Gas may be big issue in Exxon suit

Posted: Friday, March 31, 2000

ANCHORAGE (AP) -- The timing of Exxon's lawsuit to block the sale of Arco Alaska Inc. to Phillips Petroleum Co. may have been awkward, but the stakes for Exxon are high.

Exxon's move Friday, on the anniversary of the Exxon Valdez spill, prolonged uncertainty over the BP Amoco takeover of Arco and drew legislative fury in Juneau. But the company has much more to lose in Alaska than good will.

The lawsuit charges that the sale to Phillips is a breach of a 1964 contract giving Exxon first rights to purchase Arco assets. But a key reason -- hidden about as well as an elephant under the covers -- is Exxon's interest in protecting its oil and particularly its gas holdings in Prudhoe Bay.

With different levels of ownership of Prudhoe Bay's oil and gas, Exxon, Arco and BP's interests are vastly different.

Wrestling out differences among the three companies has been the core challenge of developing the Prudhoe field. The latest battle in the mid-1990s became so mired in controversy that the state nearly reshuffled Prudhoe ownership for the companies.

In most oil fields, owners iron out differences in oil and gas ownership so that the companies share an equal interest in both resources. When the companies hammered out the operating agreement at Prudhoe Bay, oil was easy to value. Gas was not. No one was certain when North Slope gas would get to market.

So the companies separated their oil and gas holdings into separate units.

BP owns most of the oil, 51 percent, but only 14 percent of the gas. Arco and Exxon have nearly parallel interests with about 23 percent of the oil and 43 percent of the gas each.

So Exxon and Arco have often been in step on Prudhoe development and frequently at odds with BP, said Tuckerman Babcock, former commissioner of the Alaska Oil and Gas Conservation Commission.

In general, BP resisted plans to convert the natural gas to a liquid and send it through the trans-Alaska pipeline, instead favoring reinjection of the gas to produce more oil. Exxon and Arco sought to maximize value of the gas.

Now, Exxon is losing a key partner at Prudhoe. Further, ''we don't have information on how the field is going to be operated,'' said Tom Cirigliano, an Exxon spokesman. Exxon wants to review the sale agreement between BP and Phillips, according to its lawsuit.

''(Exxon's) concern is that Phillips and BP have some sort of side deal which favors the oil owners,'' said Jeff Lowenfels, president of a company that is looking to export natural gas.

As Prudhoe ages and oil production declines, the gas resource becomes increasingly valuable, Lowenfels notes.

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