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Vol. 13, No. 25 Week of June 22, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Point Thomson leases a mixed bag: Can Exxon drill? What about a new lease sale?

Although the Alaska Department of Natural Resources has terminated the Point Thomson unit, the erstwhile unit owners are clearly bent on moving ahead with drilling on leases that formed part of the unit.

“Despite the DNR’s decision, we are continuing plans to begin drilling this coming winter,” Margaret Ross, media advisor for ExxonMobil corporate public affairs, told Petroleum News June 11. “We have the right to conduct such drilling under the terms of the leases, which have not yet expired.”

And Craig Haymes, ExxonMobil’s Alaska production manager, told a legislative hearing on June 17 that the company plans to drill at Point Thomson during the winter of 2008-09.

But do the companies have the legal right to conduct drilling operations on the Point Thomson land without an agreement with DNR? And what exactly is the legal status of the original leases that were combined into the unit?

A unit such as the one at Point Thomson is formed to enable lease owners to combine their efforts in developing an oil or gas field. A field often straddles multiple leased tracts, each of which typically has a different ownership configuration. Combining the leases into a single unit ensures consistent ownership interests across the entire field, thus enabling the field to be developed as a single entity.

Several categories of leases

There were 45 leases in the Point Thomson unit, Nan Thompson, petroleum manager for DNR’s Division of Oil and Gas, told Petroleum New June 16. But the differing histories of those leases make it difficult to make any general statement about the lease status, she said.

“You have to look at it on a lease by lease basis,” Thompson said. “… In truth you could probably split the leases in the unit into five or six different categories, but you have to look at the facts of each particular lease to answer the ‘what happens now?’ question.”

DNR issues leases with primary terms of seven or 10 years — a lease normally ceases to exist after the end of its primary term, Thomson said. And the primary terms have expired for all Point Thomson leases, she said.

But a lease can extend beyond its primary term if it becomes part of a unit, such as in Point Thomson. On the other hand, a lease that has exceeded its primary term but is part of a unit will generally cease to exist once the unit expires, she said.

However, the question of whether a lease or unit operator has drilled any wells within a lease complicates the lease termination situation. A lease continues to exist if it contains a well that is producing hydrocarbons or if it contains a well that has been certified as capable of producing hydrocarbons, Thompson said. On the other hand, the existence of a well that has been plugged and abandoned has no bearing on lease termination, she said.

And the existence of wells at Point Thompson has created that complex mix of different situations for the Point Thompson leases.

However, the situation is very clear for leases that formed an expansion to the original unit area, because the expansion agreement included drilling commitments, Thompson thinks.

“What that (unit expansion) agreement said was you have to drill these wells. … And if you don’t the leases contract out of the unit and you have to pay the state a $20 million penalty. They paid that last summer,” Thompson said. “… From the state’s perspective the leases in the expansion area expired when the unit was terminated. … Those have gone.”

Thompson also said that leases with no wells or with plugged and abandoned wells have clearly expired following unit termination.

Fuzzier if well suspended

Things become fuzzier where a well has been suspended, rather than plugged and abandoned. In principle these wells could be re-entered but, given that the Point Thomson wells were drilled in the late 1970s and 1980s, there’s a question mark regarding whether it is now physically possible to achieve that re-entry.

“After a period of time you can’t re-enter,” Thompson said.

And the age of the wells is likely to give rise to litigation regarding the status of wells that were certified as capable of production many years ago, Thompson said. Certification is supposed to hold the status of a well until the well starts producing after a delay of perhaps a year or two, she said. Nothing has ever happened with the Point Thomson wells that were certified and there is a factual question of whether those wells are still capable of producing, she said.

“Wells don’t last forever,” Thompson said. “You have to do things to maintain them.”

A DNR map of the Point Thomson leases depicts the wells in question as “decertified.”

So, given that the question of the legal status of at least some of the Point Thomson leases looks to be heading into litigation, does Exxon have the right to drill?

Probably not, until there is clear title to the leases, Spencer Hosie, a senior partner and specialist in business law with the San Francisco firm of Hosie McArthur, told Petroleum News June 17.

But Hosie also commented that views of the situation are a matter of perspective.

“They (the lease owners) would say they have the right. The state would say they don’t have the right,” Hosie said.

—Alan Bailey

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