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Walker administration continues brawl with oil producers for gas-marketing details

  • Author: Alex DeMarban
  • Updated: July 1, 2016
  • Published July 1, 2016

The Walker administration on Thursday continued to fight Alaska's major oil producers for details about how they will sell their Prudhoe Bay natural gas, refusing to approve an annual activity plan at one of the nation's largest oil fields until it gets the information it wants.

That doesn't mean work will stop in the initial participating area of Prudhoe Bay – an oil field responsible for close to half the state's oil production in 2015.

The Department of Natural Resources said it's giving BP, ExxonMobil and ConocoPhillips "one final opportunity" to provide the information by Sept. 1, and to provide an explanation when it can't.

The agency also extended the 2015 plan for the Prudhoe Bay oil field by four months. The yearly plan was set to expire on Thursday.

The proposed 2016 plan received by the state in April meets the requirements for oil development, but the producers have a duty under their leases and state law to provide a complete development plan for "all resources" — natural gas as well as oil, said the letter to BP, the unit operator, on Thursday.

"Given the current status of the field, it is now time to take measurable, verifiable steps towards (a major gas sale) and DNR is entitled to know what those plans and steps are and will be," said the letter, signed by Corri Feige,  director of the Oil and Gas Division.

A yearly development plan at the decades-old field typically spells out such things as the number of wells planned and anticipated levels of oil production. It's not unusual for state officials to request additional details in the plan associated with oil development, since the field has long produced oil but little gas, said a former state official.

But as Gov. Bill Walker pushes hard for a state gas line project to sell huge volumes of that gas to Asian utilities, the department took the unusual step this year of demanding answers about the companies' plans to market and sell the gas.

The oil producers have long reinjected the gas back into the ground to pressurize the reservoir and squeeze out more oil.

Feige acknowledges the gas has helped the field exceed production estimates. But she also points out the effort will no longer be needed in the "relatively near future."

At that time, the gas will need to be sold to benefit the state. A step in that process came last year, when the Alaska Oil and Gas Conservation Commission expanded the amount of gas that can be removed from the North Slope, a decision made at the producers' request, the letter notes.

"Meaningful progress on the development and production of Prudhoe Bay gas" means the resources need to be committed "toward a marketing program," she writes.

How the fight will end up is anyone's guess. The letter doesn't explain what happens if the state isn't satisfied.

As a private attorney in 2005, Walker filed a demand with the state arguing ExxonMobil and its partners were in default for not developing the Point Thomson gas field east of Prudhoe Bay, a field it had held for decades.

Under Gov. Frank Murkowski, the state terminated the unit in 2006, leading to years of legal action and the field's first-ever development, with ExxonMobil earlier this year announcing it had begun to produce light oil made from natural gas.

Walker said recently he doesn't envision putting the Prudhoe Bay field in default, addressing criticism that his administration would take such a step to force the producers to market the gas reserves.

Walker said Friday, as Alaska's governor, he needs the producers' marketing plans.

"As we see the very same producers announcing competing projects elsewhere around the world, it is important for us to know where Alaska stands in getting Alaska's gas to market," he said in a statement. "Based on meetings this week on this very issue with the top Alaska executives of BP, ConocoPhillips and ExxonMobil, I have no reason to think that information will not be provided to our satisfaction during the additional 90-day period we provided."

BP has called the demand for information illegal and unprecedented.

In an exchange of letters that began with the state's request in January, the agency has sought information such as gas pricing terms, gas volumes to be delivered, and the identity of parties expected to be involved in "substantive" marketing discussions with the partners.

BP has argued sharing such "commercially sensitive marketing information" with a potential competitor – the state — "raises significant antitrust concerns" under state and federal law.

The battle comes as the $55 billion Alaska LNG project the state and the oil companies have been working on since 2014 appears to be unraveling, at least as we know it. The project would sell liquefied natural gas to Asian customers, but it is not expected to be built until at least 2023, and possibly never.

With oil prices battering their bottom lines, the oil companies have expressed uncertainty about continuing with the project next year, state officials have said. The state is now considering taking the lead role in the project from ExxonMobil, and says lining up large contracts with gas buyers will be critical to attract investors.

The companies have cited the Alaska LNG project as the venue where "appropriate collective marketing" information has been shared with key state officials who have signed confidentiality agreements. The marketing information is not to be shared as part of the annual Prudhoe Bay development plan, they have said.

Dawn Patience, a spokesperson for BP, said Friday the state's extension was just received and is under review.

Ken Boyd, a former oil and gas director under Gov. Tony Knowles and a retired industry consultant, said the state's request is like "Alice in Wonderland" because it "makes no sense."

The producers have advanced the Alaska LNG project and remain part of it, he said.

Meanwhile, the governor's approach to the project continues to change, with key state officials coming and going, creating confusion over who's in charge. Yet despite the state's uncertainty, the agency wants details from the producers about a project that's in an initial study phase, with a completion date nearly a decade away.

"They are supposed to tell how they will market gas before they have made a decision" to build it, he said. "I sat at that desk for a long time, and I can't imagine requesting something like this."

Feige said the state has not required the producers to provide such gas-marketing details in the past, but that doesn't mean the producers are not required to do so now.

When oil began to flow at Prudhoe Bay in 1977, the producers assured the state in a development plan that a major gas sale would be held by 1982, once a gas line was built, Feige said.

But despite decades of studies by the oil companies and others, a gas line has never been built to move the gas to markets in the Lower 48 or Asia. Though gas could be shipped in large volumes for decades, project sponsors have typically backed out of the costly effort when gas prices head south, as they are now.

Though no gas line exists, the producers are still legally required to provide information about steps they're taking to develop and sell that gas, Feige said.

"Historically, Alaska has found itself in a 'Catch-22″ circumstance," she wrote.

The (producers) cite "the lack of a pipeline to justify not achieving a major gas sale while simultaneously not taking firm strides toward making gas available for a third-party project," she said.

It is against state interests for the producers to "use their refusal to market gas" to other parties to "effectively veto viable pipeline projects."

Without a commitment from the producers to make progress toward a major gas sale, they must make that gas available to third parties on "commercially reasonable terms," she said.

 

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