|
State of Alaska applies for FERC waiver Change would permit state to negotiate link between royalty gas and shipping capacity, easing royalty in-value to in-kind switches Kristen Nelson Petroleum News
State of Alaska oil and gas leases allow the state to take its royalty share — usually 12.5 percent — in-kind or in-value. Which means the producer can sell the oil or gas for the state and pay the state, or the state can take the oil or gas, something the state typically does when it wants to encourage in-state use.
The switching ability creates a potential glitch for producers-shippers on the proposed natural gas pipeline because shippers commit to volume capacity on the line and that capacity includes the royalty gas which they would typically sell for the state.
If the state decides to take the gas in-kind, current Federal Energy Regulatory Commission rules on pipeline capacity could end up stranding a shipper with unused space for royalty gas because FERC rules require space which becomes available on a gas pipeline to be put up for bid. A producer could end up with “stranded” capacity if the state royalty gas was shipped by another shipper, on a space-available basis or in expansion pipe.
The state, citing provisions of the Alaska Natural Gas Pipeline Act and previous FERC waivers for U.S. Minerals Management Service royalty gas, has asked the agency to allow it to link the royalty shipping capacity to the royalty gas, so that if the state changes from in-value to in-kind receipt of its royalty gas, the shipping capacity for that gas would remain with the gas, rather than reverting to the original shipper.
Petition to FERC The state said Nov. 13 that it has petitioned FERC to waive a rule that could add risk to shippers when the state elects to receive its natural gas in kind for in-state use.
“The ability to receive gas for in-state use as our royalty payment is an important provision in all state oil and gas leases,” Commissioner of Natural Resources Tom Irwin said in a statement. “However, the state’s ability to switch to taking royalty in-kind gas creates additional financial risk for shippers producing gas from state lands,” he said, and obtaining a FERC waiver will help minimize that risk.
A shipper pays for transporting its gas through a pipeline, a cost typically referred to as a reservation charge. The state’s royalty share is a percentage, typically 12.5 percent, of the capacity each shipper commits to transport.
When the state takes its royalty in-value it receives the price of the gas at the destination market less the cost of transporting it, commonly referred to as the netback wellhead value. The state said that under current FERC rules if it switches to royalty in-kind, the shipper may have to pay its full reservation charge, even though the state has pulled its royalty gas share from the shipper’s capacity. The unused capacity, called “stranded capacity,” would still be charged to the shipper.
Release to state A FERC waiver would allow the state to offer to eliminate the risk by allowing shippers to release stranded capacity to the state when the state receives its royalty in-kind, an arrangement referred to as “capacity going with the gas.”
The state said such an offer is being contemplated as part of the royalty regulations being developed for the upcoming open season for the project licensed under the Alaska Gasline Inducement Act. Obtaining the FERC waiver “could save the producers billions of dollars in stranded capacity costs” and remove a “significant impediment” for committing gas in an open season.
Department of Revenue Commissioner Pat Galvin said there is legal authority for such a waiver and the state is comfortable this is a reasonable request to present to FERC. Congress has recognized the Alaska project as “uniquely in the national interest,” he said, and “… by moving now to obtain this waiver we have reduced risk and removed a potential commercial roadblock for producers evaluating the economics of committing gas to any upcoming open season.”
The state has requested an expedited 75-day decision period so that a FERC waiver will be available for the upcoming open seasons, both for the AGIA-licensed TransCanada-ExxonMobil project and for the BP-ConocoPhillips Denali project.
The state also requested that the waiver apply to any project that is ultimately sanctioned for development.
Capacity would follow royalty gas In its FERC petition the state said the purpose of the waiver “is to ensure that the necessary capacity ‘follows’ the royalty gas,” as when the state selects the royalty in-kind option it will need to transport its gas on the line.
The state said it anticipates that initial producer-shippers will hold all or most of the pipeline’s initial capacity, including capacity necessary to ship royalty gas, and when the state elects the in-kind option, the shipper will not need the portion of its capacity associated with royalty gas. It would benefit producer-shippers, the state said, to permit them to enter into a prearranged capacity release to the state of the capacity necessary to transport the in-kind volumes; that capacity would revert back to the producer-shipper when the state switched back to taking its gas in-value.
“Absent a waiver of those regulations to permit a prearranged release not subject to posting and bidding,” producer-shippers “would bear a significant risk of stranded capacity,” the state told FERC.
The waiver the state is requesting would allow it to obtain, on a prearranged basis, the capacity temporarily released by the producer-shipper that produced the in-kind gas, “without requiring the capacity to be posted for bidding by third parties.” The state said the waiver would not compel producers-shippers to enter into such a prearranged deal, but would allow the state to “make a commercial offer to the lessees that reduces the stranded capacity risk that they would otherwise face.”
The state would pay the same rate for the released space as the producer-shipper pays the pipeline.
The state also requested that the waiver apply to capacity releases to a state designee, allowing the state to transport in-kind gas itself or sell in-kind gas “at the wellhead with released capacity under this waiver going to the purchaser of the royalty gas” designated by the state.
While the state “does not currently plan to acquire short-haul firm capacity from the pipeline in the initial open season” to transport its royalty gas for in-state use, “and believes that is an unlikely scenario given commercial realities,” the state also asked FERC to include a provision in its waiver that if the state decided to hold short-haul capacity for in-kind gas it could release that capacity to the affected producer when the state switched to taking its royalty gas in-value.
| 