Alaska editorial: State right to reject the latest promises at Point Thomson

Posted: Thursday, May 01, 2008

State Natural Resources Commissioner Tom Irwin had two compelling reasons to reject the latest so-called "development" plan for the long-undeveloped oil and gas fields at Point Thomson.

First: Over the past 30 years, Exxon and its partners have repeatedly promised to do development work at Point Thomson and have repeatedly reneged on those promises. The field definitely holds oil and gas - about 8 trillion cubic feet of gas plus some 200 million barrels of petroleum liquids. Yet Exxon and partners have not drilled a well in the Point Thomson unit since 1982, more than 25 years ago.

Second: Exxon's latest plan for Point Thomson contains absolutely no penalties if the companies fail to make good on their latest promises and instead just keep warehousing the resources there.

In fact, Exxon actually touts the lack of penalty provisions as a sign of how serious the company is. (If you've read "Alice in Wonderland," you might understand the company's "logic" on this point.) If we included financial penalties for nonperformance, Exxon has said, we could just opt to pay them and keep holding onto the leases. (Exxon refers to penalties as "off-ramps.") This time, Exxon says, we're serious. We're really, really, really going to do what we say. You can trust us.

Actually, Commissioner Irwin is right: We can't.

A way forward?

Any plan from Exxon and its partners is a nonstarter unless it includes drastic nonperformance penalties. At every step of the way, the cost of not doing what they promise has to be higher than the cost of actually doing the work.

A credible proposal would have to have clear year-by-year benchmarks, backed by a performance bond for each step, immediately and irrevocably forfeited for failure to perform. No excuses, except for acts of God. If production has not started by a date certain, the state gets the leases back, with no litigation. Period, end of discussion.

Exxon claimed the Point Thomson partners would spend $1.3 billion over six years on the latest "plan," so the penalties for nonperformance would have to be even higher than that. Not the penny-ante $20 million they paid recently for not fulfilling their latest commitments.

A nonperformance penalty of $1.3 billion might sound like a lot. But let's say the state got the leases back and rebid them. At today's oil prices, a field with 8 trillion cubic feet of gas reserves and a couple of hundred million barrels of oil, right there on the North Slope, would probably fetch a lot more than $1.3 billion.

The gas line angle

When you have to resort to such onerous contract provisions to compel performance, you might ask yourself, "Why do I bother doing business with these guys at all?" And it's a good question.

In this case, there's only one reason for the state not to send Exxon and Point Thomson partners packing right now.

It's because fighting them over ownership of Point Thomson could easily delay construction of a gas line to the Lower 48. Gas from the field is essential to fill a line to the Lower 48.

If there's a drawn-out legal fight, the state will have trouble trying to sell the leases to other companies. And if a company doesn't have clear rights to Point Thomson, it can't commit to ship Point Thomson's gas through the line to the Lower 48. And if Point Thomson gas isn't committed to the project, there is no project.

Getting the current leaseholders to develop Point Thomson's gas ASAP is the fastest way to get North Slope gas to the Lower 48. That argues for giving the current leaseholders one last chance to make a binding commitment to full-scale development. But the state shouldn't, and won't, just roll over because of gas line complications. Commissioner Irwin, backed by Gov. Palin, has made it clear: The state won't play the patsy at Point Thomson any more.

The state shouldn't settle for anything less than an iron-clad, irrevocable, easily enforceable commitment to develop Point Thomson - period - starting immediately. If the current leaseholders don't offer it, the state shouldn't hesitate to say "see you in court."

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