Three pipeline companies — Enbridge, MidAmerican and TransCanada — have talked to the State of Alaska and to legislators about building a natural gas pipeline.
Enbridge has said it will not apply under the governor’s Alaska Gasline Inducement Act because it believes the way to go forward with the project is in partnership with the North Slope producers who hold leases for known natural gas resources.
MidAmerican’s testimony indicates it is the most interested of the three in pursuing an application under AGIA; TransCanada does not want to go forward for a Federal Energy Regulatory Commission certificate if an initial binding open season fails to attract enough gas to justify the project (see sidebar on TransCanada).
MidAmerican believes alignment of stakeholder interests is essential for a North Slope natural gas pipeline project — but believes “the project can be advanced concurrent with the resolutions of issues that today remain outstanding,” Kirk Morgan told House Finance May 3. Morgan is president of MidAmerican subsidiary Kern River Gas Transmission Co.
Morgan said the company’s approach does not exclude interested parties: “even if a pipeline is developed by an independent developer, the North Slope producers will play a critical role as shippers on the line and sellers of gas to other shippers.”
“MidAmerican, as an independent pipeline, is impartial and in a unique position to help facilitate solutions where stakeholders’ interests diverge,” he said.
Morgan said MidAmerican has no competing interests in the upstream, downstream or globally. In fact, it would like to see AGIA amended to require applicants “to disclose existing or prospective commercial interests, business activity and or revenue streams from upstream, downstream or global activities which may affect or conflict with achieving the objectives of this project.” And the presence or absence of those conflicts “should be given significant weight in the evaluation criteria for selecting a licensee.”
MidAmerican supports AGIA, he said, and supports the requirement for a project labor agreement which was added to the bill.
MidAmerican: AGIA not too prescriptive
On other proposed changes, Morgan said MidAmerican disagrees with those who say AGIA is too prescriptive. “The state has set forth its overarching policy objectives and set forth certain terms that will accomplish those objectives,” he said. Since AGIA is not exclusive, parties are free to make proposals and the Federal Energy Regulatory Commission is free to authorize them. “To put it another way, if a party thinks it has a superior proposal, nothing in AGIA stops it from putting that proposal in writing,” Morgan said.
“This project requires a serious commitment of stakeholders, not a series of options,” Morgan said.
MidAmerican supports rolled-in rates, he said, but believes it would be fairer to shippers if those rates are tied to initial rates, likely negotiated, rather than to initial recourse rates established by FERC.
MidAmerican does want the assurance proposed in AGIA that the state will stay with the licensee it picks — or pay a penalty if it changes projects. Morgan said, as he has in the past, that MidAmerican doesn’t want to participate in another project where it is simply a “stalking horse to create negotiating leverage for the state,” his description of what happened to MidAmerican in the Murkowski administration’s negotiations under the Stranded Gas Development Act.
A failed initial open season
Morgan said that MidAmerican “intuitively” believes the project is economic. If it is, and an initial open season fails because “shippers refuse to commit their gas to an economic process,” then the company believes it should go forward to FERC certification.
“I don’t think it’s a sustainable position” for the producers to “warehouse their gas and withhold that gas from Alaska and from the United States’ market.”
The project does become “more risky if you have unwilling gas sellers,” he said. But the state is offering a match of up to 80 percent to go from a failed open season to FERC certification and that “would be sufficient for MidAmerican.”
In the two years following receipt of a license MidAmerican would do “engineering and environmental analysis and cost estimating and the market studies that have to be done,” he said, and if those show that the project is not economic, there are provisions in AGIA to walk away from an uneconomic project. “But if we believe that it’s clearly economic the fact that the producers are withholding gas is an unsustainable position and we think with the appropriate time we can convince them to commit their gas to the project.”
Withholding the gas would be unsustainable for a number of reasons, Morgan said: “First, they have a duty to develop and duty to market their gas.” And, he said, withholding that gas would be a type of behavior that is “clearly anticompetitive” and of concern to the Federal Trade Commission, the Department of Energy and FERC.
Morgan said he doesn’t expect the producers to withhold their gas from an economic project.
He said he doesn’t know “if the project’s marginally economic (or) it’s a screaming economic project,” but if money can be made by selling the gas and that gas can be brought onto the balance sheets of the companies, he thinks shareholders would want the gas sold.
And the companies wouldn’t necessarily have to take firm transportation commitments. “They can sell the gas at a commercially reasonable price and other buyers will come and buy it; other parties will take the gas.”
“I think it’s posturing today. I think that the gas must be committed if the project’s economic.”
$500 million and fiscal certainty
Morgan pointed out that the $500 million provides an inducement to applicants to move the project forward — and also reduces the tariff, which is an inducement to shippers, as well as benefiting the state with a higher netback value for the gas. That same amount put into construction wouldn’t have the front-end benefit of attracting applicants, he said, and if the state wants the money back if the project is successful, then it would lose the benefit of the lower tariff.
On the fiscal certainty issue, Morgan said the state will know a lot more after a couple of years of work by a licensee, before the open season, so that the licensee will “be able to make a credible case that the project is economic and the tariffs that are being proposed are reasonable.”
That work, he said, will allow the state to make its own judgment on how economic the project is, and respond accordingly to requests for fiscal certainty.
“If it’s marginally economic and they come to you and say ‘I need some tax concessions or royalty concession,’ or whatever it is, you’ll understand what the economics of the project really are. On the other hand, if the project is wildly economic you’ll understand that as well and may be more reluctant to provide additional inducements or incentives.”
Morgan said he has testified previously that he doesn’t think 10-year tax certainty is appropriate. He said he wasn’t offering any suggestions on what the tax rate should be, but suggested that rather than offering a 10-year term, offer “certainty on the entire volume that they’re choosing to commit” in an initial open season. MidAmerican, he said, wouldn’t be interested in developing the project if its terms could change after 10 years. “We’re looking for certainty for the life of the project as well.” Those assurances to MidAmerican, he said, would come from negotiated-rate contracts approved by FERC.
Tax rates are not an issue for the pipeline, he said, because “regulated pipelines are just that: If the taxes change I’m going to pass those through anyway. So I don’t have that same concern that the resource owners have.”
Rolled-in rates bring quicker expansions
Morgan also told legislators that the rolled-in rate provisions of AGIA are beneficial because with incremental rates the cost can be substantially higher, forcing the pipeline company to wait to expand. He said he manages a pipeline with both rolled-in rates for expansions that are economic and lower the rates, and incremental rates that are priced higher.
The time between expansions is lengthier with incremental pricing, Morgan said.
They had half a billion cubic feet of gas that could have been added but had to wait until there was enough volume that an expansion would achieve economies of scale. “When we expanded our pipeline, it was by more than double, to get a rate that would clear the market.” He said rolled-in rates prevent that. “You don’t have to wait, and it could be eight years, it could be 10 years, ‘til you aggregate another huge volume of production” to make the next expansion economic.
With rolled-in rates you can expand in smaller increments “and be responsive to the production that’s going on on the North Slope and the band of pricing, because you continue to spread those costs over a huge 6 bcf or whatever it is” of volume.
With incremental pricing, expansions “will be priced all over the map and that, by itself, sends a signal to drillers.” If the next expansion “is going to be priced at $4 instead of $2, they’re going to quit drilling.”
“So I would just say that from a policy standpoint I think the state is doing the right thing to have a rolled-in rate policy within a reasonable band of increases from the initial rates.”
Morgan said MidAmerican was definitely interested in making an application under AGIA and that their decision on an application would be made once the bill is passed and the terms are known, from the bill and from the request for applications.
