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Vol. 13, No. 29 Week of July 20, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Massey: Cycling won’t work

Exxon exec says Point Thomson development plan would settle issues

Kristen Nelson

Petroleum News

Point Thomson gas is necessary to make a North-Slope-to-market natural gas pipeline viable, Martin Massey told Alaska legislators July 10. Massey, ExxonMobil’s U.S. joint interest manager, and the company’s lead negotiator on Alaska gas pipeline issues, said the 1 billion cubic feet a day of gas the eastern North Slope field could provide for a proposed gas pipeline is critical.

Without Point Thomson gas, firm transportation commitments may not be sufficient to support the project, he said in a hearing on TransCanada Alaska’s application for a license under the Alaska Gasline Inducement Act.

There is ongoing litigation between the Alaska Department of Natural Resources and ExxonMobil — and the other Point Thomson unit owners (ExxonMobil, BP, Chevron and ConocoPhillips hold the largest positions in the unit) — over the timing of Point Thomson development. The unit has been in existence since the late 1970s and the state has grown increasingly impatient with lack of production from the high-pressure condensate reservoir, which includes an oil rim of disputed quality and quantity, liquids which could be produced from the condensate and natural gas.

Because of the volume of liquids in the condensate, the Alaska Oil and Gas Conservation Commission classifies Point Thomson as an oil field, which means commission approval is required for gas offtake from the field.

DNR terminated the Point Thomson unit and rejected a plan of development proposed by Exxon and the other Point Thomson unit owners as a remedy.

Massey said Exxon is ready to talk to DNR, but understand the state doesn’t want to talk until the administrative issue is final. He said Exxon has work under way at Point Thomson, with a rig being torn apart for mud pump upgrading, and plans to drill this winter. He said a land use permit has been issued so that Exxon can stage equipment.

Initial production at Point Thomson would provide information

The initial production project for Point Thomson, proposed by the company in February in a plan of development provided as a remedy in lieu of DNR’s termination of the unit, would provide information on how best to produce the field. Massey said he believes, based on information to date, that gas sales is the best way to go, but recognizes there is some doubt about that and with the gas pipeline years away, the companies can do some cycling.

The $1.3 billion plan calls for 10,000 barrels per day of production and Massey said he doesn’t think it will take long to get information indicating which of two paths to take — either expanding the cycling project or finding that the oil in condensate recovery was not adequate. A third option could lead to some additional cycling and gas sales, but the data from the proposed cycling pilot will provide the answer, he said.

Timeline for AOGCC to evaluate Point Thomson gas offtake?

AOGCC Commissioner Cathy Foerster, participating on a July 12 panel at the hearings, was asked how long it would take the commission to evaluate whether Point Thomson gas would be available for gas offtake.

Foerster said there are three ways the evaluation could go.

DNR and Exxon could continue the dispute and Exxon could stop sharing confidential information on Point Thomson with the commission. There is no timeline in that event, she said, because the commission would have no ability to evaluate.

If the dispute continues and Exxon continues to share data with the commission, Forester said the target to complete data exchanges is the end of 2008 or early 2009. Then the commission’s consultants would take three to six months to complete their work, and a complete evaluation should be available by mid-2009.

The study could have two outcomes: Exxon is correct in believing Point Thomson should be developed as a gas field, and the ball would then be back in the company’s court to come to the commission for pool rules to develop Point Thomson as a gas field. Foerster said the commission should be able to respond within a month of a hearing on the request.

If the commission and Exxon don’t agree and the DNR-Exxon Point Thomson dispute continues, the timeline ends there.

But if Exxon has reached an agreement with DNR, the proposed small-scale cycling and horizontal wells into the oil rim would provide information required to answer questions.

Under a scenario where the commission wants more data from Exxon, and the small-scale cycling project moves forward, data should be available from Exxon in 2013 or 2014 on both the oil rim and liquids from condensate.

Foerster said if the oil rim is as viscous as the commission thinks it is, they should know within a month of oil rim wells coming online, and should also know fairly quickly what the results are from cycling.

Where it becomes problematic is if Exxon and the commission don’t agree, and the commission requires more gas cycling before gas blowdown, Foerster said.

On the subject of the gas pipeline, Massey said Exxon doesn’t think either the TransCanada or the Denali gas pipeline proposals are viable because it will take agreement between the state and the producers for a project to move forward.

He said what the state proposed in AGIA in the way of financial incentives for producers to commit gas in an initial open season isn’t binding on the state and Exxon needs to know what the state’s take will be before it can run project economics.

On the economic picture the state’s consultants provided for producer economics, Massey said that the treatment of firm transportation commitments provided an incorrect picture of producer economics.

Exxon believes that firm transportation commitments should be treated as long-term debt, which would reduce estimates of producer net present value in the study to zero, Massey said.

The choice for a shipper is to invest in the project through an affiliate or make long-term payments to a pipeline developer. Conceptually it’s no different than looking at the true cost of leasing a car, he said.

The economics of long-term payments to a pipeline developer have to be worse for Exxon, Massey said, because the company would then be paying for actual costs plus profits and potentially higher financing costs.

Exxon wants to own a share in the pipeline commensurate with its shipping commitment he said.

Neither project viable

On the subject of the gas pipeline, Massey said Exxon doesn’t think either the TransCanada or the Denali gas pipeline proposals are viable because it will take agreement between the state and the producers for a project to move forward.

He said what the state proposed in AGIA in the way of financial incentives for producers to commit gas in an initial open season isn’t binding on the state and Exxon needs to know what the state’s take will be before it can run project economics.

On the economic picture the state’s consultants provided for producer economics, Massey said that the treatment of firm transportation commitments provided an incorrect picture of producer economics.

Exxon believes that firm transportation commitments should be treated as long-term debt, which would reduce estimates of producer net present value in the study to zero, Massey said.

The choice for a shipper is to invest in the project through an affiliate or make long-term payments to a pipeline developer. Conceptually it’s no different than looking at the true cost of leasing a car, he said.

The economics of long-term payments to a pipeline developer have to be worse for Exxon, Massey said, because the company would then be paying for actual costs plus profits and potentially higher financing costs.

Exxon wants to own a share in the pipeline commensurate with its shipping commitment he said.



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Ice road contracts issued

ExxonMobil Production Co. said July 14 that it has awarded contracts for work in support of the first well in a multi-well drilling program at Point Thomson, part of the plan of development submitted to the Alaska Department of Natural Resources in February.

A contract has been issued to Nanuq Inc. and Alaska Frontier Constructors Inc., both of Anchorage, for construction and maintenance of nearly 50 miles of ice roads and an ice air strip needed to transport the drilling rig and associated materials, camps and personnel to the Point Thomson side.

The company said barges to move construction equipment to Point Thomson have already been contracted.

“The Point Thomson working interest owners are proceeding with the drilling plan and the project while we seek to resolve the dispute with the State (of Alaska) over the Point Thomson Unit,” Craig Haymes, Alaska production manager for Exxon Mobil, said in the company’s statement. Haymes said Exxon hopes issues can be resolved to the parties’ mutual satisfaction.

“Even if we cannot do so quickly, we intend to carry out the drilling program as leaseholders,” he said.

Alaskans have been hired, upgrades on the rig have begun and long-lead materials have been ordered in preparation for drilling this winter, he said.

—Petroleum News