Exxon Retains Disputed Field With Alaska Condensate Deal

Exxon Mobil Corp. (XOM), ConocoPhillips (COP) and BP Plc (BP/) agreed to pump light crude oil from a dormant Alaskan field and offer natural gas to Asian utilities in exchange for the right to retain leases the state sought to reclaim.

Under termSs of a settlement announced yesterday, Exxon and its partners in the Point Thomson field pledged to ship 10,000 barrels of condensate daily through the TransAlaska Pipeline System beginning in 2016. The companies also promised to seek overseas buyers for gas from the field that currently is too remote from North American markets to be sold.

The deal resolved a six-year-old legal dispute that saw successive Alaska governors attempt to kick Exxon and its partners off the leases for failing to produce any of the field’s 8 trillion cubic feet of gas and 200 million barrels of condensate. Asian gas demand is growing at such a clip that Alaskan supplies will have no trouble finding buyers, even as rival gas producers such as Australia increase output, Governor Sean Parnell said.

“My goal is to get Alaskan gas to Alaska and beyond,” Parnell said yesterday during a meeting with reporters in Anchorage. “Asian markets can bear Alaskan gas.”

The settlement codified a plan first submitted by the Exxon-led group in late 2008 to tap the field by re-injecting gas into the rock formation to boost underground pressure and squeeze out more condensate. The companies also agreed to build a 70,000-barrel-a-day pipeline that will connect Point Thomson to the TransAlaska conduit.

‘Clears the Way’

If by June 2016, Exxon and its partners fail to find enough customers to buy gas from Point Thomson that would be chilled to liquid form for shipment overseas on tankers, the companies instead will expand condensate production to 20,000 or 30,000 barrels a day, according to the agreement. Condensate is a light, liquid hydrocarbon prized by refiners for use in making diesel and gasoline.

The companies sued Alaska six years ago after the state revoked their leases, which date back to 1977, for failing to commence production. A court reversed that decision in 2010. The oil companies claimed the state was trying to force them to put the Point Thomson field into production before it was economically viable. The state appealed the lower-court ruling to the Alaska Supreme Court.

The settlement is subject to the trial court lifting a stay of the case. The deal doesn’t require court approval.

“This is a great first step which clears the way for BP and the other companies to work together and find a way for Alaska gas to compete in the world market,” John Minge, the president of BP Alaska, said in a statement. “We have met the governor’s initial milestones -- settling the Point Thomson dispute and reaching agreement among the producers to move forward.”

Condensate Project

Prior to the state’s attempt to strip Exxon and its partners of the leases, the companies had been reluctant to begin production at Point Thomson because of the costs required to build a pipeline that would haul the natural gas to markets in western Canada and the continental U.S. Without a pipeline network to carry the gas away from Alaska’s northern shore along the Beaufort Sea, there’s no way for the companies to recoup their investments and make a profit.

To mollify state officials, Exxon devised the $1.3 billion condensate drilling project included in the deal announced yesterday.

‘Unprecedented Commitments’

“Commercializing Alaska natural-gas resources will not be easy,” the chief executive officers of Exxon, BP and ConocoPhillips wrote in a joint letter to Parnell. “Unprecedented commitments of capital for gas development will require competitive and stable fiscal terms with the state of Alaska first be established.”

A pipeline to the port of Valdez, where the gas would be liquefied and loaded onto tankers, would cost $20 billion to $26 billion, Tony Palmer, vice president of major projects development for TransCanada, said in January.

The settlement envisions a pipeline from the North Slope to Valdez that could carry 500 million cubic feet of gas a day.

Any plan to export Alaskan gas would require Energy Department approval, said Jose Valera, a partner at the law firm Mayer Brown LLP who has represented companies involved in the liquefied-gas business.

“In all probability, there is going to be substantially greater gas than demand in Alaska for any foreseeable period of time,” Valera said in a telephone interview. “The decision to allow export of Alaskan gas should be less controversial than the decision to export gas from the lower 48” states.

The lower-court case is Exxon Mobil Corp. v. State of Alaska, 3AN-06-13751, Alaska Superior Court, Anchorage. The appeal is State of Alaska v. ExxonMobil, S-13730, Alaska Supreme Court (Juneau).

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net; Bradley Olson in Houston at bradleyolson@bloomberg.net; Karen Gullo in San Francisco at kgullo@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Michael Hytha at mhytha@bloomberg.net

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