ConocoPhillips sues state of Alaska in road-use dispute with another oil company

Alaska’s largest oil producer is suing the state in a dispute with another oil company that plans to develop a giant North Slope prospect.

ConocoPhillips Alaska filed the lawsuit in Anchorage Superior Court on Friday, challenging an administrative decision issued in December by Alaska Department of Natural Resources acting commissioner Akis Gialopsos.

The 36-page decision upheld a state permit granted last year. The permit allows Oil Search Alaska, a subsidiary of Australia-based Santos, to access its large Pikka prospect using 75 miles of gravel roads that were built four decades ago by Arco Alaska, a predecessor company of today’s ConocoPhillips. The roads are located in ConocoPhillips’ Kuparuk River oil field, on state-owned land.

ConocoPhillips wants the court to reverse the decision and revoke the permit.

The lawsuit was originally reported by Northern Journal.

ConocoPhillips says in its lawsuit that Gialopsos erred in multiple ways, like concluding that ConocoPhillips does not have a private property right on the roads. ConocoPhillips says the state agency does not have the authority to give a third party like Oil Search the right to use the roads.

Gialopsos’ decision disregards ConocoPhillips’ $15 million annual expense to maintain the roads, which would cost more than $1 billion to replace today, the company argues.

“The commissioner erred in granting the permit, which qualifies as an unconstitutional taking under the U.S. Constitution and the Alaska Constitution,” ConocoPhillips argues.

Officials with ConocoPhillips, Oil Search and the state said Wednesday that they could not comment. The state has not yet filed its reply in the case, court records showed early Wednesday.

[Earlier coverage: Alaska’s next big North Slope oil project is mired in a feud with ConocoPhillips, and reportedly for sale]

In Gialopsos’ decision last month, he argued that ConocoPhillips’ leases at Kuparuk give it exclusive rights to access the field’s oil and gas. But the state reserves the right to grant concurrent use of the roads to other parties like Oil Search.

Gialopsos said in his decision that the permit is intended to be temporary until the two sides reach an agreement and does not represent a taking of ConocoPhillips’ assets — it can still use the road.

“In short, the state has the power to ensure that private disputes between its lessees over concurrent use on state lands do not threaten the state’s ability to maximize resource development on any of its leased lands,” Gialopsos wrote.

“While the state’s preference is for its lessees to reach concurrent use agreements on their own in a timely manner, where the public interest is threatened, DNR has the power to act to remove that threat,” he wrote. “The issuance of the permit is consistent with that power.”

ConocoPhillips says it is not impeding North Slope development because it has allowed Oil Search to use the Kuparuk River roads for exploration work at Pikka at no cost. It says Oil Search now has no incentive to negotiate a deal for the use of the road, since the permit allows the roads’ use without compensation to ConocoPhillips.

[Pressure mounts on Biden administration for decision on giant Willow oil field project in Alaska]

The Pikka field could produce up to 80,000 barrels of oil daily in a first phase of development that could see first oil in 2026, Oil Search’s parent company, Santos, announced in August.

Santos said at the time that it and its partner Repsol, of Spain, had agreed to invest $2.6 billion for the initial phase of the project. That effort would create 2,600 jobs during construction and 500 jobs once oil production begins, Santos said.

The project could ultimately produce up to 120,000 barrels of oil daily, Oil Search has said.

The new oil would significantly boost oil shipments in the trans-Alaska pipeline, which have fallen about 75% from their peak in the late 1980s, dropping below 500,000 barrels daily today.

The disagreement between Oil Search and ConocoPhillips over the terms for the use of the roads dates back well over a year, records show.

An ad hoc agreement between the companies allowed Oil Search to use the roads for exploring the Pikka deposit while the oil companies tried to find common ground, the state’s decision says.

Oil Search has offered to pay ConocoPhillips $60 million for operations and maintenance and future capital expenses for using the road, though Oil Search asserts that ConocoPhillips is not entitled to such payments, since the state allows the use of the roads.

ConocoPhillips has asked Oil Search to pay $95 million, with payments potentially spread out over 20 years.

Brad Keithley, a former oil and gas attorney, said the fundamental problem leading to the dispute is that the Department of Natural Resources does not have facility-sharing rules in place for roads. Such rules exist for common-carrier pipelines under the oversight of the Regulatory Commission of Alaska.

“But once you are beyond the major pipelines, it’s sort of a no man’s land without rules, and you have to negotiate,” he said.

He said both sides of the argument make valid points.

Larger companies like ConocoPhillips have typically gone to great expense to build the roads and other facilities on the North Slope. But smaller companies that come along later must work with the larger companies to use their facilities, sometimes creating challenges as they try to establish themselves.

“The way to resolve this issue is have a set of rules so when someone wants access, they know the terms and conditions they’ll have to pay for it,” he said. “And the ones who invested know at some point they’ll have to give access and they’ll be compensated for it.”

The lawsuit comes amid major new oil patch discoveries on the North Slope, including Pikka and ConocoPhillips’ giant oil prospect farther west, the Willow project, that could soon receive federal approval.

ConocoPhillips in May sued another state agency, the Alaska Oil and Gas Conservation Commission, to prevent the state from releasing well data from the Willow oil discovery. That case is awaiting a decision from Sharon Gleason, the chief U.S. District Court judge in Alaska.

Clarification: This story has been updated to say that the roads in dispute were built by Arco Alaska, a predecessor company of today’s ConocoPhillips.