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February 2010

Vol. 15, No. 7 Week of February 14, 2010

A Point Thomson timeout?

DNR lawyers petition Alaska Supreme Court for relief in battle with Exxon

Wesley Loy

For Petroleum News

Lawyers for the state have petitioned the Alaska Supreme Court to review and overturn a lower court ruling that ExxonMobil and other leaseholders deserve another administrative hearing in the fight for control of the Point Thomson field.

Such a hearing, lawyers for the state Department of Natural Resources told the high court, would be an arduous and expensive proceeding that would extend the Point Thomson litigation for years.

“More specifically, the hearing will involve testimony from technical experts representing both DNR and the lessees, including reservoir geologists, petroleum engineers, and drilling technicians,” the state lawyers said. “Adding to the complexity is that a vast amount of the testimony, evidence, and data will require confidentiality protection, requiring protective orders, confidential filings, and hearing sessions. Both parties will likely seek extensive discovery, with tens of thousands of documents, numerous depositions, and discovery disputes. Given the significance of the matters at stake, the hearing could take from three to eight weeks, preceded by several years of pretrial activity.”

The state’s lawyers made the comments in an unusual petition to the Supreme Court for review of a Jan. 11 ruling in a state Superior Court case that’s not yet finished.

In that ruling, Superior Judge Sharon Gleason of Anchorage reversed DNR Commissioner Tom Irwin’s 2008 decision to dissolve the Point Thomson unit. The unit designation is important because it serves to bind together a collection of old leases that would otherwise expire.

Gleason faulted the state on two counts: First, that the Point Thomson leaseholders were wrongly denied a hearing under a key section of the Point Thomson unit agreement, and second, that the commissioner misused his lawyers and staff, depriving the leaseholders of their constitutional rights to due process.

Two legal moves

Gleason’s ruling was a sharp setback for the state, but a delight for Point Thomson operator ExxonMobil and the other major stakeholders in the field, including BP, Chevron and ConocoPhillips.

The stakes indeed are enormous in the Point Thomson case, as the field contains an estimated 8 trillion cubic feet of natural gas plus hundreds of millions of barrels of petroleum liquids. It’s a world-class asset worth billions of dollars, and certainly not one the oil companies care to lose.

In their petition, the DNR attorneys repeatedly noted the leaseholders have failed to produce the known reserves for 30 years, forming the basis for the state’s efforts to dissolve the unit, void the underlying leases and take back the remote state acreage along the Beaufort Sea coastline east of Prudhoe Bay.

In recent days, the state made two legal moves. First, it filed a motion asking Judge Gleason to stay the proceedings in her court — to essentially call a timeout. Second, the state filed its petition for the Supreme Court to review Gleason’s Jan. 11 ruling, which the DNR lawyers argue was wrong.

ExxonMobil and the other leaseholders aren’t entitled to another administrative hearing — what would be the third concerning the Point Thomson unit status — and they weren’t denied proper due process, the state’s lawyers told the Supreme Court.

As Petroleum News went to press, neither the Supreme Court nor Gleason had ruled on the state’s requests.

ExxonMobil resists

Doug Serdahely, a private attorney for ExxonMobil, on Feb. 8 filed papers opposing the state’s request for a timeout in the Superior Court case, calling it “completely unnecessary.”

The state made inadequate legal arguments to justify a stay, he argued.

Important work can continue in the Superior Court case, such as hammering out the details of how the administrative hearing would proceed, while awaiting a decision from the Supreme Court on whether it will grant the state’s petition for a review of the Gleason ruling, Serdahely wrote.

In a concluding footnote, Serdahely also said the DNR “improperly assumes” the hearing would be complicated, costly and time-consuming. He suggested the two sides, with Gleason, could work out “reasonable, expeditious” procedures for the hearing.

Serdahely further noted that it’s ExxonMobil and the other Point Thomson leaseholders, not the state, that faces “real harm” depending on how Gleason rules on the motion to stay.

That’s because the oil companies are spending millions of dollars to drill on a couple of Point Thomson leases — work the DNR authorized even as the court battle rages on.

Any delay in court proceedings places these mounting investments at risk because the case is about the DNR’s efforts to terminate the Point Thomson unit, Serdahely wrote.

Does state need new lawyers?

Gleason’s ruling appears to have seriously rattled state officials.

In their Supreme Court petition, the state’s lawyers say important questions need the high court’s review now, before the Superior Court case goes down the road any farther.

With regard to the hearing, DNR believes the leaseholders aren’t entitled to any such proceeding under Section 21 of the Point Thomson unit agreement.

Section 21 says the state can alter or modify the rate of production, provided the unit operator has the opportunity for a hearing to consider whether a required production increase would violate “good and diligent oil and gas engineering and production practices.”

The state’s lawyers argued unsuccessfully in Gleason’s court that because Point Thomson has no production, Section 21 doesn’t apply.

Gleason’s ruling undermines DNR’s ability to manage the state’s resources in the public interest, the department’s lawyers say.

It puts the state in the position of having to either accept whatever development plan ExxonMobil offers — Irwin rejected its most recent plan as unreliable — or showing in a complex hearing that commercial production meets the “good and diligent” standard under Section 21, the lawyers argue.

“This shifts to DNR the burden of proposing an acceptable development path,” inviting years of appeals and further litigation, the state’s petition says.

The state also wants the Supreme Court to review and reverse Gleason’s holding that Irwin, during a weeklong administrative hearing in 2008, improperly relied on a former DNR manager, Nan Thompson, and lawyers who had previously advocated for DNR in court.

If the state has to hold a Section 21 hearing, it will need several state attorneys and DNR staffers, the petition says, yet “those best able to assist the agency in this hearing are the very people” Gleason has ruled the commissioner can’t use.






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