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Deals announced on Point Thomson leases, gas line partnership

Richard Mauer
Mark Thiessen / Associated Press

Gov. Sean Parnell announced Friday that the state has settled long-running litigation over the Exxon Mobil-operated Point Thomson oil and gas field, and with it, the emergence of a new partnership to study a large gas line from the North Slope.

In the announcement, made at a press conference in the governor's Anchorage offices, Parnell and his natural resources commissioner, Dan Sullivan, said that BP and Conoco Phillips would join Exxon Mobil and TransCanada on the gas line venture.

Parnell and Sullivan also said that production would finally begin at the giant Point Thomson field after three decades of minimal activity. Though the field would start up slowly, the settlement would impose benchmarks for production that could lead to the state taking back leases if timelines aren't met, they said.

TransCanada holds the state license under the Alaska Gasline Inducement Act -- AGIA -- to build a 48-inch pipeline from the North Slope to market, either through Canada to the Lower 48 or to a plant in Valdez that would liquefy the gas and put it on ships. Exxon has joined TransCanada as a partner, though the companies haven't disclosed their full business relationship.

Parnell said a line should run to tidewater somewhere in Southcentral Alaska, and that the big market for gas would be Asia. The new pipeline partners said in a joint letter they agreed -- at least to the point of studying that option.

TransCanada's efforts so far have proved disappointing, with no firm commitments from any company to ship gas through a potential line. Legislators and members of Congress reacting to the announcement Friday suggested they thought the deal could breathe some hope into the project.

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

The biggest hurdle to building a line, though, remains low gas prices in relation to the multibillion-dollar cost of construction. Gas pried from shale formations in the Lower 48 using new techniques has created a glut there.

That's why the pipeline developers should abandon the idea of going to Canada and the Upper Midwest and instead consider liquefied natural gas, which can be put on a tanker and shipped anywhere, Parnell said.

"I have told these companies that they were to get alignment and focus on an Alaska line, LNG project to Pacific Rim-type countries because that appears to be where the market is right now, that's where they're paying 14 bucks an 'm' (million British thermal units) for gas instead of 2 bucks an 'm' in the Lower 48," Parnell said.

When they spoke of a "tidewater" destination in Southcentral, Parnell and Sullivan didn't say if that meant Valdez or some other place such as Nikiski on the Kenai Peninsula, where a small plant has been liquefying Cook Inlet gas for decades for shipment to Asia.

A large-diameter line to Kenai would likely mean cheaper gas for railbelt communities along the way, eliminating the need for long spurs from Glennallen or other junction point, though Valdez boosters would be crestfallen.

But gas lines to destinations all over Alaska have long been studied to no significant effect. Sullivan cautioned that the Point Thomson deal wouldn't necessarily result in a pipeline either.

"This agreement does not guarantee a major gas line for Alaska, but it certainly moves us significantly closer," he said.

Reacting to the announcement, Rep. Mike Hawker, one of the leaders of an effort to build a smaller-diameter line from the North Slope to Southcentral Alaska, said the House bill passed this week to continue development work on the small line still makes sense.

There have been other big announcements on gas pipelines before that have produced nothing but dreams, so the House bill keeps an alternative alive, said Hawker, an Anchorage Republican. The line could also be used to bring gas to populated areas from a larger pipe to Valdez, he said.

Opponents of the so-called bullet line, like Rep. Les Gara, D-Anchorage, said Parnell's announcement did nothing to convince him that the small-diameter line would be anything but a big waste of money.

Point Thomson, only 60 miles east of Prudhoe Bay, has never been connected to the North Slope oil-field infrastructure of pipelines, treatment plants, metering stations or the many other facilities necessary to produce petroleum. Its first leases were issued in 1965, and Exxon found oil there in 1977, yet plans to produce it came and went.

Over the years, as Alaskans complained bitterly about large oil companies holding leases and not developing them for their own internal reasons, Point Thomson was usually the first one they cited. But Exxon's field also has difficult geology, including fierce pressures and mixtures of petroleum liquids in the gas.

Exxon has been the designated operator of the field, estimated to be one of the largest on the Slope, but "operator" has been a stretch of a term. The other major players on the Slope, BP and Conoco Phillips, also own Point Thomson shares. Chevron sold its 25 percent stake in Point Thomson to Exxon earlier this week.

The administration of Gov. Frank Murkowski moved to take away the state leases for the owners' failures to follow the requirement to develop them. His efforts set off seven years of litigation spanning three state administrations that ended with the settlement announced Friday.

Among the settlement terms is a requirement that some production of petroleum liquids condensed from gas -- it's not quite oil -- begin from two wells already drilled in the field no later than spring 2016, Sullivan said. The production would be modest -- 10,000 barrels a day -- but the deal also requires the operator to build production infrastructure, including a pipeline capable of transporting 70,000 barrels a day, Sullivan said.

That pipeline would be a common carrier, meaning it would be available to any producer willing to pay its shipping rates. It would run to the Badami field, 22 miles away, currently the easternmost producing region on the Slope. Badami is connected to the pipeline network feeding the trans-Alaska pipeline.

Parnell said the settlement has penalty clauses. If the companies fail to deliver on the schedule they agreed to, they begin to lose lease acreage, he said.

By dropping the idea of a gas pipeline through Canada -- once seen as the most likely route -- the state will likely have to renegotiate its agreement with TransCanada, Parnell said.

TransCanada is currently obligated under its AGIA license to submit the application for the Canada-U.S. line to the Federal Energy Regulatory Commission by Oct. 31. Even if that permit obligation is suspended or eliminated, the state will continue to pay TransCanada's expenses up to $500 million, as set out in AGIA, Sullivan said.

A pipeline that only runs within the state would have different requirements under U.S. law than one crossing through Canada and passing through many states. Federal pipeline coordinator Larry Persily said a FERC permit would still be needed for an in-state liquefaction plant, and might still be required for the pipeline as well, depending on how the commission rules.

The project would also need a federal export license unless all its gas were shipped to Korea, which has a free-trade agreement with the United States. China and Japan would probably be the best markets for the gas, Persily said.

Parnell said he didn't think Congress would attempt to block export of the gas because U.S. supplies were abundant. Even though worldwide gas exports to Asia are on the rise, Alaska would be considered more reliable than suppliers like Russia or Qatar, he said.

Parnell said there was nothing the agreement related to the contentious issue of oil taxes now being debated in the Alaska Legislature. But in a combined press statement on the settlement, BP, Exxon, Conoco Phillips and TransCanada didn't miss the opportunity to call again for "meaningful" tax cuts.

Reach Richard Mauer at rmauer@adn.com or (907) 500-7388.


By RICHARD MAUER
Anchorage Daily News