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Menge: Need more Point Thomson data DNR commissioner tells legislators he’ll let them make decision on gas contract, then, if needed, he’ll decide on Point Thomson Kristen Nelson Petroleum News
Department of Natural Resources Commissioner Mike Menge said he has not made a decision on Point Thomson — and won’t until the Legislature votes up or down on the fiscal gas contract — because natural gas from Point Thomson is essential for a North Slope natural gas pipeline project.
Menge, talking to legislators May 16 as part of the administration’s presentation on the gas contract, said Point Thomson is an issue “fraught with ... energy and emotion.”
Point Thomson represents some 23 percent of known natural gas reserves on the North Slope. “There is no Alaska gas highway system without Point Thomson,” Menge said, because to draw large volumes of gas from Prudhoe Bay right now would hurt oil recovery from that field.
The state has been trying to get Point Thomson developed for a very long time, and just prior to Menge taking over as DNR commissioner last fall, Mark Myers, the former director of the Division of Oil and Gas, declared Point Thomson to be in default when the field’s operator ExxonMobil Production, declined to proceed with drilling according to terms of an agreement the working interest owners at the field had made with the division.
Liquids plan found uneconomic ExxonMobil (the other major Point Thomson owners are BP, Chevron and ConocoPhillips) had been proceeding with a plan to produce liquids from the field — Point Thomson is a high-pressure gas reservoir and the plan was to produce the condensates from the gas, ship them as liquids, and reinject the gas to maintain pressure. Then the owners told the state the plan wasn’t economic, and that they wanted to defer development until there was a gas pipeline in place so that Point Thomson gas could be developed. The division rejected that plan and called for a well to be drilled to assist in field delineation. When the field owners declined to drill, the unit was declared in default.
Tom Irwin, then DNR commissioner, was fired last fall in a dispute with the governor over the gas fiscal contract and Myers, along with other department officials, quit in protest.
After Menge was named commissioner, ExxonMobil applied for an extension of the time to appeal the default decision and Menge gave the company an extension to the end of May.
“You can’t take Point Thomson away from the three producers and then ask them to go ahead and build this pipeline,” Menge said. “The economics are just not there.”
In addition to 8 trillion cubic feet of natural gas, Point Thomson contains some 200-300 million barrels of liquids.
More data needed So what’s the problem?
Geology, Menge said. Point Thomson is not “a simple structure, closed on all sides with a central high point. ... We don’t know the exact communications from one end of the structure to the other.”
That’s the basis for the disagreement on economics, he said, because a lot of initial economics “were run based on the assumption that it was a simple structure that could be produced from one platform.”
Menge said that does not appear to be the case. “But, the data is not there to make that determination. So it’s uncertain.”
He said scientists argue both sides of this case: “The data is simply not there to totally resolve this issue.”
Menge said he could throw the issue into court, but because there is no gas pipeline without Point Thomson he won’t take the decision away from the Legislature and the governor. “I will not put Point Thomson into default until you have reacted to this contract,” he told legislators.
Contract would freeze unit in place If the Legislature approves the contract, the Point Thomson unit owners would have to commit gas at an initial open season or sell gas to a nonaffiliated person before the initial open season and they must apply to the Alaska Oil and Gas Conservation Commission within six months of the contract’s effective date for pool rules to authorize gas off-take rates from Point Thomson. If the contract is approved Article 23 allows “the owners to freeze the current land position ... in Point Thomson,” Menge said. Both the core unit and the expansion acreage would be held. “It will be a bug in amber until the gas flows into the system. It will allow the companies to proceed forward to build the gas line without having to worry if one-third of the gas is going to disappear.”
If the contract is approved Article 23 suspends the default for the proposed plan of development, the producers’ obligation to file a plan of development prior to first production, DNR’s right to alter the rate of production or terminate the unit prior to first production and the expansion agreement’s work commitment to drill wells.
The Point Thomson operator would be required to file a new plan of development for approval once Point Thomson unit gas begins to flow into a gas line.
What authority remains to the department under the contract? It can terminate suspension of the plan of development if the producers don’t pay lease rentals, do not meet the open season commitment or upon termination of the contract.
Legal position strong Menge told legislators that lawyers working on the issue assure him that if the state ends up in court over Point Thomson it is in a strong position to either “compel production or to take the leases back.”
“I have not and I will not barter away that leverage,” he said. “I may defer it until you have taken your final action,” but the department’s authority is intact. “It has not been watered down. And regardless of the rhetoric that you hear from others, that is just simply the way it is.”
If the fiscal contract becomes law, the Point Thomson provisions in the contract would govern.
If the Legislature rejects the contract, the unit would be in default, Menge said. The owners can cure the default or the department “can simply find them in default and begin a process that ultimately would lead to the leases being taken back.”
It would be litigated, Menge said, but that would be in state courts, “and it wouldn’t take that long.”
Menge said legislators would get two stories on Point Thomson from experts. “But I can assure you, as a geologist, the resolution lies in data as of yet collected. We don’t know whether there’s communication, clean communication, across the entire reservoir. If there is clean communication, then the project can proceed forward much more efficiently than if there isn’t.
“If there’s bad communication between the two portions of the project, it will require essentially twice the infrastructure investment,” a very expensive proposition for the highly pressurized reservoir, he said.
ExxonMobil has an extension to May 31. Menge indicated he would probably give the company another extension.
“I’m not going to take the decision away from you,” he told legislators.
As to alternates the state could have pursued, “There are those who believe that we should have put them (ExxonMobil) into litigation and that we should have negotiated this contract with the litigation pending or ongoing and used it as leverage. We made a policy decision to negotiate a contract with willing parties for the benefit of all parties, and not to bend the negotiations based on ongoing litigation.”
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