Exxon, U.S. Government Duel Over Huge Oil Find

by RUSSELL GOLD

The Wall Street Journal

Exxon Mobil Corp. is fighting with the U.S. government to keep control of one of its biggest oil discoveries ever, in a showdown where billions of dollars hang in the balance for both sides.

The massive Gulf of Mexico discovery contains an estimated one billion barrels of recoverable oil, the company says. The Interior Department, which regulates offshore drilling, says Exxon's leases have expired and the company hasn't met the requirements for an extension. Exxon has sued to retain the leases.

The court battle is playing out at a time in which the Obama administration has made an issue of unused leases, which deprive the Treasury of valuable taxes. It also comes as regulators are being careful not to be seen as lax in their dealings with large energy companies in the wake of last year's BP PLC spill.

The stakes are high: Under federal law, the leases—and all the oil underneath—could revert to the government if Exxon doesn't win in court.

Exxon and the U.S. are in a tug-of-war over Julia Field in the Gulf of Mexico. The government has denied the oil company's lease on the field, despite it being the biggest oil find ever, WSJ's Jennifer Forsyth reports on Markets Hub. (Photo: AP Photo.)

The loss of the leases would be an enormous black eye for Exxon. The company hadn't previously disclosed the size of the discovery in what is called the Julia field until it was mentioned in the suit Exxon filed against the Interior Department last week in federal court in Lake Charles, La.

The Texas behemoth faces the sobering prospect that it may have made the largest discovery ever in the Gulf of Mexico only to lose it. Tens of billions of dollars of oil could slip through its hands because it failed to follow federal rules for getting a lease extension while it moved forward with plans to get the oil out of the ground.

Exxon spokesman Patrick McGinn said the company expected to get the extension, which he said was traditionally granted as a matter of course. "You state your case and you got it. [This] was unexpected."

This high-stakes standoff is likely to spark a political, as well as legal, showdown between the federal government and the nation's largest oil company. It has also roped in Norway's Statoil ASA, which owns 50% of the Julia find. Statoil said it filed its own suit Monday in the same Louisiana federal court against the Interior Department to preserve the leases. Exxon is the field's operator and lease holder.

A spokeswoman for the Interior Department said, "Our priority remains the safe development of the nation's offshore energy resources, which is why we continue to approve extensions that meet regulatory standards."

The Interior Department, which oversees offshore oil development and collects royalties, has been trying to show that it has become a tougher, but still fair, regulator of the Gulf of Mexico's oil riches. Its reputation was battered during the massive Deepwater Horizon well blowout and oil spill last year, when BP sought—and the government approved—last-minute changes to the well design, which some investigators say contributed to a chaotic environment aboard the drilling rig. The government was roundly criticized for weak oversight of safety rules.

Now the department must decide whether to fight Exxon in court or settle and allow it to develop the oil. Turning the leases over to another company would mean further delays to the tax royalties that would go to government coffers. At current prices, potential royalties paid to the government over the lifetime of a one billion-barrel field would be about $10.95 billion.

The oil industry, led vocally by Exxon, has said that developing oil fields in the deepest reaches of the Gulf takes time to do safely. And by threatening to take away a massive discovery, the industry says that the government is sending the message that oil companies need to be in a rush to produce.

The possibility that Exxon could lose this oil will likely send shock waves through the industry. "This is unprecedented," said Amy Myers Jaffe, associate director of the Energy Program at Rice University in Houston. "The question is: Do our offshore rules allow for flexibility? You don't want to let companies sit on a discovery…We definitely don't want to send the industry a message that you need to be in a rush or we'll take the oil away from you."

Exxon's lawsuit said the government has granted "thousands" of extensions over time. It said the government's denial of its extension relied on legal interpretations that it "had never before applied and had never before articulated." Statoil asserted in its lawsuit that no request for an extension for a deep-water development "had ever previously been denied." The Interior Department couldn't comment on this.

The Exxon discovery is believed to be the largest in the Gulf of Mexico since BP found the Thunder Horse Field in 1999, and it could be larger. The find also cements the Gulf of Mexico as a rich exploration area with large amounts of undiscovered oil that may keep oil companies active for years to come.

"This is very deep water, very complex structures and difficult-to-produce oil," said Exxon's Mr. McGinn.
The dispute over Exxon's plans for the Julia field began in October 2008—about a month before its 10-year leases expired—when it applied for a five-year "suspension of production."

Such extensions are "fairly common," said Elmer P. Danenberger III, a former federal official who oversaw U.S. offshore-drilling rules until he retired in 2009.

"I can honestly say that people who manage that program are really strict, which they need to be or it will be abused. If you don't have a commercial discovery and a plan for moving ahead at the end of the lease term…that's it."

In February 2009, the government denied Exxon's request for an extension and after a brief appeal denied it again that April. Exxon said in a letter at the time that it was "committed" to producing the oil, but the government said it didn't present a specific plan. The government contended this didn't meet legal requirements and denied the application.

More appeals followed, but Exxon lost its final appeal in May. The final decision hinged on whether Exxon had a concrete "commitment" to produce the oil in December 2008, when its lease expired. The director of the Office of Hearings and Appeals at the Interior Department ruled that it didn't.

Exxon is known in the industry for moving slowly and studying all options exhaustively before committing billions of dollars. But even if it loses this court case, all might not be lost. The Julia field consists of five leases—or square blocks in the Gulf of Mexico—and only three are being disputed. The other two aren't set to expire until 2013.

—Deborah Solomon
and Angel Gonzalez contributed to this article.