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ExxonMobil Expected to Appeal Ruling by AK Officials

ExxonMobil Corp. and several other producers have less than 30 days to pursue their legal options following Alaska's decision this week to revoke some decades-old leases in the North Slope's Point Thomson field. Barring a lawsuit, the natural gas-rich acreage could be opened to newcomers in a state lease sale scheduled for October 2007.

Alaska Natural Resources Commissioner Mike Menge on Monday said the state is stripping the Point Thomson leases after finding primary stakeholder ExxonMobil and its Point Thomson partners failed to issue a viable plan to develop the field. ExxonMobil and its predecessor companies have held the Point Thomson leases since 1977, and over that period, 22 development plans have been filed on the 106,200-acre unit. In all that time, no commercial oil or gas operations have begun.

"As of today, the Point Thomson unit is terminated," Menge said Monday. In issuing the 20-page ruling against the producers, Menge said, "This has probably been one of the most difficult decisions that I've had to make."

The state's decision does not revoke the leases directly. Instead, the decision terminates what is known as the "Point Thomson unit," a designation that covers the field and all of the leaseholders. Once the unit is disbanded, the Point Thomson leases effectively are voided because they have been extended beyond their original terms, Menge said.

The state's intent now is to offer the Point Thomson acreage for new leases. Original leaseholders could bid on the acreage along with newcomers, said Menge. The new leases could include terms that would require producers to begin development by a certain date.

The state's decision affirmed an initial ruling by former Natural Resources Commissioner Tom Irwin and the state's Division of Oil & Gas Director Mike Myers. In October 2005, Myers held ExxonMobil and the other Point Thomson leaseholders in default and said they were making a "mockery" of Alaska's laws by "continuing this 30-year record of nondevelopment and delay."

Irwin, Myers and several other state officials later resigned after they accused Gov. Frank Murkowski of making too many concessions to the North Slope producers to build a gas pipeline (see Daily GPI, Oct. 31, 2005). Contract negotiations on the gas pipeline fell through earlier this year (see Daily GPI, Nov. 9).

After Prudhoe Bay, Point Thomson is the North Slope's largest natural gas field. It is estimated to hold about 9 Tcf of gas reserves, more than a quarter of the known gas in all of the North Slope fields, as well as 300 million bbl of liquids, both natural gas condensates and crude oil. ExxonMobil owns 52% of the Point Thomson unit leases; the remainder of the leases are held by BP, 29%; Chevron, 22%; ConocoPhillips, 3%; and 18 minority-interest owners with the remaining stakes.

ExxonMobil's previously revised Point Thomson development plan was rejected by state officials last year (see Daily GPI, Oct. 10, 2005). However, the state stayed its decision to revoke any leases pending Murkowski's gas pipeline negotiations with the North Slope's major stakeholders: ExxonMobil, BP and ConocoPhillips.

After the gas pipeline negotiations again fell through, ExxonMobil was given a deadline to again update the Point Thomson plan. In the plan rejected Monday, ExxonMobil proposed paying the state $20 million and giving up 20,000 acres to settle its unmet obligations to develop the Point Thomson field (see Daily GPI, Oct. 25). The plan included a promise to drill one well in 2009 to explore the field's potential.

Murkowski, who leaves office at the end of this week, noted that ExxonMobil had been granted several extensions over several decades to develop Point Thomson, and it had never met its obligations as operator of the field.

"Basically, Exxon did not choose to meet a development scenario, which the state felt was mandated after so many extensions," Murkowski said in a statement.

If a new group of producers is allowed to bid on the Point Thomson leases, Murkowski said the odds of securing a gas pipeline contract stand a better chance. "This in turn will create an incentive and a need for new Point Thomson leases to construct a new gas pipeline," Murkowski said. "And likely they would now look on it as a motivation for building sooner rather than later."

Gov.-Elect Sarah Palin, who takes office Monday, said she supported the state's decision. Palin defeated Murkowski in the August Republican primary.

"I do think that it was the right decision," she told the Anchorage Daily News. "It was a long overdue decision, also."

In a statement, Palin added, "I've said before that these units are the cornerstone upon which a future Alaska gas pipeline will be built. That starts with strict enforcement of the lease terms for timely development of the Point Thomson oil and gas field."

ExxonMobil has not announced whether it will litigate the ruling, but spokeswoman Susan Reeves said the company was disappointed in Alaska's decision.

"ExxonMobil has complied with the Point Thomson lease agreements, the unit agreement and all Alaska statutes and regulations," said Reeves. "Any litigation by the state to take back the Point Thomson leases is likely to be protracted." She added, "This is a major setback for the natural gas pipeline project since the Point Thomson field would supply gas to the pipeline."

Murkowski acknowledged that the producers likely will litigate the decision, which in turn will delay a gas pipeline.

"The reality is that the leases can't be reoffered until any litigation is resolved," Murkowski said in a speech in Fairbanks, AK, on Tuesday. However, he said, "I don't want anyone to think this is going to be a major setback to development of a gas pipeline, because, actually, we think to the contrary."

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