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Point Thomson settlement offered Eastern North Slope unit’s working interest owners offer milestones for work in 23rd plan of development; agree to termination if not met, but with conditions Kristen Nelson Petroleum News
The major Point Thomson unit owners — ExxonMobil, BP, Chevron and ConocoPhillips — have proposed a settlement in their dispute with the State of Alaska over the development of the unit.
The basis of the March 21 settlement proposal is the 23rd plan of development for the eastern North Slope unit that the owners put on the table in February.
The Alaska Superior Court and the Department of Natural Resources would have enforcement authority, based on proposed milestones; the penalty would be termination of the unit.
DNR did terminate the unit in late 2006, based on an earlier rejection by the Division of Oil and Gas of a proposed 22nd plan of development. The owners appealed to the Alaska Superior Court which in late 2007 upheld DNR’s rejection of the plan of development but returned the matter to the department for a hearing on appropriate remedies.
In February, the Point Thomson unit owners submitted a 23rd plan of development.
DNR held a hearing on remedies in early March and at that hearing the major Point Thomson owners discussed the 23rd POD and how it would be different than previous plans, emphasizing that, unlike earlier PODs, there are no alternatives — the 23rd POD says there will be production and lays out the proposed development plan and a timetable for the work.
Questions on commitment At the hearing DNR Commissioner Tom Irwin and hearing officer Nan Thompson questioned the companies on their commitment to the development of Point Thomson and to the 23rd POD.
The companies testified that they are committed to the development plan and to putting the field on production.
In their post-hearing brief the companies said non-compliance with approved plans of development or unit expansion agreements by the working interest owners cited by Thompson during the hearing “were not situations where the WIOs failed to perform a promise” but situations where a POD or a unit expansion agreement gave the working interest owners a choice and they chose to pay rather than drill.
The companies said in their brief that such choices “are analogous to the ‘drill or pay’ leases that were once common in the oil and gas industry” which did not involve a promise to drill but rather a promise to drill or pay “and choosing one of the alternatives does not put the operator in breach of its obligations.”
The 23rd POD, however, contains no such drill or pay option but is a plan going through to production.
Milestones to production The companies selected seven milestones:
• Award the contract for conceptual engineering on the initial production system within 30 days of approval of the 23rd POD;
• Begin drilling in the winter of 2008-09 and “thereafter diligently prosecute” the five-well drilling program described in the 23rd POD;
• Award the contract for front-end engineering design for the initial production system by June 30, 2009;
• Start procurement of materials by issuing purchase orders for equipment with long lead times by Sept. 30, 2010;
• Begin gravel installation for the initial production system in the winter of 2011-12;
• Award the contract for module fabrication for the initial production system by March 30, 2012; and
• Begin onsite installation of initial production equipment in the winter of 2012-13 “and thereafter diligently complete construction of the IPS facilities.”
Subject to adjustment The companies said in the proposed order that the timing of the milestones “is based on early engineering and may require adjustment which is subject to mutual agreement with DNR.”
They also cited Article 25 of the Point Thomson unit agreement and said the time to achieve any milestone “shall be extended for any period of time” they are prevented from achieving the milestone by circumstances contemplated in Article 25, basically circumstances outside their “reasonable control … specifically including permitting and regulatory delays.”
Article 25 lists a number of examples that could cause unavoidable delay: strikes; acts of God; federal, state or municipal law or agencies; unavoidable accidents; uncontrollable delays in transportation; inability to obtain necessary materials on the open market; “or other matters beyond the reasonable control of the Unit Operator whether similar to matters herein enumerated or not.”
In the proposed settlement the companies said: “If Appellants fail to achieve any of the Milestones, and that failure is not excused by Article 25 of the Point Thomson Unit Agreement, the Court shall order termination of the Point Thomson Unit.” The settlement does say that any party may appeal an order related to the failure to achieve a milestone or whether the milestone was excused by Article 25.
Tangled with fiscal contract The Point Thomson unit was a part of the fiscal contract negotiated by the administration of Gov. Frank Murkowski under the Stranded Gas Development Act.
During the remand hearing DNR Commissioner Tom Irwin asked Kevin Brown, BP Exploration (Alaska)’s gas business development leader, about discussions with DNR during 2004-06. Were there any discussions during that period about oil and condensate recovery, Irwin asked, or did the discussions center on gas discovery?
Brown said he had not been involved in discussions with DNR at that time.
In response to the commissioner’s question, BP submitted an affidavit from Ken Konrad, who was BP’s lead negotiator with DNR on Point Thomson during 2004-06.
Konrad, BP’s vice president Alaska gas from January 2000 until March 2007, was responsible for fiscal contract negotiations with the State of Alaska which produced the May 2006 fiscal contract.
Among those negotiating for the state, Konrad said in his affidavit, were Gov. Frank Murkowski’s chief of staff, Jim Clark; DNR Commissioner Mike Menge and Revenue Commissioner Bill Corbus.
22nd POD rejected: Irwin out The director of the Division of Oil and Gas issued a decision rejecting the 22nd Point Thomson plan of development and on the same day, Oct. 27, 2005, Tom Irwin, then (and now) DNR commissioner, resigned, Konrad said. Menge was named DNR commissioner and extended the time of notice of appeal for the Point Thomson POD rejection decision.
Whether Point Thomson should be developed with gas cycling (liquids production first, then gas) or with gas sales was one of the issues in the director’s decision, Konrad said. Another issue was whether the unit owners should be required to drill an additional well in the unit in the near future.
Konrad said the parties agreed to a provision dealing with Point Thomson in the fiscal contract, and discussed the issues raised by the director’s decision in those negotiations.
“In the course of those discussions, the negotiators, including DNR Commissioner Menge, mutually agreed that the development of the PTU under a gas sales depletion plan delivering gas into a gas pipeline was the most appropriate development plan for the PTU area and that there was not a compelling technical reason to drill an additional well in the near term. It was also agreed that the expansion leases should remain part of the PTU,” Konrad said.
The Point Thomson agreements are in article 23 of the fiscal contract and Konrad said that article “specifically provided that, in exchange for and subject to certain actions to be undertaken by BP and the other parties to the fiscal contract, the state agreed not to terminate the PTU.”
Fiscal contract never approved Although the fiscal contract was submitted to the Alaska Legislature for its approval in May 2006, it was never approved.
Konrad said BP relied on the agreements reached with the state negotiators, including Menge, and provisions of the fiscal contract, as resolutions to the director’s Oct. 27 decision, “and specifically that the development of the PTU area under a gas sales depletion plan delivering gas into a gas pipeline was the most appropriate development plan” for Point Thomson.
On Oct. 18, 2006, ExxonMobil, the Point Thomson operator, filed a modified plan of development in response to the Oct. 27, 2005, decision; on Nov. 3, 2006, BP and others filed notice of appeal and submitted supplemental materials.
At that time Gov. Murkowski had announced he was considering a special session of the Legislature to consider the fiscal contract and the state was considering and ultimately did propose changes in its finding, but there was no indication from state negotiators that the state was considering changes to the Point Thomson provisions, Konrad said.
Menge’s decision a surprise In Oct. 18 and Nov. 3, 2006, submissions, BP and the other lessees submitted and supported a modified proposed plan of development previously reached with the state’s negotiators, including Menge, regarding Point Thomson development — a gas sales depletion plan delivering gas into a gas pipeline consistent with the fiscal contract. The plan also included the drilling of an additional well “on the earliest prudent schedule,” Konrad said.
The state issued interim findings and a determination related to the fiscal contract on Nov. 16, 2006, and did not propose any changes to the provisions relating to Point Thomson.
On Nov. 27, 2006, Menge issued the commissioner’s decision on appeal from the director’s Oct. 27, 2005, decision, and in that decision Menge “completely reversed the previous statements and course of conduct undertaken by him and others representing the state and relied on by BP” when it made its Oct. 18 and Nov. 3, 2006, submissions, Konrad said.
Menge terminated the Point Thomson unit on the basis of the proposal to develop the unit under a gas sales depletion plan.
Konrad said the Nov. 27 decision “was not anticipated by BP and was entirely inconsistent with the development plan for PTU that we had agreed” to with state negotiators as part of the fiscal contract, and had relied on in making the Oct. 18 and Nov. 3, 2006, submissions.
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