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State conditionally approves Point Thomson unit expansion-contraction Minority working interest owners given until Aug. 30 to sign on; million-dollar penalties due if eastern North Slope unit development doesn’t proceed according to schedule Kristen Nelson PNA Editor-in-Chief
The Department of Natural Resources Division of Oil and Gas has reached a conditional agreement with major working interest owners of the Point Thomson unit on an expansion-contraction plan. In a July 31 letter, division Director Mark Myers told unit operator ExxonMobil Production Co. that working interest owners in the expansion and contraction acreage would have until Aug. 15 to agree to terms of the agreement in writing. (See related article on page B1.)
All the working interest owners except Murphy Exploration & Production Co. notified the state prior to the deadline that they accepted the state’s terms.
That date was extended to Aug. 30 for minority working interest owners after Murphy Exploration & Production Co. notified the state that it had been unable to reach agreement with the majority working interest owners on sharing technical data.
Negotiations between the Point Thomson owners and the state began in February, when unit operator ExxonMobil applied to simultaneously expand and contract the unit to add all or portions of 16 state oil and gas leases while excluding portions of four other leases.
Assuming all of the working interest owners agree, the effective date of the expansion-contraction is July 31, the date many of proposed expansion leases were due to expire, and has earlier effective dates for two leases — the date those leases would have expired.
The state approved contraction out of the unit of our leases or portions of leases and the non-unitized portions of three of the leases are available for the state to offer in its next areawide oil and gas lease sale. Penalties for nonperformance The state has imposed hefty penalties if the working unit owners do not meet the agreed requirements in the expansion areas.
The state gets $8 million in compensation for unrealized bonus payments during the time the acreage was withheld from lease sales if the working interest owners decide, on or before June 15, 2003, to contract all of the expansion acreage out of the Point Thomson unit.
June 15, 2003, is also the deadline for a Thomson sand interval well in the work commitment area; deepening the Red Dog No. 1 well would fulfill that commitment. If the well is not drilled, acreage in the work commitment area contracts out of the unit and the state receives $940,000 compensation for unrealized bonus payments.
The big money penalties, however, are tied to development drilling in the Point Thomson unit — it must begin by June 15, 2006, or all of the extension area will contract out of the unit and the state will receive $20 million in compensation for unrealized bonus payments.
If seven development wells are not completed by June 15, 2008, all of the expansion acreage will contract out of the unit and the state will get $27.5 million in compensation.
Development wells include producers and injectors drilled from permanent drill site structures and exclude the work commitment area delineation well. Royalty ante raised The state said that if expansion acreage were available for leasing in the next areawide lease sale, there would be a higher royalty rate on some of the acreage, and raised the royalty rate in five of the seven expansion areas to 20 percent from 16.66667 percent (four areas) and to 16.66667 percent from 12.5 percent (one area). The state has also set deadlines, 2008 and 2010, for inclusion of expansion areas in participating areas, and will extract fines ranging from $28,000 to $17.031 million if some portion of an expansion area is not included in a participating area by the required date.
Point Thomson owners were not happy with some of the state’s terms, and ExxonMobil told the state in an Aug. 15 letter that while the unit owners were prepared to accept them in this instance to avoid delays, they “note for the record that acceptance of some of these terms at the Point Thomson Unit constitute a special case and are not viewed by the Owners are precedent setting in any other unit. Particularly, the increase in royalty that is agreed in this instance is viewed as an inappropriate use of the statutes and counter to the principles of unitization. Also, the imposition of performance penalties based on work commitments is believed to be more properly handled in the process of normal Unit business in the Plan of Development process.” Murphy not included In an Aug. 9 letter to the state, Murphy Exploration & Production Co., which owns a partial interest in two leases at Red Dog in the work commitment area of the expansion, said it “has been limited to observing from the sidelines and requesting information, whilst the State and PTU Major Working Interest Owners have negotiated…” Murphy said it assumes the state believed that either ExxonMobil as Point Thomson operator or BP Exploration (Alaska) as Red Dog operator, were providing information to minority working interest owners.
“Unfortunately, this was not so for Murphy,” the company said. ExxonMobil had scheduled an Aug. 8 meeting on technical and commercial merits of the revised unit, but the meeting was cancelled and Murphy was informed that “sharing of technical information was contractually prohibited, with insufficient time remaining to secure all necessary approvals.”
Murphy said it was talking with ExxonMobil about further information, and requested an extension until Aug. 31 for approval of the expansion-contraction agreement.
The state said it would accept approvals until Aug. 30. A new plan of development is due Aug. 31.
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