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Vol. 14, No. 23 Week of June 07, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

Thomson legal battle rages

Palin sounds conciliatory note at Exxon lunch; hails project launch, local hiring

Wesley Loy

For Petroleum News

ExxonMobil has resumed drilling at Point Thomson after many years, and Gov. Sarah Palin actually had some words of praise in early June for a company she has jabbed from time to time.

But these developments mask the continuing feisty legal struggle between the oil titan and the state over ultimate control of the enormous Point Thomson oil and gas field, located on state land some 60 miles east of Prudhoe Bay.

The chief outstanding issue is whether the courts will uphold the state’s decision to terminate the Point Thomson unit for failure to produce oil and gas. The state also has taken away leases within the former unit.

In recent weeks, lawyers on both sides have exchanged lengthy legal filings in Alaska Superior Court, where ExxonMobil, the field operator, and other major Point Thomson stakeholders are appealing the state unit termination.

In a filing on May 26, lawyers for ExxonMobil, BP, Chevron and ConocoPhillips argue the state has no justification for “the forfeiture of the approximately $920 million” the working interest owners have invested to date in Point Thomson.

Lack of trust

The oil company lawyers further say state officials and attorneys are perpetuating “a fictive account of the history” of the Point Thomson unit in alleging the industry repeatedly failed to honor its commitments there.

They question Department of Natural Resources Commissioner Tom Irwin’s impartiality, and say he “took every opportunity to disparage and minimize” the industry’s commitments when, in April 2008, he rejected ExxonMobil’s 23rd Plan of Development — the company’s final attempt to keep full control of Point Thomson by offering a firm promise of drilling and production.

Irwin said at the time that he couldn’t trust ExxonMobil to carry out the plan, an outlook ExxonMobil’s lawyers say was unwarranted.

“It is in fact being carried out on the North Slope and in Alaska today, a year after DNR said it would not be,” the oil company lawyers say in their May 26 court filing. “An enormous drilling rig is at Point Thomson, the first two wells are being drilled, the process of acquiring permits for a gas cycling and oil production facility is under way, and the entire project and all necessary activities are fully on schedule for production in 2014, just as the WIOs said. Over $120 million was spent last year, and $250 million is committed to be spent next year, for this production process.”

Irwin cleared drilling

The drilling is occurring only because Irwin, after a five-day hearing to consider oil company appeals of a state ruling that Point Thomson leases had expired, on Jan. 27 of this year made a major policy reversal. He rendered a conditional decision allowing Exxon to keep two of the 31 leases on ExxonMobil’s promise to start drilling a pair of wells into those leases right away.

The state subsequently issued ExxonMobil a permit to build a 50-mile ice road for hauling the upgraded Nabors Rig 27E to the remote field on the Arctic Ocean shoreline.

ExxonMobil spud the initial well on May 8. It’s the first hole to be drilled into the Point Thomson reservoir since 1983.

Development of Point Thomson long has been a goal of frustrated Alaska politicians, and for good reason. The field holds an estimated 8 trillion cubic feet of natural gas — nearly a quarter of all the known gas reserves on the North Slope — plus hundreds of millions of barrels of oil. Production of such resources would mean potentially billions of dollars in tax and royalty revenue for the state, plus a substantial number of jobs.

But ExxonMobil and other stakeholders at Point Thomson have pointed to the lack of a gas pipeline and the extreme technical challenges of tapping the high-pressure reservoir as reasons why one of North America’s richest undeveloped fields hasn’t produced since its discovery in 1977.

Importance of unit

Although the state has cleared ExxonMobil to proceed with drilling, the issue of whether the state was right in terminating the Point Thomson unit continues to loom as a vital question.

Unitization is the glue that binds together leases with different owners, ensuring orderly and efficient field development. Unit designation is necessary to realize the full potential of an oil and gas deposit, and it also allows companies to retain otherwise expired leases.

If ExxonMobil and the other oil companies prevail in court and defeat the state’s unit termination, it certainly would give them a huge boost in controlling Point Thomson’s fate. If the state wins, however, its power would be affirmed, potentially clearing the way for a resale of Point Thomson acreage.

ExxonMobil demonstrated the importance of unitization when it attempted to go around DNR and petitioned another state agency, the Alaska Oil and Gas Conservation Commission, to organize a new Point Thomson unit. The commission declined.

State officials appear to view their permission for ExxonMobil to drill on two Point Thomson leases as something of a test.

Irwin, in his Jan. 27 approval, said “failure to diligently pursue drilling operations in good faith for the purpose of production will result in the automatic termination of these leases.” He said he would deal with unitization issues later.

Kudos from Palin

Palin, who last year ran for the vice presidency and who as governor has tilted with ExxonMobil including its chief executive, Rex Tillerson, on June 2 issued a press release saying she had attended an “appreciation luncheon” the company sponsored for contractors and others working on Point Thomson.

“It goes without saying that I’m glad Point Thomson is finally feeling the drill bit,” Palin told attendees, according to a transcript of her speech.

She characterized the drilling start as a “collaborative effort,” and as she often does, invoked the Alaska Constitution and its mandate that state natural resources be developed for the maximum benefit of Alaskans. She praised ExxonMobil for hiring predominantly Alaska contractors for the Point Thomson project.

“The road to get to this point hasn’t been easy,” Palin said. “It’s taken years, and just looking at the time of day that the first well was spudded — 2:30 a.m. — it sounds more like childbirth than drilling a well!

“And there have been more than a few labor pains in the process to get to where we are today. Following a grueling administrative and legal hearing process, Department of Natural Resources Commissioner Tom Irwin authorized the drilling operation on January 27, allowing mobilization of the drilling rig. He provided guidance to regulatory officers on permitting to allow drilling to begin as quickly as possible when issues were resolved. Here again, working together to find solutions that mutually serve our interests, results in great things happening for Alaska.”

The governor’s conciliatory words, however, probably won’t have much impact on the complex court battle between ExxonMobil and the state over the former Point Thomson unit.

The 57-page court filing from the oil company lawyers on May 26 was in reply to the state’s 127-page brief filed April 1. “As the court will see,” the state brief says, “DNR’s decision to terminate reflects careful consideration, and it is well-supported.”

“Perhaps the most striking thing” about the oil company arguments, the state’s brief adds, is the “covert theme” that DNR never wanted the industry’s proposed remedy for unit termination — the 23rd Plan of Development — to pass muster.

“Nothing could be further from the truth,” the state’s lawyers write. The state long has wanted to see full field development, but the oil companies showed Commissioner Irwin a “refusal or inability to acknowledge their past failures to follow through” on Point Thomson commitments, the state brief says.

The state lawyers are asking Superior Court Judge Sharon Gleason to uphold Irwin’s unit termination, while lawyers for ExxonMobil and the other oil companies are urging her to reverse it.

Gleason has scheduled oral argument for July 20. Lawyers in the case believe she’ll rule well before the end of the year.

The loser is expected to appeal to the Alaska Supreme Court.

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