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Vol. 12, No. 18 Week of May 06, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

No stay on Pt. Thomson

Court rules against companies, says DNR can move forward with lease termination

Kay Cashman

Petroleum News

On May 1 Alaska’s Superior Court denied motions from Chevron, BP, ConocoPhillips and ExxonMobil to stop the Department of Natural Resources from moving forward with the termination of the undeveloped Point Thomson unit on the grounds that it was in the public interest to allow DNR to proceed with related lease termination.

DNR had made administrative decisions in late 2006 to terminate the eastern North Slope unit, but the four Point Thomson leaseholders wanted the court to stay (halt) any further action by DNR until their judicial appeals, filed with the court in December, had run their course. In its decision to deny the four companies’ motions to stay, the Superior Court was acting in its capacity as an appellate court for administrative decisions by DNR.

The judicial appeals filed by Chevron, BP, Conoco and Exxon asked the Superior Court to reverse both a Nov. 27 decision by DNR’s commissioner to terminate the Point Thomson unit and a Dec. 27 decision on reconsideration of the unit termination decision. The leaseholders’ briefs on appeal are due in June. The Superior Court will decide based on the briefs filed by the Point Thomson leaseholders and the state whether or not the commissioner was correct in finding Exxon’s 22nd plan of development inadequate and terminating the unit.

Since the department issued its final determinations on Point Thomson, DNR’s Division of Oil and Gas has moved forward with the unit termination process, including canceling Point Thomson’s core and expansion leases. Because of the defunct status of the unit and its leases, the agency also tabled a plan of operations and well permits filed on March 23 by Point Thomson operator Exxon to drill up to seven wells in the unit between 2008-09 and 2015 — an effort designed to hold onto the leases, not a 23rd plan of development for the 30-year old unit, Exxon’s Susan Reeves told Petroleum News in April.

The four leaseholders also filed administrative appeals with DNR’s commissioner on the division’s lease termination notices for Point Thomson. On March 27, the commissioner granted unit operator Exxon an additional 30 days to file supplemental materials in support of administrative appeals on the leases — materials that were filed the last week in April. The leaseholders asked for hearings.

Palin, Irwin pleased with decision

Alaska Gov. Sarah Palin was pleased with the court’s May 1 decision.

“This decision represents forward progress in our efforts to put these leases in the hands of a company that will responsibly develop them and bring the significant gas reserves in the Point Thomson area to market,” Palin said in a press release.

“This ruling tells us that standing up to protect Alaska’s interests, in seeing its resources produced, is the right thing to do,” said DNR Commissioner Tom Irwin. “We will continue to stand firm in protecting the state’s rights in the face of the inevitable barrage of criticism from the state’s major producers. The debate over AGIA (Alaska Gasline Inducement Act) is a good example. In protecting their shareholders’ financial interests, the producers are seeking to change the rules because competition means that they may not get a deal on their terms. I hope they choose to participate in building a gasline and will meaningfully engage in the AGIA process.”

The state had opposed the motions for stay on the grounds that halting the unit termination process would impede the public’s overriding interest in the development of Point Thomson’s oil and gas reserves, which are thought to hold about 300 million barrels of oil and natural gas condensates, as well as 8 trillion to 9 trillion cubic feet of natural gas.

In its April 5 filing, the state also told the court that the leaseholders had not filed a supersedeas bond, a requirement of Appellate Rule 603, which says, “when an appeal is taken” the appellant (in this case the Point Thomson leaseholders) may get a “stay of proceedings to enforce” an administrative judgment by filing a supersedeas bond. The stay can be effective only when the bond is approved. The filing of a supersedeas bond does not, however, prohibit the court from considering the public interest in deciding whether or not to impose or continue a stay on an administrative (or district court) judgment that is not limited to monetary relief.

Wells capable of producing paying quantities

In her May 1 decision Judge Sharon Gleason noted that the leaseholders sought to halt primarily the non-monetary portions of the administrative decisions, quoting a 1995 Alaska Supreme Court Case that gave her the right to be “guided by the public interest” in granting or not granting a stay.

The judge said the “primary contention” between the parties “at this initial stage of the unit termination appeals was the appropriate interpretation” of subparts C and D of a DNR regulation, 11 AAC 83.374, and the applicability of a separate regulation, 11 AAC 83.361.

Part C of 11 AAC 83.374 says if a default occurs in a unit in which there is no well capable of producing paying quantities of hydrocarbons the commissioner can terminate the unit agreement by mail if the defaulting party is given reasonable notice and an opportunity to be heard. Termination is effective upon mailing the notice.

In part D, if a default occurs in a unit that has a well capable of producing hydrocarbons in paying quantities, the commissioner can seek to terminate the unit, but has to do so by judicial proceedings vs. administrative ones — i.e. file a motion in the State of Alaska’s Superior Court.

11 AAC 83.361 deals with certification of well test results. It says the lessee or unit operator will consider a well capable of producing hydrocarbons in paying quantities when so certified by the commissioner.

Another regulation defines paying quantities as “sufficient to yield a return in excess of operating costs, even if drilling and equipment costs” can never be recouped and the undertaking as a whole “may ultimately result in a loss.” The quantities have to be enough to “induce a prudent operator to produce those quantities,” not considering “the costs of transportation and marketing.”

No dispute over initial well certification

None of the parties dispute that there are wells within the Point Thomson unit that had been certified by DNR as capable of producing paying quantities of hydrocarbons, the judge noted.

Because several Point Thomson wells have been certified, the leaseholders say part C of 11 AAC 83.374 applies — that the commissioner should have sought to terminate the unit through judicial proceedings.

The appellants also contend that their constitutional rights to due process and equal protection were violated at the administrative level because they claim the Alaska Gasline Port Authority submitted extensive materials it identified as confidential to DNR that contained AGPA’s legal analysis of the state’s ability to terminate the Point Thomson unit — materials that were not served on the leaseholders during the course of the administrative proceedings.

In BP, Chevron, Conoco and Exxon’s view, they have demonstrated a clear probability of success on these issues, so the Superior Court should rule in their favor and stay DNR’s administrative actions while the appeal is still pending in Superior Court.

The leaseholders also contend that it’s in the public interest to grant the stay because they will be able to continue development of the Point Thomson unit if the unit agreement is reinstated and because if the state puts the Point Thomson leases up for sale, bidders will discount their offers because of the pending appeal.

Leaseholders want to keep leases

The state told the court what BP, Chevron, Conoco and Exxon “actually want is a stay of the lease termination appeal proceedings now pending before the DNR commissioner.”

In her May 1 order, the judge referred to the commissioner’s November unit termination decision, in which he acknowledged that former division directors had certified seven Point Thomson unit wells as capable of producing paying quantities, all of which where certified in the 1970s and 1980s and have since been plugged and abandoned. The commissioner said there were no existing certified Point Thomson wells capable of producing in paying quantities, noting that no production wells had ever been drilled in the unit.

The commissioner said, and the judge quoted him, that “the primary basis of the (unit termination) decision is the unequivocal statement that the leaseholders cannot find a way to put the unit into production and their refusal to submit an acceptable” plan of development to DNR.

In their replies the leaseholders said the plugged and abandoned wells in the unit that had been certified must still be considered capable of producing hydrocarbons, as so defined by DNR’s own regulations, so judicial proceedings to seek termination of the unit were required.

The judge pointed out that while the Point Thomson leaseholders want the court to consider the wells capable of producing hydrocarbons in unit default proceedings, when it comes to filing development plans for Point Thomson they “appear to assert that the wells that were certified are in fact not currently capable of producing hydrocarbons in paying quantities.”

The judge wrote that “according to DNR’s director of the Division of Oil and Gas, the appellants proposed 22nd plan of development for the unit ‘states that Point Thomson unit development is not possible without modifying the laws regarding the state’s right to taxes and royalties on oil and gas production and on construction of a North Slope gas pipeline.’”

Despite the fact that the department certified the seven Point Thomson wells in the 1970s and 1980s, which makes them capable of producing hydrocarbons in paying quantities for the purpose of 11 AAC 83.374, the state asked the court to look at the current actual status of the wells. But the court said “parties appearing before an agency are entitled to relief when an agency has substantially failed to follow its own procedural regulations.”

Over the course of the judicial appeal “the public interest could be adversely affected by DNR’s decertification action to the extent that the action generates uncertainty and instability among lessees or potential lessees throughout the state with respect to their rights in the state’s oil and gas reserves,” Gleason said.

Leaseholders have strong case, but….

After reviewing the regulations, Gleason determined that BP, Chevron, Conoco and Exxon had made a “clear showing of probable success on the merits with respect to the procedures employed by DNR to terminate the Point Thomson unit,” but she said “it is certainly possible that upon further briefing of the many complex and unprecedented legal issues presented in this case,” that “this court may be persuaded by the state that the department’s decisions should be affirmed.”

Still “at this initial stage of the appeal” leaseholders BP, Chevron, Conoco and Exxon have “made a clearing showing of probable success” with respect to procedural challenges, and “specifically with DNR’s apparent violation of its own procedural regulations.”

But her decision on whether or not to grant the stay requested by the leaseholders was “guided by the public interest,” which Gleason said was to see Point Thomson’s oil and gas reserves produced, which means making them available for development.

The judge also said the leaseholders argument that the public interest is best served by allowing a stay so that BP, Chevron, Conoco and Exxon can “continue development” of the unit is not persuasive because it’s “somewhat at odds with the appellants’ own proposed 22nd plan of development, which did not propose to put the unit into production.”

Sixty day notice on lease offering

Gleason said the state had “persuasively demonstrated that it is in the public interest” to give DNR a reasonable opportunity to address the related lease termination proceedings at the administrative level.

And, if DNR wants to re-offer the Point Thomson tracts in a lease sale, the judge said the state has agreed to give at least 60 days notice of its intent, which would allow the leaseholders sufficient time to renew their motions for stay with the court.

With respect to the commissioner’s finding that the leaseholders owe the state $20 million for breach of the 2001 unit expansion agreement, Gleason said the appellants are entitled to a stay of the monetary portion of the commissioner’s decision if they post a $25 million supersedeas bond with the court.

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