will be buried and the surface equipment will be housed in fit-for-purpose buildings. The cost of the production facilities will be between 2.5 - 4.5 million dollars depending on the size of the discovery and, ultimately, the number of wells drilled on the pad.

MOC, by virtue of its controlling interest in the oil and gas leasehold estate of subject Government Lots 5 and 8 is entitled to use as much of the surface as may be reasonably necessary to exploit the oil and gas, but is liable for damages to the owner of the surface estate, as provided in AS 38.05.130, for all damages sustained by the owner, by reason of entering the land. ^{(1) The Kenai Peninsula Borough (KPB) has issued a Land Use Permit to MOC to enter upon the subject KPB land for the purpose of constructing an access road, drilling/production pad and drilling a gas well and water well. Please reference the attached aerial photo and site plan. If MOC does not discover a commercially viable natural gas reservoir, it will abandon the site and, at the KPB's option, the KPB will be left with a gravel pad and water well on its land.}

The site is suitable for a drilling/production pad based on good access from the Sterling Highway and no immediately adjacent residential development. MOC will realign the existing beach access road. The KPB has negotiated a fair market value rental rate with MOC.

Construction of the pad is intended to begin within the month.  Construction of production facilities will begin as soon as practicable upon the discovery of commercial quantities of natural gas. The subject ordinance gives MOC until July 1, 2005 to sign the lease. This extended time period to execute the lease will allow MOC time to determine if it has a commercially viable gas well.

KPB 17.10.090 requires borough land to be classified prior to transfer. The subject 10-acre site is not classified pursuant to KPB 17.10.080 provisions. The ordinance requests exception to the classification of the 10 acres. This is a sole source lease to MOC due to its right to develop its mineral estate interest. Use of the land will be governed by the lease terms that include a development plan. Classification will not serve a useful purpose at this point in the decision making process.

The KPB Planning Commission will consider this ordinance at its regularly scheduled meeting of November 22, 2004, and the action taken will be reported to the assembly.

1.

¹ Colette Thompson, Borough Attorney, memorandum titled Shallow Coal Bed Methane Gas: Split estate issues, dated 10/15/03.