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July 2008

Vol. 13, No. 28 Week of July 13, 2008

Porter: PTU owners, state should settle

Tells legislators Point Thomson owners lost on development plan, DNR would lose on decertifying wells and on trust issue

Kristen Nelson

Petroleum News

There has been a lot of discussion about Point Thomson as the Alaska Legislature debates giving TransCanada Alaska a license under the Alaska Gasline Inducement Act.

Legislative Budget and Audit Committee consultant Steve Porter reviewed the issues for legislators July 9, calling Point Thomson a dilemma, and telling legislators the state should view it as a problem to be solved, not as a war to be won.

That’s because winning that war could take 10 years, Porter said.

Point Thomson matters right now because it’s been expected that natural gas from Point Thomson would be available as part of the gas committed at an initial open season for a North-Slope-to-market Alaska gas pipeline. Porter said a gas line without Point Thomson gas would be more expensive to shippers, from 50 cents to $1 more in the tariff based on information the state has provided. That means the wellhead value of the gas would drop, cutting into the state’s revenues.

What happened at Point Thomson, Porter said, was that tensions between the Department of Natural Resources, which manages the state’s interest in units, and Point Thomson operator ExxonMobil, accelerated to the point that the director of DNR’s Division of Oil and Gas rejected a plan of development for the unit because it didn’t provide for timely development and informed the unit owners that the rejection was the basis for unit termination. The director also said that individual leases with certified wells must commence production by Oct. 1, 2009.

Porter said he absolutely agreed with the decision: the state figured they had to do that or they’d sit there forever waiting for the field to be developed.

Commissioner ups ante

The decision was appealed to the DNR commissioner, and after the failure of the Stranded Gas Development Act to produce a contract between the state and the gas owners to develop a gas pipeline, the commissioner terminated the unit and revoked certification of the Point Thomson wells.

The Point Thomson unit owners appealed.

Porter said a decision from Alaska Superior Court in May 2007 allowed the process to move forward but put DNR on notice that it had failed to follow its own statutes and regulations when it decertified the wells.

In late 2007 the court found DNR had broad authority to accept or reject plans of developments and the authority to terminate the unit, but not without a hearing to consider an appropriate remedy for rejecting the plan of development.

With regard to decertification of the wells, the court basically said, see our earlier comments.

Porter optimistic

Porter said he is optimistic that DNR and the Point Thomson unit owners will settle, the field will be developed and Point Thomson gas will be available for commitment in an open season.

He told legislators the Point Thomson unit owners should want to settle in order to have Point Thomson gas to commit to a North-Slope-to-market gas pipeline.

DNR should want to settle because if it doesn’t, it would take 10 years to get back to where the unit is now, Porter said.

The Alaska Supreme Court should take about a year and a half to come to a conclusion, said Rep. Les Gara, D-Anchorage. Why 10 years?

Because, Porter said, termination of the unit, based on an unacceptable plan of development, is only the first legal issue.

The second issue, the seven decertified wells, is not likely to go in the state’s favor, based on what the court said last May.

On the first issue, DNR fulfilled the court’s instruction to hold a hearing on alternatives to termination, Porter said. DNR has broad authority to accept or reject a plan of development, the court said, as long as it isn’t arbitrary. That gives it a lot of clout in working with the unit operator to get them to move forward, he said.

Certified wells at issue

But certified wells are another issue. Well decertification wasn’t in the decision by the director of the Division of Oil and Gas rejecting the 22nd plan of development and notifying ExxonMobil that that was grounds for termination; it only appeared in the decision by the commissioner of the Department of Natural Resources terminating the unit.

Porter said that while the court sided with DNR on the plan of development, it agreed with ExxonMobil on the certified wells; in essence, he said, the state got part and ExxonMobil got part. He said the court basically told DNR it would lose on the issue of certified wells.

The commissioner ruled it was bad policy to certify wells, Porter said, but the court said while it may be bad policy, the commissioner couldn’t ignore the department’s own regulations.

The other reason Porter thinks DNR should settle is in its decision rejecting a proposed 23rd plan of development — the unit owners’ proposed remedy in the termination hearing.

The unit owners didn’t offer penalties because they have opted to accept penalties in the past rather than drill so they just said they would move to production with no options. DNR asked questions about adding penalties, and did suggest a court order that would terminate the unit for lack of performance, but that was rejected by DNR.

Porter said DNR needs to come to the table with the unit owners and solve the penalty problem. The only thing the record shows now is that DNR rejected the 23rd plan because it said it didn’t trust ExxonMobil to carry through.

The courts won’t let that stand because that would allow a sovereign to walk out on any contract because they don’t trust the other party. He said you don’t want that issue to go to court because he doesn’t think DNR could win on it and the court could then hold against DNR on the unit termination issue.

Once court filings are complete DNR would have an opportunity to talk with ExxonMobil, Porter said.

Additional court battles over the decertification would be avoided, as well as a new best interest finding, a new lease sale, formation of a new unit and bringing everyone up to speed. With potential court challenges to the best interest finding, Porter said he thought 10 years to get back to where the state is today with Point Thomson is probably optimistic.






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