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Providing coverage of Alaska and northern Canada's oil and gas industry
January 2003

Vol. 8, No. 2 Week of January 12, 2003

RCA issues conditional certificate for Kenai Kachemak Pipeline

Commission requiring ‘unconditional guarantees’ of financial capability for GUT LLC, revised tariff and connection agreements before first shipment and brief in support of proposed tariff and ‘contract carriage’

Kristen Nelson

PNA Editor-in-Chief

The Regulatory Commission of Alaska has conditionally granted Kenai Kachemak Pipeline Co. LLC a certificate of public convenience and necessity to construct and operate a new common carrier gas pipeline on the Kenai Peninsula subject to proof of financial backing and submission of a final tariff and a brief in support of the tariff.

The commission said in a Dec. 24 decision that the certificate will be issued when the pipeline company “files unconditional guarantees from a financially acceptable entity for GUT” — the subsidiary of Unocal which is a partner in the pipeline — and from Marathon Oil Co., “that KKPL will construct, operate, maintain and terminate the Kenai Kachemak Pipeline.”

A revised tariff, supported by a brief, is due no later than 90 days before the first shipment, along with all connection agreements.

The 33-mile 12-inch-diameter pipeline will extend from the Kenai gas field to near the Susan Dionne pad near the southern boundary of the Ninilchik exploration unit near Ninilchik and will connect new gas discoveries along the Kenai-Kachemak pipeline system to the existing Alaska Pipeline Co. and Kenai Nikiski Pipeline Co. pipelines near Kenai. Gas can be delivered either to Kenai Peninsula or Anchorage destinations. A second receipt point into the pipeline will be within the Ninilchik unit and, the RCA said, there will be two additional delivery points “near the communities of Ninilchik and Kasilof in anticipation of additional gas distribution activities.”

The pipeline company will build, own and operate the two primary delivery meters at the Kenai Nikiski Pipeline and Alaska Pipeline pipelines; “other initial delivery and all receipt points will be connected to facilities to be constructed by the shipper or other person requesting the interconnect,” the commission said.

Alaska LLC

The Kenai Kachemak Pipeline is a member-managed Alaska limited liability company with two members: GUT, a wholly owned subsidiary of Union Oil Company of California (40 percent) and Marathon Oil (60 percent). The Kenai Kachemak Pipeline will be managed through a management committee with each member appointing two representatives and GUT appointing the initial chairman. RCA said that after initial operation, the member with the largest volume commitment will appoint a new chairman.

The line was originally proposed from Kenai to the Kachemak area, and Northstar Energy Group Inc., along with Unocal Alaska and Marathon, submitted initial non-binding expressions of interest. Following disappointing drilling results in the Kachemak area, however, the pipeline company “decided not to extend its system south beyond the Ninilchik unit,” and only Unocal Alaska and Marathon submitted binding agreements in the final open season.

The system has two rate schedules: firm transportation service and interruptible transportation service.

Requirements for certificate

The RCA said that because natural gas is needed in Southcentral Alaska, and in communities within reach of the proposed pipeline, and because there is no other pipeline in the area, the proposed pipeline “is required by the present and future public convenience and necessity.”

On the issue of whether Kenai Kachemak Pipeline and its member owners Marathon and GUT are “able and willing to properly construct and operate the proposed pipeline,” the commission found that Marathon and GUT, through its parent company Unocal, had the experience necessary to build, own and operate the pipeline.

The commission said, however, that it also requires applicants to be financially able to meet the obligations of pipeline ownership and operation. Kenai Kachemak Pipeline filed financial statements of its owner companies. Marathon meets the commission's requirements, but GUT does not.

The RCA said it was told in testimony at a September hearing that Unocal “made a business decision two years ago to create GUT to hold the gas pipeline assets” of the company. Unaudited financial statements showed that for the period ending Dec. 31, 2001, GUT had a negative equity of $300,500 and a net loss of $300,500. “Based on this information,” the commission said, “we find that GUT is not financially fit because it has not established that it has sufficient financial assets, equity or income to provide for the construction of the Kenai Kachemak Pipeline.”

The commission said its record for the application do not contain any financial information from Unocal and based on the record, “we conclude that GUT, owner of a 40 percent interest in KKPL, is not financially fit unless it submits an unconditional financial guarantee, from a financially acceptable entity, to construct, operate, maintain and terminate the Kenai Kachemak Pipeline.”

Once that submittal is made, the commission said, “then KKPL will meet the certificate of public convenience and necessity application requirement of being financially fit.”

It is for that reason that the commission made a conditional grant.

Unocal Alaska spokeswoman Roxanne Sinz told PNA Jan. 2 that Unocal submitted a letter to the RCA that morning, asking that one document suffice for current parent guarantees, and asking that a document Unocal filed earlier with the Alaska Department of Natural Resources be accepted as the required parent guarantee.

The RCA also said Kenai Kachemak Pipeline had asked “for authority to construct additional receipt and delivery points within its defined service area as may be requested from time to time by shippers or other persons.” The commission said, however, that Alaska statutes require permits for additional receipt and delivery points, so commission review is required.

Contract carriage an issue

The commission said the Kenai Kachemak Pipeline's proposed tariff “includes separate estimated rates for firm transportation service and for interruptible transportation,” a tariff structure known as “contract carriage” which has not been allowed in the past under Alaska statute. The Legislature recently amended the statute “to allow for contract carriage for the transportation of gas on the North Slope of Alaska,” the RCA said, but there is a question of whether contract carriage for gas pipelines is permissible elsewhere in the state.

In addition to whether contract carriage is allowed for this gas pipeline, the commission said the facts in this proposal also raise a policy question: “Should contract carriage be allowed when a pipeline is owned by affiliates of the producers/shippers?”

The commission said the issues are sufficiently important “that on the limited record before us we are unwilling to resolve them at this time.”

The tariff in this case also “raises issues of rate design, rate levels and general tariff terms and conditions” and costs are incomplete since there is only an estimated construction cost.

The commission said it is not required to approve a tariff at this time, and is ordering Kenai Kachemak Pipeline to file a revised tariff when construction costs are known, and to file “a supporting brief addressing known issues already raised in this docket.” The revised tariff and the brief must be filed at least 90 days before the first shipment on the pipeline.





Want to know more?

If you’d like to read more about the KKPL pipeline, go to Petroleum News •Alaska’s web site and search for these recently published articles.

Web site: www.PetroleumNewsAlaska.com

2002

• Nov. 24 Joint Pipeline Office ties up six renewals, one new ROW permit

• Oct. 6 Wanted: Level playing field

• Sept. 8 Marathon Oil permitting two new pads at Ninilchik unit

• Sept. 8 The Oil Patch Insider

• Sept. 1 Kenai Kachemak pipeline secures long-term commitments, finalizes design

• Aug. 4 DGC issues consistency determination for proposed Kenai Kachemak pipeline

• June 16 RCA schedules Kenai Kachemak pipeline hearing for July

• May 5 Unocal unsuccessful in gas exploration on Lower Kenai

• April 28 Marathon announces two more successful tests at Ninilchik

• April 7 Right of way application filed for Kenai Kachemak gas line

• Feb. 10 Marathon’s budget for Alaska up from last year

• Jan. 27 Unocal, Marathon announce gas discovery at Ninilchik

• Jan. 27 Unocal Alaska capital budget to be around $80 million this year

• Jan. 27 Commission approves new South Ninilchik well location

• Jan. 20 Gas delivery to Enstar driving Kenai Kachemak Pipeline schedule

2001

• Dec. 23 Pipeline begins open season

• Dec. 16 Unocal, Marathon going forward with Kenai Kachemak pipeline project

• Nov. 18 Unocal budgets $112 million for exploration, pipeline

• Nov. 11 Permitting field work to begin for Kenai Kachemak pipeline

• Sept. 23 Marathon joins Kenai Kachemak Pipeline Project


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