Use it or lose it?

Attorney Jack Griffin says court likely to view an award of damages, not lease termination, as solution if North Slope gas owners refuse to support pipeline

Kay Cashman

PNA Publisher

Ken Thompson says the North Slope gas owners need more than incentives to build a North Slope gas pipeline; they should also be penalized if they don’t build it. The former senior ARCO executive and a member of the governor’s gas policy council says the state has the right to take back the Prudhoe Bay leases it issued to BP, ExxonMobil and Phillips if those companies don’t start marketing gas.

No one questions the fact that the involvement of the North Slope gas owners is necessary to making a North Slope gas project happen. But can the state take back its Prudhoe Bay leases if a North Slope gas project is determined economic by the state and if the North Slope producers refuse to market the natural gas from their Prudhoe Bay leases?

To get an answer to that question, both Thompson and state Revenue Commissioner Wil Condon, who disagrees with Thompson’s opinion about the leases, referred PNA to Jack Griffin, a Department of Law attorney who specializes in oil and gas law.

“Ken was referring to the implied lease covenants to market or to reasonably develop the leases. If the state could prove there was a breach of the covenant, my view is that it is highly unlikely a court would choose termination of the Prudhoe Bay leases as the appropriate remedy for this type of breach given the billions of dollars of investment (BP, ExxonMobil and Phillips have made in Prudhoe Bay development),” Griffin told PNA April 3.

Leases are automatically extended, he says, by ongoing production operations.

And it is because of these ongoing production operations and their immense value to state of Alaska coffers that “the state might not be inclined to seek termination of the leases as a remedy of a breach, assuming you could establish a breach.”

“If the state can show that the failure to build a gas project and to market the gas is a breach of certain terms within the lease, the state can ask for termination of the leases but the other remedy it might ask for in case the court wouldn’t accept termination, is to sue for damages for breach,” Griffin says.

Monetary awards preferred remedy

The court generally awards enough money, he says, “to put the party in the place it would have been in the absence of a breach.

“Now the state may argue that there are a lot of things about gas development that would provide the state benefits that it can’t get through an award of damages and I think that’s probably true. But it’s something the court would have to consider and weigh,” Griffin says. “It might make the more drastic remedy of termination appropriate.

“But in my view, it’s possible for the court to come up with an award of damages that would make the state whole. It’s much less likely, in my view, the courts would consider termination the appropriate remedy,” he says.

“This is all premised on the fact that you can in fact show that the failure to go forward is a breach.”

Tough to prove breach

“It really depends on the facts,” Griffin says. “If discovery reveals that the companies themselves viewed this project as competitive and economic, but chose not to pursue it simply out of spite, the state would prevail in a breach of contract action.

“But it is irrational to think that these profit-motivated companies are going to refuse to do a profitable project simply out of spite. If a project is not built, it is more likely that discovery will reveal that the companies, or some of the companies, viewed the project as either noncompetitive or uneconomic or both,” he says.

“To prove a breach, the state would likely have to show that the companies’ views were irrelevant or unreasonable. This will be a much harder case to prove.”

If the state elects to bring a breach of contract lawsuit against the North Slope gas owners, it would “make a lot of attorneys very, very happy,” Griffin says.

“I really like Ken Thompson. … I have a lot of respect for him. At some point, who knows what some administration in the future might want to do. And if oil production stops up there, the termination question becomes an entirely different one. It is one of the remedies you could ask for.”