Point Thomson lease fight hits peak

NORTH SLOPE: Court hearing set as state tries to evict Exxon.

December 27, 2008 

More than 30 years ago, drillers made a spectacular discovery of oil and natural gas at a remote site called Point Thomson, along the Arctic coast of Alaska.

Many observers figured the new field would soon add to the production from an even richer North Slope deposit, Prudhoe Bay, which started sending oil down the trans-Alaska pipeline the same year as the Point Thomson find, 1977.

But it hasn't worked out that way.

Point Thomson has been dormant all these years. The 106,201-acre field has no working wells. It hasn't produced a single barrel of oil or molecule of gas.

Now the oil companies that long ago leased acreage at Point Thomson are in jeopardy of eviction because the landlord, the state, is tired of waiting for the taxable oil and gas to start flowing.

State officials have canceled the leases and say they aim to rent the land to companies more eager to drill and develop the field.

Exxon Mobil Corp., the lead Point Thomson leaseholder, has responded with a new development plan, and has a drilling rig poised to start poking holes in the frozen tundra.

Yet the state has posted a stop sign, refusing to grant Exxon permits for drilling or for building an ice road this winter for hauling the rig from Prudhoe Bay to Point Thomson, 60 miles to the east.

The state's natural resources chief says Exxon's development plan is inadequate, and besides, Exxon can't be trusted to carry it out after years of broken promises.

The whole affair is now bound up in court with dozens of lawyers fighting for control of an asset no oil company would willingly walk away from, say experts in such cases.

"That will absolutely never happen," said Mark Cotham, a Texas lawyer who specializes helping property owners force oil companies to get drilling on leased land.

That Point Thomson, one of the world's largest undeveloped discoveries, has sparked such a court battle makes sense considering its stupendous value.

At today's oil and gas prices, the field holds recoverable resources worth roughly $55 billion. That's more than triple the bailout President Bush announced for the U.S. automobile industry on Dec. 19.

Point Thomson's significance goes beyond its potential profits for Exxon, as well as the taxes and jobs it would generate.

Because it holds about a quarter of the 35 trillion cubic feet of gas already discovered on the North Slope, Point Thomson development could be vital for filling a proposed multibillion-dollar gas pipeline to the Lower 48.

The state's standoff with Exxon and other major leaseholders including BP and Chevron could reach a resolution soon -- or devolve into years of entrenched legal warfare.

State officials and Exxon executives say they've been meeting for weeks, trying to negotiate a settlement. Neither side will say what chips are on the table.

"These are serious negotiations. If there's a solution out there, we're going to find it," said Kevin Banks, the state's oil and gas director and a participant in the talks.

Beyond the bargaining, key aspects of the Point Thomson dispute are scheduled for hearings in court on Wednesday, and before the Alaska Oil and Gas Conservation Commission, which regulates drilling, on Feb. 9.

How it started

The state's move to reclaim Point Thomson began under former Gov. Frank Murkowski's administration in 2005, when the state's oil and gas director at the time, Mark Myers, rejected Exxon's "plan of development" for the field. It was the 22nd such plan the company had filed over the years.

Myers faulted the plan's lack of a firm commitment to produce oil and gas. He said Exxon's "30-year record of nondevelopment and delay ... makes a mockery" of lease obligations.

The state had moved to cancel leases before, but never on such a prize as Point Thomson, or against so formidable an opponent as Exxon.

"Some have questioned our rationale," Murkowski would tell Fairbanks Chamber of Commerce audience. "Some have questioned our sanity."

After Gov. Sarah Palin unseated her fellow Republican in the 2006 election, she picked up what Murkowski started and has continued efforts to wrest control of Point Thomson away from Exxon and the other leaseholders.

In fact, Point Thomson has been a frustration for a long string of Alaska governors.

Former Gov. Wally Hickel, near the end of his second term in 1994, considered trying to take back the field. Hickel, now 89 years old, is still advocating such action.

Exxon responds

To no one's surprise, Exxon and other leaseholders went to court to defend their leases after the Myers decision.

Through the years, Exxon executives have argued plenty of good reasons exist for why Point Thomson hadn't been developed. The field is remote, located 60 miles east of Prudhoe Bay next to the Arctic National Wildlife Refuge. Its reserves are deep and under unusually high pressure. To handle the pressure, the company would need brawny wells that cost a lot more to install.

Perhaps most significantly, Exxon noted the lack of a pipeline to carry Point Thomson's dominant resource -- natural gas.

This hasn't satisfied state officials, however, who say Exxon should have gotten busy long ago producing the field's considerable reserves of crude oil as well as a light form of oil known as condensate. A study this year from state consultant PetroTel Inc. estimates as much as 1 billion barrels of these liquids could be recovered from Point Thomson and sent down the existing 800-mile trans-Alaska oil pipeline.

Faced with the real threat of losing its acreage, Exxon in February unveiled a new development plan that -- unlike its many prior plans -- contained a pledge to produce from Point Thomson.

The $1.3 billion plan calls for drilling five wells and producing 10,000 barrels of condensate per day by 2014. The condensate is collected by cycling natural gas up through a surface processing plant and then back underground.

The plan, however, didn't pass muster with state Natural Resources Commissioner Tom Irwin, who in April ruled it wasn't good enough to halt state efforts to reclaim Point Thomson. Irwin said Exxon had a history of broken promises and couldn't be trusted to carry out the plan.

Line in the snow

Undeterred, Exxon put on its hard hat and spent the summer hiring contractors to barge equipment to Point Thomson, to stage fuel tanks and a work camp on a gravel pad, and to retrofit a powerful drilling rig.

In late September, Exxon took out a full-page newspaper ad thanking its three dozen contracting companies and declaring that drilling would commence in February.

Exxon sought -- and received -- permits from state agencies to prep the site for drilling.

But the state's indulgence has run out.

After Exxon applied for a key drilling permit, Irwin on Aug. 29 scolded the company: "You do not have and will not be granted permission to enter the subsurface of Alaska lands without a valid oil and gas lease."

On Nov. 14, state officials denied Exxon's application to build an ice road to transport its drilling rig.

"It is unfortunate that Exxon Mobil's efforts to force a solution on the Department of Natural Resources over its repeated and strenuous objections may have led honest Alaskans to believe that this drilling effort might actually take place," a state press release said.

In court filings, Exxon now is casting the state itself as the roadblock to oil and gas production at Point Thomson.

The company's lawyers say Exxon already has spent $100 million to prepare for drilling, and accuse Irwin's department of pressuring other agencies to deny permits to Exxon.

"DNR now emerges as the principal, indeed the sole remaining, obstacle to the drilling that it says it wants," wrote Exxon attorney Doug Serdahely, a former state Superior Court judge, in a Nov. 24 filing.

A hearing on the permit denials is scheduled for Wednesday in Superior Court in Anchorage.

multifront strategy

Company attorneys admit that Exxon began work toward drilling only when faced with the state's "obvious intention" to reclaim Point Thomson.

They argue the leases remain valid so long as "drilling operations" are being conducted.

Aside from its efforts in court, Exxon is fighting on other fronts:

• After Irwin terminated the Point Thomson Unit -- a unit designation groups leases with different owners so a field can be developed efficiently with shared wells and pipelines -- Exxon petitioned a different state agency, the Oil and Gas Conservation Commission, to form a new unit.

The petition to a sister agency is "an unprecedented way to try and circumvent" the Department of Natural Resources, wrote Richard Todd, an assistant attorney general leading the state's Point Thomson legal defense.

Were Exxon to succeed in winning a new unit designation for Point Thomson, the state couldn't lease the field to new companies.

The commission has scheduled a Feb. 9 hearing on the matter, and has booked a larger room to hold all the lawyers.

• Exxon has lodged a claim for $800 million in damages against the state, claiming breach of contract for improperly breaking up the Point Thomson field and rejecting development plans.

The $800 million equates to what Exxon and other companies have invested over the years in Point Thomson, Exxon attorneys say. They add that if the state succeeds in reselling the Point Thomson acreage, the state will be obliged to hand over the proceeds to the rightful owners -- Exxon and its partners.

The damages claim is pending before a hearing officer with the state Department of Administration.

The gas line

A big question during legislative hearings this year concerned how important Point Thomson might be for achieving one of the state's top economic development goals -- a natural gas pipeline.

The field holds an estimated 8 trillion cubic feet, or almost a quarter of North Slope reserves.

What if control of the Point Thomson field remains unsettled when, as soon as 2010, companies are called upon to make binding commitments to ship gas on the pipeline?

Major pipelines can't be financed without such commitments.

State Revenue Commissioner Pat Galvin, who is not among state officials negotiating with Exxon, said it's not critical for Point Thomson gas to be in the mix at the beginning of a pipeline project.

He cites an analysis from Black & Veatch, a Kansas-based global consulting firm the state hired, that a viable pipeline project can be built either by relying more heavily on gas from the enormous Prudhoe Bay field, or by designing a smaller-capacity pipe.

But drawing gas faster from Prudhoe could mean recovering fewer barrels of oil from the field, because the gas is used now to pressure oil to the surface.

Some believe Point Thomson gas -- plus a lot more yet to be discovered -- will be needed for a viable pipeline project.

Counting Point Thomson reserves, the North Slope has 35 trillion cubic feet of known reserves.

"The conventional wisdom is you'll need 50 trillion to make a pipeline pay," said state Rep. Ralph Samuels, an Anchorage Republican who chairs a committee with oversight on the project.

Who will win?

With the prime winter drilling season now beginning and its rig stranded at Prudhoe Bay, Exxon is clinging to hope of drilling at Point Thomson.

"We still consider it a possibility," said company spokesman Bill Brackin, based on the "good-faith" negotiations between company executives and state officials.

Houston attorney Cotham, who has long tracked the Point Thomson case, said he believes the state has a strong hand with Exxon. He said his clients in Texas, mostly private landowners, routinely win cases aimed at prodding oil companies to drill more wells on leased acreage.

Companies often sit on acreage because they have prospects with better profit potential elsewhere, Cotham said, and that's especially true for a global giant such as Exxon.

But he believes the state should be skeptical of Exxon's drilling plan and hold firm.

"It's kind of like after you've been evicted from your home, trying to mow the front yard to show you were a good owner," Cotham said. "Really, the only way the state could lose would be if it either gave up or negotiated away the victory that it already achieved."

State Rep. Craig Johnson, an Anchorage Republican and co-chairman of the House Resources Committee, isn't so sure a clash with Exxon will pay off.

"We just saw what happens with Exxon when they decide to dig in their heels and go to court," he said, referring to the nearly 20-year Exxon Valdez case.

One possible solution, Johnson said, might be to require Exxon to post a large bond -- say, $100 million or more -- in exchange for its promise to develop the field.

"It's earnest money on a house," he said. "If they don't do it, then the earnest money is ours."

Find Wesley Loy online at adn.com/contact/wloy or call 257-4590.

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