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Gas contract fixable, says Hanley: Anadarko hopes for governor’s support to revise access, expansion provisions
Kay Cashman
Mark Hanley says the proposed North Slope gas pipeline contract can be revised to the satisfaction of Anadarko Petroleum. Hanley is the Houston independent’s Alaska spokesman.
The former state representative told Petroleum News in a recent interview that Anadarko is primarily concerned about pipeline access and expansion provisions in the fiscal contract negotiated by the Murkowski administration with North Slope producers BP, ConocoPhillips and ExxonMobil.
Access and expansion provisions have to be changed to ensure natural gas from northern Alaska explorers makes its way into the gas pipeline in the next 20-25 years. Simply having a pipeline will not encourage non-owners of the line to spend hundreds of millions of dollars on exploration and development, Hanley said. Two hundred trillion cubic feet of gas the target Northern Alaska’s undiscovered natural gas is estimated by the U.S. Geological Survey to be 211 trillion cubic feet, with 83 percent of that economically recoverable. That compares to the 35 tcf of discovered gas at the Prudhoe Bay and Point Thomson units, largely owned by BP, ConocoPhillips and ExxonMobil.
The gas at the producing Prudhoe Bay oil field was discovered while its owners were exploring for oil and has not been produced for sale because there isn’t a pipeline to take it to market.
The gas at undeveloped Point Thomson was also discovered while its owners were searching for oil, but the quantity of oil there was much less than at Prudhoe and has not yet proven enough of an incentive for its owners to produce it.
Critics of the gas line contract have said there is enough gas at those two fields and at other properties controlled by BP, ConocoPhillips and ExxonMobil to keep a 4 bcf per day gas line full for 25 to 30 years, postponing the exploration for, and development of, the bulk of northern Alaska’s natural gas.
What Hanley wants to see in the gas contract is fair and reasonable access to the pipeline for North Slope explorers. Once Anadarko has that, the company has said it will begin exploration drilling for natural gas. Currently, no companies on the North Slope are targeting natural gas in their exploration programs.
In the meantime, gas explorers continue to pay rents on thousands of acres of leases in gas-prone areas of the North Slope in hopes that a gas line will be built and they will be able to get reasonable and timely access to it. Walk the talk, please BP, ConocoPhillips and ExxonMobil have “always said the right thing about expandability,” Hanley said. “They’ve said the pipeline is going to be a four to four and a half bcf per day pipe. They’ve said it’s going to be easily expandable to 5.6, 5.9 bcf with just compression. They’ve said that’s how it’s going to be designed, and those bcf of expansion are going to be relatively inexpensive because it will be just a matter of adding compressors.”
But those assurances aren’t in the proposed gas contract that is currently up for legislative review and that worries Hanley and his company.
“They’ve said all the right things all along, all good things, because the governor said the gas line should be expandable. What we don’t see are any guarantees in the actual contract. We hear the talk,” Hanley said, “but don’t see the producers putting those assurances in writing, in the contract.” A big red flag And Hanley said there are things the producers are doing that suggest they don’t intend to back up their verbal assurances.
“One of the red flags we see is that the open season regulations that were adopted by FERC to assure access and expandability are being challenged by the producers in court. … The producers are challenging FERC’s authority to require a design change to accommodate all the capacity in the initial open season and expansion,” he said. “And that’s a real concern for us” because here in Alaska the producers are saying ‘oh FERC will handle it, FERC decides what a fair rate is, FERC has the ability to expand the pipe,’ FERC this, FERC that … but they’re challenging FERC’s authority to make sure the pipe’s designed the right size. … They are in court challenging that very authority they want us to rely on,” Hanley said.
“They also say they can do an expansion through the mandatory expansion language in the contract. … But there’s a difference between building a pipe that can only handle four bcf a day and have to be looped from day one versus having a pipe that can handle four bcf a day and can be easily expanded just by adding compressors from day one,” he said.
“You could design it either way but if you have to loop it from day one, which is much more expensive than installing additional compressors, then a lot of those expansions might be uneconomic because the explorer has to bear the cost of expansion per the contract. That’s not what they have been talking about, it’s not what they say they’re going to do, but again if you assume it’s going to be designed exactly as they’ve said then, well maybe it will be and maybe it won’t. So why don’t they just put it in the contract? … Why not put in what they’ve been saying — that the first few substantial expansions are compression only and they’ll be inexpensive.” State-initiated provisions flawed When asked about the provisions in the contract for state-initiated expansions, Hanley said the language was problematic.
“I think the administration had good intentions when they asked for the language in article 8.7, which deals with state-initiated expansion. They wanted to set up a system in which the state entity, as part owners of the line, could try and force … an expansion. I think their intent was good but the terms they negotiated were not. (They said they) tried to model it after the FERC mandatory expansion provisions, so basically all eight of the provisions for FERC mandating an expansion are included in the proposed fiscal contract, but they added another 10 or 12 provisions. They’re even more onerous than FERC’s,” he said. Article 8.7 deterrent to exploration In its public comments about the contract Anadarko addressed several concerns within article 8.7, one of which Hanley brought up in the interview with Petroleum News.
“Once we know this line is going to be built you’d expect to see a lot of exploration up there. Lots of exploration. And, hopefully, lots of gas finds. Companies will want to nominate gas for the pipeline before they start field development. But there’s a provision in article 8.7 that says before you can even start a state-initiated expansion you have to wait for commencement of pipeline operations.
“Under the normal process,” Hanley said, “we can initiate an expansion before they start operations. In fact if it’s just adding compressors, they may or may not be able to change the design at that time. But at least we’d be able to start the process. And if they can add the compressors as they’re building the line, it might be easier and less expensive.
“If they have to wait for the pipeline to begin operations it’s penalizing explorers. And, worse, according to the contract, you can only ask for an expansion every five years. If it’s a good idea and it’s economic and you can meet all the criteria, why do you have to wait every five years? That’s a deterrent to gas exploration.”
In their comments, Anadarko suggests replacing Article 8.7 with other provisions to help ensure fair access to the gas line. Regulatory gaps a possibility Other parts of Article 8, he said, are problematic.
One concern, he said, is the possibility that parts of the project facilities, including parts of the pipeline, could land up not being regulated by any government agency.
“We view regulatory agencies as protectors of both consumers and shippers. The proposed pipeline is a monopoly and there is a reason monopolies are regulated because you don’t want them to control everything. Three companies working together are going to control the pipe and they control much of the gas up there as well. So we don’t think there should be a regulatory gap. We need to have a regulatory agency that we can go to on appeal if we think the rate is too high, or if they’re not letting us in. Someone has to adjudicate access issues and tariff issues,” Hanley said.
“FERC is probably going to do most of that…. But typically FERC does not regulate very far upstream. They typically don’t regulate conditioning plants. They typically don’t regulate feeder lines. We think they probably will on this pipeline but there’s no guarantee, so there shouldn’t be a regulatory gap. If FERC doesn’t regulate something, the Regulatory Commission of Alaska should,” he said.
The proposed contract says FERC will probably regulate the entire project, but if it FERC does not assert jurisdiction, “the contract forbids parties to seek or support the jurisdiction of the Regulatory Commission of Alaska, which would normally step in. Instead, the contract says commercial agreements negotiated by the LLC and the shippers will deal with regulatory gaps. In other words, the commercial monopoly will regulate it,” Hanley said.
And according to the contract, if RCA does intercede and rules for instance that the transportation rates being charged are too high, then the pipeline owners have the right to demand the State of Alaska reimburse them for that loss, Hanley said.
“The contract should say if FERC doesn’t regulate a part of the project, then the RCA should regulate to the extent that they have the legal authority to do it,” he said.
“Let’s say the feeder line from Point Thomson to the mainline isn’t regulated by FERC, so then if an explorer wants to get a new gas find from the eastern North Slope into that line, it’s a private line. … And that means the owners of that feeder line don’t have to live by any rules, they can charge any rate they want to,” he said.
“And people are assuming that the gas treatment facility will be regulated by FERC and I think they’re probably right but there are no guarantees. Ten years from now FERC might say, ‘ah we’re not going to regulate it’ and then, under this contract, nobody regulates it but the companies. And they get to set whatever rates and terms that they want,” Hanley said.
Anadarko’s 27 page comment on the proposed gas fiscal contract between the State of Alaska and BP, ConocoPhillips and ExxonMobil can be found here: http://commador.ursokr.com/data/1670_Anadarko%20Petroleum%20Corporation%20Comments%20on%20Draft%20Alaska%20Stranded%20Gas%20Fiscal%20Contract.pdf Confidence in Murkowski The bottom line, Hanley said, is “we want the gas line built. We realize if there’s no gas line we aren’t going to be able to go out and explore for gas. So we want to see this thing built. … We’re not trying to be unreasonable. And, frankly, the fiscal terms, well, we haven’t analyzed them very deeply. It’s not our issue. If it gets the gas line built, then we’ll support it. As long as it doesn’t create competitive advantages for our competitors, we’re for it.”
Hanley has “high hopes the governor will support changes to the contract to help with access and expansion because from the time he took office Gov. Murkowski has been supportive of explorers. … We have to give him a lot of credit for the things that he’s done and the help he has given us since he took office in regard to streamlining the regulatory process and offering exploration incentives.”
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