State and BP are still far from leak claim decision

Hundreds of millions in royalties sought for oil not produced.

Petroleum NewsJuly 27, 2012 

A decision in the high-stakes arbitration proceeding between the state and BP appears still to be months away. The dispute centers on the state's claim for damages stemming from pipeline leaks in the Prudhoe Bay oil field in 2006.

State lawyers are seeking hundreds of millions of dollars in royalties they argue the state is due for oil not produced as a result of the leaks, which forced partial field shutdowns and disruptive pipeline replacements.

BP's lawyers have resisted the state's claim.

BP operates Prudhoe, the nation's largest oil field, on behalf of itself and partners Conoco Phillips, Exxon Mobil and Chevron.

The state first laid out its claim in a March 2009 lawsuit filed in state Superior Court against BP Exploration (Alaska).

The suit alleged negligence on the part of BP for its pipeline maintenance and claimed a host of damages.

Most significantly, the suit sought back taxes and royalties to compensate the state for what it contended were production shortfalls of at least 35 million barrels of oil and natural gas liquids from Prudhoe and the neighboring Milne Point field.

A judge threw out the state's tax claim, hugely reducing BP's potential liability in the lawsuit. In January, the court stayed the case after the state and BP said they would go to binding arbitration on the royalty claim.

Since then, closed proceedings have been held before a three-member panel of arbitrators.

BP Alaska spokeswoman Dawn Patience provided this status report on July 11:

"The matter was presented to an arbitration panel and the hearing concluded on June 26. The arbitrators asked the parties to submit written legal briefs, which will be filed in August and September, after which the panel will take the matter under advisement and render a decision."

It is not known exactly how much money the state is seeking but conceivably, if the state is able to persuade the arbitration panel it is due a 12.5 percent royalty on the full 35 million barrels of lost production alleged in the suit, it would be about $328 million at $75 a barrel.

The two corrosion-related pipeline leaks at Prudhoe were a big problem for BP. They drew criticism from members of Congress and federal pipeline regulators, and forced costly replacement of oil transit lines that feed sales-grade crude into the trans-Alaska pipeline.

One of the leaks, at 212,252 gallons, was the largest oil spill ever on the North Slope.

BP Alaska was convicted of a federal environmental misdemeanor, which resolved the criminal aspect of the matter.

Subsequently, the federal and state governments each filed a civil suit against BP.

The federal suit was settled in July 2011 with BP agreeing to pay a $25 million civil penalty, implement a Prudhoe pipeline integrity management program and hire an independent monitoring contractor to report to the government on company compliance.

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