Trouble Ahead: Port or Starboard Captain?...Captain?

January 22, 2010: Almost three years ago I sat in an airport conference room with DNR Commissioner Tom Irwin, Deputy Commissioner Marty Rutherford and then Lt. Governor Sean Parnell and listened to Irwin explain just how AGIA was going to get Alaskans a natural gas pipeline.

I'm going to use public, political and shareholder pressure to get the producers to commit their gas under AGIA, Irwin said.

It became clear from listening to Irwin's strategy, he was betting the state's economic future on the hopes that the shareholders of BP, Conoco, Exxon and Chevron, would direct their management to agree to pay for the largest and most expensive oil & gas project in the world without any say in key fiscal and legal terms.

I wrote about the tone of the meeting afterwards:

"with the visible contempt the current gas line team feels for the producers, I don't see any productive discussions until the administration takes a deep breath." andrewhalcro.com 4/24/07

The truth is that under Irwin's leadership, DNR has been fueled on contempt for the producers. One industry executive mentioned an "Irwin factor" which is an additional risk cost due to the hostile environment at the DNR.

I think we can all guess how little Tom Irwin probably cares for Exxon, but to violate their constitutional rights not once but twice? The recent court ruling shows a commissioner either hell bent on getting even or incredibly incompetent.

Either way, he has put the state's development years behind when time is our biggest enemy. 

Irwin's dislike for the oil & gas industry has led him to critical errors that threaten Alaska's economic future. In the process, his actions have revealed a management style that is largely based upon getting even rather than getting Alaska's resources developed.   

It's time for real climate change in the DNR. It's time for Tom to go. 

Meanwhile, there are two key issues facing Alaska's oil & gas industry dead ahead; the fate of Point Thomson and the debate over oil taxes.

Governor Sean Parnell needs to take the lead on both issues, beginning with Point Thomson.

The last few years under Commissioner Tom Irwin, DNR's anti-industry stance regarding Point Thomson has been on the main stage for all to witness. 

It sounded like a back slapping great time in the Senate Judiciary Committee room on February 13, 2008 as two Department of Law Attorneys accepted accolades for their performance against Exxon, BP, Conoco and Chevron in the fight over the cancellation of Point Thomson oil & gas leases.

The committee was discussing the ruling handed down by Superior Court Judge Sharon Gleason on December 27, 2007 where she ruled that DNR had the legal authority to cancel the leases, but also ruled they violated the producers right to due process.. 

The Senate Judiciary Committee Chair Hollis French (D-Anchorage) remarked that the state won on four large issues and got hung up on a procedural question of whether there had been perfect written notice.

Mr. Richard Todd, from the attorney generals office characterized it as a fabulous victory. "We won every major point except this procedural issue on due process." 

Mr. Craig Tillary, from the attorney generals office agreed it was an unqualified success but  the legal work is  only as  good as  the agency work  it is  defending. "We would be remiss if we didn't  point out what a tremendous job DNR has done in this matter," he said.      

This was three lawyers, including French, all agreeing that the violation was just a minor notification error.

Ahh, but that was back in the heady days of early 2008. They were young, they were rebels, they were fearless.

They talked with swagger, like when DNR Commissioner Tom Irwin talked about marching into court and taking back leases. Or when DNR Deputy Marty Rutherford and Revenue Commissioner Pat Galvin peppered their speeches with phrases like "AGIA's must haves" or "ACES won't hurt the investment climate."

TransCanada had emerged as the winner of AGIA, Palin had just kicked Conoco to the curb after they dared suggest costs should be known before commitments are made, and Sen. French and the Department of Law attorneys expressed confidence that they were one administrative hearing away from being able to slay the dragons.

Last week, almost two years after the lease love fest in the Senate Judiciary Committee, Superior Court Judge Sharon Gleason ruled once again that DNR violated the producer's constitutional rights to due process.   

It was a complete legal ass whipping.

Left in the rubble were tall tales told by over confident lawyers who should now be benched, the cache of emails between DNR staff showing them slow rolling the permitting process at Pt. Thomson and the over sized executive egos that waltzed themselves right into the corner.

It was clear reading the judge's ruling that she felt the state over reached in defending DNR's actions in denying the producers a fair hearing in the cancellation of their Pt. Thomson leases.

After the decision last week, the state's response was to repeat what Judge Gleason already ruled on two years earlier; DNR has the right to cancel leases...so long as they're cancelled properly. 

In response to the judges ruling that the producers were entitled to a section 21 hearing, the next step is determining who will sit and rule on the actual case. Since DNR has already proven they've yet to learn the words "due process," the court will arguably maintain jurisdiction.

Here is what's ahead:

If the Point Thomson case goes to hearing, under section 21 the state has the burden of proving that Exxon and their Point Thomson partners should have been doing more than what they proposed in their plan of development (POD).

The state's has a very weak legal case and would have an impossible time meeting the burden as required. The lack of substance on the legal arguments of taking back the leases is why Irwin and company aren't storming the court house steps.

Back in July of 2008 Exxon asked the State Superior Court to order a mandatory settlement conference, requiring all parties with settlement authority to participate in trying to reach an agreement on the fate of Point Thomson.

Exxon was tired of the state dancing around with procedural issues and wanted to get to the heart of the legal dispute, which was the attempt to cancel their leases in Point Thomson. 

Exxon wrote that "At no time prior to, during or following the remand hearings have the parties held any meaningful settlement negotiations, conferences or mediations", Exxon argued that the fastest way to resolution isn't through litigation, it's through negotiations.

There is an old saying in politics; when you have votes..vote, when you don't..talk. 

DNR showed their hand by opposing Exxon's motion, arguing that it was premature to move to the merits of the issue because there was still some talking to do.   

Eighteen months later, Judge Gleason ruled that once again DNR had violated the producers right to due process.  

In order to prove their burden in a section 21 hearing, the state will be faced with testimony from regulators like Alaska Oil & Gas Conservation Commissioner Cathy Foerster, who said publicly in May of 2008 that Exxon's Point Thomson plan was a reasonable first step due to the cost and complexity of the high pressured gas field.

They'll face a parade of industry experts that will testify the heavy duty equipment that is being used on Point Thomson is world record breaking in many ways and wasn't even available five years ago.

The experts will explain the complex challenges of drilling in Point Thomson and how the pressure is the highest in the world along with the fact that it is primarily a gas field with no transportation system.    

In addition, one of Exxon's best witnesses would come in the form of DNR Commissioner Tom Irwin.

When Irwin rejected Exxon's 23rd plan of development in 2008, he wrote on page 31, "Despite the fact that the plan may present a technically reasonable first step for developing these lands from a conservation perspective, I cannot risk the continued delays in development of this valuable state resource." 

I'd like to see Irwin try and explain how Exxon's plan was not reasonable when he's already written in a public record that it was.

And what does the state have as proof that the Point Thomson operators aren't doing all they should be doing? 

The state will probably run out a study from a petroleum consultant PetroTel Inc, who estimates as much as 1 billion barrels of liquids could be recovered from Point Thomson and sent down the existing 800-mile trans-Alaska oil pipeline.

This report was a key part of Irwin's argument when he denied Exxon's plan of development for Pt. Thomson in 2008 because it wasn't enough.

However Petro Tel's report was thoroughly discredited after it was found to have failed to take into consideration among other things, economics, reservoir planning, field development planning, environmental considerations and the feasibility of drilling wells.  

Even AOGCC Commissioner Foerster responded to the Petro Tel report by saying she thought it was based on very large assumptions and then went on to state her commission believed Exxon's assessment of field development was closer to the truth.

Since getting slapped down to earth by Judge Gleason, DNR has reportedly re-adjusted their thinking and become much more open to a settlement. 

If this is true, that's good because this case needs to be settled before we waste anymore time or money.  

Governor Parnell has but two logical choices now that Tom Irwin's DNR has been spanked by the court a second time: He should instruct DNR to accept Exxon's POD 23 (like Irwin should have done two years ago) and then he should fire Tom Irwin. 
  

Taxes

A/P Photo - The Introduction of ACES on September 4, 2007

Alaska Revenue Commissioner Pat Galvin, right, explains how the proposed higher tax rates won't deter investment while DNR Commissioner Tom Irwin, Lt. Governor Sean Parnell and Governor Sarah Palin look on in support.

The debate over changing the state's tax structure (ACES) for oil & gas production has emerged as one of the top issues facing state government.

The tax structure was signed into law in December 2007, after becoming the product of a populist governor and angry legislators piling on. One veteran Democratic lawmaker told an oil executive that he'd waited twenty years for the opportunity to get even.

At the signing ceremony for the "Palin-Parnell ACES Plan", then Lt. Governor Parnell gave his voice of approval for a tax hike that was over twice what he had initially endorsed when standing behind Governor Sarah Palin at a press conference back in September. 

"The old is gone, and the slate has been wiped clean. Public trust has been restored here today. This is really a new beginning; it represents a new beginning" Parnell said as Palin signed the new oil & gas tax bill into law.

Today, as some predicted two years ago, the tax structure is driving away investment at a time when Alaska needs more oil flowing in the pipe.

Recently there have been stories about how Alyeska Pipeline will safely manage the pipeline when the flow of oil slows.

Meanwhile the governor, his departments and some lawmakers have been reluctant to actually admit what is happening in the oil patch.

Last week the Revenue Department released a study that showed oil company capital spending on the North Slope has increased since the higher taxes were imposed and at $2.2 billion stands at the highest level in Alaska's history. At least some of the increase is due to new development activities, the study said, pointing to Eni's Nikaitchuq field and Pioneer Natural Resource Co.'s Oooguruk field.

To answer that report, a good portion of the capital expense increase has in fact been committed over the last two years to the Denali Project associated with studying the natural gas pipeline, the investment in Pt. Thomson from Exxon and the safety and reliability work that is being done to improve systems integrity on the North Slope.

Very little of these capital expenses result in pulling more barrels of oil through the pipeline. And sooner or later the state is going to have to stop using those two same fields as examples that ACES is working. Both Oooguruk and Nikaitchuq were in motion before ACES was passed.  

But still, between Gov. Parnell and Revenue Commissioner Pat Galvin, they remained unconvinced that the tax structure was having any negative impact on investment.