Exxon wins a round

For second time, judge disallows breakup of Alaska’s Point Thomson unit

Wesley Loy

For Petroleum News

An Alaska judge on Jan. 11 dealt the state government a blow in its quest to wrest control of the rich Point Thomson oil and gas field from ExxonMobil and other leaseholders.

Superior Court Judge Sharon Gleason reversed state Natural Resources Commissioner Tom Irwin’s April 2008 decision dissolving the Point Thomson unit for lack of an acceptable development plan.

It marks the second time that Gleason, after oil company appeals, has blocked state attempts to terminate the unit.

And, for the second time, it could mean the matter will bounce back to the Department of Natural Resources for a high-profile hearing on Point Thomson’s fate.

State officials expressed disappointment with the ruling, though they note the conflict with ExxonMobil has induced what they have long desired — actual drilling at Point Thomson with an eye toward production by the end of 2014, according to ExxonMobil’s timeline.

“It’s about development for us,” state Oil and Gas Director Kevin Banks told Petroleum News. “We’ve always been focused on that.”

ExxonMobil issued a statement saying it is “encouraged that Judge Gleason has agreed with our position regarding the process DNR followed” in considering the company’s development plan for the Point Thomson unit.

The energy giant also sounded a conciliatory tone: “We are ready to work with the DNR on all aspects of Point Thomson development in a mutually satisfactory manner for the benefit of all Alaskans.”

Two holdings

First, she held that the leaseholders were denied a hearing under provisions of a key section of the Point Thomson unit agreement, which dates to 1977.

Second, Gleason said state officials failed to assure at least the appearance of fair and impartial administrative proceedings that followed her initial Point Thomson ruling of Dec. 26, 2007.

The first holding pertains to the unit agreement’s Section 21, titled “Rate of prospecting, development and production.”

The section says the state oil and gas director has the “authority to alter or modify from time to time in his discretion the … rate of production under this agreement.”

The section, as modified in 1985, adds that the director’s powers can be exercised only after the unit operator, ExxonMobil, has the opportunity for a hearing to consider, among other things, whether a required increase in the production rate would violate “good and diligent oil and gas engineering and production practices.”

The state had resisted such a hearing for ExxonMobil, arguing in part that it’s not required in a situation where the production rate is zero.

The lack of any oil or gas production from Point Thomson decades after its discovery is the basis for the state’s efforts to break up the unit and potentially put the state acreage up for lease again.

“The question presented is whether ‘rate of production’ as used in Section 21 includes the rate of zero production,” the judge wrote in her 29-page ruling.

Gleason concluded that, based on common definitions of “rate,” ExxonMobil is entitled to a Section 21 hearing despite having no production at Point Thomson.

The judge also shot down another of the state’s arguments — that she had ruled in 2007 that the leaseholders were in default of the Point Thomson unit agreement.

Not so, Gleason said.

In summary, DNR does have the right to seek increased production from Point Thomson, “but it can only enforce that right in accordance with … Section 21,” the judge held.

‘Entirely ethical’

In that ruling, Gleason affirmed DNR’s rejection of ExxonMobil’s development plan for Point Thomson, but reversed the department’s unit termination decision.

She remanded the unit termination to DNR with instructions to give the oil companies “an opportunity to be heard … as to the appropriate remedy” for the rejection of the development plan.

DNR subsequently held a weeklong administrative hearing in March 2008 before Commissioner Irwin, with the department’s Nan Thompson serving as hearing officer. Thompson was manager of the Point Thomson unit in DNR’s Division of Oil and Gas.

A couple of weeks before the hearing, ExxonMobil offered up a new, $1.3 billion plan of development for Point Thomson that included drilling several wells with an “unconditional commitment” to produce 10,000 barrels a day of natural gas condensate by 2014.

On April 22, 2008, Irwin rejected the development plan as inadequate and declared the unit terminated.

The oil companies, as they had done once before, appealed again to the Superior Court.

Part of the strategy for ExxonMobil lawyers was to go after Thompson, arguing she had been an “advocate” for the state against the company and had no business serving as hearing officer in the remand proceeding.

The ExxonMobil lawyers used public records requests to dig up documents, including e-mail, to make their point against Thompson.

“Long before the remand, the Hearing Officer, with the assistance of DNR’s litigation counsel, coordinated an inter-agency effort to frustrate ExxonMobil’s development efforts at Point Thomson and impugned ExxonMobil’s motives for undertaking that development,” ExxonMobil’s lawyers wrote in a May 26, 2009, court filing.

They offered an April 25, 2007, e-mail from Thompson to another state official that purportedly said in part: “I think EM has instructed their troops to try to create a record that the state is blocking EM’s efforts to develop these leases so they can make a record in court. Posturing rather than a sincere effort to move the project forward, is the more likely motivation.”

ExxonMobil argued that the same state lawyers who defended DNR along with Thompson after the leaseholders first appealed the unit termination in court later provided private legal advice to Irwin during the remand proceeding, in violation of their constitutional right to due process.

Lawyers for the state countered that, well, Thompson wasn’t the decision maker, Irwin was.

Gleason, in her Jan. 11 ruling, sided with ExxonMobil, writing, “There is no indication that the advocates in this case took any active part in the substantive deliberations of the Commissioner, and this Court has no doubt that the purpose of their private meetings with the Commissioner during the remand proceeding was entirely ethical. Nonetheless, in order to assure both the fact and appearance of impartiality … DNR’s litigation counsel should not have been providing legal guidance to the Commissioner at the remand hearing, nor should DNR’s agency representative in the first appeal have served in the position of hearing officer at the remand proceeding.”

What now?

Barring some sort of settlement, the Point Thomson conflict now appears headed for months, if not years, of further jousting in court. All parties seem to agree that, once it exhausts the Superior Court, the case will advance to the Alaska Supreme Court.

Control of an asset worth billions of dollars is at stake.

Point Thomson holds an estimated 8 trillion cubic feet of gas — about a quarter of all the known gas reserves on the North Slope — plus hundreds of millions of barrels of petroleum liquids.

Many industry observers see Point Thomson gas as vital for an Alaska natural gas pipeline, though state officials have said a pipeline project could go forward without Point Thomson.

Gleason gave both sides 30 days to file arguments on whether she should again remand the matter to DNR for another administrative hearing, or whether the judge should retain jurisdiction and conduct what’s known as a trial de novo.

Meantime, ExxonMobil is going ahead with drilling on a pair of Point Thomson leases, which Irwin is allowing despite the still undetermined status of the unit and 29 other leases the state considers expired.