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Providing coverage of Alaska and northern Canada's oil and gas industry
March 2009

Vol. 14, No. 9 Week of March 01, 2009

ExxonMobil relinquishes expansion leases

Palin notes ongoing progress in DNR’s move to resolve legal issues at Point Thomson; Exxon says a positive step toward settlement

Kristen Nelson

Petroleum News

Alaska Gov. Sarah Palin said Feb. 19 that ExxonMobil has surrendered eight leases in the Point Thomson area, some 17 percent of the leases in the former unit area.

The governor cited the surrender of the leases as part of the ongoing progress the Department of Natural Resources is making in its goal of resolving the legal dispute over Point Thomson. DNR terminated the unit in 2008 for lack of development and the remaining leases in the unit were terminated in August. The unit termination is being litigated in Alaska Superior Court; the lease termination is under appeal to DNR Commissioner Tom Irwin.

The eight surrendered leases were part of a 2002 expansion agreement ExxonMobil reached with DNR’s Division of Oil and Gas which added some 40,000 acres to the Point Thomson unit in exchange for agreement by unit operator ExxonMobil to drill an exploration well to evaluate the western extent of the Thomson sand reservoir by June of 2003, commence development drilling by June 2006 and complete seven development wells within the unit by 2008. The agreement also increased the royalty rate on eight of the expansion leases and provided for contraction of the leases and a $20 million penalty if the unit owners failed to meet the drilling commitments.

ExxonMobil did not do the drilling required in the agreement and ultimately paid $20 million plus interest to the state but refused to relinquish the leases and took the relinquishment issue to Alaska Superior Court.

Five leases remain

The state said ExxonMobil acknowledged that it is not entitled to retain eight of the expansion leases in a stipulation filed with the court the week of Feb. 16 and has returned the leases to the state.

ExxonMobil spokeswoman Margaret Ross confirmed in a Feb. 26 e-mail that the company has dismissed litigation in Alaska Superior Court appealing notices of expiration from DNR for eight Point Thomson expansion leases.

There were 13 expansion leases and Ross said DNR and ExxonMobil “have agreed to suspend the appeal before the Alaska Superior Court regarding the remaining five Point Thomson Unit expansion leases.”

“These actions, and DNR’s recent decision regarding core Point Thomson leases, are all positive steps toward reaching settlement of Point Thomson issues so this important resource can be developed and put on production,” Ross said, calling Point Thomson resources “essential to the success of an Alaska gas pipeline development.”

The state said the return of the leases reflects “continuing progress in this administration’s efforts to bring the world-class resources in the Point Thomson area to market. Because the state has diligently pursued its legal options and strictly enforced its contractual rights, ExxonMobil is now preparing to mobilize a rig and begin to drill a well. For the first time in more than 25 years, Exxon will be drilling a well at Point Thomson.”

In a decision issued in late January on the lease-termination appeal, Irwin conditionally granted ExxonMobil and its partners at Point Thomson (BP, Chevron and ConocoPhillips are the other major owners) the right to operate on two leases. ExxonMobil and its partners have promised to drill two wells, one on each of the two leases, by the end of 2010, and construct a pipeline and processing facilities to bring those leases into production no later than 2014.

The state said that if the commitments are not honored, the two leases will automatically terminate.

Expansion on margins

The 2002 expansion agreement included some contraction of acreage; expansion acreage was on the western, northwestern, central northern, eastern, southeastern and southern edges of the unit. Expansion acreage not surrendered in February is on the far western and central northern edges of the former unit area.

Some of the surrendered leases are offshore, some onshore. The first opportunity the state has to offer the acreage for lease is this October, when regularly scheduled areawide lease sales will be held for both North Slope and Beaufort Sea acreage.

Division of Oil and Gas Director Kevin Banks told Petroleum News in a Feb. 26 e-mail that “the return of these eight leases demonstrates the wisdom of the state’s legal process so far.”

He said no decision has been made “as yet about whether we will offer the expansion leases” in the October lease sales.

As for the terms under which those leases might be offered, Banks said the state has several options in existing law on how acreage within the former Point Thomson unit area might be offered.

“We are also visiting ideas that may require changes in law that might give the state a more direct role in the development and benefits of production of the area,” he said. While no decision has been made, “the latter might depend on whether the state gets more acreage back.”






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