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Port Authority says Pt. Thomson in default Authority demands state terminate unit, give natural gas to authority; threatens legal action if public hearing not scheduled Kristen Nelson Petroleum News Editor-in-Chief
In August the Alaska Gasline Port Authority told the State of Alaska it expects to ship royalty North Slope natural gas as part of its proposed liquefied natural gas project.
It also said it would expect state assistance in obtaining natural gas.
In September the authority got specific about the kind of help it expects from the state: it wants the Point Thomson unit terminated and wants the state to provide it with the natural gas from that unit.
The port authority’s Aug. 22 Alaska Stranded Gas Development Act filing with the state is based on shipping the state’s royalty gas, but also proposes that the state assist the port authority with third-party negotiations for other gas; “diligently enforce” any rights the state has to cancel leases or unit agreements; “bring suit against leaseholders” or unit working interest owners for “failure to meet a duty to develop or market ANS gas” to either compel the sale of gas to the port authority or forfeiture of the leases; and support legislation “to clarify” the port authority’s “right to exercise the use of eminent domain to acquire needed gas.”
In mid-September the port authority sent an “Agency Demand Regarding the Point Thomson Unit” to the Alaska Division of Oil and Gas, demanding that the division notify the working interest owners at Point Thomson that they are in default of the unit agreement and of state regulations, telling unit owners that the unit will terminate in 90 days and also demanding “that gas from Point Thomson be made available” to the port authority as described in its Aug. 22 proposal.
The demands were filed Sept. 16 by port authority attorney Bill Walker on behalf of the port authority and Jim Whitaker, the authority’s chairman, described in the demand as “a citizen-taxpayer of the State of Alaska…”
The authority’s demands would seem to run counter to one of the division’s demands of plans from the Point Thomson owners. The owners want to focus on gas development; the division is opposing that focus, saying it also requires a plan on how liquids would be produced from the unit, since an initial focus on gas production could potentially leave liquids stranded in the reservoir. Public hearing demanded In a Sept. 23 supplement, the port authority demanded that the division hold a Point Thomson public hearing not later than Oct. 31. At that public hearing, Walker told the division, ExxonMobil and the other Point Thomson working unit owners would justify the terms of their proposed 22nd plan; explain why no production has occurred from the unit; explain why all wells in the unit are currently plugged and abandoned; explain when and how unit production is expected to occur; “report all inquiries they have received to purchase gas from the Alaska North Slope generally” and specifically from the Point Thomson unit; and explain why they have requested a delay in development drilling.
The port authority said in its Sept. 16 demands that in April it “made a detailed offer to purchase Alaska North Slope gas and transport it to market,” an offer “distributed to” ExxonMobil, ConocoPhillips, BP, Chevron “and others.” The major producers declined to sell gas to the port authority, “or even to discuss prices or terms,” the authority told the division.
The authority said it has also “intensified its correspondence and meetings” with ExxonMobil about Point Thomson gas, and asked ExxonMobil in August to present information on a gas sales agreement it would find acceptable. The authority said ExxonMobil’s response is that it would need to do an analysis of the project from the wellhead to market to access the project’s viability, and has asked for information for its analysis. Also opportunity for comments The port authority said that in addition to testimony from ExxonMobil, the port authority “and other interested parties” would be able to comment at the public hearing on whether or not it is in the state’s best interest for the division to approve a 22nd plan of development, “and if so under what terms,” and to comment on issues raised in the authority’s Sept. 16 agency demand, and in general whether it is in the public interest for the state to extend or terminate the Point Thomson unit agreement, thereby terminating leases within the unit.
Walker said if the authority did not receive confirmation of a public hearing by Sept. 27, it would “seek judicial intervention to bring this about.”
Division Director Mark Myers said in a Sept. 26 letter to Walker that it would “consider your demands and requests as we evaluate Exxon’s proposed plan.” The division, he said, intends to issue a decision on the 22nd plan of development before the 21st plan expires Sept. 30. Point Thomson plan under review Point Thomson is on the eastern edge of the state’s North Slope lands, abutting the coastal plain of the Arctic National Wildlife Refuge. The main Point Thomson reservoir, discovered in the 1970s, contains high-pressure natural gas and condensate, hydrocarbons which are liquids at normal pressure. There are also shallower conventional oil reservoirs within the unit.
The Point Thomson unit was formed in 1977 and requires a state-approved plan of development. There are also requirements related to a 2001 unit contraction and expansion agreement in which the state agreed to add acreage to the unit in exchange for development drilling by June 15, 2006, and completion of seven development wells by June 15, 2008.
The division and Point Thomson unit operator ExxonMobil Production (major working interest owners are ExxonMobil, BP Exploration (Alaska), Chevron USA and ConocoPhillips Alaska) are in the process of negotiating the next plan of development, discussions which have been ongoing for some months.
The original unit agreement required a well to be drilled each year. This occurred through 1982, with several wells certified by the state as capable of producing in paying quantities. In 1980, however, state officials said that a well a year within the unit was no longer crucial, as delineation wells drilled outside of the unit might be more appropriate.
In 1982 the first unit plan was approved without a drilling requirement, and also in 1982 Division Director Kay Brown agreed with Exxon’s assertion to Commissioner of Natural Resources John Katz that the unit should be extended beyond the initial five years because it contained discoveries recognized by the state. Plan had been gas cycling In recent years the unit owners have proposed a gas cycling project at Point Thomson: liquids would be produced; a pipeline would take those liquids to the trans-Alaska oil pipeline; and gas would be reinjected into the reservoir for sales once there was a gas pipeline from the North Slope.
But in late 2003 ExxonMobil told the state that further work evaluating Point Thomson had “resulted in a significant reduction in liquid resources,” and said the owners could not “identify a viable gas injection project under current fiscal terms.” With a smaller condensate resource, ExxonMobil said the owners tried to identify a smaller gas injection project which would be viable, but were not able to identify enough cost reductions.
This June the unit owners told the division they wanted development of the field tied to a natural gas pipeline from the North Slope with development drilling to begin three and a half years before field startup, rather than by June 2006. Terms of the expansion agreement call for expansion acreage to be contracted out of the unit if development drilling did not begin by June 2006, or if seven development wells were not completed by June 2008, with the owners paying the state $20 million at the first default date or $27.5 million at the second.
Myers told ExxonMobil in a July letter that the division “is not inclined” to accept the extension of development drilling, and said the division “does not intend to relieve” the owners of the drilling play they committed to in the unit expansion in 2001. He told ExxonMobil the division would enforce the terms of the expansion agreement — contracting expansion acreage out of the unit — if the owners failed to meet the work commitment. Myers said, however, that the division would accept an exploration/delineation well in lieu of development drilling. Owners would apply for conservation order A revision of the 22nd plan, submitted by ExxonMobil Aug. 31, remained focused on gas development, but acceded to the division’s concerns that the field owners describe plans to develop all hydrocarbon reserves, not just natural gas.
As for the exploration well, ExxonMobil instead proposed a joint planning effort with the state to define the value of information which would be gained from a well. The division had asked for a well to delineate the Thomson reservoir west of the Point Thomson Unit No. 1, in lieu of deferring the start of development drilling for one year. Myers told ExxonMobil that the state would enforce the expansion agreement if the owners failed to meet the work commitment, contracting 2001 expansion acreage out of the unit.
ExxonMobil said the owners would agree to apply to the Alaska Oil and Gas Conservation Commission for a conservation order for field gas off take for Point Thomson, and would also prepare a schedule of activities to prepare permits.
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