The state Division of Oil and Gas has officially rejected BP’s 2016 operational plan for Prudhoe Bay, but is extending last year’s plan until Nov. 1 in hopes the company will provide information on its efforts to market natural gas from the oilfield.
Oil and Gas Director Corri Feige wrote a 15-page letter to BP Alaska Reservoir Manager Scott Digert June 30 rebutting several arguments BP and the fields, primary working interest owners, ConocoPhillips and ExxonMobil, have made over the past few months as to why they cannot give the state what it wants.
In the letter Feige contends the state needs to be able to plan for “major gas sales” — a natural gas pipeline and export project — and doing so requires BP and the working interest owner companies sharing specific work they’ve done to market the gas worldwide.
“Major gas sales, in the relatively near future, are necessary to realize the benefit of the enormous gas resource within the (Prudhoe Bay Unit) to the people of Alaska, and planning for (major gas sales) must be done now,” the letter states.
Prudhoe holds roughly three-quarters of the natural gas planned for export in the now-tenuous Alaska LNG Project.
The 2015 Prudhoe Bay Plan of Development was set to expire June 30. The renewal dates of the annual operational plans for oil and gas units vary because they are based on when the original plan was approved and thus often do not follow a calendar year.
BP has until Sept. 1 to submit a modified plan of development for review by the division, according to the letter. Subsequently, the 2015 plan has been extended until Nov. 1 “to allow continued operations at (the Prudhoe Bay Unit),” the letter states.
If the issue cannot be resolved, the Alaska Oil and Gas Conservation Commission would likely hear it, according to commission officials. The Division of Oil and Gas has said court action could also be a final remedy if it can’t be settled through administrative appeals.
According to sources, BP and DNR have an agreement under the Alaska LNG Project that covers gas marketing information.
“That agreement expressly prevents the parties from sharing the very information DNR is demanding from BP,” a source said.
In January, now-retired DNR Commissioner Mark Myers sent letters to all the unit operating companies across the state informing them the department, through the Division of Oil and Gas, would be requesting additional information in future unit development plans about natural gas production and sales.
The information would be used to better understand how the state can maximize those resources, either through in-state uses or export sales, Feige explained in a previous interview with the Alaska Journal of Commerce.
BP submitted its Prudhoe plan just before the submittal deadline in late March. The plan document contained a few short and general paragraphs that indicated BP has significant interest in selling its gas from the North Slope field, but lacked any further detail.
Feige responded in a letter dated April 11, stating the plan needs to contain “a detailed discussion of the efforts to market gas from the unit during the preceding year, and a detailed plan for marketing efforts the (working interest owners) or unit operator will undertake under the proposed (plan of development).”
More specifically, the division has demanded information about which, if any, potential gas buyers the companies have talked to as well as potential pricing terms that would make gas sales viable.
The company held firm that the original plan document is complete in a back-and-forth of letters with the division since, stating much of the information the state wants does not exist, and if it did sharing it with the state could violate antitrust laws because the state is a potential competitor with the companies whenever the gas from the field is sold.
ConocoPhillips and ExxonMobil have stood behind BP in their own correspondence with the division, saying they also believe the plan is complete.
Gov. Bill Walker said in an interview July 6 that he doesn’t believe there are antitrust issues but also that he doesn’t have an issue to the companies pushing back on the request.
He has had meetings with Alaska leadership from all three of the producers in the last week and is convinced there is middle ground to be had. Walker said the discussions included alternative ways, such as a workshop setting, for the companies to provide the gas marketing information the administration seeks.
“I’m confident that we’re going to reach some sort of understanding of what information they can provide and that they’re comfortable providing and would be acceptable to us,” the governor said. “It looks from the outside more onerous than it really is. I’m very optimistic that we’re going to receive something from them by Sept. 1. There were some suggestions around the table about how that might be done.”
The companies also contend the new demands are a significant departure from the precedent that has been set over the nearly 40 years that the state has been approving development plans for Prudhoe. The first one was approved in 1977.
On the other hand, the state argues it needs the marketing information to begin preparing for major gas sales in about 2025, because that’s when the producers sought and got approval from the Alaska Oil and Gas Conservation Commission last October to start taking gas from the Prudhoe and Point Thomson fields.
Walker said that he thinks updates on the companies’ efforts to sell North Slope natural gas are appropriate now, particularly given how far along the state is in the Alaska LNG Project with these same companies.
“We’re about to face a (front-end engineering and design investment) decision. Going forward, we’re looking at a way of restructuring the project. We just want to make sure that there’s efforts on their part to market the gas,” Walker said.
“If asking for more information is a deal killer for anybody, I have to sort of scratch my head and go, ‘So what are we doing putting hundreds of millions of dollars into a gasline if no one wants to talk about, by the way, what they’re going to do on the marketing side.”
Walker has said repeatedly that solidifying the market, with all other challenges facing the mega gas project, is among the most critical to overcome quickly.
“Our royalty share (of the natural gas) comes from their gas leaving the field, so that’s why its important to us because if their gas doesn’t leave the field there’s nothing we have to market on our side. We need to know that we’re all in alignment on taking gas to market at some point in the future,” he said.
Further, the state has cited the companies’ “duty to produce” the gas resources repeatedly since the disagreement arose.
While each side’s argument has largely remained the same in multiple letters, Feige, in her June 30 letter, referenced lines in the original 1977 Prudhoe Bay Plan of Development that states BP planned “to commence gas pipeline deliveries of 2 (billion cubic feet per day) as soon as a pipeline and plant to condition the gas to specification can be completed. This is currently estimated to be about five years after the start of oil production,” for the first time.
• Elwood Brehmer is a reporter for the Alaska Journal of Commerce. He can be reached at elwood.brehmer@alaskajournal.com.
