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August 2010

Vol. 15, No. 31 Week of August 01, 2010

State has marginal open season role

Revenue commissioner: alignment of shippers, pipeline, at issue; bigger line better from state’s perspective, Galvin tells chamber

Kristen Nelson

Petroleum News

As important as the current open seasons are for an Alaska gas pipeline project, the state doesn’t have much of a role in that alignment, Alaska Commissioner of Revenue Pat Galvin told the Anchorage Chamber of Commerce July 26.

Illustrating his point with a Venn diagram, the commissioner said the open season alignment is between shippers and the pipeline entity, and is focused on commercial terms and the route.

The open season for the Alaska Pipeline Project, the TransCanada-ExxonMobil project licensed under the Alaska Gasline Inducement Act, closed July 30; the open season for Denali, the ConocoPhillips-BP project, closes Oct. 4.

Both projects propose a line into Canada — existing pipelines are expected to have the capacity to carry Alaska North Slope natural gas to Lower 48 markets; the Alaska Pipeline Project also offers an option to Valdez, where gas would be liquefied for shipment as liquefied natural gas.

“The open season,” Galvin said, “is an opportunity for the market to respond to those two options.”

The other option that’s being discussed is a bullet line, a smaller-capacity line which would bring North Slope gas only as far south as in-state markets.

Because of the resource available on the North Slope, “bigger is better with a gas pipeline,” Galvin said. A larger line moves more gas, spreading the large investment for the product over more gas, thus reducing the transportation cost and lowering the cost of gas for consumers.

That also means more economic gas for Alaskans, because taking gas off “a large mainline is going to be less expensive than having it off of a smaller line,” he said.

And while a small-capacity line could move existing reserves from the North Slope, it wouldn’t provide an opportunity for getting new gas to market.

“And when we open up that opportunity for that new gas to get to the market, that would create a new industry for Alaska … based upon gas development,” Galvin said. The state would go from having just oil production to having both oil and gas production, creating “a much more diversified opportunity for businesses and entrepreneurs in the state.”

The large-capacity natural gas pipeline would also impact oil production because with both North Slope oil and gas being produced for sale the cost of production is shared and the marginal cost is reduced, making “the overall production more economic — and more oil becomes economic to produce than it does when you only have an oil pipeline,” Galvin said.

The alignments

Getting to a large-capacity gas project, a mainline into Canada and the Lower 48, requires alignment of the state, the shippers and the pipeline entity around a single project, he said.

Referring to the Venn diagram, which shows three intersecting circles, Galvin said at each juncture — between state and shippers, shippers and pipeline and state and pipeline, there are issues.

These issues have to be worked out.

The project will potentially spin off “hundreds of billions of dollars if not eventually trillions of dollars.”

“The terms by which people make alignment have the ability to move billions of dollars between the parties, and therefore everybody is very careful and very concerned about what they’re agreeing to, what they’re locking in and what opportunities they may be losing by agreeing to something at any particular point in time,” Galvin said.

Posturing around attempts to reach those alignments has been going on for a decade or more, he said.

What the state wants is to “get to a gas pipeline that protects the state’s interests as soon as possible.”

And the state wants to make sure that while negotiations around needed alignments take place, investments continue in design work, engineering and permitting.

That, Galvin said, is the purpose of the Alaska Gasline Inducement Act, AGIA.

“We want to see forward progress on a project that will meet the state’s interests while these alignments are taking place.”

AGIA required the licensee to commit in advance to moving the project through receipt of a Federal Energy Regulatory Commission certificate of convenience and necessity, irrespective of the success of an initial open season.

The state provided $500 million in matching funds against costs, putting “the money in front to get the project moving.”

That AGIA process, Galvin said, focused on “the relationship between the state and the pipeline entity, to try to get alignment there in terms of the types of terms the state’s going to be looking for in a pipeline to move it forward.”

Open season results

Galvin said there are four possible results of an open season.

Shippers could submit bids basically accepting terms offered by the pipeline, “with minimal additional conditions.” In that case, he said, shippers and the pipeline could probably sign precedent agreements quickly.

If the shippers submit bids with conditions, Galvin said negotiations would take place in the months following the open season and shippers and the pipeline would either reach agreement on the additional terms or eliminate the conditions put on bids by shippers.

Or, there might be some interest, “but not sufficient interest to actually denote that the project is completely viable.” The question then becomes: “Is it something to do with the project, with the market, or with something else that the state could potentially react to and respond to?”

Then there could be no interest.

In that case “we’ll have to investigate that with the potential shippers; we’ll have to look at it from the standpoint of is this an issue with this project or is it an issue with the economics of getting North Slope gas to market at this time?” Galvin said.

But the “important thing in protecting the state’s interests, is that while that evaluation takes place, while we are attempting to figure out what we need to do to speed up alignment, the project — at least the Alaska Pipeline Project — is obligated to continue to move forward, so that we don’t lose time on that first gas, so that we’re not left stranded waiting for the project to advance while people are trying to figure out what needs to be done to bring that alignment together.”

Close of APP open season

When the Alaska Pipeline Project open season closes July 30, Galvin said he expects that very little will be announced, although he said the Alaska Pipeline Project has made it clear that if there are no bids it will “make it clear that the open season was unsuccessful and there were no bids submitted.”

But if bids are submitted, that “kicks off a negotiation process — and a very competitive negotiation process as well, competitive in multiple ways,” he said.

The pipeline is dealing with multiple customers who may be including different conditions on their bids. The pipeline won’t want to share conditions one shipper has put on a bid while it’s negotiating with other shippers.

Then there is a competing project “that is also out there simultaneously talking to these customers about what they can do to attract their business.”

In addition, FERC requires pipelines to consider late bids.

“And so for all these reasons, we would expect that if there are bids submitted, the public announcements are going to be very general about the nature of the bids that came in.”

On the issue of changes the state might make in its fiscal system, Galvin said his message has been consistent through the Palin and Parnell administrations: “If the shippers demonstrate that changes to the state’s fiscal system are needed, then those changes can and should be done.”

But, he said, the process needs to continue so fiscal terms don’t “become a barrier for getting that alignment and that the state isn’t put in a position of having to make concessions simply to see forward progress on the project.”






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