Lease Dispute May Cloud Exxon Role in Alaska Pipeline

SAN FRANCISCO (Dow Jones Newswires), August 8, 2008

Exxon Mobil Corp. said Thursday it's ready to work with the Alaskan government and three companies competing to build a natural gas pipeline in the state, even as a dispute over leases revoked in 2006 looms in the background.

Exxon's olive branch comes as BP PLC (BP) and ConocoPhillips (COP) compete against TransCanada Corp. (TRP) to build a pipeline that would bring natural gas produced on Alaska's North Slope to markets in the lower 48 states and Canada.

"We are ready to work with the state, TransCanada, ConocoPhillips and BP to move forward one of the largest and most complex projects ever undertaken in the United States," Exxon spokeswoman Margaret Ross said.

The company also said that gas supply from Point Thomson, a field on the eastern North Slope where it is fighting to regain control of revoked leases, "is essential for a successful gas pipeline project."

Exxon has been in an ongoing legal dispute with Alaska since November 2006, when the state revoked its Point Thomson drilling leases. The state argued that during the decades they controlled the field, Exxon and its partners had failed to put it into production, as required by the leases. The case is still pending in administrative court.

Exxon estimates that Point Thomson could produce about 1 billion cubic feet per day of gas starting at the end of 2014, under a $1.3 billion plan in which the company and its partners would begin drilling next year.

In April, ConocoPhillips and BP announced plans to build a 2,000-mile pipeline called the Denali Alaska Gas Pipeline that would move about 4 billion cubic feet of natural gas a day from the North Slope to Alberta, Canada, with the possibility of 1,500 miles of additional pipeline in the lower 48 states.

The state of Alaska is backing a competing proposal by TransCanada, Canada's biggest pipeline company. The company won a license and financial support from the state Friday after its Senate approved a proposal by Gov. Sarah Palin. The Calgary-based company plans to build a $26 billion, 1,715-mile natural gas pipeline from Prudhoe Bay to Alberta. The pipeline would ship 4.5 billion cubic feet of gas per day, with a possible expansion to 5.9 billion cubic feet per day.

Only one pipeline is likely to be built, and Exxon's preference for one project over the other is seen as a major factor in determining which one succeeds.

Alaska is hoping Exxon makes a decision soon.

"The fact that Exxon has yet to commit to one project or the other is perfectly reasonable and not at all unexpected from them at this early stage, but we want to see them make tangible commitments sometime in the near future," said Kurt Gibson, deputy director of the Alaska Division of Oil and Gas.

TransCanada will likely need its rivals' support to go ahead with the pipeline, but the swing factor is Exxon, which has the most gas leases on Alaska's North Slope. TransCanada's chief executive underscored that point earlier this week when he told The Globe and Mail newspaper that the pipeline project hinged on Exxon's participation.

Exxon's litigation with the state over the Point Thomson leases is likely playing some role in the company's position on the pipelines, Gibson said. But the state is treating them as separate issues, he said.

"There is no direct connection between Point Thomson and the pipeline from the state's perspective," Gibson said. "We don't see resolution of the Point Thomson issue as being a major obstacle to advancing the pipeline project."

Exxon wouldn't say whether its litigation over the leases would be a factor in its decision to participate in one of the proposed pipelines. The company said it has the right to "conduct drilling activities" at Point Thomson and that it considers its Point Thomson leases still valid.

"Our preference is to resolve this matter outside of the courts," said Exxon's Ross. She added that the company had requested mediation with the Alaska Department of Natural Resources in the hope of reaching a settlement.

In December 2006, after Exxon sued the state over the revoked leases, the company said gas supply from Point Thomson would be critical to a natural gas pipeline, and that the ensuing litigation could affect an agreement for an Alaska gas pipeline.

In January, Alaska rejected a natural gas pipeline proposal from ConocoPhillips. At the time, Gov. Palin said the company had submitted its plan outside the government's required procedures and that the government would consider the plan if the company filed it through procedures outlined in the Alaska Gasline Inducement Act.

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