Governor, ExxonMobil at odds over Point Thomson

A new round of jousting could be underway between Gov. Bill Walker’s administration and ExxonMobil over the big Point Thomson natural gas project on the North Slope.

Fierce legal battles raged between 2007 and 2012 between the state and the Point Thomson lease owners, which include BP as well as ExxonMobil, but a settlement of the dispute was negotiated in 2012, when Sean Parnell was governor.

Walker, who defeated Parnell’s bid for reelection in 2014, was head of the Alaska Gasline Port Authority, a municipal group attempting to build a North Slope gas pipeline. He opposed the settlement along some other prominent Alaskans, such as former state resources commissioner Mark Myers. Walker filed a personal lawsuit to block the deal, but it was unsuccessful.

Walker is now governor, however, and a recent decision by the state Division of Oil rejecting, for now at least, a proposed new Plan of Development for Point Thomson seems to echo the earlier disputes.

An Aug. 29 letter from the state Division of Oil and Gas to ExxonMobil also asserted the company has not met production goals in the settlement, and could arguably be in technical violation of the deal. ExxonMobil is sensitive to this because such a claim might provide an opening in undoing the deal, even the threat of which could hand Walker negotiating leverage for concessions.

The state is now leading the effort to build the $40-billion-plus Alaska LNG project and there’s speculation that a new Point Thomson dispute could be a way to leverage commitments of gas supplies at lower costs to the state’s pipeline. This could help the state win customers for its pipeline, although it could also result in lower royalty and gas production taxes to the state.

“With respect to the Initial Production System (at Point Thomson) ExxonMobil has not breached the terms of the Settlement Agreement as claimed by the Division (of Oil and Gas,” Exxon’s Alaska production manager, Cory Quarles, wrote in an Oct. 12 letter to Commissioner of Natural Resources Andy Mack, but just released to the public last week.

“As set forth in the Settlement Agreement, ExxonMobil has constructed and started-up a facility designed with the capacity to produce and reinject (or cycle) 200 million cubic feet per day of gas, utilizing reciprocating compression and with the objective of a minimum of 10,000 barrels per day of condensate," Quarles said in his letter.

In briefings this summer, the company told state officials that technical problems with gas compression and reinjection in the high-pressure Point Thomson reservoir has prevented it from reaching a consistent 10,000 barrels-per-day rate of liquid condensate production. The state cited this in its Aug. 29 letter to ExxonMobil.

Quarles cited language from the settlement agreement to dispute any assertion of a violation: “ExxonMobil has demonstrated that the capacity to produce and inject 200 million standard cubic feet of day have been in place since Point Thomson was placed in continuous production in April 2016. As clearly defined in the settlement agreement, continuous operations exist even when production temporarily ceases due to planned or unplanned maintenance, repairs or upset conditions,” Quarles said in the letter.

Elizabeth Bluemink, spokeswoman for the natural resources department, said Mack cannot comment on Quarles’ letter and that a decision on issues raised by the letter will be made in 60 days.

At first glance, a production shortfall caused by technical problems hardly seems grounds for a claim of non-compliance of the settlement, particularly since the companies have spent over $4 billion on the Point Thomson Initial Production System, and there are some reports that $6 billion was spent. However, the governor’s previous positions on Point Thomson is causing worry, and there are echoes of the earlier disputes in the state’s letters.

Walker, before he was elected governor, had argued that the state should nullify ExxonMobil’s leases on grounds the company had not acted diligently to develop them in the years following the discovery of natural gas and liquid condensates in 1975. If the leases were cancelled the state would take back ownership and control of the 8 trillion cubic feet of gas and 200 million barrels of condensates discovered at Point Thomson.

In his earlier efforts for the port authority the governor had hopes of gaining ownership of Point Thomson gas for the group, which would help it to advance a gas pipeline, Walker believed.

Procedurally the state oil and gas division must approve new plans of development for producing fields, which are a kind of operating permit for the fields on state oil and gas leases.

In its August 29 letter to ExxonMobil the oil and gas division said it is withholding approval of the latest plan of development, an echo of the earlier disputes, until more information on the expansion is obtained and evidence is presented that that serious work in underway on the expansion, through efforts like advanced engineering and Front End Engineering and Design, or FEED.

In his Oct. 12 response, Quarles said the more advanced work like FEED cannot be done until there are agreements with Prudhoe Bay field owners, where the Point Thomson gas would be injected. Quarles said negotiations with the Prudhoe owners are now underway. These are complicated, however, because the ownership interests in Prudhoe Bay and Point Thomson are different. While BP and ExxonMobil are major owners at Prudhoe as well as at Point Thomson, the percentages are different, and probably more important ConocoPhillips is a major Prudhoe owner but does not have an ownership position in Point Thomson.

Because the ownership percentages vary any negotiations involving operations in one field that affect another, such as in imposing costs without corresponding benefits, involve tradeoffs of benefits and costs and can be time-consuming. However, Quarles said ExxonMobil is targeting a Dec. 31, 2019 deadline for approvals of the expansion plan by the Prudhoe and Point Thomson owners. He also said that certain engineering and planning work for the expansion has been underway for a year, and that the field owners, mainly ExxonMobil and BP, have approved funds for continuing the work through the end of this year.

The current project underway at Point Thomson, considerered a first phase of its development, involves production of gas from the high-pressure reservoir and “stripping,” or removal, of liquid condensates that are in the gas. The condendates are send to Prudhoe Bay through a new liquids pipeline while the produced gas is injected back underground. As the injected gas, now “lean” with the condensate removed, moves, or cycles, through the underground reservoir toward gas producing wells it soaks up more of the condensates. The gas is produced again, the condensates stripped off. Gas is injected once again, and the “cycling” process is repeated.

While gas cycling projects are not unusual, what is atypical of Point Thomson is that the extreme high pressures of rhe underground reservoir, at 10,000 pounds per square inch, present real challenges for Exxon in injecting the gas back underground. In fact, compression at those pressures has not been done before and the facilities at Point Thomson are first of a kind. It is not surprising that technical problems would present themselves.

The expansion project now proposed would solve many of the problems by reducing the amount of gas to be injected. It would increase gas production from 200 million standard cubic feet per day to 870 million cubic feet, but instead of being injected underground the gas would be transported to Prudhoe Bay through a new 60-mile gas pipeline. There would also be an increase in liquid condensate production from 10,000 barrels per day to 50,000 barrels per day which would move through thr existing liquids pipeline to Prudhoe and the Trans-Alaska Pipeline System, or TAPS. At TAPS Pump Station One the condensate would be mixed with conventional crude oil and shipped to market through the oil pipeline.

Quarles also pointed out in his letter that new facilities built for the expansion project, including the 60-miles gas pipeline, can also be used to support a large gas pipeline built from the North Slope and a large LNG export project that are planned but now delayed because of LNG market conditions.

If the expansion proceeds it would be a major new construction project for the North Slope. No cost estimates have been given by ExxonMobil but the plan includes construction of new plant facilities at Point Thomson as well as the new gas pipeline, which would require an investment of several hundred million dollars, if not a billion or more.

It seems unlikely that the governor would throw a roadblock in front of new construction of this magnitude, but the prospect for the state to gain more leverage over Exxon over Point Thomson gas for the state-led Alaska LNG Project would be tempting. Alternatively, this could also be a case of the state simply doing due diligence in ensuring proper development of state leases. However, the tenor of the back-and-forth correspondence implies that there is more to this than due diligence.

Tim Bradner is a long-time Alaska journalist and coeditor of the Alaska Legislative Digest