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Vol. 11, No. 53 Week of December 31, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

DNR says no to Exxon

Rutherford: lessees had notice; ‘poor policy’ to certify nonexistent wells

Kristen Nelson

Petroleum News

The State of Alaska is continuing to indicate it will kick start development of the languishing Point Thomson field, with a denial of reconsideration of the commissioner’s decision issued Dec. 27 by acting Commissioner of Natural Resources Marty Rutherford.

For 30 years the poster child of failed attempts by the state to get the owners to develop, the state signaled the end of its patience in 2005 when Mark Myers, former director of the Division of Oil and Gas, rejected a plan of development from operator ExxonMobil Production and found the Point Thomson unit in default for lack of an approved plan of development.

The field’s owners, operator ExxonMobil Production, BP, Chevron and ConocoPhillips — along with a host of smaller owners — have struggled to find an economic way to develop the high-pressure condensate field on the eastern edge of the state’s North Slope lands. At one point the owners were agreed on a gas cycling plan: oil would be produced from the condensate and the gas re-injected. The recent brouhaha began when the owners said gas cycling was not economic and that they would develop Point Thomson as part of North Slope gas commercialization.

POD rejected

It was at this point that Myers rejected a proposed plan of development and declared the unit in default.

But a change in leadership at the Department of Natural Resources in the fall of 2005, and continuing negotiations over a gas pipeline fiscal contract between the administration of former Gov. Frank Murkowski and the major North Slope gas holders, BP, ConocoPhillips and ExxonMobil, led to extensions of the appeal from Myers’ decision by a new DNR commissioner, Mike Menge.

The inability of the administration to get legislative approval for the contract, and Murkowski’s defeat in the primary, finally triggered Menge’s Nov. 27 decision terminated the unit.

ExxonMobil and ConocoPhillips requested reconsideration of the unit termination, and a finding by Menge on wells certified capable of production in the unit by previous directors of the Division of Oil and Gas. Menge said that because these were exploration wells which had been plugged and abandoned they were not capable of production. Wells certified capable of production are the basis for holding leases, although the state requires plans for those leases — or in this case, for the unit of which the leases are a part.

Reconsideration request denied

Rutherford denied requests for reconsideration of the Nov. 27 decision by Menge terminating the Point Thomson unit and affirmed the decision “in all respects.”

“The facts clearly uphold Mike Menge’s decision to terminate the Point Thomson unit agreement,” Rutherford said in a statement. “I agree that ExxonMobil has not met its obligations, and I must deny them the relief they sought in their reconsideration request.”

ConocoPhillips and ExxonMobil requested reversal of the finding that the Point Thomson unit contains no wells certified as capable of producing in paying quantities and reversal of the decision to terminate the unit.

The companies also claimed they did not receive fair notice that certified well status was an issue and contended that the department refused to allow them to review its files.

On the certified well issue, Rutherford said lessees had notice of the certified well issue and said both ExxonMobil and the Alaska Gasline Port Authority cited the issue in appeal paperwork.

“Lessees do not on reconsideration challenge the grounds for unit termination” in the Nov. 27 decision, which were “unwillingness to commit to put the unit into production” and failure to submit an appropriate plan of development. “Instead, the focus of reconsideration is the collateral finding that the PTU does not contain wells certified as capable of producing in paying quantities.”

Rutherford: certification of wells that don’t exist ‘poor policy’

On the contention “that the certified well finding is bad policy because it will generate uncertainty in the oil and gas industry,” Rutherford said the decision was about the Point Thomson unit, not about leases and not about any other unit.

“Certification of a well that does not exist as capable of producing in paying quantities is poor policy,” Rutherford said. “DNR does not need to certify a non-existent well in order to extend the term of a lease. There are other much more appropriate ways to extend the term of a lease. The other leases and units that lessees are concerned about will be administered based on the facts applicable to them, and not the facts applicable to the PTU.”

Rutherford said that the department does not contest that the commissioner’s decision reverses’ longstanding decisions by directors of the Division of Oil and Gas certifying plugged and abandoned wells. But, she said, the DNR commissioner “has the ultimate authority to set DNR policy,” this is the first time the well certification issue has reached the commissioner’s office and the commission “has the responsibility to correct poor policy. Certification of a non-existent well is poor policy not just because the well cannot be ordered into production but because it sends the wrong message to state oil and gas lessees.” The lessees “interpret the certification of a well as an indefinite extension of the lease upon which it was drilled. This is not an appropriate policy,” Rutherford said.

“The agreements, regulations and statutes provide for lease extension where a lessee makes appropriate commitment to explore, produce or other wise develop oil and gas leases.”

On a claim that they were denied access to department files, Rutherford said that on the afternoon of Sept. 14 an ExxonMobil representative requested to review 105 files the following morning. On Sept. 15 the department sent the company a letter asking for the document request in writing; ExxonMobil did not respond. “Lessees’ assertion is not supported by the facts,” she said.

Grounds for unit termination

Rutherford discussed two grounds for DNR to terminate the unit.

“DNR is entitled to terminate the unit because the purpose of forming a unit is to effect production,” she said, and while Point Thomson has been known for more than 30 years “to contain massive hydrocarbon reserves” it has never been put into production and the lessees “unequivocally state that they still cannot find a way to put the unit into production.”

“Units are not formed for the purpose of simply holding properties until such time as the lessees think production will be profitable enough to commence. On these facts, when the lessees say they cannot put the unit into production, DNR can terminate the unit as a matter of law.”

The second primary ground for unit termination is the failure to submit an acceptable plan of development, Rutherford said. The director’s Oct. 27, 2005, decision put the lessees on notice that the 22nd plan of development was unacceptable and they had nearly a year to submit an acceptable plan “that committed to put the unit into production. Instead they submitted a revised 22nd POD which suffered from the same defects as the original 22nd POD,” Rutherford said, noting that the reasons the plan was not acceptable were discussed in the director’s decision.

The department said the Point Thomson unit covered 45 leases on approximately 106,000 acres of state land just west of ANWR. It holds an estimated 300 million barrels of oil and natural gas condensates and 8 trillion to 9 trillion cubic feet of natural gas.

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Exxon sues state in Superior Court

As expected, Exxon Mobil Corp. is suing the Alaska Department of Natural Resources over the department’s decision to terminate the Point Thomson unit.

Exxon’s Dec. 22 appeal in Alaska Superior Court, 3AN-06-13751, asks for reversal of all respects of the commissioner’s Nov. 27 decision, “or in the alternative to remand the matter to the commissioner with instructions to make a new and different decision.”

In its statement of points on appeal, ExxonMobil, the Point Thomson unit operator, said it intends to rely on a number of points.

The company said the commissioner erred in disapproving the plan of development and in affirming the director’s decision, and called the decisions “an abuse of discretion … entirely unsupported by the evidence in the record.”

The company said the correct legal standard for a unit operator is the reasonable prudent operator, “which means the exercise of reasonable diligence to develop the hydrocarbon resources, giving consideration to the interests of both the working interest owners … and the mineral owner” without requiring the working interest owners “to follow a course that would not be economic for them.”

The company said the commissioner considered only the interests of the state and failed to consider the interests of the working interest owners.