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State rebuffs Conoco’s gas line proposal
Kristen Nelson Petroleum News
In a Jan. 9 letter to Jim Mulva, ConocoPhillips CEO, Alaska Gov. Sarah Palin says thanks but no thanks to the alternative gas line proposal ConocoPhillips submitted in late November.
Palin said the ConocoPhillips alternative “continues the approach advanced by the producers in the Stranded Gas Development Act negotiations,” and does not meet the terms the Legislature established in the Alaska Gasline Inducement Act.
While the ConocoPhillips’ proposal doesn’t seek the incentives offered under AGIA, Palin said it “instead appears to require that the state change its fiscal system and concede crucial sovereign prerogatives in order for ConocoPhillips to agree to consider building a gas pipeline.” Under the stranded gas act negotiations, “these types of changes to the state’s fiscal system would have deprived the state of its ability to regulate its oil and gas activities, including taxation, for 30 to 40 years and would have cost at least $10 billion in revenues over its term” in exchange for an “unenforceable promise” that a gas pipeline might be built.
“That approach is no more acceptable now than it was before AGIA,” the governor said.
Production tax link to pipeline Palin said the ConocoPhillips proposal “links changes in upstream production taxes and royalties to the so-called ‘commitment’ to build a pipeline.” ConocoPhillips has not demonstrated a necessary link between production tax and royalties and building a pipeline, she said. “The economic terms under which oil and gas is produced ‘upstream’ and the construction of a pipeline should be independent.” AGIA recognizes this distinction, the governor said. “The upstream incentives are entirely separate from any requirement to build a pipeline.”
ConocoPhillips had asked the administration to sit down and negotiate fiscal changes. Palin said those “concessions are only relevant to whether ConocoPhillips, by committing its production to the pipeline, can make a profit that is acceptable to ConocoPhillips. AGIA effectively disentangled this issue from the decision to build a pipeline.”
Palin said that once the cost of a pipeline is “better defined” the state will know whether “any further changes in production taxes or royalties may be necessary. The price of gas at destination markets minus the cost of capacity on an open access pipeline may be more than adequate to meet profit requirements for producers shipping gas through the line.”
Open access an issue The governor also said that open access is an issue. The state’s experience with the trans-Alaska oil pipeline, she said, demonstrates that Federal Energy Regulatory Commission “regulation alone is not sufficient to ensure a truly open-access pipeline that will provide real value to the state. A producer-owned pipeline has the motive and ability to create roadblocks to access for explorer producers who are competitors of the producer-owners.”
The governor said that in 2005 the chairman of FERC noted that in the 1970s the U.S. Department of Justice recommended an outright ban on a producer-owned gas pipeline and said FERC would consider that opinion in certificating any producer-owned gas pipeline.
ConocoPhillips’ “alternative falls critically short of meeting the state’s key objectives in advancing a gas pipeline project,” Palin said, but does include terms which she takes as a positive sign that the company “may someday be part of the project team.” She noted the ConocoPhillips’ commitments to training, local project headquarters in Alaska and opportunities for in-state delivery points and pricing. “These are things which any project must provide,” she said. “I appreciate that your alternative has recognized this.”
“Your efforts have set ConocoPhillips apart from the pack,” Palin told Mulva. She said the administration was disappointed ConocoPhillips did not submit an application under AGIA, and hopes the company will commit gas during the first open season.
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