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Vol. 13, No. 32 Week of August 10, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Thomson leases terminated

DNR: With unit gone, leases expired; Exxon disagrees, moves ahead with work

Kristen Nelson

Petroleum News

The Alaska Department of Natural Resources has terminated all 44 expired leases in the former Point Thomson unit, leaving one 15-acre lease in the unit area that will expire in March 2010. Point Thomson is the farthest east oil and gas discovery on state land on Alaska’s North Slope, abutting the western boundary of the Arctic National Wildlife Refuge.

In addition to lease and unit termination, both contested by Point Thomson unit operator ExxonMobil Production Co. and other former lease and unit owners at Point Thomson, there is an ongoing issue of permits for work at Point Thomson this winter.

In an Aug. 5 statement about the Aug. 4 lease termination decisions, DNR said ExxonMobil applied for permits to construct an ice road and has begun contracting to conduct operations in the Point Thomson area despite its “knowledge that the unit was terminated, that the last plan of development was rejected and it was at risk of losing these leases.”

“ExxonMobil’s willingness to engage Alaskan companies and workers and contract with Alaskan business for support services with the knowledge that the 23rd Plan of Development had been rejected and that its leases would soon expire is unfortunate,” the department said.

“ExxonMobil’s efforts to enlist the public’s sympathy and discourage the state from acting to enforce its laws will not deter the state from moving forward so that these lands can be brought into meaningful production,” DNR said.

The department said it “is uniquely qualified to know and protect the state’s interests. Today’s actions are a significant step forward to achieving that goal.”

ExxonMobil argues Point Thomson leases have not expired

ExxonMobil said in an Aug. 6 e-mail statement that it is “extremely disappointed by the DNR action.” The company said it “has complied with the Point Thomson lease agreements, the Point Thomson Unit Agreement and all Alaska statutes and regulations.”

ExxonMobil said it has “the right to conduct drilling activities under the terms of the leases, which we do not believe have expired” and said it has begun activities included in the 23rd proposed plan of development submitted to DNR Feb. 19.

“We have applied for and already received some of the required permits,” the company said; a rig is being prepared to drill at Point Thomson; “other materials are ready and on order; and contracts have been awarded to Alaskan companies who are undertaking critical work now for the multi-well drilling program. These activities will provide jobs for over 200 people.”

The company has received a land access permit from DNR “to begin site preparatory work for a drilling program at the Point Thomson field” and is working with DNR, the Alaska Department of Environmental Conservation, the North Slope Borough, the Alaska Oil and Gas Conservation Commission, the U.S. Fish and Wildlife Service and “other agencies to obtain other permits necessary to begin the multi-well drilling program this winter,” ExxonMobil spokeswoman Margaret Ross told Petroleum News in an Aug. 7 e-mail.

Nan Thompson, DNR Division of Oil and Gas units manager, told Petroleum News in an e-mail that numerous permit applications have been filed for the project and two have been issued — one by the Alaska Department of Fish and Game Division of Habitat for water withdrawal at the Alaska State C-1 pit, the other a land use permit for staging a camp, ice road construction equipment and fuel at the Point Thomson 3 pad, from DNR’s Division of Mining, Land and Water.

Both contain warnings that permit issuance does not mean the state has changed its position on the status of the unit or the leases; that the state is not waving any aspect of its Point Thomson unit decisions; and that the permittee “does this work at its own risk.”

DNR expects appeal; ExxonMobil asks for mediation, settlement

DNR said it expects that the lessees will appeal the lease termination decisions.

The department’s termination of the unit has already been appealed, with a final decision expected from Alaska Superior Court by the end of the year; that decision will be subject to appeal to the Alaska Supreme Court.

ExxonMobil said in its statement on the lease terminations that its “preference is to resolve this matter outside of the courts.”

The company said it has “requested that the court direct a mediation and settlement conference with DNR” with the purpose of determining “the terms and conditions that DNR will accept to bring the Point Thomson resources into commercial production.”

“Successful mediation would avoid years of delay in production at Point Thomson,” the company said, adding that it will “pursue all alternatives to protect our rights to develop these resources.”

Natural gas from Point Thomson would be sold into a natural gas pipeline, once such a line is built, and once reservoir issues for the deep, high-pressure gas condensate field have been resolved with the Alaska Oil and Gas Conservation Commission, which is charged with ensuring maximum hydrocarbon recovery from oil and gas fields in the state.

Most leases issued more than 25 years ago, some 43 years ago

Most of the Point Thomson area leases were issued more than 25 years ago, DNR said, some as many as 43 years ago, and none has ever produced hydrocarbons.

The state has been trying to get Point Thomson unit operator ExxonMobil Production Co. to do more drilling and move the unit into production for a number of years. In 2005 the division director rejected a plan of development for the unit and in 2006 the commissioner terminated the unit.

The unit working interest owners appealed in Alaska Superior Court; the court held for DNR on the ability to terminate the unit, but remanded the decision for a hearing on appropriate remedies.

Early this year, prior to the court-ordered hearing, ExxonMobil and the other Point Thomson working interest owners submitted a plan of development which would have culminated in a pilot cycling project at Point Thomson, with condensate being sold down a line built to connect to the oil-shipment line running from the Badami unit to central North Slope facilities.

DNR Commissioner Tom Irwin rejected the proposed plan and terminated the unit earlier in April, saying that based on the history of the unit, he did not have confidence that ExxonMobil would bring the unit into production.

Leases beyond primary terms

The department said the area leases expired because they are years beyond their primary terms, are not producing hydrocarbons, do not have any capable wells and are no longer part of a unit.

Division of Oil and Gas Director Kevin Banks terminated expansion leases after they contracted from the unit in December 2006 for failure to meet drilling commitments as required by a 2001 expansion agreement. ExxonMobil, BP Exploration (Alaska) and Chevron U.S.A. appealed the director’s decision. The three held the majority of lease interest at Point Thomson.

Irwin said in his decision on the appeal that he affirms Banks’ termination decisions because “mutually agreed-upon conditions” in the 2001 expansion agreement required development drilling to begin by December 2006. In the absence of development drilling by that date, expansion leases were to contract out of the unit and all those beyond their primary term were to be terminated.

Twelve expansion leases were beyond their primary term; one expansion lease was still in its primary term, but that term expired May 31, 2008.

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The certified well issue

In his Aug. 4 decision on appeal of termination of the Point Thomson unit expansion leases, Alaska Commissioner of Natural Resources Tom Irwin addressed a variation on the issue of wells capable of producing. In addition to inclusion in a unit, the existence of a well certified as capable of producing has been a way of holding a lease beyond its initial term.

This issue surfaced in 2006 when then-DNR Commissioner Mike Menge terminated the unit. Menge said that wells certified as capable of producing on Point Thomson unit leases had been plugged and abandoned, were not therefore capable of producing and could not be used to hold leases.

One of the expansion leases, ADL No. 388425, was said by ExxonMobil, BP Exploration (Alaska) and Chevron U.S.A. in their consolidated appeals to be capable of producing in paying quantities.

Irwin said appellants argued that the director had to order the well on ADL No. 388425 into production under state regulations and requirements in the leases prior to terminating the lease.

“Appellants are mistaken,” the commissioner said.

Not capable of producing

Irwin said the well on the lease “is a plugged and abandoned exploration well that is not capable of producing in paying quantities. DNR never determined that this well was capable of producing in paying quantities, and Appellants offer no evidence that it is capable of doing so.”

The commissioner said the well was plugged and abandoned under Alaska Oil and Gas Conservation Commission procedures in 1988. “In 2007, after the lease had expired, Appellants asked DNR to certify the well but they offered no evidence that the well is capable of production,” he said.

The shut-in well savings clause exists to allow a lease to be held when it has an actual well capable of production. “Because a plugged and abandoned exploration well is not capable of production,” Irwin said Menge’s November 2006 decision “found that such wells are not capable of production. I agree with this position,” he said.

Only a well capable of production can hold a lease, he said. “Alaska law does not allow a well incapable of production, or a valuable discovery standing alone, to hold a lease past its primary term,” Irwin said.

—Kristen Nelson