Providing coverage of Alaska and northern Canada's oil and gas industry
February 2010

Vol. 15, No. 6 Week of February 07, 2010

FERC gives Alaska requested gas waiver

State can obtain prearranged capacity releases for transporting royalty gas, facilitating switching from in-value to in-kind

Kristen Nelson

Petroleum News

The State of Alaska has gotten FERC approval for a fix to an issue which could have caused it problems in shipping royalty gas on a proposed natural gas pipeline and could also, the state feared, have caused uncertainty in open seasons for the line.

Over objections by Denali and ConocoPhillips, the Federal Energy Regulatory Commission has granted the state a limited waiver, allowing it to obtain prearranged capacity releases for transporting its royalty gas.

Because Alaska oil and gas leases allow the state to take its royalties in-value or in-kind, the state would need shipping capacity when it took its gas in-kind — but the producer would need that capacity when the state took the gas in-value.

The state’s petition for the waiver, filed Nov. 12, requested linking shipping capacity for the state’s royalty gas to the gas, so if the state changed from in-value to in-kind, the shipping capacity would remain with the gas, rather than reverting to the shipper.

The state applied for a waiver because FERC requires that any spare shipping capacity on a gas pipeline be put out for bid, which could have theoretically left a producer-shipper with stranded capacity in the line.

The state sought “permission to obtain prearranged capacity releases for transporting its royalty gas without posting the releases for bidding,” FERC said in a Jan. 28 order.

The commission granted the request subject to conditions.

Conditions from shippers

FERC said BP Exploration (Alaska) Inc., ExxonMobil Gas & Power Marketing Co., TransCanada and Anadarko Petroleum Co. in general supported the waiver, although ExxonMobil and Anadarko conditioned their support.

Denali — The Alaska Pipeline Co., ConocoPhillips Alaska Inc. and ConocoPhillips Co. filed adverse comments or protests.

ExxonMobil asked FERC to limit the state’s request by requiring that the producer-shipper accept a capacity release from the state “at the corresponding contract rate,” a condition which would also apply if the state made a sale of in-kind gas at the wellhead.

Anadarko requested that FERC not limit the state’s waiver to only those producer-shippers acquiring capacity in the initial open season. The company told the commission the risk of stranded capacity applied to all producer-shippers, not just to those participating in the initial open season. Anadarko also said limiting the waiver to producer-shippers participating in an initial open season “would create an uneven playing field and undermine the goal of promoting future exploration, development and production of Alaskan natural gas.”

Protests from Denali

The commission said comments filed by Denali and a protest from ConocoPhillips had some overlapping concerns, including a contention that the state’s request for a waiver was premature and that the state’s petition was inconsistent with FERC’s capacity release rules and its policy respecting waivers.

Denali also requested that, if FERC granted a waiver, it attach a number of conditions, including making the waiver applicable only to gas used in Alaska, requiring the state to waive its sovereign immunity and setting a minimum timeframe for any switching by the state between taking its royalty gas in-kind and in-value.

Conoco requested that the commission deny the waiver, telling FERC the state would use the waiver to address fiscal and royalty matters in commercial negotiations with producers.

State accepts some conditions

FERC said the state accepted the condition from ExxonMobil “and will accept capacity releases from the releasing producer-shipper at the corresponding contract transportation rate.”

The state accepted “Anadarko’s suggestion that the waiver apply to any capacity on any Alaska Gas Pipeline Project, including expansions to such systems.”

The state opposed Denali’s request to narrow the waiver to gas solely transported within Alaska, but told FERC the predominant use of the waiver would be to address in-state demand and storage fluctuations. It also opposed Denali’s request for limits on the frequency of switching and rejected the suggestion that it should waive sovereign immunity.

The state requested the commission reject ConocoPhillips’ protest and said the waiver is not premature. The state said the request would provide clarity before the open seasons begin and said it depended on the waiver to transport its in-kind volumes.

The state told FERC ConocoPhillips failed to prove its claim that the waiver would confer any commercial advantage to the state and told FERC that if commission granted the waiver request it would remove the ability of any party to gain potential leverage in commercial negotiations regarding capacity associated with royalty gas.

The state also said FERC could assure any waiver would be neutral by requiring the state to apply the terms of the waiver equally to shippers participating in any open season on any Alaska gas pipeline project.

Commission conditions

FERC granted the state’s waiver request but said if the state uses the waiver to take capacity release from one producer it must offer to do the same with similarly situated producers on any Alaska gas pipeline project and “the waiver must apply to all firm capacity held by producer-shippers and is not limited to firm capacity acquired by a producer-shipper during the initial open season.”

FERC said holding the state to its agreement that the waiver would apply to either pipeline project “should alleviate the concerns of certain parties, such as Conoco and Denali, concerning potential discrimination.”

The commission said it found the conditions requested by Denali are not necessary and rejected them. The waiver will not be limited to gas for in-state use, FERC said, because the state indicated that “out-of-state uses will be incidental” and no party will be harmed because the state will pay for released capacity at the contract rate.

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