Governor ups ante in Exxon case

Posted: Friday, March 31, 2000

Gas may be big issue in Exxon suit

ANCHORAGE - The timing of Exxon's lawsuit to block the sale of Arco Alaska Inc. to Phillips Petroleum Co. may have been awkward, but the stakes for Exxon are high.

Exxon's move last Friday, on the anniversary of the Exxon Valdez oil spill, prolonged the uncertainty over the BP Amoco takeover of Arco and drew legislative fury in Juneau. But the company has much more to lose in Alaska than good will.

The lawsuit charges that the sale to Phillips breaches a 1964 contract giving Exxon first rights to buy Arco assets. But a key reason is Exxon's interest in protecting its oil and particularly its gas holdings in Prudhoe Bay.

With different levels of ownership of Prudhoe Bay's oil and gas, Exxon, Arco and BP's interests are vastly different.

Wrestling out differences among the three companies has been the core challenge of developing the Prudhoe field. The latest battle, in the mid-1990s, became so mired in controversy that the state nearly reshuffled Prudhoe ownership for the companies.

In most oil fields, owners iron out differences in oil and gas ownership so that the companies share an equal interest in both resources. When the companies hammered out the operating agreement at Prudhoe Bay, oil was easy to value. Gas was not. No one was certain when North Slope gas would get to market.

So the companies broke their oil and gas holdings into separate units.

BP owns most of the oil, 51 percent, but only 14 percent of the gas. Arco and Exxon have nearly parallel interests, with about 23 percent of the oil and 43 percent of the gas each.

So Exxon and Arco have often been in step on Prudhoe development and frequently at odds with BP, said Tuckerman Babcock, former commissioner of the Alaska Oil and Gas Conservation Commission.

In general, BP resisted plans to convert the natural gas to a liquid and send it through the trans-Alaska pipeline, instead favoring reinjection of the gas into the ground to produce more oil. Exxon and Arco sought to maximize value of the gas.

Now, Exxon is losing a key partner at Prudhoe. Further, ``we don't have information on how the field is going to be operated,'' said Tom Cirigliano, an Exxon spokesman. Exxon wants to review the sale agreement between BP and Phillips, according to its lawsuit.

``(Exxon's) concern is that Phillips and BP have some sort of side deal which favors the oil owners,'' said Jeff Lowenfels, president of Anchorage-based Yukon Pacific Corp., a company that wants to export natural gas.

As Prudhoe ages and oil production declines, the gas resource becomes increasingly valuable, Lowenfels noted.

Gov. Tony Knowles has warned Exxon Mobil Corp. it might not get state leases for North Slope oil and gas operations even if Exxon acquires assets of Atlantic Richfield.

Calling it the state's ``checkmate move'' against a further delay in rearranging the players on the North Slope, Knowles said Thursday that in the end the state could prevent Exxon from using Alaska assets now owned by Arco.

Asked if he was threatening Exxon, Knowles said: ``It's not a threat; it's a fact.''

Commissioner of Natural Resources John Shively can reject lease transfers if he judges them not to be in the state's best interests, the governor said.

Exxon is trying to block BP Amoco's proposed sale of Arco Alaska Inc. to Phillips Petroleum. Exxon's lawsuit in Superior Court in Los Angeles is based on a 1964 contract between Exxon and BP that allegedly gives Exxon the right of first refusal on some Arco assets.

An Exxon spokesman said attempts to clarify those agreements and reach some sort of settlement have failed.

``We were left with no choice but to file a lawsuit,'' spokesman Tom Cirigliano told the Associated Press. ``What we want is to preserve the status quo in order to enable a proper and careful analysis of the impact that the proposed transaction between Arco and Phillips would have on Exxon Mobil's rights.''

The sale of Arco Alaska to Phillips - intended to clear up antitrust concerns about the effect of the BP-Arco merger on the West Coast oil and gas industry - is awaiting approval from the Federal Trade Commission.

The Exxon lawsuit, which raises the specter of an injunction against FTC action, has been greeted with outrage in Alaska.

Knowles announced the state would intervene in Exxon's lawsuit in favor of BP. He also said he lobbied FTC board members, including Chairman Robert Pitofsky, in phone conversations Thursday morning.

``My goal in taking these steps is very simple: Alaskans want to get back to work today,'' Knowles said in a Capitol news conference. ``Our message to the FTC is this: Let's get on with it.''

Knowles said he told Exxon CEO Lee Raymond on Tuesday that the state would use ``any means in any forum available'' to expedite the BP-Arco merger and the sale of Arco Alaska to Phillips.

The timing is right for a new burst of activity on the North Slope, Knowles said. Oil prices are at record highs, and there is ``a healthy national debate'' about increasing domestic production to reduce reliance on foreign sources, he noted.

Meanwhile, thousands of Alaskans already have had their lives disrupted by a year of uncertainty since the BP-Arco merger was proposed, Knowles said.

The governor described the BP-Exxon fight as ``a private matter (that) could be settled by monetary relief.''

``Alaska should not be the collateral damage,'' he said.

Knowles said he told the FTC that delaying its decision on a consent decree for the BP-Arco merger would tip the balance of power in favor of Exxon. He said he heard no indication that commissioners weren't inclined to approve the merger. But Knowles said there also was no signal given about whether the lawsuit would hold up the decision.

In a letter to FTC chairman Pitofsky on Wednesday, Attorney General Bruce Botelho said Exxon is asserting ``a unique new principle of corporate law'' that is unlikely to be upheld in court. In claiming preferential rights for Exxon, the lawsuit contends there is no difference between selling an asset of Arco and selling the whole company, he said.

But Exxon appears to be positioning itself for a general negotiating advantage over BP, rather than genuinely trying to gain control of Arco Alaska, Botelho said.

``For one thing, such an acquisition would undoubtedly trigger a new round of antitrust review by the FTC, the western states and Alaska,'' he said. ``More particularly, insofar as Alaska is concerned, a transfer of leasehold interests from BP-Arco to Exxon is likely to be prohibited by the state under its charter (with BP, Arco and Phillips),'' unless the same level of North Slope competition can be guaranteed with a different arrangement.

Asked about the timing of the Exxon lawsuit - filed March 24, on the 11th anniversary of the company's catastrophic oil spill in Prince William Sound - Knowles said: ``I'll leave that intellectual strategy to the wisdom of their legal counsel.''

Exxon apparently has achieved the rare feat of uniting Alaska politically.

Earlier this week, the Republican-led state House voted for a resolution calling on Exxon to stop appealing a $5.3 billion damage award from the 1989 oil spill.

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