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Point Thomson nixed Irwin not convinced ExxonMobil will carry through on field development Kristen Nelson Petroleum News
Point Thomson is no more.
Alaska Department of Natural Resources Commissioner Tom Irwin said in an April 22 decision that after reviewing the history of the Point Thomson Unit, testimony from the working interest owners and a proposed 23rd plan of development he does not have confidence that unit operator ExxonMobil and the other major owners — BP, Chevron, ConocoPhillips — would carry through on commitments to develop the unit.
Irwin turned down the latest development proposal for the eastern North Slope field and has terminated the unit.
The April 22 decision was on an appropriate remedy for failure to submit an acceptable 22nd plan of development.
In rejecting the proposed 23rd plan of development, Irwin cited a unit history he characterized as rife with failure to perform on promises made to the state. He said in a statement that the 23rd plan of development “is not an appropriate remedy” for ExxonMobil’s failure to submit an acceptable 22nd POD. Irwin said the 23rd POD “does not serve the state’s best interests or meet the legal standards in DNR’s regulations.”
Alaska Superior Court Judge Sharon Gleason found in the state’s favor in an appeal by the Point Thomson Unit working interest owners of a 2006 decision by then DNR Commissioner Mike Menge rejecting the 22nd POD and terminating the unit, but said in a Dec. 26, 2007, decision that the working interest owners were due an opportunity to suggest alternatives other than unit termination.
In February the Point Thomson owners proposed a 23rd POD as an alternative to unit termination and DNR held a hearing in early March at which the working interest owners testified on the proposed plan.
Reconsideration of the commissioner’s decision may be requested within 20 calendar days; the commissioner said he would look at such a request and issue a decision on reconsideration.
DNR has until June 15 to have its final decision back to Judge Gleason.
Irwin not confident in 23rd POD Thirty years of Point Thomson history between the state and its lessees at the unit played a significant role in Irwin’s decision.
“Despite the fact that the plan (the proposed 23rd POD) may present a technically reasonable first step for developing these lands from a conservation perspective, it is an inappropriate remedy because I find no basis in the record to conclude that I can be assured that it will be completed as promised; or that if the 23rd POD is completed, that Appellants will continue to expand production as promised. … I cannot risk the continued delays in development of this valuable state resource by these WIOs with this history of unfulfilled commitments,” Irwin said in his decision.
He noted that in the hearing he warned the companies “that it was absolutely critical to convince me that they would follow through on the 23rd POD.” He said that in reviewing the unit history “a clear pattern emerges” of commitments to the state not being met and told the companies they would have to “convince me that the pattern has been changed.”
Irwin said he is “very troubled by testimony that Appellants believed they had always followed through with commitments made in prior PODs and with commitments made in the course of convincing DNR to accept those prior PODs.”
He said the major working interest owners “apparently believe that they have lived up to their obligations to DNR.”
Irwin cited in his decision commitments made to DNR in PODs or in expansion applications that were not met — or cases in which the companies chose to pay rather than drill. The companies characterized this as an option; Irwin said it wasn’t a drill-or-pay option, but a commitment to drill accompanied by a penalty if that drilling commitment was not met.
“Overall, the refusal or inability of the witnesses to acknowledge the Appellants’ past failures and the manner in which they betrayed DNR’s trust weighed very heavily against them and significantly compromised their credibility.”
As far as enforcement, he said: “The history of this unit demonstrates that … there is no effective way to ensure the WIO’s performance.”
The issue of performance There were no penalties proposed in the 23rd POD. ExxonMobil said that allowed no “off ramps” — the working interest owners had to go straight through to production.
Irwin talked about penalties which the owners might have proposed in the decision, and noted that the owners argued DNR “could impose benchmarks only with their consent.”
Whether that position is correct in law, he said, “it suggests another issue that Appellants may litigate.”
He said “specific, meaningful performance benchmarks” in the 23rd POD might have resolved the issue. He said the owners “could have offered to voluntarily dissolve the unit and relinquish the leases if they failed to complete the promised activities in the 23rd POD. They could have made their commitment to put all of the unit’s resources into production more credible by offering to contract the unit to the boundaries of the existing participating areas at the end of this POD, or to contract the unit now to the area included in this POD. They could have offered financial penalties to compensate the State for delayed production and lost lease sales revenue. Appellants argue that I have no authority to impose these penalties, that only they have the ability to offer them, yet they do not.”
ExxonMobil to appeal The Point Thomson working interest owners have a different view than the state, with a focus on planned drilling and a belief that they have provided assurances that commitments in the 23rd POD will be met. This includes judicially supervised benchmarks in the proposed ruling the companies submitted — a proposal Irwin rejected because he said it would give DNR authority to the court.
ExxonMobil said it intends to protect its rights at Point Thomson, where the owners have spent $800 million over the years.
ExxonMobil does not believe Irwin has the “legal basis to terminate the unit and doing so will lead to further court appeals, which will take an indeterminate number of years to resolve and delay PTU development to the detriment of the State of Alaska and the project participants,” Greg Pulliam, the company’s Alaska spokesman, told Petroleum News in an e-mail April 22.
“We’re surprised and extremely disappointed by the DNR’s decision,” he said. “This plan is responsive to all of the DNR’s requirements, including a commitment to bring Point Thomson on production. Thus, we plan to appeal this action and will pursue all alternatives to protect our rights to develop these resources,” Pulliam said.
ExxonMobil said that prior to 2005 DNR had approved Point Thomson plans of development. “Consistent with the guidance that the court provided, the owners believe the updated plan is an appropriate remedy for DNR rejection of plans of development that were submitted in 2005 and 2006.”
BP concerned about gas BP, which earlier in April joined ConocoPhillips in a joint venture project to move Alaska North Slope natural gas to market, is also disappointed to have a “good plan” turned down, Steve Rinehart told Petroleum News April 22. Rinehart, BP’s Alaska spokesman, said: “We offered a robust development plan. It had firm commitments to produce Point Thomson resources and we were fully committed to it.”
The state said it wanted production, Rinehart said: “Production is what we offered here.” The $1.3 billion drilling and production program “would have brought Point Thomson into production and it would have enabled full-field development.”
On the gas side, Point Thomson gas is “vital for a successful North Slope gas project,” he said. BP remains committed to moving the Denali gas pipeline project forward to open season, “and to doing everything we can to make sure it’s a successful open season.”
Rinehart said the decision cast doubt on whether Point Thomson gas will be available, “and if there’s doubt about the availability of the gas that could result in an unsuccessful open season.”
An unsuccessful open season “could delay the project; it could even cause the project to fail,” he said.
Rinehart said BP hopes the Point Thomson issue “can be resolved in a way that enables a successful open season.”
BP wants an Alaska North Slope gas pipeline project to go forward.
“This decision makes it harder.”
BP is the second-largest Point Thomson interest holder, with 32 percent. ExxonMobil has 36 percent, Chevron 25 percent and ConocoPhillips 5 percent. There are also a number of small interest holders at Point Thomson.
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