Monday, June 26, 2006

Question No. 5 Of Natural Gas Pipeline Roundtable - What About Point Thomson?

Special Note: Revised and reposted on March 8th, 2007 to delete superseded links.

On June 7th, KTUU-TV's John Tracy met with Jim Clark, Joe Marushack, Bill Walker and David Gottstein to discuss the natural gas pipeline. The 15 questions discussed aired on the "5 O'Clock Report," the "NewsHour" and the "Late Edition." While KTUU has since dumped their archives of all 15 discussions, the account of the fifth discussion survives in this post.

The Panel: John Tracy, News Director of KTUU, serves as the moderator.

1). Jim Clark: Governor Murkowski's chief of staff and the state's chief negotiator. He represents the executive branch.

2). Joe Maruschak: ConocoPhillips' vice president of gas commercialization and one of the primary negotiators representing the producers.

3). David Gottstein: A financial analyst and a co-chairman of Backbone 2, a resource watchdog group.

4). Bill Walker: General counsel for the Alaska Gasline Port Authority, the organization promoting an LNG project (the "all-Alaska gas line") from Prudhoe Bay to Valdez. Since he's relying upon work done by Econ One for the legislature, he can be considered a "proxy" representative of the legislature.

Background: For some 30 years now, the state has been waiting for ExxonMobil to develop the Pt. Thomson field. Exxon has filed no less than 22 development plans during that time. The latest plan says the field and its nine trillion cubic feet of gas won’t be developed without a gasline. In fact, the field is a cornerstone of the governor’s gasline contract with producers.

Question No. 5: Roughly one-third of the available natural gas on the slope is contained in the Point Thomson Unit. How does the contract address development of Point Thomson?

Jim Clark responds: “Let me begin by saying Pt. Thomson almost absolutely requires a gasline to be built in order to develop that gas. Why? Because it’s under such incredible pressure that re-injecting that gas back in the ground is impractical. It needs to come down a pipeline. We have put in requirements that six months after the gasline is up and going, they’re going to need to build into the gasline”.

David Gottstein responds: “When an oil company signs a lease to drill at the North Slope they, are legally bound to produce the resource they find if they can make a reasonable profit. The state has been waiting for years for Exxon to develop Point Thomson. There’s no doubt in today’s energy demand rich world that the gas is economic to develop. The state should take Point Thomson back and use it as we see fit. It’s the law. Gov. Murkowski is afraid they’ll sue. Let ‘em sue, it’s our gas they’re holding hostage. The U.S. judicial system and the Alaska people will defend our actions”.

Joe Marushack responds: “What happens to PPT in this contract? It gets developed. The issue is during an open season, the contract specifically states there will be at least a 500 million cubic feet a day nomination that will require, directly from Pt. Thomson, so the bottom line is this gas that was discovered 30 years ago now will make its way to market through development of this contract and the project”.

Bill Walker responds: “This may be the most egregious portion of this contract if there can be a gradation in that fashion. What it effectively does is give Pt. Thomson up to a 45-year extension on their development obligation".

Bill Walker continues: “Bear in mind Pt. Thomson sits on the fence line of ANWR. You look at all we’ve done to try to open ANWR, and we’ve not required them to develop right next door -- look at a map, it’s astounding -- right next door to the Point Thomson field which is known to have a minimum of 8 trillion cubic feet of gas, and a minimum of 400 million barrels of oil. It’s under tremendous pressure as a field. It should be taken back. It should not be rolled into this contract, they should not be rewarded for bad behavior”.

Jim Clark responds: “Taken back means, in this case, litigation again and my colleagues here constantly are suggesting putting aside a contract which the producers said they’d sign. Build a gas line, that’s what it’s going to take to get Pt. Thomson developed. Instead of that, the proposal is put the contract aside and go to litigation”.

David Gottstein responds: “There’s gonna be litigation no matter what. There are hundreds of billions of dollars at stake, so if it’s not litigation to get Pt. Thomson back there are constitutional or other issues”.

Joe Marushack responds: “This contract gets (Pt.) Thompson developed. And if the contract is terminated, then the state gets to go back and work under the plan and development process which would allow the state to pull those leases back. So the contract presents a win/win in every way I can think of here”.

Bill Walker responds: “This contract takes every tooth of leverage away from us for having Point Thomson developed. We are on the verge of one or two steps left to be able to take back Point Thomson, to make it available for a project. What this does is it rolls into this process with no teeth, no ability to cancel this contract. It’s a horrible section of this agreement to have Pt. Thomson rolled into this study”.

Jim Clark responds: “Leverage to do what? Leverage has been to get a contract by which we’re going to move this forward. We have a signable contract. To retreat from the contract into litigation which is the proposal, really makes no sense. You use litigation when people aren’t doing what you want them to do. When they’re ready to sign a contract, they’re doing what we have wanted for over 30 years in this state. And to resort to litigation just makes no sense”.

History: Here's why Point Thomson has become such an issue. Point Thomson is located 55 miles east of Prudhoe Bay Field, straddling the Arctic coast.

On June 11th, the Alaska Journal of Commerce published a story on this issue. Here's an excerpt of the most pertinent part:

Former Oil and Gas Division Director Mark Myers last year found Exxon Mobil, operator of the unit for itself and other leaseowners, in default for submitting a development plan that had no specific benchmarks for developing Point Thomson's gas reserves.

Myers also said the companies had failed to perform under a separate work obligation to begin drilling development wells in 2006. Exxon Mobil, the designated operator for Point Thomson, has filed 22 plans of development over nearly 30 years for the 106,200-acre unit.
The company's last plan said a gas pipeline would have to be built before Point Thomson could be developed. Myers found that plan unacceptable and threatened to find the company in default, which could ultimately lead to revocation of the leases to Point Thomson unless the company submitted a new plan.

However, Myers resigned when former Natural Resources Commissioner Tom Irwin was forced from his job by Murkowski for disagreements the two had over the gas contract negotiations.

The root of the Point Thomson dispute is an earlier plan Exxon Mobil worked on to develop the field to produce liquid condensates, a natural gas liquid, and then to begin commercial gas production when a gas pipeline was available. The plan called for gas and liquids to be produced with the liquids stripped off and the gas injected back into the reservoir.

However, the extreme high pressure of the Point Thomson reservoir, over 10,000 pounds-per-square-inch, would require compression facilities more powerful than any now operating. The wells would also have to be extremely sturdy to handle the high gas pressures.

After several years of study and tens of millions of dollars in investment, the project was ultimately found to be uneconomic by Exxon Mobil because of high costs and reservoir problems. The company then told the state that the field would best be developed as a conventional gas field, and that its development should wait until a gas pipeline is under construction.

When Menge took office last year he extended Exxon Mobil's deadline to file a new development plan. Menge has said Point Thomson is essential to the development of a North Slope natural gas pipeline and Exxon Mobil was one of the three participants in a contract that could lead to that pipeline to be built.

Analysis: The Administration and the producers want to link Point Thomson with the overall natural gas pipeline scheme to curb costs and redundancy. Their opponents believe Exxon has had ample opportunity to develop the Point Thomson field and should be penalized for the failure to do so by having Point Thomson severed from the overall scheme and offered to another producer.

Personally, I think the producers' position makes more sense, but they would have to consider concessions in other areas. For example, while Point Thomson could become part of the overall scheme, a separate revenue scheme could be devised for Point Thomson output alone. A precedent has been established by the State Legislature being willing to treat Cook Inlet gas under separate ground rules. The producers should also consider modifying their demands for 30 and 45 years of tax stability, respectively.

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