AD Main Menu

'Duty to produce' Alaska's natural gas? Just shoot me already.

Andrew Halcro
Aaron Jansen illustration

Enough already. The back and forth and back and forth have presented readers with a volley of conflicting views on the concept of "duty to produce." Okay, I'll take the bullet, chest-high, Granny.

The "duty to produce" is the idea that the state has the contractual power to force North Slope producers to start selling their gas. 

Craig Richards, a local attorney who specializes in oil  and gas issues, argues by citing several precedents from Lower 48 state supreme court cases, that Alaska has a case to force BP, Exxon and ConocoPhillips under their existing leases into gas production.

First, it's damn sad we are this deep into the weeds debating if the state can force a gas pipeline into existence. 

Second, I disagree with Mr. Richards. There is no way Alaska courts are going to force the producers to sell natural gas. While unfamiliar with the cases Richards states, I do know that none of those precedents had anything to do with paying for an 800-mile, $45-billion transportation system through the coldest region in the world.

But today I am going to agree with Mr. Richards.

I'm going to ignore every thing I know. 

I'm going to ignore the words of Ted Stevens who said "I don't believe any court could force the producers to put gas in a pipeline."

I'm going to ignore the AGIA testimony of Spencer Hosie, a San Francisco lawyer who is considered the pioneer of the Duty-to-Produce argument, that a case against the producers would be a "loser."

I'm going to forget the legislative testimony of the Alaska Oil and Gas Conservation Commission, who stated the producers were more than meeting their leases.

I'm going to forget that any independently built pipeline will not be built without the producers of the gas agreeing to resource extraction terms for the necessary 25-year commitments. 

I'm going to forget the one very clear point the producers have made since day one: They'd want to own the pipeline to mitigate their fiscal risk, to hedge against price or supply swings. For instance, the way natural gas went from $12 to $3 in a little more than a year.

All of that goes into the wind.

As of now, I agree with Richards that the state should exercise its Duty to Produce argument.

First comes the lawsuit regarding the exact meaning of the contract language. What exactly is the “implied covenant to market?" According to the state's own oversight agency, the producers are more than meeting their marketing obligations.

Let's say the lower court rules in favor of the state, and it's appealed all the way to the Alaska Supreme Court. To give an example, the Exxon Point Thomson lease battle took five years before it even got to the state's high court.

Second comes the lawsuit to argue about how the profitability of a gas production project is determined. Who is the final arbiter of the profitability?

Third comes the lawsuit regarding the actual profitability of any project, once the state establishes standards or adopts a third party valuation.

Remember, the state has already been around this block and wiped out with AGIA. The state collected an army of consultants who argued the AGIA line was "wildly profitable," at any price. Today the project is scraped due to economics.

All in all, that's about fifteen years worth of drawn out litigation, and the state might lose any or all of these issues before the court.

Fifteen years worth of uncertain litigation, and we're at 2030 with no natural gas pipeline. 

... thanks, Granny, dag nabbit you're the best.

Andrew Halcro is the publisher of AndrewHalcro.com, a blog devoted to Alaska issues and politics, where this commentary first appeared. He is president of Halcro Strategies and Avis/Alaska Rent-A-Car, his family business. Halcro served in the Alaska House of Representatives from 1999 to 2003, and he ran for governor in 2006 as an Independent.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.