On March 30, 2012, Alaskan Governor Sean Parnell announced that the state had settled a seven-year battle with North Slope producers’ ExxonMobil, ConocoPhillips and BP over whether the leases for the Point Thomson oil and gas field could be terminated. The Point Thomson field, located 60 miles east of Prudhoe Bay, is Alaska’s largest undeveloped oil and gas field containing 25% of the 35 trillion cubic feet of discovered North Slope gas.

Importantly, this settlement was accompanied by both a plan of action and a commitment by these North Slope Producers to develop these immense resources in the near term now that this litigation has ended.

Not surprisingly, actual development of the Point Thomson oil and gas fields was stymied by this long-standing litigation. However, federal enactment of the Alaskan Natural Gas Pipeline Act (ANGPA) in 2004 and state enactment of the Alaska Gasline Inducement Act (AGIA) in 2007 still fostered two competing proposals to develop this immense North Slope resource—the Alaska Pipeline Project (APP), sponsored by ExxonMobil and TransCanada, and the Denali Project, sponsored by BP and ConocoPhillips. That competition has now ended. By signing onto the joint letter to Governor Parnell, BP and ConocoPhillips have jettisoned the Denali Project in favor of the APP, which was previously awarded an exclusive state license under the AGIA. As the APP is an AGIA-licensed project, the APP sponsors, among other things, are obligated to filing a certificate application for development with the Federal Energy Regulatory Commission (FERC) by October 2012 and to provide for at least five in state natural gas delivery points on the pipeline to be constructed. In return, APP sponsors receive up to $500 million for reimbursement of incurred development and permitting costs.

The APP is to transport this gas via a new 58 mile pipeline from the Point Thomson field to a new gas treatment plant to be located at Prudhoe Bay. It now appears likely that the gas would then be brought to market via an approximately 800 mile pipeline running from Prudhoe Bay and connecting to LNG facilities to be built near port facilities in Southcentral Alaska. The other option under consideration is to construct a much longer pipeline which would continue across Alaska to the Canadian border and then across the Yukon and British Columbia for eventual delivery to existing TransCanada gas pipeline facilities in Alberta, Canada. A key consideration in the final design decision will be the economics of the domestic market considering the dramatic increase in shale gas supplies in the lower 48 and the equally dramatic drop in gas prices. The current economic situation appears to favor development of an LNG export terminal at tidewater as opposed to a long line pipeline delivering yet more gas to a domestic market experiencing low prices and ample supplies for the foreseeable future.

Decisions will have to be made quickly if the APP sponsors are to meet their deadline for filing a complete certificate application at the FERC by October 2012. However, the Point Thomson settlement sets fixed, near term deadlines for oil and gas production which if not met, will lead to significant acreage being returned to the state. Thus, North Slope Producers and TransCanada have substantial economic incentive to make relatively quick decisions on how to proceed with the APP.