Monday, February 13, 2012

Going through motions; With settlement still pending, Alaska Supreme Court hears Point Thomson case

Wesley Loy
For Petroleum News

In front of a special audience of several hundred high school kids, the Alaska Supreme Court heard oral arguments Feb. 8 in the high-stakes Point Thomson case.

Justices left their regular courtroom to conduct the hearing in Anchorage’s West High auditorium. It’s part of a public outreach program known as Supreme Court Live.

With respect to the case, it was a significant event not so much for the arguments the opposing lawyers made, but the fact that the hearing was held at all.

The case pits the state Department of Natural Resources against ExxonMobil, operator of the Point Thomson field.

The two sides have for years have been tussling for control of the rich but undeveloped field, and the case was elevated to the state’s highest court after DNR in early 2010 appealed an unfavorable lower court ruling.

State officials in August said a “resolution in principle” had been reached with ExxonMobil to settle the Point Thomson conflict.

But the deal remains incomplete. And so the lawyers went to school on Feb. 8.

Origins of conflict
The case centers on DNR’s efforts to terminate the Point Thomson unit. The unit designation binds together leases within the field, located on the North Slope just west of the Arctic National Wildlife Refuge.

Leaseholders went to court to try to preserve the unit. Aside from ExxonMobil, major Point Thomson leaseholders include Chevron, BP and ConocoPhillips.

The state long has been frustrated Point Thomson has not been developed more than 30 years after its discovery on leased state acreage. The field is believed to contain some 8 trillion cubic feet of natural gas plus hundreds of millions of barrels of oil.

The leaseholders have cited Point Thomson’s technical challenges, along with the lack of a very expensive North Slope natural gas pipeline, as reasons the field hasn’t been developed.

Alaska Gov. Sean Parnell has complained that the reason the tentative settlement of the case hasn’t been finalized is because ExxonMobil’s partners in the field haven’t yet signed onto the deal.

DNR Commissioner Dan Sullivan told legislators in August the Point Thomson working interest owners were trying to work out “internal commercial terms between themselves.”

Points on appeal
In April 2008, the DNR commissioner at the time, Tom Irwin, terminated the Point Thomson unit.

A Superior Court judge in January 2010 reversed Irwin’s unit termination on two grounds.

First, she held that the Point Thomson stakeholders were wrongly denied a hearing under Section 21 of the Point Thomson unit agreement.

Second, the judge said DNR failed to accord the oil companies their constitutional right to due process in allowing state lawyers and DNR’s unit manager to both advise Irwin, in his role as an impartial decision maker, and fight the companies in court.

During the oral argument at West High, state Assistant Attorney General Richard Todd argued no due process violation occurred.

Most of the hearing centered on the Section 21 question.

Section 21 says the state has authority to adjust the “quantity and rate of production,” but only after the unit operator has the opportunity for a hearing to consider, among other things, whether any rate increase would violate “good and diligent oil and gas engineering and production practices.”

ExxonMobil and the other companies argue Section 21 is a vital contractual protection when faced with the prospect of losing an enormously valuable asset such as Point Thomson.

But Todd told the four Supreme Court justices — Craig Stowers, Dana Fabe, Daniel Winfree and Chief Justice Walter Carpeneti — that the Superior Court ruling incorrectly served to reverse the roles of DNR and the oil companies. Under that ruling, he said, it would fall to DNR to craft an acceptable plan of development for the unit — something the department is not as well-equipped to do as the major oil companies.

Todd further said the lower court ruling, if allowed to stand, had “statewide implications,” as other unit agreements in Alaska contain a Section 21 clause.

Section 21 actually was drawn from federal regulations adopted in the 1930s to avoid overdrilling and excess production, Todd told the justices. It’s a tool for government — one Alaska has never used — and not something for oil companies to invoke whenever DNR rejects an unacceptable plan of development, as it did with Point Thomson, he argued.

Questions and answers
Charles Lifland, an attorney speaking for ExxonMobil and the other Point Thomson leaseholders, told the justices Section 21 was “backstop protection” for the companies.

One justice asked him why the companies, with Section 21, would ever submit a plan of development that ever required them to do much of anything. Why not just let DNR propose a plan?

Lifland replied that the companies, under their leases, “have an obligation” to propose a plan of development.

After the oral argument — each side had about 30 minutes to talk — the high school students had a chance to pose questions to the lawyers and the justices. The students had been studying the complex case prior to the hearing.

Not surprisingly, the students asked some quite pointed questions.

One student asked: If the state wins the appeal and the oil companies get “kicked out” of Point Thomson, what then?

“It’s sort of premature to talk about the companies getting kicked out,” Todd replied. Either way the Supreme Court rules, he said, the case will be sent back to the Superior Court for further proceedings.

Todd went on to say that if the state did end up rebidding the Point Thomson acreage, lots of companies would want the property but probably the current leaseholders would get the land back, as they know the most about the field.

Another student asked Lifland what the plans are for Point Thomson if the Supreme Court favors his side.

Lifland said he couldn’t comment on that, but noted ExxonMobil is now working on a project to produce natural gas liquids from the field.