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Alaska Terminates Point Thomson Unit; Producer Questions Legality

April 28, 2008
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Blasting Alaska North Slope producers for their repeated failure to develop long-held leases on the Point Thomson Unit, Alaska's Department of Natural Resources (DNR) Commissioner Tom Irwin last week rejected the 23rd Plan of Development and Operations (POD 23) for the oil and gas field and terminated the Point Thomson Unit.

"I found that the proposed 23rd Plan of Development is not an appropriate remedy for the previous failure to submit an acceptable 22nd Plan of Development, and I determined that the proposed 23rd Plan of Development does not serve the state's best interests or meet the legal standards in DNR's regulations," Irwin said. "I did not approve the 23rd Plan of Development and terminated the Point Thomson Unit."

Last month ExxonMobil Corp., the operator of the Point Thomson Unit, announced a proposal, which included BP Exploration (Alaska) Inc., Chevron U.S.A. Inc. and ConocoPhillips Alaska Inc., that committed the companies to developing the field, which was discovered 30 years ago (see NGI, March 31). If accepted the producers' proposal would have resolved the litigation over Point Thomson and held the companies to the unit's POD 23 dated Feb. 19 (see NGI, Feb. 25).

"We're surprised and extremely disappointed by the DNR's decision," ExxonMobil said. "This plan is responsive to all of the DNR's requirements, including a commitment to bring Point Thomson on production. Thus, we plan to appeal this action and will pursue all alternatives to protect our rights to develop these resources. "The owners have achieved a comprehensive technical understanding of the Point Thomson Unit reservoirs. We've spent $800 million to date. The Point Thomson Unit plan of development is a commitment to production at an estimated investment of an additional $1.3 billion. Our plans include beginning drilling this year and we have already secured a rig for this purpose.

"We believe the DNR commissioner has no legal basis to terminate the unit and doing so will lead to further court appeals, which will take an indeterminate number of years to resolve and delay Point Thomson Unit development to the detriment of the State of Alaska and the project participants."

Alaska Gov. Sarah Palin, whose administration has sought proposals from energy companies -- including the Point Thomson operators -- to construct a pipeline to tap North Slope gas reserves, said she supported the DNR decision. "I want development and Alaskans are ready to see real progress at Point Thomson, finally, after 30 years," she said. ConocoPhillips and BP recently offered their proposal for a North Slope-to-Lower 48 pipeline, which the state is considering (see NGI, April 14).

As far as the DNR was concerned, the producers had lost credibility due to numerous development delays.

"I found that I could not risk further delay in development of these valuable resources by accepting the proposed 23rd Plan of Development," Irwin said. "In light of the history of this unit, I did not trust the appellant's commitment to follow through with their 23rd Plan of Development. Despite the fact that this unit was formed in 1977, none of its oil or gas resources have been produced. This unit includes an estimated 8 Tcf of gas and hundreds of millions of barrels of oil. The unit operator has not drilled any wells since 1982. In this Plan of Development the working interest owners proposed to drill at least five wells over the next six years to better understand the reservoir and to produce 10,000 b/d of gas condensates (oil extracted from gas) and transport it down the Trans Alaska Pipeline beginning in 2014. The 23rd Plan of Development did not include a commitment to produce any gas from this unit."

The case had been remanded to DNR by Alaska Superior Court Judge Sharon Gleason. Irwin, in a statement, said he could not comment further on the issue as the case is still being litigated.

It is clear from what Irwin wrote in his decision that he and the state expect the producers' history of inactivity to weigh against them in any further litigation.

"Appellants' proposed judgment asks that I cede to the court the responsibility to decide whether appellants have complied with the terms of the 23rd POD," Irwin wrote. "The remedy also 'withdraws' the prior administrative decisions in this matter. History cannot be erased. Those administrative decisions are valid determinations and comprise part of the history of the unit. The only reason for appellants to ask that those decisions be withdrawn is a desire to escape the consequences of their past actions and failures to act. Withdrawing these decisions could harm the state in future disputes with appellants by creating significant holes in the record."

Last week's decision was on the issue remanded to DNR by Gleason on Dec. 26, 2007. Gleason affirmed DNR's rejection of the 22nd Plan of Development and found that DNR had the authority to terminate the unit. However, she held that the due process rights of ExxonMobil, BP, Chevron, Conoco and numerous minor interest holders might have been violated because they did not have adequate notice that the unit would be terminated. She directed DNR to give them a fair opportunity to present alternative remedies to unit termination for their failure to submit an adequate plan of development.

The companies submitted a 23rd Plan of Development on Feb. 19 and a hearing was held March 3 through March 7 to allow the companies to present testimony and argue in support of POD 23.

Within 20 days the companies may request reconsideration of the DNR decision by the department. A final decision is due to Gleason by June 15.

Point Thomson is adjacent to the Arctic National Wildlife Refuge, about 60 miles east of Prudhoe Bay. Estimates say it could hold about 25% of the North Slope's 35 Tcf of natural gas as well as 300 million bbl of oil.

The Point Thomson leaseholders have argued in the past that the Point Thomson leases could not be economically developed, and the state threatened to nullify the leases. In December 2006 Exxon asked the court to overturn Alaska's decision to revoke its Point Thomson leases (see Daily GPI, Jan. 2, 2007).

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