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Vol. 13, No. 24 Week of June 15, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Thomson decision confirmed

Irwin sticks with April termination of PTU unit; Exxon still plans to drill

Kristen Nelson

Petroleum News

Alaska Commissioner of Natural Resources Tom Irwin is standing by his April decision to terminate the Point Thomson unit and backing it up with a 25-page decision providing DNR’s perspective for the benefit of a reviewing court.

The major owners at the former Point Thomson unit — Exxon Mobil Corp., BP Exploration (Alaska), ConocoPhillips Alaska Inc. and Chevron U.S.A., along with one of the minority owners, Leede Operating Co. — asked for reconsideration of Irwin’s April 22 decision rejecting a proposed 23rd plan of development for Point Thomson.

The unit was terminated in late 2006, a decision upheld in Alaska Superior Court in early 2008, although Judge Sharon Gleason remanded the decision to the department so that the former unit owners would have an opportunity to suggest an appropriate remedy for their failure to submit an acceptable plan of development.

In February the owners proposed a 23rd plan of development as a remedy, including dates for drilling to begin on a small-scale gas cycling project to test the feasibility of such development and the department held a hearing on the proposed remedy.

The previous plan, the rejection of which led to the unit’s termination, called for gas production for the proposed North-Slope-to-market gas pipeline. The rejected plan, the 22nd, said gas cycling, which would maintain reservoir pressure by reinjecting gas after stripping out the liquids, was not economic.

Irwin: no hydrocarbons to market from Thomson in 30 years

Irwin rejected the proposed 23rd plan of development as a remedy in an April 22 decision. The companies requested reconsideration May 12; partial reconsideration was granted May 22.

“My decision to terminate the Point Thomson Unit stands,” Irwin said in the June 11 decision on reconsideration.

He said units are formed to facilitate development of the state’s resources, but in more than 30 years since the Point Thomson unit was formed, “no oil or gas has been brought to market and none of the infrastructure for development has been built.”

“This unit is terminated because the Point Thomson unit working interest owners failed to fulfill the commitments made in the unit agreement.”

He listed a number of deficiencies in the request for reconsideration, and called it “flawed,” but also said the request “on several issues merits a response so that a reviewing court has the benefit of DNR’s perspective.” The remand requires DNR to report back to the court on the outcome.

ExxonMobil will appeal

ExxonMobil is the largest Point Thomson acreage holder and the unit operator.

ExxonMobil spokeswoman Margaret Ross told Petroleum News June 11 in an e-mail that “ExxonMobil is extremely disappointed by the DNR decision.” She said ExxonMobil’s 23rd plan of development “is responsive to all of the DNR’s requirements, including a commitment to bring Point Thomson on production.”

“Thus, we plan to appeal this action and will pursue all alternatives to protect our rights to develop these resources,” she said.

ExxonMobil believes Irwin “has no legal basis to terminate the unit and doing so will lead to further court appeals,” Ross said, taking years to resolve and delaying Point Thomson development, and creating “tremendous uncertainty about the availability of Point Thomson gas for a gas pipeline project — gas that is essential to the success of such a project.”

Ross said that prior to 2005 DNR approved plans of development for Point Thomson.

“Consistent with the instructions of the court, the owners believe the updated plan is an appropriate remedy for DNR rejection of plans of development that were submitted in 2005 and 2006,” she said.

The owners have a “comprehensive technical understanding” of the Point Thomson reservoirs and have spent $800 million to date, she said, with $1.3 billion budgeted in the 23rd plan of development.

Plans for this year include drilling, Ross said, “and we have already hired Alaskans, secured a rig and ordered long-lead materials for this purpose. The plan would provide jobs for over 200 people this winter.”

She also said the companies “are continuing plans to begin drilling this coming winter,” despite DNR’s decision. “We have the right to conduct such drilling under the terms of the leases, which have not yet expired,” she said.

On the issue of commitment, Ross said: “The owners provided significant assurances that they would meet their commitments, including a provision for unit termination if we did not meet key milestones included in the plan of development.”

DNR says it’s not required to plan unit development

Irwin said he took issue with the claim in the request for reconsideration that if the department “found the 23rd POD deficient, it was obligated to disclose what it wanted Appellants to do to avoid termination.” He said that claim misinterprets the remand proceeding “and constitutes an effort to put the responsibility for unit development on DNR.”

The unit was terminated, he said, because of failure to submit an acceptable plan of development and “the failure to meet the obligation to develop oil and gas leases.” The remand was to allow appellants to describe what they would do to remedy their failures, he said.

Irwin said the issue at hand was not a presentation by DNR of an acceptable plan of development under the unit agreement and the reasonably prudent operator standard. Judge Gleason found that DNR properly rejected the 22nd plan of development. The question, he said, is whether it is in the public interest for the unit to continue.

As for issue of whether the companies would carry out the 23rd plan if it were approved, Irwin said given “a unit with a history of broken promises and failures to meet work commitments, it is completely appropriate to query Appellants as to why I should believe they will carry out their work commitments and what assurances they can offer me that I can believe them.”

Appellants’ interests considered

The appellants contended that DNR “improperly focused on the public interest in terminating the unit and that the agency failed to adequately consider Appellants’ interests. I disagree,” the commissioner said.

DNR is required to consider the public interest, he said.

And if the “proposed remedy of 10,000 barrels per day of production” were accepted, Irwin said, it would take 40 years before Point Thomson gas was available because of the hundreds of millions of barrels of oil-rim oil and condensates that would have to be produced before gas production, unless the companies dramatically increased oil production or got permission from the Alaska Oil and Gas Conservation Commission to leave the oil in the reservoir and produce primarily gas.

Irwin said he carefully considered the rights of the companies when terminating the unit and said the unit history demonstrates the “close and generous consideration” DNR has given the companies for many years, allowing them many opportunities to conduct studies and refraining “from taking punitive action when Appellants repeatedly breached their various work commitments.”

Irwin said the companies “ignore that their failure to submit an acceptable 22nd POD was the culmination of over thirty years of failure to develop.”

DNR has struggled “for years” to get the unit into production, he said.

Issue of approved PODs

Irwin said the record doesn’t support the “contention that DNR’s approval of 21 PODs means that it approves the state of development.” After the last well within the unit was drilled in 1983, “DNR has repeatedly requested or demanded that more wells be drilled to move the unit towards production,” he said: Ten wells were promised between 1984 and 2001; not one was drilled.

“DNR approved most of the PODs, but it did not agree with the pace of unit exploration and development,” Irwin said.

As for DNR’s conclusions about whether the companies intend to perform legally enforceable contractual obligations, Irwin said the credibility of the companies matters because they “have asked DNR to trust that they will perform the commitments contained in the proposed 23rd POD. Credibility matters because they ask DNR to trust that they will expand production beyond the 10,000 barrels a day of gas condensate they plan to begin producing by the end of 2014 if their test results accumulated over the next six years are favorable and all permitting issues are resolved.”

Credibility is also an issue, he said, because there is no commitment for production of the 8 trillion cubic feet of gas or the hundreds of millions of barrels of oil.

“Credibility matters because they are asking DNR to have faith that despite the long history of broken development commitments, they will eventually bring the state’s oil and gas to market,” he said.

Irwin said he would need to be certain that the companies would perform before he approved the 23rd plan of development.

He said testimony at the hearing and the companies’ perspective on the unit’s history convinced him that the companies “have a different view than I do on what honoring a commitment means.”

He said he carefully considered credibility of witnesses at the hearing, as well as reviewing the history of the unit. “What I found was a pattern of broken promises and misleading communications by Appellants that did not result in any production of oil or gas.”

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