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Alaska lawmakers question Point Thomson settlement

Lisa Demer

JUNEAU -- Signs of skepticism emerged Friday over the deal applauded by the Parnell administration last month to resolve long-running litigation over the Exxon Mobil-operated Point Thomson oil and gas field.

The huge field, some 60 miles east of Prudhoe Bay, is Alaska's remaining "crown jewel" on state lands, the state Senate Judiciary Committee was told. It holds hundreds of millions of barrels of oil but the real prize has always been the natural gas, estimated by the state at eight trillion cubic feet.

Under the Point Thomson settlement, the state could end up with much of the oil left in the ground by allowing Exxon to develop the field in a way that is simpler and less costly, a former state oil and gas director told senators at Friday's oversight hearing. Plus the complicated settlement provides no guarantee that Point Thomson will ever be developed, a lawyer challenging it told them.

State officials sharply disputed the criticisms and said the court settlement is a good deal for Alaska.

"The history of Point Thomson is long, complex and tortured," Sen. Hollis French, a Democrat from Anchorage who chairs the committee, said at the start of the hearing, which spanned nearly four hours.

Numerous administrations have tried and failed to force Exxon to develop Point Thomson, but there's only been minimal activity. Gov. Sean Parnell and Natural Resources Commissioner Dan Sullivan have said the court settlement imposes timetables and requirements for investment that will gradually lead to production.

Because the giant Point Thomson gas field contains roughly a fourth of the North Slope's recoverable gas, clearing the legal cloud over its leases has been considered essential to the viability of a large natural gas pipeline.

SHAKING UP A SODA CAN

Whether the Point Thomson deal helps the state get a big pipeline appears questionable, some of the senators said. Sen. Joe Paskvan, D-Fairbanks, noted in some of his questioning that Exxon could satisfy settlement terms with a pipeline shipping just over 500 million cubic feet of natural gas a day, much less than the 3 to 4 billion cubic feet envisioned for a big pipeline.

One of the settlement's chief critics was Mark Myers, and he brings notable credentials.

Myers is a former oil company geologist who served as state oil and gas director from 2001 to 2005 and went on to head the U.S. Geological Survey. He's now vice chancellor for research at the University of Alaska Fairbanks, but he took time off to testify at French's request.

The settlement strips the Department of Natural Resources of its normal authority to manage the development and lets Exxon and its partners, including BP and Conoco Phillips, decide how to proceed, Myers said.

The Alaska Oil and Gas Conservation Commission classifies Point Thomas as an oil field, not a gas field, which means getting the most oil out should be the top priority, he said. Because Point Thomson is a high-pressure field, the design of wells and other facilities is key, he said.

The commission, which is charged with ensuring the state doesn't waste oil and gas resources, would still have authority over the project. And if the Department of Natural Resources believed the field producers were operating outside the law, it could challenge that, state officials said.

The field could be developed for natural gas production through a method called "blow down," which Myers said is like taking a can of soda, shaking it up and "whatever comes out, comes out. The oil and the gas come out but a lot of the liquids stay in the Coke can." Both the gas and oil are produced, separated and sold or stored, he said.

Or it could be developed through full field cycling, which involves specialized compressors and other equipment, making each well much more expensive. In that system, gas is reinjected to keep pressure high and allow more oil to flow. A version of that is common at Prudhoe Bay.

LOST OIL

If that isn't done, the sudden loss of pressure and resulting clogging can forever trap the oil in the reservoir, he said.

Myers presented senators with key findings from a 2008 study by consultant PetroTel Inc. that was commissioned by the state.

If Point Thomson is developed like a gas field, with the oil incidental, an estimated 125 million or more barrels of condensates -- a sort of light oil -- could be produced over 20 years, but another 240 million to 320 million barrels could be lost, the study said.

"It's more than half the value of the Permanent Fund," Myers told the senators.

"Say that again?" French asked.

Myers repeated his comparison. "It's a huge resource on the North Slope."

As to oil, the information is more speculative, but the loss could be close to that, he said.

SECRET DEAL?

Senators also heard from lawyer Craig Richards, who sat at the witness table with Bill Walker, a one-time candidate for governor and longtime proponent of a large, in-state natural gas pipeline. Richards is a lawyer with Walker & Levesque, Walker's law firm, and is representing him in a challenge to the settlement.

Richards told senators that a deal of that magnitude should have included a public process and should have come to the Legislature for approval. The settlement is full of confusing and ill-defined terms and provides no assurance that Point Thomson will ever be developed, Richards said.

"You have an agreement that was negotiated in secret. The court case was dismissed before the deal was made public. It was announced already executed with no public comment," Richards said. And, according to a letter that Attorney General Michael Geraghty sent to Walker and Richards this week, the settlement is not appealable.

Among other problems, Exxon could satisfy terms without ever producing gas if the state built a smaller bullet line from the North Slope to Southcentral Alaska that didn't even connect to Point Thomson, Richards said.

House members, in fact, have scheduled hearings next week on a new version of House Speaker Mike Chenault's gas pipeline bill, which could lead to a bullet line or merge with a big pipeline project being pursued by TransCanada and Exxon. That's the only item remaining in the special legislative session that crumbled this week when the governor took oil taxes off the table and the Senate adjourned.

Attorney General Geraghty, Deputy Natural Resources Commissioner Joe Balash, and a top aide, lawyer Jon Katchen, all told the senators that the characterizations by Myers and Richards were off.

Geraghty only had a day's notice of the hearing and said he intended to send a written response.

But as to the issue of negotiating in secret, he said that's how court settlements are done, and that he had every right to bind the state to the deal.

If the state hadn't settled, he said, the court case would have dragged on for years with no hope of production from Point Thomson, leaving a big obstacle for a pipeline.

'ACTUALLY IT'S GRAY'

One of the criticisms of the settlement is a provision that the state can only tax the gas once, meaning the state doesn't get to charge if it is drawn up only to be reinjected either at Point Thomson or Prudhoe Bay. That's already in policy, regulation and law, Balash told the senators.

"What we've agreed to in this provision, the sky is blue," he said.

"Actually, the sky is gray," French said, looking out the window at the Juneau mist. But he said he also was referring to the fact that the state's share of the gas is not the same across all fields.

As to the concern that valuable oil would be left in the ground, the settlement aims for initial production of about 10,000 barrels of oil a day, and that amount would increase, Balash said.

Exxon could only use the blow down method if it can prove to the oil and gas commission that it won't waste the resource, he told senators.

Reach Lisa Demer at ldemer@adn.com or 907-500-7388.


By LISA DEMER
Anchorage Daily News