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Providing coverage of Alaska and northern Canada's oil and gas industry
June 2008

Vol. 13, No. 22 Week of June 01, 2008

AGIA on trial

First public discussions show administration will be defending process, not proposal

Kristen Nelson

Petroleum News

Fifty-nine to one was the margin when the Alaska Gasline Inducement Act passed the Alaska Legislature in May 2007. Judging from the questions the administration is getting on the TransCanada AGIA license it has recommended to the Legislature, it is AGIA, not the TransCanada license that will be the issue when a special session to consider the license convenes June 3.

The dustup around AGIA and the TransCanada project is driven by high energy prices and by competing projects.

High prices are creating a crisis for Alaskans faced with dramatically higher energy costs and are producing cries for immediate action, and concern the gas pipeline project is moving too slowly.

The real issue is competing projects — some predating AGIA and some newer — which are causing some legislators to ask if the state needs to spend up to $500 million to incent activity when there is a proposal moving ahead without state incentives, or, alternatively, if an overland line is the right project for the state’s gas.

Projects, past and present

Since AGIA was passed and applications under its provisions were accepted by the state, ConocoPhillips proposed a non-AGIA project which required negotiations with the state for fiscal terms up front (this proposal was submitted late last year as AGIA applications closed). Earlier this year ConocoPhillips and BP announced a joint venture pipeline, Denali, and said they would move ahead without fiscal certainty from the state, trusting that those discussions could take place at the appropriate time.

The other type natural gas project which stands in opposition to AGIA is liquefied natural gas. The Alaska Gasline Port Authority applied under AGIA for an LNG project, as did Little Susitna Construction in partnership with Sinopec. The authority, formed by Valdez, Fairbanks and the North Slope Borough to promote an LNG project, has discussed both LNG to the Far East and LNG to the West Coast; Little Susitna-Sinopec proposed LNG to China.

Denali and North Slope gas

The Denali project solves one question frequently asked about the TransCanada AGIA proposal: Where’s the gas?

BP and ConocoPhillips — along with ExxonMobil — hold leases containing substantial amounts of natural gas at Prudhoe Bay, gas which is currently produced and recycled to maintain reservoir pressure and assist in the production of crude oil.

The issue of getting gas was discussed May 22 at the press conference announcing the administration’s recommendation of an AGIA license for TransCanada.

The Alaska Legislature will officially receive the proposal June 3 and have 60 days to approve it.

Tony Palmer, vice president of TransCanada Corp. and president of TransCanada Alaska, said TransCanada believes “alignment of the state, TransCanada and the three North Slope producers is the best and fastest way to affect the project.” The TransCanada AGIA application includes an offer to make equity partnership in the line available for companies committing sufficient quantities of gas in an initial open season.

Alaska Gov. Sarah Palin said there is no reason to think major oil producers wouldn’t want to commit gas to such an economic project. “They’re reasonable commercial players,” she said, and are looking out for the bottom line. She said once the line is ready to go and the producers see the commitment to build it, there will be no reason for them not to boost that bottom line by committing gas.

She said there is always litigation, but the state doesn’t want to begin the process by litigating.

Revenue Commissioner Pat Galvin said the gas team looked closely at how to get gas “and whether it’s reasonably likely that the TransCanada project would end up with gas commitments.” He agreed with the governor that “a big part of that is ensuring that it’s an economic project and that it will provide a good return” to companies making the investment.

The producers have a choice right now, Galvin said, one they’re setting up with the Denali project. One thing Denali will do is provide them “some leverage on TransCanada, on the state,” so it clearly is in the state’s interest, as the project moves forward, to ensure that the TransCanada project is attractive to the producers.

Specter of unsuccessful

open season a concern

The question of no one committing gas to an open season was raised May 23 at a presentation on the AGIA application sponsored by the Alaska State Chamber of Commerce and the Resource Development Council.

Galvin said the first thing would be to determine why the open season was unsuccessful. Under the AGIA license TransCanada will be required to move on to obtain Federal Energy Regulatory Commission certification even if insufficient gas is committed at an initial open season.

TransCanada will continue to move the project forward, Galvin said, while the state works on why the open season was unsuccessful.

Was it a failure because the economics weren’t good enough — and what could be done to improve the economics? “If the project doesn’t have the economics because gas prices have suddenly tanked, there’s nothing anybody’s going to be able to do about it,” Galvin said.

If, on the other hand, the economic failure was because “the state is taking too big a bite in our gas tax, that’s something that we would have to address” with information about what is needed to solve that problem, he said.

If the economic failure was tied to how TransCanada structured the rates, the state could urge TransCanada to make adjustments.

“And if the answer to the question is because the state hasn’t provided fiscal certainty for 35 years, then we’ll have to wrestle with that question as well, as to whether or not that is a legitimate barrier to moving this project ahead,” he said.

If the project offer is one that is going to make money for those who commit their gas at any reasonable gas price — and no gas is committed — then Galvin said there will probably be a lot of people asking why no gas was committed.

Oil first from Point Thomson

Prudhoe Bay is a major immediate source of gas for a pipeline because the gas there is being produced and re-injected on a daily basis. Palmer said May 22 that 3.5 trillion cubic feet a day is considered the minimum amount for the company’s line into Canada.

Then there is Point Thomson, which is in litigation.

Deputy Commissioner of Natural Resources Marty Rutherford said at the press conference that the AGIA findings and determination deal not with Point Thomson ownership issues but with the field’s geology.

She said the findings show that Point Thomson is not just a gas field but also a liquids field, with both condensates and oil.

“And the truth is it’s too bad for the State of Alaska that the oils and the condensates haven’t been produced over the past years” because there’s a good chance — both for reservoir reason and for state revenue reasons — that those liquids need to be produced before the gas, a process which could take anywhere from eight to 20 years.

The state modeled the proposed project “based upon the availability of different amounts of gas” and Rutherford said the results show “the project is very robust whether or not Point Thomson gas comes in during the initial construction phase or not.”

At the May 23 chamber presentation Rutherford said that since it could be years before Point Thomson gas would be available, the gas project was modeled with and without Point Thomson gas. TransCanada assumed that Point Thomson gas would be available early — in the first or second open season, but the team also modeled a case in which Point Thomson gas never comes on, she said.

“Now somewhere in between those two is probably the reality, but we wanted to know what our situation was in terms of the economics of the gas line.”

What they found was that even with no Point Thomson gas ever coming on, it’s “still a very viable project,” she said, just “not as viable.”

Why not just go with Denali?

While the LNG projects applied for AGIA incentives and appear stalled without state support, BP and ConocoPhillips are moving ahead with Denali, which has raised the issue for some of why the state should be shelling out $500 million when there is a project going ahead without state monies.

Galvin told the May 23 presentation that the $500 million gets the state some crucial things: a commitment to move the project ahead and a project that meets the state’s long-term needs for an open access, expandable pipeline with low tariffs.

The benefits for Alaskans go beyond gas flowing and revenues coming into state coffers, he said: The real goal is a “competitive North Slope gas basin” which will create jobs and provide energy for Alaskans.

If the state sets aside AGIA and goes with Denali, that “puts the state at tremendous risk, tremendous risk that the project’s not going to advance until the state provides some sort of additional fiscal concessions; the risk that that fiscal concession is going to be tremendously expensive to the state; or the risk that no fiscal concession is ultimately going to result in those commitments.”

And if the producers go ahead with Denali, and commit their gas to that pipeline and build that line without state concessions, the state would still be better off “than if we had provided them with potentially billions of dollars of concessions,” Galvin said, referring to the estimated $10 billion price tag for fiscal certainty charged the state in the contract with BP, ConocoPhillips and ExxonMobil negotiated by the previous administration under the Stranded Gas Development Act.

Asked if the AGIA 10-year tax incentive should be extended to Denali, Galvin asked “why would the state provide that fiscal certainty to the Denali project if we’re not getting back a pipeline that we know is going to be in our interest?”

And those AGIA protections ensure gas exploration, he said, because without them new companies won’t have assurance of getting their gas into a line.

“And the risk isn’t that we’re going to end up knowing that the pipeline that didn’t have these AGIA protections resulted in killing off a bunch of new wells that would otherwise have been drilled because frankly we’ll never know.

“It’s all the people that never showed up.”






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