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January 2010

Vol. 15, No. 2 Week of January 10, 2010

Exxon’s legal extra

Just ahead of Point Thomson ruling, firm touts drilling progress; state objects

Wesley Loy

For Petroleum News

With a judge on the brink of issuing a key ruling in the battle for control of the rich Point Thomson oil and gas field, ExxonMobil has filed a last-minute statement from its Alaska chief in hopes of boosting the company’s chances of victory.

The move drew vigorous opposition from lawyers for the state, who argue ExxonMobil’s “unorthodox” filing comes way too late and threatens to drag out the proceedings.

The case concerns the state’s termination of the Point Thomson unit for failure to produce oil and gas from the remote field, located on state land along the Beaufort Sea coastline some 60 miles east of Prudhoe Bay.

The major Point Thomson stakeholders including ExxonMobil, BP, Chevron and ConocoPhillips are appealing that decision, and the case is pending before state Superior Court Judge Sharon Gleason.

Lawyers for the two sides made their final written and oral arguments months ago, and they have been awaiting a decision since Gleason took the matter “under advisement” last July.

Close observers of the case predicted a decision would come by the middle of January — that is, right about now.

‘High-level summary’

But two days before Christmas, lawyers for ExxonMobil dropped a surprise in the case file, which otherwise hadn’t stirred for months.

It was a motion to “supplement” the record on appeal with some late-breaking news of ExxonMobil’s progress on its limited development project at Point Thomson.

The filing included a five-page affidavit from ExxonMobil’s Alaska production manager, Dale Pittman.

Although state Natural Resources Commissioner Tom Irwin, in April 2008, issued a decision terminating the unit and rejecting ExxonMobil’s latest plan of development, the following January he allowed the company to keep two of the 31 expired leases on its promise to drill a pair of wells.

ExxonMobil’s lawyers as well as Pittman, in his affidavit, assert that Irwin’s principal basis for his April decision was that the company and its partners “could not be trusted” to carry out the plan of development, which involves cycling natural gas to produce condensates.

But over the past year, ExxonMobil has shown “we are willing to and, in fact, are fulfilling the commitments” made in that plan, Pittman’s affidavit says.

He goes on to sketch out a “high-level summary” of recent drilling and other activity aimed at bringing Point Thomson on production by the end of 2014, Pittman said.

Some of his major points:

• Early in 2009, more than 60 miles of ice road was constructed, and a drilling rig was moved from Deadhorse to Point Thomson in April. The company has completed partial drilling of two wells — a producer and an injector — and is on schedule to complete and test both holes by year’s end.

• Between July and October of last year, contractors completed 120 barge runs from the Prudhoe Bay West Dock to the Point Thomson central pad, delivering more than 30,000 tons of fuel, equipment and supplies to support the drilling. In addition, 14,000 barrels of drilling waste was hauled away.

• The U.S. Army Corps of Engineers has begun work on an environmental impact statement for the Point Thomson development.

• ExxonMobil has conducted “significant engineering work” for production facilities to be installed at Point Thomson.

• The company is on schedule to drill a minimum of five wells and commence production by year-end 2014.

• The project owners have invested more than $300 million to date.

‘Trickle of production’

ExxonMobil’s lawyer on the Point Thomson case, Doug Serdahely of Anchorage, put in the motion to add Pittman’s affidavit to the record for the judge’s consideration.

Serdahely should know something about the thinking of a Superior Court judge, having once been one himself during the 1980s.

He cited court rules that allow adding materials to the record “for good cause.”

Lawyers for the state, however, urged Gleason to disallow the Pittman progress report on the “alleged” development activities at Point Thomson.

“This case has now been ripe for decision for over five months. It would be extraordinary to supplement the record with new factual materials at this time,” the state’s lawyers said in a Jan. 4 filing.

They dispute ExxonMobil’s contention that lack of trust was why Irwin rejected the plan of development as a cure for breach of the Point Thomson unit agreement.

Irwin indeed was concerned the oil companies “would pull the plug on their proposed development plan at some future date, as they had done repeatedly in the past,” the state lawyers wrote.

But ultimately, he rejected the plan “because it was not in the public interest,” they said.

ExxonMobil has said its plan will achieve 10,000 barrels a day of production.

The commissioner was concerned about whether the companies would keep a commitment to increase output “as opposed to sitting on a minimal trickle of production in order to hold leases,” the state lawyers wrote.

Even if taken as entirely true, the Pittman affidavit “only demonstrates one year of progress,” with drilling begun — but not finished — on just one producer well, the lawyers argued.

“The affidavit does not definitively demonstrate” that the oil companies will finish drilling all wells, build production facilities and a pipeline, or begin production in 2014, they said.

If the Pittman affidavit is added to the record, the state deserves a chance to counter because “there is significantly more to the story of recent events,” the state lawyers add.

For example, they cite contradictory statements from ExxonMobil as to whether it intends a five-well or a nine-well drilling program.

And the state lawyers cite “significant doubt” as to whether the oil companies will actually expand production. Their proposed production facilities “could not be scaled to handle increased production of fluids much beyond 10,000 barrels a day,” the lawyers said, noting expensive new compressors would need to be installed.

Because of the potential for time-gobbling back-and-fourth arguments, the judge should avoid “opening this can of worms,” the state lawyers argued.

High-stakes case

Development of Point Thomson long has been a goal of frustrated Alaska politicians, and for good reason. The field holds an estimated 8 trillion cubic feet of natural gas — nearly a quarter of all the known gas reserves on the North Slope — plus hundreds of millions of barrels of oil.

Production of such resources would mean potentially billions of dollars in tax and royalty revenue for the state, plus a substantial number of jobs.

But ExxonMobil and other stakeholders at Point Thomson have pointed to the lack of a gas pipeline and the extreme technical challenges of tapping the high-pressure reservoir as reasons why one of North America’s richest undeveloped fields hasn’t produced since its discovery in 1977.

Although Irwin has cleared ExxonMobil to drill on two leases, the overarching question before Judge Gleason is whether the state was right in terminating the Point Thomson unit.

The unit designation is extremely important. Unitization is the glue that binds together leases with different owners, ensuring orderly and efficient field development. Significantly in this case, it allows companies to retain otherwise expired leases.

If ExxonMobil, BP, Chevron and ConocoPhillips win their appeal and defeat the state’s unit termination, it would give them a huge boost toward hanging onto Point Thomson and controlling its development.

A state victory, however, would affirm its power, potentially clearing the way for a resale of Point Thomson acreage.

An even bigger consideration for the state is its relationship with industry and its ability to call the shots on development of Alaska’s natural resources.

A defeat in the Point Thomson case would suggest state officials must demand much stronger development commitments from companies before approving oil and gas units.






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