A seven-year fight for control of Alaska’s rich but undeveloped Point Thomson field came to an end March 30 with the announcement of a legal settlement between the state and major oil companies.
The deal snuffs a high-stakes conflict that could have run years longer, and holds out the prospect of a modest level of production by early 2016 from the remote North Slope field.
Longer term, the deal offers hope that field operator ExxonMobil and its partners might invest billions of dollars to fully develop Point Thomson. And state officials said removal of the legal cloud over the field improves chances for an even greater prize — construction of a pipeline to market the Slope’s vast but stranded natural gas reserves.
Since ExxonMobil discovered the field in the 1970s, Point Thomson hasn’t produced a single barrel of oil or molecule of gas, and the settlement makes no guarantee that it ever will.
But state officials, long frustrated over what they call the “warehousing” of Point Thomson resources, believe the terms of the settlement will finally deliver production.
It’s clear from the dense, 85-page settlement agreement that both sides — the state and the oil companies — made huge concessions.
The deal also spawned a reshuffling of Point Thomson ownership with Chevron assigning its sizeable interest to ExxonMobil. The other major owners are BP and ConocoPhillips.
In a press conference in Anchorage to announce the deal, Alaska Gov. Sean Parnell said settling the Point Thomson matter was one of his priorities.
“Point Thomson is the largest undeveloped oil and gas field in Alaska, holding 25 percent of the North Slope’s known gas,” Parnell said. “Many administrations have struggled over the lack of production from this field, where the initial leases were granted 40 years ago. When the state decided to take those leases back, it triggered a significant but important legal battle with the producers that has already spanned three different administrations.”
In a joint letter to Parnell, the chief executives of ExxonMobil, BP and ConocoPhillips said that with the settlement now finalized, “our companies are moving forward, as participating co-venturers, with the initial development phase at Point Thomson.”
‘Earning’ acreage
The Point Thomson unit is 60 miles east of Prudhoe Bay, along the Beaufort Sea coast. The unit encompasses 38 state leases on 93,291 acres.
The Point Thomson conflict started in 2005, when the administration of then-Gov. Frank Murkowski began taking steps to terminate the unit and invalidate the leases.
The oil companies were fighting these actions administratively and in court.
As part of the settlement, the state is fully reinstating the unit as well as the leases.
Now the Point Thomson leaseholders are “on the clock,” state Natural Resources Commissioner Dan Sullivan said in an interview with Petroleum News.
The companies must start performing, and soon, to “earn” the leases, Sullivan said, or risk losing potentially all of the acreage at Point Thomson “without appeal.”
The deal lays out a complex schedule for starting, and then increasing, production from Point Thomson.
The first step, dubbed the “initial production system,” or IPS, involves putting two wells, known as PTU-15 and PTU-16, on production by the end of the 2015-16 winter season. These wells on Point Thomson’s central work pad will be part of a “gas cycling” operation whereby condensate, a liquid hydrocarbon, is collected with the residual dry gas injected back underground for storage. Initial production is to be 10,000 barrels per day.
The IPS also entails construction of a 22-mile pipeline to carry the condensate west to the existing Badami field. Ultimately it will flow into the trans-Alaska oil pipeline.
If the IPS sounds familiar, it’s because ExxonMobil made an “unconditional commitment” back in 2008 to produce 10,000 barrels a day of condensate. Even as the state and ExxonMobil fought over Point Thomson, the company went ahead and drilled the two wells.
In a court filing in January 2010, the state’s lawyers suggested 10,000 barrels was “a minimal trickle of production.” Indeed, it’s a small volume when measured against total North Slope production of around 600,000 barrels per day.
Sullivan, formerly Alaska’s attorney general, said he and other state negotiators did consider “going for something bigger.”
They concluded the fastest path to first production was to go with the 10,000-barrel project ExxonMobil already had in the works. Federal and state permitting is well along for the project, and starting over with a different or bigger project would squander time and effort, Sullivan said.
He added that the common carrier pipeline will have a capacity of 70,000 barrels per day, thus serving as a vital asset for developing highly prospective oil and gas acreage on the eastern North Slope.
Expanded development
At the IPS stage, the settlement also calls for drilling another well on Point Thomson’s west pad by the end of the 2016-17 winter season. And the companies must permit two additional wells for the east pad.
Once the IPS is on production, the companies must then turn their attention to three alternatives for full-field development.
The state’s fondest alternative is a “major gas sale,” a project to develop Point Thomson’s estimated 8 trillion cubic feet of gas. However, this would require a multibillion-dollar North Slope gas pipeline, a project the industry to date has regarded as too expensive and risky.
If the companies fail to sanction, or green light, a major gas sale project by June 2016, they must begin engineering and permitting to expand Point Thomson production under the second or third alternatives.
The second alternative requires the companies to produce a minimum of 30,000 barrels of liquids per day, or face losing some unit acreage.
The third alternative is more creative, involving a “complex reservoir integration” between Prudhoe Bay and Point Thomson, says a state-prepared settlement overview. This would involve transporting dry gas from Point Thomson to the Prudhoe Bay field for injection underground, boosting crude recovery from the nation’s largest oil field.
One other element of the settlement concerns Point Thomson’s Brookian oil accumulation. The companies must commit to production by 2018 or they lose the Brookian acreage.
Overall, if ExxonMobil and its partners balk on IPS production and fail to sanction a major gas sale by 2019, then the unit terminates and all acreage automatically returns to the state “without appeal.”
That includes leases with wells the state certified years ago as “capable of producing in paying quantities.”
‘Sledgehammer’
The settlement is profound in a number of ways. As already mentioned, the state made a major concession in reinstating the disputed unit and leases.
The companies, in turn, made a huge concession with a provision in the deal vacating a Jan. 11, 2010, ruling in Superior Court that reversed, on procedural grounds, the state’s termination of the Point Thomson unit.
It was that decision that forced the state, clearly wounded, to make an unusual interlocutory appeal to the Alaska Supreme Court. On Feb. 8, the justices heard oral argument on the case at Anchorage’s West High School.
The Supreme Court hasn’t ruled on the case — and won’t. At the joint request of the state and the oil companies, the court dismissed the appeal on March 29, the day before the settlement was announced.
The tedious language of the settlement agreement suggests that Point Thomson could again become the subject of court and administrative wrangling, or arbitration.
But Sullivan says the document packs “sledgehammer” provisions for the companies to produce or else lose acreage. The language the companies have agreed to would kill any court challenge they might bring, he said.
One reason ExxonMobil has cited for lack of Point Thomson development is the field’s extraordinary reservoir pressure, among other technical issues.
State officials sought to verify that at the outset of settlement talks with ExxonMobil.
“We went down to Houston for about a week and got access to their data room,” said Jonathan Katchen, a Department of Natural Resources official who worked on the settlement. Later, he said, ExxonMobil brought up “a truckload of documents” to its Anchorage offices for review.
Katchen, working in the state Department of Law at the time, said it was clear to him and DNR staffers that Point Thomson does, in fact, present real challenges.
Thus, state documents note that the IPS will “help determine the feasibility of” expanding liquids production from Point Thomson.
Chevron’s retreat
One company that held a major stake in Point Thomson, and was involved in the court fight to preserve the unit and leases, is now bowing out.
Chevron spokesman Russell Johnson told Petroleum News in an April 3 email that his company has agreed to assign its interest in Point Thomson to ExxonMobil. Terms of the agreement are confidential, he said.
“Chevron has elected to exit Point Thomson,” Johnson’s email said. “Going forward, Chevron will not be a part of that development. In evaluating the opportunity, we determined that Point Thomson is unable to compete for capital with other global opportunities in Chevron’s portfolio. Chevron continues to invest in Alaska through its minority interests in the Prudhoe Bay, Kuparuk and Endicott fields, as well as the TransAlaska Pipeline.”
At the end of 2011, Chevron closed a deal to sell its oil and gas assets in Alaska’s Cook Inlet basin to Hilcorp Energy Co.
Assignment of Chevron’s 11.6 percent working interest in Point Thomson will bump up ExxonMobil’s share to 68.3 percent. BP owns 27.2 percent and ConocoPhillips 3.2 percent, with 20 others combining for 1.2 percent.
