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Vol. 13, No. 49 Week of December 07, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Legislators hear PT tiff

Exxon says it is keeping to drilling schedule; DNR disputes what’s permitted

Kristen Nelson

Petroleum News

The State of Alaska and working interest owners in the terminated Point Thomson unit are in court-ordered settlement negotiations — which made for some interesting testimony before a Dec. 1 joint meeting of the House Judiciary and Resources committees.

The topic was Department of Natural Resources permitting and legislators heard from DNR officials, representatives of Escopeta Oil on Cook Inlet (see page 1 story in this issue) and ExxonMobil Production Co., which was/is the major owner and unit operator at Point Thomson, depending on whether you agree the unit has been terminated.

House Majority Leader Ralph Samuels, R-Anchorage, asked ExxonMobil’s Alaska production manager, Craig Haymes, how much work has been done at Point Thomson since November 2006 — the month former DNR Commissioner Mike Menge terminated the unit, a decision which is under appeal in Alaska Superior Court.

Haymes had provided the committee an update of work including upgrades to Nabors rig 27E and work done on site at Point Thomson in preparation for an as-yet unpermitted development well. He told Samuels that the work to get the drilling pad ready was done this summer; last summer’s work involved surveying to determine where the wells would be sited.

Conductors set

In describing work at the drill site Haymes said: “We’ve also set two conductors; we have drilled down to 120 feet (and) set these conductors” using a 75-ton crane. Conductors, he said, are large pieces of pipe, about 3 feet in diameter. “You can’t start drilling until you have these in place,” he said.

Samuels 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.

At this point ExxonMobil is not waiting on permits, he said. Of 22 permits needed, 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?”

Issue of trust

Haymes said he couldn’t speak for DNR, but from the owners’ perspective the question has been raised “can we be trusted to execute this plan of development? And we’re trying to show that yes, we can be trusted to execute this plan of development.”

He said from 1977 through 2005 DNR approved plans of development for Point Thomson.

It’s in everyone’s interest to move the development forward, Haymes said, “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.”

He said the working interest owners have spent a lot of money to keep on schedule. “We believe we can resolve the dispute; we are currently in full-faith settlement discussions with the DNR.”

But ExxonMobil also believes that its actions in advancing a winter drilling program hold the leases.

Leases don’t automatically expire 90 days after expiration of the unit, Haymes told legislators, but can be held through different means such as “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.”

Conductors an issue

Whether setting conductors was drilling and how the conductors got there were issues of some interest.

“... I don’t think we permitted anybody to put conductors on that pad as far as I’m concerned,” Acting Division of Oil and Gas Director Kevin Banks told the legislators. Permits that have been granted are those, such as for tundra travel, that don’t require a leasehold right, he said.

Deputy DNR Commissioner Marty Rutherford said it’s a distinction between general-use permits — which DNR has issued — and permits requiring a leasehold interest.

Haymes said setting conductors was included in a permit from DNR’s Division of Land, Mining and Water for summer work. It included maintenance and site work and installation of cellars and conductors. The cellars and conductors wording was from the Point Thomson drilling program, which was approved in a July 7 permit, he said, and described proposed work including “removal of equipment currently stored on the pad by another operator, placement of ice road construction equipment, a 30-man construction camp, fuel storage tanks and fuel associated with ice road construction, and for the use in other operations and maintenance and site preparation on the existing pad. The maintenance and site preparation work will include grading, placing gravel from the Prudhoe Bay area and installation of cellars and conductors,” he read from the program approved by the permit.

Drilling or not?

Banks told Petroleum News in a Dec. 2 e-mail that setting conductor is not drilling.

“A conductor is a short string of pipe set to ensure the integrity of the drilling operation, but it is not a well.” He said a conductor is different than surface casing, which is set deeper. A conductor does not require a drilling permit from the Alaska Oil and Gas Conservation Commission, Banks said, because the commission does not consider setting a conductor to be a drilling operation.

“ExxonMobil does not have a drilling permit from the AOGCC for this work, so they must not consider it a drilling operation either,” he said.

Resources Co-chair Craig Johnson, R-Anchorage, said it seemed to him that based on the description of what was permitted, “that we have permitted drilling ... basically the first step in drilling a well ... with that language.”

Rutherford said she had spoken with Haymes recently 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 is a general use permit.”

Another take

But a court filing by ExxonMobil in late November provides some insight into the view the companies are pushing.

Following a description of work, including modification of a drilling rig, plans to move equipment to the drilling site and to set “casing at the surface” and other operations “necessary and preparatory to drilling,” and which “are intended to lead to drilling during the winter of 2008-09,” ExxonMobil told the court: “Notwithstanding these drilling operations, on July 22, 2008, DNR purported to terminate the leases, on the theory that 90 days had run since the termination of the Unit. DNR simply paid no attention to the fact that the conduct of drilling operations by ExxonMobil and the WIOs had extended the leases.”

ExxonMobil described DNR’s denial of permits, and then told the court:

“DNR’s conduct here is accordingly quite remarkable. Having terminated the Unit on the ground that DNR wanted development of the Point Thomson field, but that the WIOs could not be ‘trusted’ to carry out the drilling program they had submitted, DNR now emerges as the principal, indeed the sole remaining, obstacle to the drilling that it says it wants.”

ExxonMobil said that whereas DNR is refusing to permit drilling because the leases “have purportedly terminated” this is “exactly contrary to the provisions of the leases. The leases say that the term is extended so long as ‘drilling operations’ are being conducted, and so long as drilling operations are being prevented by the acts of the State. In other words,” ExxonMobil told the court, “DNR’s anti-development acts give the lie to its pro-drilling words, while its insistence that the leases are terminated results in extending their term.”

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