BP Alaska to pay $255M

Arbitrators award state damages for production shortfalls following 2006 spills
 
Two leaks from major oil pipelines in the giant Prudhoe Bay field in 2006 ignited big trouble for operator BP Exploration (Alaska) Inc.

The leaks caused a partial field shutdown that rattled world oil markets, and drew scrutiny from federal regulators and members of Congress who criticized the company’s upkeep of pipelines infested with corrosion.

BPXA ultimately was placed on probation for three years and fined $20 million after pleading guilty to a federal pollution misdemeanor.

But that wasn’t the end of it. The state filed an aggressive civil suit against BPXA in 2009, seeking to recover back taxes, royalties and other damages for the leaks and the production shortfalls resulting from shut-ins and extensive pipeline repairs.

At the time the suit was filed, a state lawyer said the damages could exceed $1 billion.
The state won’t collect that much. But it has succeeded in winning a very substantial sum, more than $255 million.

$8.09 per barrel

Most of the state’s winnings are the result of a recent binding arbitration proceeding.

A three-member panel of arbitrators on Oct. 31 awarded the state $245,410,959 for the loss or deferral of oil and natural gas liquids, or NGLs, from the Prudhoe Bay unit and the related Greater Point McIntyre area.

BPXA also will pay the state $10 million to settle civil assessments for the spills, the Alaska attorney general’s office said.

The two sides agreed to submit the sole issue of the state’s royalty claims to arbitration. Previously, lawyers for BPXA had made substantial headway in reducing the company’s liability in the case, winning dismissal of the state’s claim for back taxes.

The arbitrators were Mark Kantor, of Washington, D.C.; Thomas W. Reavley, of Austin, Texas; and tribunal chair Thomas J. Brewer, of Seattle.

In their ruling, the arbitrators found that the state did indeed sustain royalty damages. And they rejected BPXA’s argument that the state hadn’t suffered any harm because the lost or deferred production was quickly made up.

The arbitrators put the state’s royalty loss at 30,344,971 barrels of oil and NGLs, and said the production won’t be recovered until the end of field life.

The panel then calculated the state’s damages award, including interest, at $245,410,959.
That translates to about $8.09 per barrel.

BPXA has partners in Prudhoe Bay and Point McIntyre, the main ones being ConocoPhillips and ExxonMobil.

Company spokeswoman Dawn Patience on Nov. 8 issued this statement on the arbitration outcome:

“We are pleased to finally resolve the last remaining claim from the 2006 Prudhoe Bay spill. Our share of the judgment is approximately $66 million. With this behind us we can now move forward, operating North America’s largest oil field in a safe, reliable and compliant manner to the benefit of Alaska and the rest of the United States.”

‘Rebound’ argument rejected

The arbitrators held a hearing between May 22 and June 26 in Anchorage on the royalty dispute. The hearing was closed to the public.


Their 35-page ruling is fascinating and very clearly written, but quite technical in places, particularly in the discussion of how the state’s damages were calculated with respect to oil and NGLs that might not be produced for decades.

Fundamentally, as owner of the land on which the Prudhoe Bay field is located, the state is entitled to receive 12.5 percent of the volume, or value, of the oil and gas produced. That’s the state’s royalty.

A major point of contention for the numerous lawyers and experts participating in the arbitration was whether the production shortfalls experienced after the pipeline leaks were later made up.

BPXA argued “there was a relatively quick rebound in production, in a higher‐price environment,” with the net result being that the state wasn’t injured, the arbitration ruling says.

“BPXA coined the term rebound in this case as a shorthand way of referring to various well and reservoir phenomena that can cause a well or wells to produce at a higher rate after a period of being rested or ‘shut‐in,’” the arbitrators wrote.

But the tribunal ultimately found BPXA’s rebound argument “unpersuasive.”

Field performance did improve in the years following the pipeline spills, with a “noticeable lessening” of the decline rate in oil production, but it wasn’t due to rebound, the arbitrators wrote. Rather, most of the production enhancements in the 2006-2010 timeframe stemmed from “a substantial increase in capital expenditures” for work such as drilling and well workovers.

Such activities to promote field production and arrest natural decline are the normal duty of a prudent field operator, the arbitrators said.

The arbitrators also determined on the evidence that Prudhoe Bay oil production was, and is, constrained by the field’s gas-handling facilities. A great deal of gas emerges from wells mixed with the crude.

Because of the gas-handling limitations, the production deferrals experienced in the wake of the 2006 leaks “could not be, and were not, recovered simply by running the field at a greater capacity later,” the arbitrators said.

Although the state raised the possibility that “some or all of the oil in question will never be recovered,” the arbitrators found a lack of evidence to support that.

Source:http://www.petroleumnews.com/pntruncate/10808996.shtml