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Vol. 15, No. 33 Week of August 15, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

State vs. BPXA rages on

Two sides tussle over state access to North Slope facility sharing agreements

Wesley Loy

For Petroleum News

As BP girds for what promises to be a tsunami of litigation over the Deepwater Horizon disaster, its Alaska subsidiary continues to defend itself in a major lawsuit the state of Alaska filed against the company in 2009.

The civil suit in state Superior Court in Anchorage seeks perhaps $1 billion in back taxes, royalties and other damages stemming from the Prudhoe Bay oil pipeline spills of 2006.

The case has seen some interesting twists in recent weeks, including an outbreak of fights within the fight over just what sort of information BP Exploration (Alaska) Inc. must turn over to the state through the pretrial process known as discovery.

Among the documents the state’s lawyers want to see are the “facility sharing agreements” for oil and natural gas liquids production on the North Slope.

The state argues that these are key documents to help it understand the value of oil and NGL production that was “lost” as a result of extensive shut-ins while BPXA replaced corroded pipelines. The state argues BPXA was negligent in the upkeep of those lines.

What is ‘backout’ worth?

The state’s case against BPXA is weighty and complex enough that it involves, in effect, two judges — Superior Court Judge Peter Michalski and “discovery master” Dan Hensley, whose job is to sort out discovery disputes.

In November 2009, the state served BPXA with discovery requests for “all documents relating to facility sharing agreements” back to Jan. 1, 1990.

Under facility sharing agreements, the owners of oil processing facilities, such as BPXA, accommodate production from adjacent or “satellite” fields. This means a facility owner might need to defer some of its own oil production at times.

The adjacent or satellite field lessees must compensate the facility owners for displaced fluids that “may never be produced” or might be deferred into the future when “numerous unknowns” would influence the oil’s profitability, the state said in court filings.

The facility sharing agreements and related documents contain formulas for valuing a facility owner’s foregone production volume, known as “backout,” the state said.

“The State expects the requested documents to include BPXA’s and, more broadly, the oil industry’s own treatment of revenues when production is curtailed,” one state filing said. “These documents are evidence of the method employed by BPXA and other North Slope producers to determine the present-day value of lost or deferred oil production, and therefore are relevant to the State’s calculation of its damages in this case.”

Split decision

On June 27, Hensley held the state was entitled to facility sharing agreements and associated documents, but only those for the Prudhoe Bay and Milne Point units.

Hensley sided with BPXA in denying the state’s broader request for facility sharing agreements across the North Slope.

“I find that the agreements for Prudhoe Bay and Milne Point are relevant or may lead to the discovery of relevant information regarding how the oil industry values lost or deferred production in those fields,” Hensley said, noting the lawsuit centers on Prudhoe and Milne.

The state, in its lawsuit, contends the shut-ins resulted in a production shortfall of at least 35 million barrels of oil and NGLs from Prudhoe and Milne from 2006 through 2008. BPXA operates both fields.

“The facility sharing agreements for those fields are far more likely to lead to the discovery of relevant evidence than agreements for other fields,” Hensley wrote. “Further, I suspect the State will have access to facts related to the industry’s general treatment of lost or deferred oil production and doesn’t need discovery of sensitive commercial documents from fields not in issue here.”

The state is appealing Hensley’s ruling to the presiding authority in the case, Judge Michalski. The state says it needs the facility sharing agreements from throughout the North Slope, arguing in a July 7 filing: “BPXA should not be given an ‘unfair tactical advantage’ in this lawsuit by being permitted to keep the State uninformed regarding industry-wide treatment of compensation for lost or deferred production of oil.”

Lawyers for BPXA are opposing the state’s appeal, arguing that Hensley “set reasonable geographical limitations” on which facility sharing agreements the company must produce.

BPXA had opposed turning over any facility sharing agreements at all, citing their confidential nature and arguing that the backout terms “are in no way analogous or relevant” to the state’s damages claim.

The backout amount, normally paid in kind as a volume of oil, “is only one of several commercial terms within” a facility sharing agreement, BPXA argued in a July 12 court filing. “Other terms, such as the access fee that must be paid by the satellite owner to use the facilities and the portion of the operation and maintenance costs of the facilities the satellite owner must pay, are negotiated contemporaneously. The final terms are the result of myriad considerations unique to the facility owners and facility users, including the relative bargaining powers of the parties, the availability of alternative facilities, and the satellite owner’s ability to bear the cost, risk, and inconvenience of building its own facilities. Thus, a backout provision, as finally negotiated, is not at all indicative of the actual market value of deferred production.”

Since Hensley’s ruling, BPXA said it has turned over some 40 documents, nine containing backout provisions.

Other action

The state and BPXA also are clashing over another recent ruling from the discovery master: that BPXA must provide certain documents from its parent companies, BP PLC and BP America Inc.

BPXA is seeking to reverse the decision, arguing it lacks control over the records.

It filed an affidavit from BPXA Senior Vice President Claire Fitzpatrick, who said important legal and commercial reasons exist as to why a subsidiary such as BPXA can’t access parent company documents.

Fitzpatrick said in her affidavit: “BPXA has no right of control of or access to documents generated or maintained by BP plc or BP America. BP plc, for example, maintains additional levels of security of its records and stores them on restricted access servers. Access to the servers is strictly controlled. Not only can employees of BPXA not access the servers from BPXA’s offices in Alaska, even if BPXA employees travel to London they are unable to access the servers.”

In further action in the lawsuit, Judge Michalski on Aug. 5 ruled against the state’s motion asking him to reverse his June 11 partial dismissal of one of the state’s claims against BPXA.

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