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BP, Exxon stress risk, opportunities
Kristen Nelson Petroleum News
When the Alaska Senate and House Resource committees heard from the North Slope producers on gas pipeline issues in February, the presentations constituted something of a changing of the guard.
Joe Marushack, who has headed up the gas pipeline project for ConocoPhillips for six years, told Senate Resources Feb. 9 that he will shortly be leaving to head up ConocoPhillips’ Australia operations (see part I of this story in Feb. 18 issue of Petroleum News). Wendy King, director of external strategies for ConocoPhillips, told House Resources Feb. 14 that the company would be bringing in a replacement for Marushack, assuring the committee “that we have on the ground a very experienced and capable team.”
Angus Walker, BP’s commercial vice president for Alaska, told Senate Resources Feb. 9 that he’s taking over from Ken Konrad as BP’s senior vice president for gas commercialization in Alaska.
And Craig Haymes of ExxonMobil told House Resources Feb. 14 that he’s recently moved to Alaska from ExxonMobil Canada, replacing Richard Owen as ExxonMobil Production’s Alaska production manager.
Company representatives returning to the gas line fray included King, Marty Massey, ExxonMobil’s U.S. joint interest manager, and Dave Van Tuyl, BP’s Alaska gas commercialization manager.
Also a changing project With a new administration, the companies face a new gas pipeline process on terms which haven’t yet been made public.
“We understand the governor is considering an RFP process,” Massey told Senate Resources. He said the company has “expressed our thoughts to the governor and we are hopeful that a process that will lead to a successful result will be developed.” He said ExxonMobil’s “key feedback” to the new administration “is that it’s important that process not foreclose any options and that it be as flexible as possible.”
Van Tuyl said BP thinks the state is “uniquely positioned” to help overcome the challenges of the project.
“We see that happening through an open process that’s available to any project sponsor. We think it should be open, with the same rules for all the parties, any party. That would allow the best project to move ahead.”
He said BP thinks it is very important to allow the free market to work: “that’s where the best ideas are created and certainly a project like this needs good ideas to allow the best project to emerge,” he said.
King said ConocoPhillips believes the resource issues have to be addressed to provide “adequate securities to those of us that are going to be asked to make long-term shipping commitments.” She said ConocoPhillips wants to continue exploring with the State of Alaska aligning the company’s ownership position in the pipeline with its shipping commitment.
“We don’t want to rush into a bad deal,” she said, “but we think we need to act diligently in trying to find those solutions.
“We want to find new ways to come up with a compromise to move this forward,” King said.
What if we hold an open season … An open season, with gas owners committing to ship gas on a proposed line, is an important part of the process leading up to construction of a gas pipeline, because the firm transportation or ship-or-pay commitments provide surety for those financing the line.
Committee members on both the Senate and House committees asked the producers: what if there is an open season and no one comes?
“One of the worst fears everybody has is we have an open season and no one shows up to participate,” said Sen. Bert Stedman, R-Sitka.
He asked BP’s Van Tuyl what the state could do to make sure that doesn’t happen.
Rep. Craig Johnson, R-Anchorage, co-chair of House Resources, put the question a little differently: “Let’s say you’re not the chosen pipeline constructor: is there any reason why you wouldn’t show up during the open season to make a firm transportation commitment.”
Van Tuyl told Stedman that the service that’s offered needs to be responsive to customers. “And what that means is that we have a low-cost project that is offered that encourages shippers to participate.” Shippers, he said, need to have confidence that the project sponsor can deliver a low-cost project.
The other thing that those making firm-transportation commitments need is confidence that they know the rules, he said, that the resource terms are defined in advance of the open season so shippers know what the fiscal terms will be.
To Johnson Van Tuyl said “you’d want to see a low-cost project and therefore a low toll, a low tariff structure to ensure that we could get our gas to market for a reasonable rate.” And the resource owners would need to ensure that the risks they bear have been managed, including the fiscal risk on the upstream business. So, whether or not ConocoPhillips was a pipeline owner, that fiscal risk “would still need to be dealt with in some shape, fashion or form.”
Producers concerned about risk All of the producers talked about the risks they bear in the project as the resource owners.
Haymes said the Alaska gas project is very significant to ExxonMobil, having the potential to add over 1 billion cubic feet a day of gas sales for the company, equivalent to 10 percent of its current global gas production. And the project could add more than 1 billion oil equivalent barrels of proved reserves, enough to replace a full year of ExxonMobil’s production.
But the project will be the largest private investment in North America and because of its size, “many factors impact commercial viability.”
The 2001 cost estimate was $20 billion, but since then “steel prices have doubled, industry and construction labor costs are experiencing hyperinflation and there’s world-wide pressure on global markets” for contracting services and skilled labor because of world-wide mega projects, Haymes said.
Gas prices remain volatile.
There are many other risks, including “cost overruns, schedule delays and construction conditions, regulatory and state fiscal uncertainties,” he said.
BP’s Van Tuyl said the project faces three basic kinds of risk: the price the product will actually get in the market; the cost of developing it; and fiscal and regulatory risk.
“Price is set by markets and we are price-takers, not price-makers,” Van Tuyl said, as is the state. And the price of natural gas is volatile.
Rising costs are a major challenge for any mega project, he said, but “the Alaska gas pipeline project is not any mega project.” It’s sheer size, “and we’ve talked about $20 billion, $30 billion, maybe more,” he said. … “Because of its size it’s really in a class of its own,” and most mega projects exceed their sanctioned cost estimates.
Gas prices have increased, Van Tuyl said, but so have project costs. “And the net result is that the project remains challenged.”
Price risk is inherent to any commodity: “it’s borne by the resource owners.”
The project cost risk is something the North Slope producers manage “through rigorous project management processes,” Van Tuyl said. “And as fellow resource owners along with the state we think that careful management of the cost is absolutely critical to maximizing the value of the resource.”
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