The State of Alaska has put the Point Thomson unit into default, and said leases from the unit could be offered as early as October, depending on whether the present leaseholders file suit and whether a judge would order the leases held pending the outcome.
In a Nov. 27 decision, Commissioner of Natural Resources Mike Menge voided Point Thomson expansion acreage, put the entire unit into default — and ruled that there are no wells in the unit capable of producing in paying quantities, a certification which is used to hold individual leases beyond their original term.
On that point Menge said he was differing with the October 2005 decision by then-Director of the Division of Oil and Gas Mark Myers.
ExxonMobil holds 52 percent of the Point Thomson acreage, BP holds 29 percent, Chevron 14 percent, ConocoPhillips 3 percent, with another 1 percent scattered over about 18 additional lessees, Menge said.
October 2005 decision
The October 2005 decision of the director rejected the 22nd plan of development for the Point Thomson unit submitted by unit operator ExxonMobil Production Co., and put the unit in default for failure to submit an acceptable plan of development.
The lessees had an opportunity to cure the unit default by submitting an acceptable plan of development.
Menge extended ExxonMobil’s deadlines to appeal while the Legislature studied the administration’s proposed gas pipeline fiscal contract. When no contract was finalized, Menge set an Oct. 20 deadline for ExxonMobil to submit a cure for a default and a Nov. 13 deadline to file an appeal and supporting documents; he held a hearing Nov. 20.
The commissioner’s Nov. 27 decision denies the request for modification of the 2001 expansion agreement; affirms the director’s decision to the extent it is consistent with the commissioner’s decision, but disapproves it “to the extent it can be read to mean the PTU contains certified wells”; rejects the revised 22nd plan of development submitted by the lessees Oct. 18; and terminates the unit.
The decision is effective Oct. 27 and the unit owners have 30 days to appeal the decision to state Superior Court.
Menge said some 106,200 acres will revert to the state: the 40,000 acres of expansion and the other 60,000-plus acres.
Richard Todd of the Department of Law said litigation could be complete within three years. He said the commissioner’s decision is the final decision from this administration but is subject to appeal to court. It could be settled, Todd said, noting that many such disputes have been settled before the court reached a final decision.
Lessees’ key points on appeal
The commissioner’s decision listed some of the key points the lessees made in appealing the director’s decision.
They argued that adequacy of their proposed plan of development has to be decided under the reasonably prudent operator standard — that they don’t have to do anything a reasonably prudent operator wouldn’t have to do to put the unit into production.
The lessees also argued that the Department of Natural Resources cannot terminate the unit “unless it first successfully prosecutes an action, presumably jury trial in Superior Court,” which finds lessees have breached the reasonably prudent operator standard.
They argued that the revised 22nd plan of development meets the reasonably prudent operator standard.
They also said the unit cannot be terminated because the lessees have been precluded by a force majeure event, the lack of a gas pipeline, from producing from Point Thompson.
And they argued DNR has agreed that the only way to develop the unit is to blow down the gas, producing gas and liquids together without engaging in pressure maintenance or gas reinjection or cycling to improve liquids recovery — which cannot occur until there is a gas pipeline.
The commissioner’s decision said the record does not support the lessees’ assertion that a gas blow down is the only way to develop the field. “DNR has repeatedly requested that the unit be adequately delineated and put into production. The unit contains more than dry gas. Oil and gas liquids are available.” And, the commissioner’s decision said, this assertion was expressly rejected in the director’s decision.
Myers told the lessees in his decision: “The premise that the PTU can only be developed if a North Slope gas pipeline is built is inappropriate. In addition to dry gas, the unit contains 100s of millions of barrels of hydrocarbon liquids. These hydrocarbons could be produced using mostly existing oil pipelines without construction of a North Slope gas pipeline.”
AOGCC cooperation also an issue
The Alaska Oil and Gas Conservation Commission has also raised issues, Menge said in his decision.
While the lessees said they had been working with AOGCC to obtain permission for a gas blow down, the commission said it has not received lessee cooperation (see story in Nov. 12, 2006, issue of Petroleum News).
The commission told the department is has not received “sufficient information” from the lessees for it to determine that Point Thomson “is primarily a gas field, as opposed to an oil field. The data available to the AOGCC indicates that the PTU is an oil field.”
The commission, like DNR, needs information from an additional exploratory well or wells.
DNR has repeatedly requested that lessees drill an exploration well to better delineate hydrocarbons at the field and the potential of liquids production. “A pure gas blow down project will result in the loss of millions of barrels of gas condensate. Neither DNR nor AOGCC are prepared to allow a pure gas blow down project in the face of such a potential hydrocarbon loss without more data indicating it is appropriate. Lessees contend the data indicate uncertainties which prevent them from engaging in liquids production, yet they refuse to obtain more data to reduce the uncertainties,” the commissioner said.
Certified wells not capable of production
The commissioner’s decision raises a new and interesting issue related to discovery exploration wells, wells which the state certifies as capable of producing in paying quantities.
Directors of the Division of Oil and Gas have certified seven exploration wells in the Point Thomson unit as capable of producing in paying quantities. With the exception of the Sourdough No. 2 well, all of the certifications were issued in the 1970s and 1980s, the commissioner said, and all of the certified wells have been plugged and abandoned.
Certified wells require an annual lease plan, unless the wells are in a unit.
The state’s early, DL-1 oil and gas lease forms, do not have an express provision requiring a plan of development for a lease with a well capable of producing in paying quantities to be continued beyond its primary term; new-form leases have this requirement.
The commissioner’s decision argues that because discovery exploration wells have been plugged and abandoned, none of them are capable of producing today. And those were discovery wells; no production wells have ever been drilled, the commissioner said:
“There is no existing certified PTU well capable of producing in paying quantities. A PTU production well has never been drilled. No certified PTU well exists today.
“Whatever the merits of the certifications when they were originally issued, the suggestions in the Director’s Decision that certified wells exist today or that the prior certifications of now non-existent exploration wells indefinitely extend the term of the leases upon which they were drilled or that the PTU should be treated as a unit with certified wells is disapproved and reversed in this Commissioner’s Decision. Those suggestions are not supported by the facts. There are no certified wells in the unit capable of producing in paying quantities. All the wells which were certified have been plugged and abandoned. Inconsistent findings and statements in the Director’s Decision on certified wells are hereby disapproved.”
Murkowski supports decision; Palin pleased
Gov. Frank Murkowski said Nov. 27 that he stands behind the commissioner’s decision. He said he had spoken with the president of ExxonMobil Production Co. and briefed Gov.-elect Sarah Palin.
Alaskans should be concerned about how the decision advances development of a gas pipeline, he said.
Murkowski said the new administration will have the opportunity to tie in requirements for field development as part of the terms of any new leases, requirements for development of oil and gas liquids, as well as natural gas at the field.
On Nov. 20 Gov.-elect Sarah Palin asked Menge to leave the Point Thomson decision to her administration, but on Nov. 27 she praised the decision the governor and commissioner had made.
“I appreciate that Gov. Murkowski has acted in the best interest of the State of Alaska,” Palin said in a statement. “I’ve said before that these units are the cornerstone upon which a future Alaska gas pipeline will be built. That starts with strict enforcement of the lease terms for timely development of the Point Thomson oil and gas field.”
“I look forward to working with ExxonMobil as they decide upon their next step in responding to this decision,” she said.
ExxonMobil, BP ‘disappointed’
Exxon Mobil Corp. spokeswoman Susan Reeves told Petroleum News Nov. 28 that the company is “disappointed” that the state did not approve the modified plan of development.
“ExxonMobil, on behalf of the PTU owners, has complied with the Point Thomson lease agreements, the Point Thompson Unit Agreement and all Alaska statutes and regulations,” she said.
“Any litigation by the state to take back the Point Thomson leases is likely to be protracted,” Reeves said, and also called the state’s decision “a major setback for an Alaska gas pipeline project since gas supply from Point Thomson is critical for the project.”
She said ExxonMobil is still reviewing the details of the decision.
BP Exploration (Alaska) spokesman Daren Beaudo said “BP is extremely disappointed in the decision taken by the State of Alaska to terminate the Point Thompson leases. We believe it was an incorrect decision.”
BP is “studying the options available to us,” Beaudo said.
He said the company wants “to develop the Point Thomson gas field” and has invested more than $20 million in the field since 2002.
“Point Thomson includes 25 percent of the known gas resource on the North Slope,” he said, adding that both “Prudhoe Bay and Point Thomson are needed to underpin the Alaska Gas Line.”
ConocoPhillips Alaska spokeswoman Dawn Patience said “ConocoPhillips hopes that the State’s concerns regarding lack of development at Point Thomson can be resolved in a way that does not delay progress on a gas pipeline project.”
