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Vol. 11, No. 28 Week of July 09, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Thomson contract blues

Eason worried by inclusion of Point Thomson field in natural gas contract

Kristen Nelson

Petroleum News

Jim Eason has fought in the State of Alaska’s long battle to get the Point Thomson field developed.

Now, as a consultant, the former director of the Division of Oil and Gas is explaining to legislators why he thinks including Point Thomson in the gas fiscal contract could further slow development of the field.

Point Thomson, discovered in 1977, is a high-pressure condensate field east of Prudhoe Bay on the western edge of the Arctic National Wildlife Refuge. Liquids could be produced by bringing the condensate to the surface; the gas would be re-injected to maintain reservoir pressure — and to await the building of a gas pipeline from the North Slope to market. That had been the plan until recently when unit operator ExxonMobil said gas recycling was not economic and that development needed to be part of a gas pipeline project.

The fiscal contract would defer existing requirements for Point Thomson unit plans and development as long as gas from the unit is committed to the gas pipeline.

In a June 3 memo to the Legislative Budget and Audit Committee, Eason said that in recent presentations representatives of Gov. Frank Murkowski’s administration have talked about three assumptions for including Point Thomson in the contract.

Those assumptions are as follows:

1) Absent the “package of benefits and concessions” in the contract, ExxonMobil, the majority Point Thomson acreage owner and the unit operator, will “continue to delay or block the early development” of the Point Thomson resources;

2) “the concessions are necessary to get the unit lessees to commit their gas reserves to the project;”

3) litigation enforcing the decision by former Division of Oil and Gas Director Mark Myers to compel development of Point Thomson “would be protracted and uncertain.”

Unit still undeveloped

Eason said evidence supports the first point, since the unit is undeveloped and original leases have been extended almost 30 years beyond their initial term, with no new wells drilled in almost 21 years despite “numerous commitments” by lessees to do so. Most recently, Eason said, lessees failed to meet a 2006 development drilling commitment, and declined to drill a delineation well proposed as a compromise to defer the development drilling commitments.

Exxon “now claims that there are insufficient reservoir continuity data to support timely development” of liquids at Point Thomson, as required in a 2005 decision (currently stayed pending completion of the contract negotiations).

“Assuming for the sake of argument that Exxon is correct — something that I am not prepared to do — any lack of reservoir continuity data is attributable to one thing only, the refusal of the Pt. Thomson Unit’s lessees to have timely drilled the wells that would have provided them that information,” Eason said.

Exxon has apparently told the state it will not produce Point Thomson without incentives, he said, but the state must also be assuming it could not “successfully enforce its lease and unit rights to require prudent and timely development of its resources”; that Exxon wouldn’t act to book the Point Thomson reserves and gain the cash flow from that production; and “that Exxon and its shareholders will not be influenced by the growing political pressures, both in Alaska and in Washington, D.C., to expedite the ANS project.”

On the state’s ability to enforce its lease rights, the state’s outside counsel, Spencer Hosie, prepared a memorandum on obligations and duties of lessees “and the standards which are likely to apply in any litigation,” Eason said, suggesting legislators might want to review Hosie’s conclusions (see stories in April 24, 2005, and May 8, 2005, issues of Petroleum News).

In presentations to legislators on the contract in May, Department of Natural Resources Commissioner Mike Menge “indicated that the administration’s attorneys believe that he has a very strong case (on Point Thomson) and is likely to prevail,” Eason said (see story in May 21 issue of Petroleum News).

PPT also benefits Point Thomson

On the issue of incentives, Eason said there are incentives which benefit Point Thomson in other provisions of the contract and in the proposed petroleum profits tax or PPT. At a 20 percent tax credit for capital investments in the proposed PPT, and with the contract providing for the state to own 20 percent of the pipeline and other facilities in a gas pipeline project, as well as other incentives in the contract, Eason said “it appears the State will be picking up considerably more than 40 percent” of Point Thomson unit development costs, as well as “allowing the recovery of operating expenses associated with the development, upstream field costs” through payment of an upstream cost allowance,

Eason said he believes legislators “are more capable and better situated than I am to assess” whether or not Exxon and its shareholders will be influenced by political pressures.

Point Thomson in the contract

The contract (article 23.1) says the Point Thomson unit owners will make an open season commitment and apply to the Alaska Oil and Gas Conservation Commission within six months of the effective date of the contract for issuance of pool rules to authorize the field gas off-take rate for Point Thomson unit gas, in exchange for a temporary suspension of certain unit obligations. The temporary suspension would run from the effective date of the contract through the reinstatement date, defined as initial delivery of Point Thomson gas. Eason said that with the contract’s work commitment language, “coupled with potential suspensions for resolution of litigation, force majeure events and other unforeseen delays, this is essentially an indefinite suspension period which could easily extend the life of some” of the Point Thomson unit leases to 50 years “or more with no development of oil, gas or condensate from the field.”

He also said he is unclear how BP, ConocoPhillips and Exxon can commit the Point Thomson unit since neither Chevron nor Point Thomson minority owners would be signatories to the contract. There are 25 lessees in the 45 state oil and gas leases in the unit, he said, although almost 99 percent of the acreage is held by Exxon (52.5779 percent), BP Exploration (Alaska) (29.1943 percent), Chevron U.S.A. (14.3125 percent) and ConocoPhillips Alaska (2.821 percent).

The state also agrees in the contract not to enforce provisions which require cash payments from unit owners for non-compliance; not to terminate the unit or any property within it; not to require plans of development; and not to alter the rate of development or operations for the unit.

One of the conditions under which the state could, with 30 days notice, terminate its Point Thomson agreements in the contract is if the owners or operator of the unit fail to pay annual lease rentals, “after receiving Notice and opportunity to cure the failure of at least 30 days.”

Eason said that while this may seem to be something the state is gaining, it “represents a unique and significant departure” from terms of the state’s leases, which require that if the annual rental is not paid on the date due, the lease automatically expires at 11:59 p.m., Alaska Standard Time, on the day the rental was due.

“Also,” Eason said, “notice of rental payments is not provided by the department, nor is any time allowed to cure the failure. The lease simply dies under its own terms, and the acreage is available for lease in the State’s next scheduled competitive oil and gas lease sale. In the course of my time at the Division of Oil and Gas, several lessees lost their leases for failure to comply with the explicit terms of the rental provision.”

Point Thomson a major policy decision

Eason said a decision to adopt the Point Thomson unit language in the proposed gas contract “represents a major policy decision for the Legislature.” Based on the actions to date of the Point Thomson lessees he believes it would be “a major leap of faith to presume that under the ambiguous provisions of the (fiscal contract) work commitment that this pattern will change.”

If development does not occur, the state “will have given up any recourse to its lease and unit terms, its statutes and regulations, its precedents from prior court decisions, the courts’ deference to the commissioner’s decisions, and most importantly, the Department of Natural Resources’ access to the court to enforce lease compliance.”

The Legislature, he said, is being asked to give up the authority of the DNR commissioner to administer terms of the state’s oil and gas leases — a decision which would extend well beyond the Point Thomson leases.

“It will extend to all leases included in Exhibit D of the (gas fiscal contract), which includes all leases currently owned by the Participants, and it is intended to include future leases that they may obtain.” Under the proposed uniform upstream fiscal contract, the state “also intends to include the ‘lease administration terms, the audit procedures and mandatory arbitration’ among the rights to be conveyed to all North Slope lessees who enter into the proposed” uniform upstream fiscal contract.

“In my opinion, few policy decisions carry more weight than this one,” Eason said.

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