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Conoco still doesn’t believe in AGIA Company officials told Legislature it couldn’t submit proposal that met law’s requirements, but still believes it has a workable plan Kristen Nelson Petroleum News
ConocoPhillips Alaska officials told Legislators early in 2007 that they didn’t think the governor’s Alaska Gasline Incentive Act, known as AGIA, would result in a successful North Slope to market gas line project.
That is why the company submitted its own proposal, outside of AGIA, on Nov. 30.
ConocoPhillips told legislators AGIA “did not provide sufficient flexibility for us to present the best, most creative package or proposal to the State of Alaska to truly advance the gas pipeline in a successful manner,” Brian Wenzel told the Alaska Support Industry Alliance Dec. 13.
Wenzel, vice president of ANS gas development for ConocoPhillips, said the company was particularly concerned about the tax terms, believing they were not sufficient to give the producers enough confidence to nominate gas in an open season. The bill, as introduced, had a 10-year fiscal stability clause, but was changed so that when AGIA was passed, he said, “essentially one year of fiscal stability was provided.”
He said the issue is how many uncertainties shippers can swallow on a $30 billion project. There are capital cost uncertainties, which will be passed on to shippers in the tariff. There are schedule uncertainties. And there are natural gas price uncertainties. “We do not believe this pipeline will happen if we also tell them they’ve got unquantifiable fiscal uncertainty, tax uncertainty,” Wenzel said.
Not a call for oil fiscal stability He said ConocoPhillips doesn’t want the state’s $500 million in matching funds, offered in exchange for meeting the requirements in AGIA: What it does want is “a gas fiscal framework.”
But, Wenzel said, ConocoPhillips is “not seeking to tie this project to oil fiscal stability,” which was an issue with the contract the Murkowski administration struck in 2006 with the major North Slope producers. ConocoPhillips is “definitely not at all happy with what’s happened on oil production taxes in this state” and thinks the tax increase “that was passed cannot stand. It will not work for Alaska in the long term; it will result in negative impacts on both production and investment in this state.”
That aside, there is an opportunity to develop a gas pipeline, he said: “Let’s find a way to move this pipeline ahead; let’s do it on the foundation of a gas fiscal framework.” Shippers need to know what the gas fiscal rules are and whether they’re going to change and if they’re going to change, how frequently they will change, Wenzel said.
He said three things characterize ConocoPhillips’ proposal: the company is not asking for any portion of the state’s $500 million in matching funds; it wants to sit down with the administration and work out a gas tax framework; and it is willing to include a third-party pipeline company in the pipeline ownership, something the administration has indicated it wants in order to have “that non-producer perspective” among the pipeline owners.
20-25 year shipping commitment Why is the tax fiscal framework so important?
Wendy King, ConocoPhillips Alaska’s manager of ANS gas development, said the shipping commitment required on an Alaska gas pipeline will be 20-25 years. In exchange for that commitment, she said, ConocoPhillips thinks potential shippers will be asking “what kind of predictability can I have in that gas fiscal regime?”
The total value of the shipping commitments over 20-25 years could be $100 billion to $150 billion, she said: “The numbers are just staggering.”
One of the things Alaskans want is delivery milestones, King said. ConocoPhillips agrees with the state about doing field work in the summer of 2008. “We have a team already working on what those activities would be, focusing on route reconnaissance, contaminated land sites.” The company anticipates ramping up that work in January in order to be in the field in June.
Another critical step is front-end engineering design. Customers will want to see “proper front-end engineering design” before they commit in an open season. ConocoPhillips believes “it’s critical in one of these early phases to get a full project management team up and running” so that when you go into an open season, “the customers know that the work has been done to ensure that there’s a good cost estimate, a good schedule out there and they can trust this entity to deliver on what it’s saying it can do in that open season.”
ConocoPhillips is proposing a preliminary or non-binding open season. That would involve talking to customers about what they need including the volumes they will want to ship and how long a shipping commitment they would be willing to make.
A binding open season would be completed in 2010.
Six delivery points King said the state has asked for five in-state delivery points and ConocoPhillips has included a sixth — in Canada at Whitehorse. That delivery point has been included, she said, because a group of Alaska mayors got together a few years ago and said Southeast Alaska might need access to North Slope gas. Whitehorse is the closest vicinity for them to have access. Whitehorse could also serve local Canadian markets as well as Southeast.
Where those off-take points actually occur depends on in-state gas needs and ConocoPhillips proposes to kick off a study of in-state gas needs in 2008. “We think that’s important because you need to have that done prior to an open season, so you need time to complete the study, look at the results and figure out where are the best off-take points,” King said.
She also said ConocoPhillips stands ready to work with entitles that are interested in building a spur line.
The state has been concerned about pipeline ownership and authorization for expansions and King said the pipeline entity would be set up in such a way that a single owner could not block an expansion.
ConocoPhillips would seek Federal Energy Regulatory Commission regulation on the gas transmission lines and the gas treatment plant, so there would be “a common regulatory environment then between the main pipe, the gas treatment plant and those gas transmission lines.”
The proposal would also unbundle gas treatment plant services, with compression and chilling separated from removal of impurities so that if a company found gas that didn’t have impurities it wouldn’t have to pay for that portion of GTP services.
Fiscal framework this year King said ConocoPhillips believes that “a gas fiscal framework can be accomplished.” She said two parties should be able to sit down and figure out “how that framework can be established, what are going to be the terms for the predictability of that fiscal tax structure.” That mechanism can be worked out, she said, so that something can be brought to the Legislature this session.
“In parallel to that, we could easily be working with the administration as well as others on a role for a third-party pipeline company.”
If the gas fiscal framework is established and a third-party pipeline brought in, the process would be in place “to get that full project management team up and running to get ready for that successful open season.”
Skilled labor is a big concern, and King said labor training, as well as the in-state gas needs study, would both begin in 2008.
King said she believes the project has two unique components: The lending community will be looking for a company that has the financial strength to complete a $30 billion project — something financiers call completion support.
The other thing that will be looked at is the strength of the shipping commitments standing behind a pipeline, she said. There the question will be does the entity that signed the shipping commitment have the financial strength to pay the pipeline company for 20-25 years whether natural gas prices are $2 or $10?
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