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Vol. 13, No. 52 Week of December 28, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

State says work illegal

Claims Exxon did not have permit for well work done last summer at Point Thomson

Kay Cashman

Petroleum News

An individual in the private sector who does permitting for oil companies in Alaska told Petroleum News that recent events at the former Point Thomson unit on the eastern North Slope reminded him of the 1974 movie “Blazing Saddles,” and the Mexican bandit who said “Badges? We don’t need no stinking badges.”

The line, which originated in the 1935 book “The Treasure of the Sierra Madre,” would have to be modified for Point Thomson, to read, “Permits? We don’t need no stinking permits.” And the culprit, he said, would be ExxonMobil, not a Mexican bandit.

The gentleman was one of three private sector permitting contractors who agreed to talk to Petroleum News about the hullabaloo over Exxon’s work in the defunct Point Thomson unit. Sometime this past summer, the company augered down 120 feet into an existing gravel drilling pad at Point Thomson for the purpose of installing two conductors — three-foot-diameter casing, or pipe, that is cemented into place as the first part of drilling a well. Exxon’s top official in Alaska recently claimed that the work, which state officials said was not permitted, was part of “drilling operations” and therefore allowed Exxon and its partners to retain several of the unit’s leases, which the Alaska Department of Natural Resources said expired months ago.

DNR officials, who didn’t hear about the conductors being set until Dec. 1, and the three permitting agents, who asked to remain anonymous, said drilling into the subsurface and installing conductors from a gravel pad in Alaska requires a lease or unit plan of operations that has been approved by DNR’s Division of Oil and Gas, and a drilling permit from the Alaska Oil and Gas Conservation Commission, or AOGCC. Exxon did not have either, and filled out paperwork on June 12 for DNR’s Division of Coastal and Ocean Management, saying that it did not need approval from Oil and Gas because the Point Thomson project involved “surface activities only on an existing gravel pad.” The company said all it needed was a land use permit.

State officials agreed, and the land use permit (26895) issued to Exxon by the DNR’s Division of Mining, Land and Water in July, was for “staging equipment, fuel and a camp at the Point Thomson unit #3 exploration pad.”

Such permits, however, do allow augering or drilling down as much as 300 feet for things like soil testing, but do not allow something as permanent as the setting of conductors or well casing in the hole, director of Mining, Land and Water, Dick Mylius, told Petroleum News Dec. 23.

“The whole point of the permit was because Exxon wanted to get things, equipment out there during the open water season,” in case its negotiations with DNR resulted in a decision that would allow Exxon and its partners to reclaim the leases and proceed with their proposed 2009 drilling program, Mylius said. “We definitely did not expect them to set casing to drill. We have never issued a permit to set casing to drill. You need a drilling permit to do that.”

State of Alaska officials were astounded when they learned Exxon had set conductors on the gravel pad — and that Exxon intended to use what the state considered illegal activity to lay a legal claim to leases that expired after the Point Thomson unit had been terminated.

But just because it hasn’t been done, doesn’t mean it can’t be done.

Land use regulations not specific

State regulation 11 AAC 96.010 says land uses “requiring a permit” or “other written authorization” include “drilling to a depth in excess of 300 feet, including exploratory drilling or stratigraphic test wells on state land not under oil or gas lease.” (Exxon drilled to only 120 feet.)

Regulation 11 AAC 96.025, which deals with conditions for generally allowed land uses, says drilling is subject to the following conditions: “Holes, pits, and excavations must be repaired as soon as possible; holes, pits, and excavations necessary to verify discovery on prospecting sites, mining claims, or mining leasehold locations may be left open but must be maintained in a manner that protects public safety.” (By definition there is an organic class of minerals that include hydrocarbons.)

The land use regulations do not exclude well conductors as a maintenance method.

An issue of trust

The first time DNR officials heard about the two conductors being installed at Point Thomson was at a Dec. 1 legislative hearing in Anchorage, which in itself was odd because Exxon and its partners at Point Thomson — BP, Chevron and ConocoPhillips — have been in what company officials have described as “good faith” negotiations with the state to get some of their leases back.

Trust has been cited by top DNR officials as an issue they have with Exxon because the company has not carried through on previous drilling and production commitments for the Point Thomson unit, which Exxon and its partners have held for more than 30 years.

At the Dec. 1 hearing Exxon Alaska production manager Craig Haymes said that by doing the work at Point Thomson, the company is “trying to show that yes, we can be trusted to execute this plan of development. ... It’s in everyone’s interest to move the development forward. And we’ve kept the project schedule alive for the last year and a half — we’ve kept the schedule alive so we can start production in 2014.”

Obviously shocked by Haymes admission that Exxon had set conductors at Point Thomson, DNR deputy Commission Marty Rutherford said that she had recently spoken with Haymes and was assured “that they would not do any drilling that was not permitted by DNR. I don’t think they perceive this (setting conductors) as drilling and they also clearly understand that this (the land use permit) is a general use permit.”

“At the end of the day, agencies can only approve what they have the authority to permit,” acting director of Oil and Gas, Kevin Banks, told Petroleum News Dec. 22. State regulations, he said, clearly require approval from Oil and Gas and AOGCC to drill on state lands. Exxon had neither, he said.

But Haymes disagreed. He told members of the Alaska State House Judiciary and Resources committees Dec. 1 that leases don’t automatically expire 90 days after expiration of a unit, but can be held by drilling.

“If you have a drilling operation under way on those leases then you can retain those leases in accordance with regulations and in accordance with the lease conditions,” he said.

In describing work at the drill site Haymes said: “We’ve … set two conductors; we have drilled down to 120 feet (and) set these conductors” using a 75-ton crane.”

Rep. Ralph Samuels, R-Anchorage, asked if ExxonMobil had a permit for the well conductors.

Haymes said it was part of the land use permit. He said that permit stated that the company was going to install conductors on the site, and assured Samuels that all the work had been done according to laws and regulations.

Petroleum News got a copy of the permit. It did not mention conductors or well cellars, nor did Exxon’s June 12 application for the permit, but its cover letter to Mining, Land and Water did, as did an attachment to the application titled “Point Thomson Drilling Program: Equipment Staging and Pad Preparation Project Description” that state officials said was circulated to several agencies as part of other permitting applications.

The private permitting agents and state officials said the language that is in the application is what counts, especially when Mining, Land and Water does not permit conductors and cellars and would have assumed the conductor and well cellar descriptions — and the mention of barging activities, a drilling rig and an ice road that were in the other two documents — were there because Exxon was seeking permits for those activities from other agencies.

Still, the permit issued by Mining, Land and Water said site development activities described in Exxon’s June 12 plan were covered by the permit. The plan clearly lists the “installation of a cellar(s) and conductor(s)” under subsection “Equipment Staging and Site Preparation.”

BUT in its permit application Exxon described its proposed project activity in these words: “Exxon Mobil intends to stage ice road equipment, fuel and other materials at the Point Thomson un….”

That was the end of the project description, an unfinished sentence, which a Mining, Land and Water official assumed was only missing the completed word “unit.”

Samuels: ‘It’s like Alice in Wonderland’

At the Dec. 1 hearing Haymes said ExxonMobil was not waiting on permits to advance its 2009 winter drilling program at Point Thomson. Of the 22 permits needed from state, local and federal agencies for Exxon’s proposed winter drilling program at Point Thomson, 16 are in hand, two have been denied and the status of the other four is unclear.

“It’s like Alice in Wonderland,” Samuels said, referring to the disputed status of Point Thomson. “They keep issuing permits and you keep spending money and at the end of the day, why would you spend the money and why would they issue even one permit?”

So why did DNR divisions issue any permits to Exxon?

“No one knew what the ultimate decision on the leases would be, whether or not Exxon would get them back ... so when they applied for the permits, we had to treat them like any other non-leaseholder. At the time, it seemed like the right thing to do,” Mylius told Petroleum News.

“But we were very forthright with them,” he said, referring to the warnings that were part of every permit issued by DNR’s divisions and included in cover letters and correspondence from the agencies. Those warnings were in bold type and told Exxon that issuance of each permit did “not mean DNR has changed its position” on the status of the Point Thomson unit or leases, and that Exxon was doing the work “at its own risk.”

And DNR has not issued permits to Exxon for Point Thomson that require the permittee to be a leaseholder.

On Nov. 14 DNR Commissioner Tom Irwin denied Exxon’s application for a permit to build an ice road to move a drilling rig to Point Thomson, and previously rejected the company’s plan of operations.

In a Nov. 18 appeal of that action, Exxon said the leases in the contested Point Thomson unit have not terminated, and that DNR “wrongfully” denied the ice road permit for lack of leases. The company said it held the leases on July 10 when it submitted the ice road permit application. “The leases remain in force for so long as ExxonMobil is conducting drilling operations on the leases, and for so long thereafter as ExxonMobil is prevented by an act of the state from conducting such operations,” the company said.

Inspection notes violations

Three days after the Dec. 1 legislative hearing, the Mining, Land and Water official who signed Exxon’s land use permit inspected the work the company had done at pad No. 3.

In a Dec. 15 letter to ExxonMobil, Gary Schultz said that the company was “for the most part” in compliance with the environmental stipulations of the permit, but there were some issues of non-compliance,” mostly related to Exxon’s project description, including the installation of the two well conductors.

Schultz said the land use permit authorizes surface uses only, such as the staging of equipment, but not the installation of conductors, which “is the first step in the drilling of oil wells” and “must be approved by the Division of Oil and Gas. …

“This activity was not clearly stated in your application and was not approved,” Schultz told Exxon.

He also noted that in Exxon’s project plan it had said it was going to use only two small areas of the pad, and instead the company was using the entire pad.

He asked Exxon to submit a revised plan by Jan. 9, and warned that Mining, Land and Water might ask the company to remove the conductors next summer.

Legislators get letter

On Dec. 23, Mylius sent a letter to the chairs of House Judiciary and Resources clarifying Mining, Water and Land’s position on Exxon’s land use permit.

He said Haymes was “incorrect” in saying that the “drilling operations” were being lawfully conducted under the land use permit.

The permit, he said, was issued for surface use only, and that his division does not regulate oil and gas drilling operations.

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AOGCC delays action on Exxon permits

The Alaska Oil and Gas Conservation Commission has decided to hold off making a decision on applications from ExxonMobil for drilling permits for the former North Slope Point Thomson unit.

Petroleum News learned of the decision from a Dec. 19 letter AOGCC sent to Tom Irwin, commissioner of the Alaska Department of Natural Resources.

Irwin had written to Dan Seamount, the commission chair, on Oct. 29, asking, as a landowner, to be heard on the Point Thomson permit applications AOGCC had received from Exxon.

Irwin also said that state law prohibits drilling on state land without an approved plan of operations from DNR’s Division of Oil and Gas, which had rejected Exxon’s plan.

In a Nov. 6 response, Seamount said the commission had been officially notified that DNR had terminated 44 of the 45 leases “in the area formerly known as the Point Thomson unit.”

Exxon’s permit applications were filed “well before that notification but have not been withdrawn,” he said. “We understand that ExxonMobil is disputing DNR’s determination regarding lease status.” He invited both DNR and Exxon “to submit written argument on the question of what action” the commission should take on the drilling applications.

Seamount noted that AOGCC’s regulations say permits to drill are “not valid at a location where the applicant does not have a right to drill for oil and gas,” while courts have found that a drilling permit “grants no affirmative rights to the permittee to occupy the property,” merely removing conservation laws and regulations as a bar to drilling.

The same ruling said — in that case the Texas Railroad Commission — “should not do the useless thing of granting a permit to one who does not claim the property in good faith.”

In their Dec. 19 letter to Irwin, the three AOGCC commissioners said they knew that the Point Thomson leases on which Exxon planned to drill were involved in DNR and court “dispute resolution processes,” and that if the case was resolved against Exxon, the drilling applications “will be moot.”

If the dispute is resolved in favor of Exxon, the commissioners think there will be sufficient time to “promptly” make a decision on the drilling permit applications, and not cause a delay in drilling.

The commissioners also noted that issues raised about the drilling applications might be “intertwined to some extent” with the compulsory unitization petition Exxon submitted to AOGCC, and which is scheduled for oral argument before the commission on Feb. 9.

—Kay Cashman