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Vol. 11, No. 48 Week of November 26, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Thomson on the table

Companies say little at hearing; agencies, port authority comments negative

Kristen Nelson

Petroleum News

Alaska legislators are concerned Gov. Frank Murkowski will sign a gas pipeline fiscal contract with North Slope producers ExxonMobil, BP and Chevron before he leaves office in early December.

There is also concern that Murkowski’s resources commissioner, Mike Menge, will make a decision on another gas pipeline issue that involves the undeveloped Point Thomson unit before Gov.-elect Sarah Palin takes office on Dec. 4.

Palin has asked Murkowski and Menge to leave decisions about the gas line and Point Thomson to her administration (see sidebar to this story).

The Point Thomson unit owners, ExxonMobil, BP and Chevron, are asking for approval of proposals that would reverse a 2005 decision by then Division of Oil and Gas Director Mark Myers, who found the unit in default for lack of an approved plan of operations.

Unit operator ExxonMobil is asking Menge to approve a proposed plan of development, based on gas sales from the high-pressure condensate Point Thomson field, rather than a previously approved plan to produce oil first and reinject the gas to maintain reservoir pressure.

Also at issue is an unmet commitment to drill that was part of a unit lease expansion agreement ExxonMobil struck with the state. Since that agreement, the unit owners have told the state that a gas cycling project (producing oil from the condensate for sale and reinjecting the gas) is not economic and that they want to produce Point Thomson gas first as part of a North Slope gas pipeline project.

ExxonMobil, BP and Chevron are the major working interest owners at Point Thomson, which is at the eastern edge of state lands on the North Slope, abutting the Arctic National Wildlife Refuge.

Myers rejected a Point Thomson plan of development proposed in 2005. When ExxonMobil did not revise the plan to meet the division’s objections, Myers found the unit in default for lack of an approved plan.

Gov. Frank Murkowski named Menge commissioner last fall after he fired Tom Irwin in a disagreement over the gas fiscal contract negotiations; Myers was one of six DNR officials who quit in protest.

Menge has extended the Point Thomson unit pending completion of the fiscal contract for a North Slope gas pipeline, citing the importance of gas from the unit, some 8 trillion cubic feet of 35 tcf of known North Slope gas, to a gas pipeline project.

Division of Oil and Gas officials oppose Exxon proposal

While some Murkowski administration officials are at least in public agreement with the administration on the proposed gas line fiscal contract, the same can’t be said for Point Thomson.

Officials from the Department of Natural Resources’ Division of Oil and Gas are opposed to Exxon’s proposal.

They did not testify at a Nov. 20 Point Thomson hearing chaired by Menge; their views come from a memo that was part of the public record.

Three division section chiefs were asked for input on Exxon proposals (amendment of an expansion agreement, as well as the new plan of development) and told Menge in an Oct. 23 memo: “It is the unanimous opinion of the staff from our sections who have worked on PTU decisions that the modification to the expansion agreement and the proposed cure should be rejected. This recommendation is based upon a thorough review of the proposal and takes into consideration the past negotiations and agreements entered into by the state and Exxon.” The three, Patrick Galvin, Kevin Banks and Julie Houle, are chiefs, respectively, of the division’s leasing and permitting, commercial and resource evaluation sections.

Exxon proposed returning to the state some acreage currently in the unit, but the three said that under the proposal, “Exxon will keep the portion of the expansion acreage with the greatest potential,” some 75 percent of the expansion area, although it failed to meet work requirements specified in the expansion agreement, which “amounts to a repudiation of the state’s reasons for accepting” the expansion agreement.

Exxon has failed to meet the obligations in previous Point Thomson unit agreements and has failed “to even attempt to meet the state’s expectations for an acceptable POD,” the three said, arguing that the state should not accept Exxon’s modification of the expansion agreement.

They said the plan “should be rejected because it does not commit the PTU owners to timely development and production” from the unit and “offers even less to that end than the rejected” 2005 plan. The new plan also does not contain any of the requirements of the 2005 decision which rejected the earlier plan, such as “specific commitments to timely delineate the hydrocarbons underlying the PTU and develop the unitized substances.”

The 2005 decision also required that production “maximize oil, condensate and gas recovery.”

The officials said that while Exxon has said development of Point Thomson was not economic, “Exxon’s economic assessment is not relevant to the decision at hand.”

They quoted the 2005 director’s decision, which said: “The state’s interest is not met by allowing the producers to delay production until such time as the lessee determines that it is the lessee’s optimum time to develop a known resource or the state agrees to compromise its tax and royalty system.”

Conservation commission also raises objections

The Alaska Oil and Gas Conservation Commission raised objections to the Point Thomson unit plan of development in pre-filed testimony (see story in Nov. 12 issue of Petroleum News).

Commission Chairman John Norman came to the Nov. 20 Point Thomson hearing to tell Menge in person that Exxon’s proposal to change the development plan from a gas-cycling project to a gas sales project runs counter to the commission’s regulations, which consider the Point Thomson reservoir an oil pool.

The commission regulates off-take rates from oil and gas fields in Alaska as part of its charge to prevent the waste of hydrocarbon resources and maximize production, and would have to approve both a change in classification of the Point Thomson reservoir and gas rates. This would require information from the field operator that the commission doesn’t have, Norman said.

He told Menge that Exxon’s latest plan of development “is based on uncertainty that has been perpetuated by the operator’s own lack of reservoir delineation activity. Elimination of this uncertainty is within the operator’s control,” he said, but the timeline of the proposed plan of development “does not appear designed to permit the acquisition and evaluation of the necessary reservoir data within a time frame that will allow it to be considered in the AOGCC decision process.”

Norman said that for a reservoir like Point Thomson, which contains both oil and gas, “preventing waste means that one cannot be produced at the expense of the other.”

Port authority wants default

The Alaska Gasline Port Authority presented extensive testimony, both pre-filed and at the hearing, advocating that the state find the Point Thomson unit in default, take back the leases and re-offer them.

The port authority wants access to Point Thomson gas for its proposed liquefied natural gas project out of Valdez.

Houston attorney Mark Cotham, testifying for the port authority, said the working interest owners at Point Thomson do not own the asset, but have rights to develop those assets that they must diligently pursue. One measure of diligence is the amount spent developing the field. With a total resource in place estimated at 9 tcf of gas at $4 per thousand cubic feet and 300 million barrels of oil at $50 a barrel, Cotham put the value of the field’s resources at more than $50 billion, and said some $800 million spent to date is not commensurate with the resource, and does not meet a reasonably prudent operator standard for field development.

Cotham also told Menge that even if a reasonably prudent operator is not normally required to build a pipeline, there is still a requirement to market the gas, and said the field owners are not actively marketing the gas and have rejected offers to buy it.

Then there is the issue of the amount of time, some three decades, that the Point Thomson leases have been held: nowhere has an operator done less with more over such a long period of time, Cotham said.

In closing remarks for the port authority, its general counsel, Bill Walker, said Point Thomson is the largest U.S. field that is not developed. Since it abuts ANWR, he said he was surprised that in all of the ANWR debates no one had ever asked: why should you be allowed to develop ANWR when you haven’t developed Point Thomson?

Little comment from unit owners

The Point Thomson working interest owners told the commissioner they did not think a public hearing was necessary. The three major owners filed extensive comments prior to the hearing and while they attended in force, their verbal comments were brief.

Richard Owen, ExxonMobil’s Alaska manager, requested approval of the modified plan and noted that it does include a Thomson sand well planned for 2008-09. He said efforts to accelerate the drilling would be evaluated.

Don Dunham, BP Exploration (Alaska)’s performance unit leader for the Greater Kuparuk Area fields and the Point Thomson unit, said BP was relying on its pre-filed testimony and exhibits, and said the company supports the proposed plan.

Vince LeMieux, new ventures manager for Chevron Alaska, said Chevron supports and is in agreement with materials presented on behalf of the unit by ExxonMobil.

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Gov.-elect asks Menge to desist

Gov.-elect Sarah Palin asked Commissioner of Natural Resources Mike Menge to leave decisions about the future of Point Thomson to her administration.

“I once again call upon Commissioner Menge to allow my resources commissioner to determine whether to accept ExxonMobil’s POD (plan of development) as an acceptable cure for the Point Thomson default,” Palin said in a Nov. 20 statement, read into the record by the Alaska Gasline Port Authority’s general counsel, Bill Walker.

Palin noted the importance of the gas resources in Prudhoe Bay and Point Thomson and said the Nov. 20 hearing would allow Menge to hear Exxon’s evidence to determine whether its latest plan of development is sufficient to cure a decision made in October 2005 by former Division of Oil and Gas Director Mark Myers who found the Point Thomson unit in default of its lease obligations.

“These units are the cornerstone upon which a future Alaska gas pipeline will be built,” Palin said. “Due to the unprecedented importance of this decision, it should not be rushed, and should not be decided by a commissioner as one of his final acts before leaving state service.”

Palin said state administrative rules contain no deadline for when a decision must be issued following a hearing.

She said that should Menge refuse to honor her request, she would reconsider any decision he issues.

“If the commissioner refuses to honor my request, upon taking office in 14 days, I will immediately direct my DNR commissioner to review on reconsideration any development plan accepted or rejected by Commissioner Menge,” Palin said.

—Kristen Nelson