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Alaska's Point Thomson settlement raises hopes for fabled gasline

Alex DeMarban
Business Wire photo

Three successive state administrations have taken a stand against the world's oil giants on the Point Thomson oil and gas unit. It appears industry may have blinked.

That's one early conclusion to be drawn from an agreement between the state, Exxon Mobil Corp. and other oil majors over the largest untapped oil and gas reservoir in Alaska; a deal that ends a bitter court conflict that's lasted years and whose resolution might open a new chapter in Alaska's role as an oil province.

Gov. Sean Parnell on Friday unveiled the agreement with Exxon Mobil, ConocoPhillips, BP and Leede Operating Co., saying it will lead to the first natural gas production from long-dormant Point Thomson, a field 60 miles east of Prudhoe Bay that's considered critical for construction of a fabled 800-mile natural gas pipeline to Southcentral Alaska. It also brings the Big Three oil companies together to work on that pipeline.

Lack of oil and gas development at Point Thompson has for decades rankled Alaskans who want North Slope natural gas delivered to communities suffering stratospheric energy prices, which are generally the highest in America. And Alaskans want that gas exported to markets Outside in order to boost the state's bottom-line.

For years, unit operator Exxon Mobil has complained that the massive field was under severely high pressure, making it uneconomic to develop. The state had heard enough by 2005 when then-Gov. Frank Murkowski began the process of trying to take back the Point Thomson leases. That battle continued under Gov. Sarah Palin and then Parnell before a portion of the case made its way to the state Supreme Court for arguments earlier this year. But on Thursday, the Supreme and Superior courts dismissed the case at the request of the oil companies and the state.

Alaskans long skeptical of Exxon Mobil and their Big Oil brethren might consider the agreement just another promise. But the deal got some early support, though sometimes hesitantly.

Sen. Bill Wielechowski, a Democrat and outspoken opponent of the governor's plan to give a massive tax break to the oil companies, said he needs to review the agreement. He called for transparency as the companies and the state plan for a gasline.   

"This seems to be a pretty strong concession by industry that they do have that obligation to produce," he said. "When the state acts as a sovereign and enforces leases, it puts us in a stronger position. My rough analysis is it looks like the state is getting a good thing out of it. Until I can sit and analyze it, I'm cautiously optimistic."

State officials plan to present terms of the plan to the Alaska Legislature Saturday.

Senate President Gary Stevens, a Republican who has for more than a year locked horns over oil tax reform with Parnell, a fellow Republican, called the news "fantastic."  

"The governor's announcement about the alignment of the three major producers on the North Slope is very exciting for the future of this state. I am also very encouraged by the Point Thomson settlement," he said in a statement.           

Cathy Foerster, commissioner of the Alaska Oil and Gas Conservation Commission, said the regulatory body must determine if gas production is the best use for Point Thomson, which the commission considers an oil field. But now that the matter is out of court, the questions is up for consideration.

"It's a good thing that the state and the operators have come to an agreement because there's not anyone who can do it better than Exxon, Conoco and BP," she said. "Those companies have worldwide and Alaska experience and big budgets and big technical staffs."

Penalties and timelines

So why is this deal any better than past agreements that have floundered? Parnell and other state officials answered that question at a press conference Friday morning. They said:

• It sets a precedent by laying out penalties if production timelines lag, said Dan Sullivan, Natural Resources commissioner. Within four years, the companies must be sending 10,000 barrels of gas condensates -- liquids such as propane or kerosene -- into the trans-Alaska pipeline each day. To do that, they must build a gas-cycling facility and a pipeline extending west that ties into pipeline infrastructure at the North Slope's Badami field. Gas condensates from Point Thomson would be shipped in TAPS along with the 600,000 or so barrels of daily oil already flowing down the line. If the companies miss their timeline without a valid reason -- for example, the courts could issue an injunction after environmentalists sue -- they lose significant acreage at Point Thomson.

• Areas on the eastern side, known as the Brookian oil formation, must be producing oil by 2018 or the state takes back those leases.   

• A key clause in the agreement is designed to stop the companies from using the "uneconomic excuse" when it comes to building the gas-cycling facility and pipeline. Companies have balked at development over the years by calling projects at Point Thomson unfeasible. The cost of the project "cannot be used as a rationale or justification for not completing" the gas-cycling and pipeline facility, the agreement says.

•  For the first time, the agreement brings together the companies that control the lease rights to most of Alaska's gas and oil. It puts them together with pipeline builder TransCanada Corp. to advance construction of a line to Southcentral Alaska. TransCanada has already begun efforts to permit a major gas line from the North Slope that would extend into Alberta, Canada. Much of the work done for that line won't be lost and can be used to help build a pipeline to Southcentral, Sullivan said. In the past, Exxon Mobil and TransCanada had pursued construction of a gasline to Alberta, while ConocoPhillips and BP studied a separate pipeline project they eventually abandoned. Now, they're on the same page.

Letter from the CEOs

Also significant, said Parnell, is a March 30 letter from the CEOs of the oil companies, Rex Tillerson of Exxon, Jim Mulva of Conoco and Bob Dudley of BP.

That letter, issued to media during the press conference, said the parties will assess a gasline to Southcentral that would allow "large-scale liquefied natural gas" exports. The line could also serve in-state energy demands.  

The companies said they would need "stable and competitive fiscal terms" from the state, meaning tax rates that they believe will make production possible, a hint that the discussion over taxes may not end with this legislative session.  

So why is unit operator Exxon Mobil now ready to develop Point Thomson? How did the state get some of the world's most powerful companies to agree to the terms? The prospect of losing the right to develop a major oil field helped, said Dan Sullivan.  

"I think they recognize this is a world-class resource they wanted to have, so the (possibility of losing leases) was a bit of a motivator," he said. But Sullivan said the agreement benefits both sides. Parnell called it a "win-win."

The state escapes the threat of litigation that could have dragged on for years. Even if the state had won the case, and dissolved the Point Thomson Unit, they would have been back in court trying to separate companies from individual leases, attorneys said.  

"Years and years and years" is how long it could have taken before the state finally prevailed in court, said Jonathan Katchen, intergovernmental affairs coordinator for Sullivan.   

'The project could also benefit the oil companies and the state, because once the gas cycling and pipeline are built, new opportunities are opened up for oil and gas development in a long fallow region," one that sits on the western doorstep of the Arctic National Wildlife Refuge and south of where Shell plans to start drilling for oil this summer in the Beaufort Sea.

The companies could lose "significant acreage" if they haven't taken the regulatory and commercial steps to begin construction of a gasline by 2016 or pursued alternatives that include increasing gas condensate production at Point Thomson. They can lose even more acreage if they don't do that work by 2019.

If they've done nothing by 2019 -- neither built the gas-cycling facility nor the pipeline nor prepared for a major gas sale -- they lose all their Point Thomson leases, with no right to appeal.

Contact Alex DeMarban at alex(at)alaskadispatch.com

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