Buffett to the rescue?

MidAmerican would continue to FERC certification if open season failed

By Kristen Nelson

Petroleum News

MidAmerican’s Kern River is back in the Alaska gas pipeline wars, and told legislators at the end of March that it would continue to FERC certification after a failed open season.

While the company said alignment with both the state and the producers is necessary for a successful project, it said it would go ahead with project work while the state settles alignment issues with the producers.

Two other pipeline companies interested in the project have a different view. They want the state to settle with the producers up front. Enbridge told legislators “no producers, no pipeline” and TransCanada said “no producers, no credit, no pipeline.”

MidAmerican said it believes the producers will come to an open season if the project is economic.

But, once-burned twice-shy, the company seemed more concerned about the state than about the producers.

MidAmerican, and its wholly owned subsidiary Kern River, pursued the project in 2003.

“We felt like, frankly, we were a stalking horse to create leverage for the last administration,” Kern River Gas Transmission President Kirk Morgan told Senate Resources. “And we’re not coming up here to go through another beauty contest.”

That is one reason the proposal of state matching funds in the Alaska Gasline Inducement Act is important, Morgan said. “The alignment that the $500 million (from the state) creates is extremely important,” he said, and not just to MidAmerican: “It’s an important signal to the marketplace; it gives the project much more credibility.”

MidAmerican did not ask the state for a $500 million commitment, he said. The state is offering that commitment in exchange for achieving several of its goals: getting the project started, controlling the timeframe and commercial issues.

MidAmerican likes AGIA

The key is to “determine the appropriate balance of risks and rewards for all stakeholders,” he said.

There is an alternative: “The North Slope producers have for years articulated their must haves before advancing the project,” including: tax and royalty certainty on both oil and gas; regulatory certainty in the United States and Canada; cost reductions through technology; and federal enabling legislation.

“This approach is effectively saying that the project will get started if and when all the preconditions have been met and all concessions have been extracted,” Morgan said.

MidAmerican believes “the project can be advanced concurrent with resolutions of issues that today remain outstanding,” he said. Stakeholder alignment is critical, he said and MidAmerican’s “approach does not exclude interested parties or discount new ideas which may be offered to help manage project risks.” The North Slope producers will play a critical role as shippers and sellers of gas to other shippers and “MidAmerican, as an independent pipeline, is impartial and in a unique position to help facilitate solutions when stakeholder interests diverge.”

The company supports the open and transparent process in AGIA “and while we can understand debate over what constitutes the best pipeline development proposal, it’s harder to understand why parties would object to a process that calls for an open and transparent comparison of proposals.”

Investment surety an issue

Morgan said it would depend on why the open season failed.

“We expect to have completed the full top-to-bottom cost estimate and be able to offer a definitive tariff so that potential shippers have the knowledge of what they’re committing to.”

If the failure was because the project wasn’t economic, there are provisions in AGIA dealing with an uneconomic project, he said, “and that might be a legitimate reason to walk away.”

But what if an open season fails “and all of the cost studies and market studies that we’ve done show the project to be economic?”

First of all, Morgan asked, “why would it fail? Does somebody not want to make money here?”

The producers have two choices, selling gas at the wellhead or shipping gas; he said he has never heard the producers say they would warehouse the gas.

“If it is clear to us that the project is economic and the open season fails because people wouldn’t commit their gas because maybe they want to build the pipeline rather than us, we would continue to FERC certification.”

The provision in AGIA allowing for up to five years for sanction after FERC certification for a project that doesn’t have gas is important, Morgan said. “We don’t want to make it easy to boycott the project,” and set up a situation where the licensee goes away and it’s the producers’ project again.

Morgan said “if the project is demonstrated to be economic” he does not think the producers would withhold their gas. He said he thinks the scrutiny such a move would draw from the U.S. Congress, the Alaska Legislature and the public would be considerable, because the producers would be “withholding gas from the United States market when people are paying $600 in the winter for a heating bill.”

Samuels: the producers are still sitting on the gas

“The frustration we all have is that since those three companies have the gas and we feel we are leveraged by those three companies — at the end of the day, all … roads lead to those three companies,” he said.

If the state partners with MidAmerican and there is a failed open season, Samuels said the reason the producers would give would be “the same reason that we always hear — that the taxes are just too high. Now I’m getting leveraged by you and them.”

The leverage doesn’t go away because the state is dealing with MidAmerican instead of Exxon, he said, predicting that if there were a failed open season MidAmerican would be saying “I tried to get the gas and I couldn’t get it.” And it would be MidAmerican that would be saying: “If you just give them this they’ll show up at this next open season.”

The leverage doesn’t go away, Samuels said, the only difference is that it’s “Warren Buffet and Rex Tillerson leveraging me. … It’s not getting better,” he said, referring to ExxonMobil’s CEO and the fact that MidAmerican is a subsidiary of Buffet’s Berkshire Hathaway.

Alignment is required

“Whatever the tax level is, that will be factored into the economic analysis of the project and it either will be commercial or it won’t be commercial,” he said, adding that he doesn’t think the information is available today so that legislators could know “whether you need to reduce taxes or whether this project might be wildly economic and you don’t need to do anything.”

What’s important is that things don’t change once the investment decision is made.

Morgan said just as he needs to know the return on a pipeline — and would have difficulties if FERC could come back and change the rate of return on a pipeline once it is built — the producers need to know what tax rate the state will charge.

The issue is that “investor expectations are set when we make this investment” and “changing the game midway through — baiting and switching — giving them low taxes for 10 years and then an unknown after that” is a problem in a project that is already risky because of unknowns around future gas price and ultimate costs of the project, he said.

As an alternative to a 10-year fixed rate, which Morgan said wasn’t sufficient for a line with a 35-year expected life, he suggested the state consider fixing the rate for the volume of gas committed in the initial open season. Although even if all of the known 35 trillion cubic feet were committed, it’s not enough, he said.

Low tariffs needed to attract additional gas

“There’s not enough gas: 35 tcf isn’t enough,” Morgan said.

“We have to encourage new exploration to fill up this pipe so we can extend the life of the project and get a better rate.”

He said MidAmerican wants the resource committed. “We’re going to design a tariff that we think will encourage new exploration and will encourage a long-term commitment of the resource by the North Slope producers.”

Sen. Bert Stedman, R-Sitka, and Resources Chairman Charlie Huggins, R-Wasilla, both asked Morgan how important the $500 million was, and if MidAmerican would walk away if the state matching funds were taken out of AGIA.

Morgan said MidAmerican did not ask for the $500 million but “the $500 million does a lot of things. It gets you a project structure on major elements that will lower the tariff no matter who’s selected. It gets you an expedited schedule. It’s kind of a two-for in that … it does attract pipeline investors like our company to the table to pursue a very risky project but it also flows right through to the resource owner in terms of a lower tariff.”

Huggins asked if any of the things in AGIA are “must haves” for MidAmerican.

“Investment protection is a ‘must have’ for us,” Morgan said. If MidAmerican partners with the state and “the state decides there’s an easier road, I’m going to just change horses here and support another project, there is a provision for treble damages in there.”

“That is investment protection, long-term, to us.”

So is the five years to get sanction for a project that has a FERC certificate but no gas, because that five years provides that “there’s not an easy wait-‘em-out period.”

Alignment is also critical and “I think the $500 million commitment really helps align the parties to make this happen and will make it happen in the most expeditious manner possible.”

Nationalization possible threat to gas pipeline

The Lower 48 needs Alaska North Slope natural gas, Morgan said in presentations to House Oil and Gas and Senate Resources March 29.

“Projects of this scale can easily be delayed — that’s been the history of this project,” he said.

Getting the gas to market will require “proper planning, organization and execution” and if those don’t occur, and the project doesn’t move forward, the project and development of the resource will be relegated to “the next energy crisis where goals are frequently compromised in the interest of expediency.”

Young said April 3 in a Juneau press conference that he’s recently heard the suggestion in Congress that the federal government take over North Slope gas to get it to Lower 48 markets.

“The gas line is something that must be done,” he said, and the Alaska Legislature and the governor have “to work together to reach a solution to develop that gas line.”

“If the producers aren’t interested in it then we have to find a way to make them interested.”

Young said that isn’t meant as a threat.

But, he said, in the course of work on an alternate energy bill, “for the first time I’ve heard people, because of the need, say what about Alaskan gas? Why aren’t we doing something?”

“And then I heard the words which I don’t like to hear but they did come out: ‘Maybe we ought to nationalize it.’ That does not make me happy,” Young said. “But a Congress can do this. A Congress can in fact take a resource under the national emergency clause and make it part of the nation for the good of the security of the nation.

“I don’t think it would be good for the state,” Young said. “But if somebody else is thinking that way, and there’s no action taken — and I say this to the producers as well as the state legislators — there is a potential of something very harmful occurring in the state such as the Alaska National Lands Act, where they took 27 million acres of our land away from us that we’d selected.”

“It can be done,” he said, “so there’s a real challenge to us and I think Alaskans have to wake up to that.”

—Kristen Nelson