Exxon regains 2 Slope leases

POINT THOMSON: Truce over lockout lets drilling begin at 106,201-acre field.

January 27, 2009 

A partial truce was reached Tuesday in the bitter legal battle for control of a rich but dormant North Slope oil and gas field, as state officials reversed course and gave Exxon Mobil Corp. permission to proceed with a drilling campaign.

Exxon and its partners had been on lockout status after regulators took away their leases on state land in the 106,201-acre Point Thomson field due to lack of development over three decades.

Hoping to hang on to its leases, Exxon last year rolled out a plan to drill wells this winter and start producing by 2014 -- a plan state Natural Resources Commissioner Tom Irwin rejected, saying he couldn't trust Exxon to carry it out.

On Tuesday, however, Irwin made a major policy reversal, issuing a conditional decision allowing Exxon to keep two of the 31 leases at issue on the company's promise to start drilling a pair of wells into those leases right away.

This morning, the state expects to issue Exxon a permit to construct a 50-mile ice road to the remote field on the Arctic Ocean shoreline east of Prudhoe Bay. The road is needed for hauling an enormous drilling rig to the site. The state previously had denied the permit to Exxon.

The Irwin decision has huge impact.

First, it likely means some production at long last will come from Point Thomson, a goal several Alaska governors had pursued mostly in vain ever since the field was discovered in 1977. Considered an extraordinary technical challenge to develop, Point Thomson is believed to hold trillions of cubic feet of natural gas as well as hundreds of thousands of barrels of oil.

Exxon's drilling campaign will mean hundreds of jobs beginning this winter as the company employs dozens of contractors. Exxon will become only the fourth company running an oil and gas field on the North Slope. The others are BP, Conoco Phillips and Pioneer.

Beyond this, Point Thomson, if fully developed, could play a vital role in proposals to build an Alaska natural gas pipeline to the Lower 48. The field holds roughly a quarter of the Slope's 35 trillion cubic feet of known natural gas reserves.

Exxon spokesmen were near jubilant with Tuesday's decision, while state officials continued to talk tough, saying they expect to see results from Exxon and noting only two of the field's 31 leases have been conditionally reinstated at this point.

"We're going to hold their feet to the fire. They've still got to perform," said Kurt Gibson, deputy director of the state Division of Oil and Gas.

The state and Exxon have been locked in a struggle for control of Point Thomson ever since state officials, under former Gov. Frank Murkowski in 2005, took the first steps to reclaim the field for leasing to new owners.

That provoked a massive court challenge from Exxon and other leaseholders in the field.

Irwin's decision partially reverses an Aug. 4 decision from state oil and gas director Kevin Banks, who ruled that the Point Thomson leases had expired.

Exxon and its partners appealed that decision to Irwin. In a hearing the week of Jan. 12, the companies laid out their legal arguments for keeping the leases, as well as their $1.3 billion plan to start producing a light form of oil called condensate.

The liquid condensate is collected by cycling natural gas up through a surface processing plant and then back underground. The condensate can be carried through the trans-Alaska oil pipeline.

Point Thomson's huge gas stores wouldn't be produced until a gas pipeline is built. The lack of a multibillion-dollar pipeline is a major reason the field has gone undeveloped for so long, Exxon executives have said. A gas line could take 10 years or more, with two proposed construction projects now pending.

Exxon's lawyers argued that because the company was engaged in "drilling operations," including the act of planning for such drilling, the state couldn't legally take away the Point Thomson leases.

Irwin said Tuesday he decided to reverse Banks and reinstate two leases because Exxon representatives said during the hearing the company is "unconditionally committed" to drilling two wells by 2010 and producing from those wells by 2014.

Allowing the drilling to go head is "in the public interest," Irwin's decision says. It sets a number of conditions. For instance, within two weeks Exxon must show drilling rig contracts for each well, as well as company "authorizations for expenditure."

"Failure to diligently pursue drilling operations in good faith for the purpose of production will result in the automatic termination of these leases," Irwin's decision adds.

The last time a well was drilled in Point Thomson was in the early 1980s.

Exxon spokesman Bill Brackin issued a written statement that said in part:

"This decision clears the way for construction of nearly 50 miles of ice roads needed to transport the drilling rig and associated equipment, materials, camps and personnel to the Point Thomson site. This is good news for Alaska and especially for the 50 Alaskan companies and more than 200 people working at Point Thomson today. We are committed and ready to move forward with the Point Thomson Project."

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

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