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Vol. 15, No. 8 Week of February 21, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Point Thomson case on ice

Judge grants state’s call for timeout as it appeals ruling to Alaska Supreme Cour

Wesley Loy

For Petroleum News

A judge has ordered a temporary halt to the Point Thomson case pending the state’s appeal of a recent unfavorable ruling to the Alaska Supreme Court.

The one-page order from state Superior Court Judge Sharon Gleason of Anchorage, issued Feb. 11, came over the objections of ExxonMobil and other oil companies with a stake in the rich Point Thomson oil and gas field on Alaska’s eastern North Slope.

Fresh off a significant victory in Gleason’s court, the companies had opposed the State of Alaska’s request for a timeout in a case that’s not yet run its course.

Gleason granted the state’s motion to stay the Superior Court proceedings until the Supreme Court either rejects the state’s petition, or accepts and acts upon it.

Issues for the high court

Lawyers for the state want the Supreme Court to review Gleason’s Jan. 11 ruling that reversed state Department of Natural Resources Commissioner Tom Irwin’s 2008 termination of the Point Thomson unit.

Gleason held that the state did two things wrong.

First, the major Point Thomson leaseholders — BP, Chevron, ConocoPhillips and the operator, ExxonMobil — were wrongly denied an administrative hearing under Section 21 of the Point Thomson unit agreement, the judge ruled.

Second, in a prior administrative hearing before Irwin, the commissioner improperly relied on the same attorneys and a staff member who previously had acted as state “advocates” against the oil companies in court. This created the appearance of a lack of impartiality and deprived the leaseholders of their constitutional right to due process, Gleason held.

Although the Superior Court case has yet to go to trial and no final judgment has been rendered, the state took the unusual step of appealing Gleason’s ruling to the Supreme Court.

The state’s attorneys argue Gleason incorrectly found that the Point Thomson leaseholders deserve a Section 21 hearing — a hearing the state contends would be enormously complex and expensive, potentially adding years to the Point Thomson conflict for no good reason.

The state also refutes the judge’s finding that the oil companies were denied proper due process.

A monumental case

As Petroleum News went to press, the Supreme Court had not yet ruled on the state’s petition for a review of the Gleason ruling.

Lawyers for ExxonMobil are expected to file papers by March 1 opposing the state’s petition.

For five years now, the state has been trying to reclaim the remote Point Thomson field on state land along the Beaufort Sea coastline east of Prudhoe Bay.

Frustrated state officials have said the oil companies have failed to develop the field 30 years after its discovery, choosing instead to “warehouse” the asset.

ExxonMobil has cited the lack of a North Slope natural gas pipeline, along with the extremely high reservoir pressure at Point Thomson, as big reasons for the development delay.

Even as the oil companies fight, both in court and through the DNR administrative appeals process, to keep the state from dissolving the unit and voiding the underlying leases, ExxonMobil this winter is mounting a limited drilling campaign at Point Thomson with Irwin’s blessing.

While it’s unclear how the conflict ultimately will play out, one thing is clear: Alaska might never have seen a court case involving so fabulous a prize.

Point Thomson’s estimated 8 trillion cubic feet of gas, plus hundreds of millions of barrels of petroleum liquids, are worth tens of billions of dollars.

The ‘taint’ in DNR

After her January ruling, Gleason asked both sides to submit arguments about how to proceed with a hearing under Section 21 of the Point Thomson unit agreement.

Section 21 says the state can alter or modify the rate of production, provided the unit operator has the opportunity for a hearing to consider whether a required production increase would violate “good and diligent oil and gas engineering and production practices.”

The state’s lawyers argued unsuccessfully in Gleason’s court that because Point Thomson has no production, Section 21 doesn’t apply.

Not surprisingly, lawyers for the state and for the Point Thomson leaseholders disagree on how to proceed with a Section 21 hearing.

Lawyers for the oil companies, in a 10-page argument filed on Feb. 10 in Superior Court, urged Gleason herself to preside over the Section 21 hearing on grounds that DNR’s administrative handling of the Point Thomson matter is now “tainted.”

That’s because DNR, in misusing its lawyers and staff, failed to keep its decision making and advocacy functions separate, wrote ExxonMobil attorney Doug Serdahely.

He suggested the taint disqualifies all the senior people at DNR, including the commissioner, from presiding over the Section 21 hearing.

Serdahely held out the possibility no hearing will be necessary if DNR is now “satisfied with the current rate of development” at Point Thomson, where ExxonMobil has vowed to begin 10,000 barrels a day of gas condensate production by year-end 2014.

If DNR is unhappy, then it must, under Section 21, tell the oil companies what changes to the current development would be satisfactory, within the bounds of “good and diligent” practices, Serdahely argued.

“No one’s interests have been served by DNR’s unwillingness to say straightforwardly what it wants” from the companies, he wrote.

State looks to keep control

State attorneys don’t like ExxonMobil’s idea of putting the judge in charge of a Section 21 hearing.

Rather, they argue the administrative hearing should stay in DNR’s court. And they contend the department is fully capable of acting as an impartial decision maker.

Under state law, DNR has the authority to “balance complex economic issues and the public interest in formulating state oil and gas leasing policy,” Senior Assistant Attorney General Richard Todd wrote in a 14-page argument filed Feb. 10 in the Superior Court.

Turning over to anyone else a resource management decision “of this magnitude” is inconsistent with Alaska law, Todd wrote.

He continued: “The Section 21 hearing goes to the essence of the state interest in oil and gas leases and DNR’s land management responsibilities. The DNR Commissioner is the person who under Alaska law is entitled to make the initial Section 21 decision,” a decision that could then be appealed to the Superior Court.

DNR would not allow any attorneys working as advocates for the department to advise Irwin this time around, Todd added. Ditto for any DNR staffers who have, or will, function as DNR advocates.

The state filing names the attorneys who would stay clear of Irwin in a Section 21 proceeding. They include Todd and fellow state attorneys Jonathan Katchen and Jeff Landry, plus lawyers with the private firm of Ashburn & Mason.

As far as what should happen going into a Section 21 hearing, the state laid out a different roadmap from what ExxonMobil argued.

The way the state sees it, the oil companies would first say what rate of development and production they propose for the Point Thomson unit.

The commissioner would determine whether their proposal was consistent with “good and diligent oil and gas engineering and production practices.”

And if he did not agree with the proposal, “the matter would then proceed to hearing” with the commissioner ultimately deciding the “proper rate of development for the unit.”

Whether the arguments over Section 21 procedure are very important — at least for now — is debatable given Gleason’s order staying the Superior Court case.

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