State, BP to arbitrate royalty income lost from Slope leaks

Wesley LoyPetroleum News

The state's civil suit against BP over the high-profile pipeline leaks in the Prudhoe Bay oil field in 2006 is headed to arbitration.

On Dec. 29, attorneys for the state and the oil company filed a "stipulation to stay litigation." The filing said a stay would "allow the parties to proceed with an arbitration of the present dispute."

Although the state sought a variety of damages in its suit, the arbitration will focus on only one claim: the amount of royalty income the state might have lost as a result of the leaks and subsequent shut-ins to accommodate pipeline repair and replacement work.

"This binding arbitration path resolves the disputed claims in the litigation," Steven Mulder, a state assistant attorney general, told Petroleum News by email on Jan. 10. "The court case will be stayed until the arbitration is competed or the royalty damages claims are settled."

The state sued BP Exploration (Alaska) Inc. in 2009 in state Superior Court in Anchorage. The suit came in the wake of a pair of oil spills in 2006 in the huge Prudhoe Bay field, which BP operates for an ownership group that also includes Exxon Mobil, Conoco Phillips and Chevron.

The first spill, discovered on March 2, 2006, was 212,252 gallons -- the largest oil spill ever on the North Slope. Another spill occurred on Aug. 6, 2006, and involved 966 gallons.

Both spills came from corroded oil transit lines, also known as sales lines, that feed processed crude from Prudhoe into the trans-Alaska pipeline.

The spills were big trouble for BP, with the company drawing criticism from regulators and members of Congress for its pipeline maintenance. The second spill triggered a partial showdown of Prudhoe, briefly rattling world oil markets. The company later would have to replace miles of transit lines.

BP's Alaska subsidiary was convicted of a federal environmental misdemeanor, fined $20 million and put on probation for three years. That resolved the criminal aspect.

The state's subsequent 49-page, nine-count civil suit alleged negligence and sought a range of damages from BP, including reimbursement of spill response costs, fines and punitive damages.

The suit also 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.

These shortfalls, from 2006 through 2008, resulted from "massive production shut-ins" due to the spills and subsequent replacement of corroded pipelines, the suit said.

BP, in court papers, argued the state was "overreaching" with its lawsuit.

By attacking the suit's various counts, BP cut its potential liability considerably. For example, on Dec. 10, 2010, BP won a ruling that threw out the state's tax claims.

Mulder said the case now comes down essentially to the state's royalty claim, the only issue to be arbitrated.

BP will pay $10 million to resolve the state's "non-income claims" for civil assessments, penalties and natural resource damages, he said.

The state and BP plan to arbitrate the royalty claim "later this year," Mulder said.

A three-member arbitration panel, yet to be chosen, "will be asked to award an amount to compensate the State for the royalties it did not receive due to the 2006-08 pipeline corrosion and replacement events," he said.

Ostensibly, if at arbitration the state is able to show that it is due a 12.5 percent royalty on the full 35 million-barrel production shortfall alleged in the suit, that would be about $328 million at $75 per barrel.

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