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Vol. 14, No. 26 Week of June 28, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

A blast from the past

Exxon tells legislators predictable and durable fiscal terms needed for gas line

Kristen Nelson

Petroleum News

When ExxonMobil aligned with TransCanada on the Alaska gas line project in May it brought North Slope gas and corporate clout to the table — and a couple of specific items TransCanada hadn’t previously had access to: the gas study the North Slope producers did in 2001 and right-of-way information for the trans-Alaska oil pipeline, whose route a gas pipeline will parallel for a considerable distance.

It also brought an agenda.

ExxonMobil — along with the other North Slope producers, BP and ConocoPhillips — said during Alaska Gasline Inducement Act hearings in 2007 that fiscal certainty was needed for a project to go forward. ExxonMobil had taken the lead during Stranded Gas Development Act negotiations under the Murkowski administration and the resulting contract between the North Slope producers and that administration, put on the table in early 2006 but never voted on by legislators, gave producers 35 years of fiscal certainty.

AGIA provides a certain amount of fiscal certainty for the first 10 years of gas sales into a line for companies committing gas to the project in an initial open season.

The Palin administration argues that what AGIA provides is sufficient, while saying it is open to hearing what producers believe they need to make the project work as more information on costs becomes available.

Legislators express concerns

Legislators had a chance to question all parties — ExxonMobil, TransCanada, Denali (the BP-ConocoPhillips pipeline project), gas producers and the administration — at back-to-back Anchorage hearings June 23, one held by the House Resources and Energy committees and one by the Senate Resources and Energy committees.

Tony Palmer, TransCanada vice president for Alaska development, told legislators that discussions began between TransCanada and ExxonMobil last August after the Legislature approved the administration’s award of the AGIA license to TransCanada. Those discussions turned into negotiations in the fall.

TransCanada advised the administration that it was in discussions and then in negotiations with ExxonMobil, but did not reveal the subject of those talks until agreement was reached in early May and the companies were ready to go to their boards. At that point, TransCanada was obligated under AGIA to share the terms of the alignment with the administration, Palmer said.

ExxonMobil Production Co.’s U.S. joint interest manager, Marty Massey, said ExxonMobil evaluated the full range of options available to it to progress the project: joining Denali; joining TransCanada; doing its own line; and just showing up at an open season. He said the company’s decision came down to what it believed would move the project forward and had the best chance of bringing all the parties together.

ExxonMobil believes that partnering with TransCanada through AGIA provides the best chance for success, Massey told legislators.

What Exxon brings

The 2001 study and right-of-way data for the oil line that ExxonMobil brought to the alignment with TransCanada are not reimbursable under AGIA, Palmer said, because state matching funds under AGIA only cover work done after the license was issued in December.

Any assets jointly developed by TransCanada-ExxonMobil will remain in TransCanada’s hands in the event the TransCanada-ExxonMobil deal breaks apart, he said.

Massey said the value of those items would be calculated for inclusion in the tariff, and reviewed by the Federal Energy Regulatory Commission.

House Resources co-Chair Craig Johnson, R-Anchorage, said he was taking notes for a letter to FERC: We’ve paid for the oil line, he said, and now those right-of-way costs are going into a gas tariff?

Rep. Charisse Millett, R-Anchorage, asked when ExxonMobil would become a partner in the AGIA license rather than just a partner with TransCanada.

Palmer said ExxonMobil would have to commit its gas to the pipeline and resolve its issues with the state. Then the financial interest ExxonMobil has in the project would be converted to a voting interest.

Asked what those issues are, Massey said predictable and durable fiscal terms are needed, and said ExxonMobil has come to understand that working through AGIA is the way to address those fiscal terms.

Rep. Jay Ramras, R-Fairbanks, asked Massey if the 10 years in AGIA wasn’t durable.

Massey said AGIA only contains a moral obligation for the state to abide for 10 years by fiscal terms that are in place when companies commit gas in an initial open season. It is not a contractual obligation and it is very clear, Massey said, that if the Legislature decided to change those terms within 10 years there is nothing in AGIA to stop them.

No commitments from state

Asked by Johnson whether there were any discussions with the administration about Point Thomson related to the TransCanada-ExxonMobil alignment, Massey said there were no commitments from the state on Point Thomson related to the alignment agreement.

The Department of Natural Resources terminated the Point Thomson unit for lack of an adequate development plan and initially took back all of the leases. It subsequently allowed Exxon access to two leases to drill two wells for a gas cycling project at the field. That work is ongoing.

DNR and Exxon are in court — and in discussions — over the company’s plan of development for the field.

Massey said the state continues to have questions on the Point Thomson plan of development and ExxonMobil is hopeful the state will come to the conclusion the company’s Point Thomson plan of development is correct, and that the state and the Point Thomson interests can then move forward to settlement discussions.

Johnson asked whether Point Thomson is necessary for the gas pipeline.

Massey said yes. Point Thomson represents 25 percent of discovered North Slope gas and the project would be much different without Point Thomson, he said. Gas production could start from Prudhoe Bay, Massey said, but having two fields reduces the risk of financial commitment.

Producer in the line

Rep. Bryce Edgmon, D-Dillingham, told Palmer he was concerned about ExxonMobil joining the project.

He said when he voted on the AGIA license it was apparently awarded to an independent third-party pipeline. If TransCanada is partnering with the largest company on the planet, the $500 million in state matching funds might not need to be part of the overall arrangement, he said.

The AGIA terms established some two years ago provided for any party to bid, and had terms like those an independent pipeline would provide, Palmer said, whether AGIA applicants were independent pipelines or producers. TransCanada committed to the AGIA terms, he said, and the state provided $500 million in matching funds in exchange for a commitment from AGIA applicants to go beyond a failed open season to a FERC certificate.

If there is a resolution of fiscal terms and a successful open season, Palmer said there would be no question that the value of the $500 million to the pipeline goes down.

But that is not the case today, he said, and the $500 million is risk

Administration’s role

Commissioner of Revenue Pat Galvin told legislators the administration’s role was to look at the agreement between TransCanada and ExxonMobil and determine if it required any approval by the state.

Members of the state’s gas team and outside contractors gave the agreement a thorough review, he said, and determined it did not modify or diminish the state’s rights.

The administration is excited about the development, which is what AGIA was intended to produce, he said.

Rep. Scott Kawasaki, D-Fairbanks, asked if ExxonMobil had approached the administration about changing any parts of AGIA; he also asked if the administration had decided to open up AGIA for changes.

Galvin said no to both. The administration is aware of Exxon’s views on AGIA, but continues to hold to its position that AGIA provides 10 years of tax certainty.

He told Millett the administration believes there is significant distance between what the producers want and what they will ultimately need to commit gas. Those discussions, he said, can take place moving forward.

Galvin called the open season a “false deadline” and said a post-open season discussion of a durable fiscal system won’t change the timeline for having a gas pipeline in place because AGIA provides for moving forward.

He also said the state’s fiscal system is only one component, with project costs and the market for natural gas being significant factors.

Galvin told Johnson that changes in tax durability would be statutory, requiring enactment by the Legislature.

AGIA issue

Sen. Bert Stedman, R-Sitka, asked if ExxonMobil has signed on to the AGIA must haves and Massey said all of the AGIA obligations remain with TransCanada under the alignment agreement between the companies. Stedman was concerned that, with no commitment to AGIA requirements, ExxonMobil would still receive state matching funds.

TransCanada retains all of the AGIA commitments, Palmer told Stedman, and reimbursements will come to TransCanada which will dispense them to ExxonMobil.

Stedman said he had issues with reimbursements to any entity that hasn’t signed on to AGIA.

Sen. Hollis French, D-Anchorage, asked whether ExxonMobil retains rights to information it develops in the partnership and Palmer said ExxonMobil and TransCanada will jointly have access to information, but not to assets. Right of ways would remain with the AGIA licensee as well as permits, he said.

Open season issue

Sen. Lesil McGuire, R-Anchorage, co-chair of Senate Resources and chair of Senate Energy, asked Massey if ExxonMobil would need the state to make changes before it could make firm transportation commitments.

Massey said it’s always good to settle these issues early, but said the company can go forward after open season without resolution.

He said resolution would be needed before the company committed to build the line.

As to fiscal terms, Massey said the AGIA 10-year commitment is only a moral obligation and the Legislature could change it; it’s not a contractual obligation.

He said ExxonMobil isn’t just talking about a single commitment, but needs to see the whole package so it can determine whether the project is economic.

Sen. Lyman Hoffman, D-Bethel, told Massey that AGIA, now the law of the land, still seems to be an issue for ExxonMobil, and asked how he saw that being resolved with the administration and the Legislature.

AGIA is the law, Massey said, and TransCanada is going to execute that project under AGIA. AGIA is the framework under which the state wants to progress the project, he said, and told Hoffman Exxon hopes it can have discussions with the administration; we need to prove to them the things we need to have, he said.

Question of a link

When the state looked at the TransCanada-ExxonMobil deal, was there any discussion of a link with Point Thomson, Sen. Gene Therriault, R-North Pole, asked Massey?

Massey said no, no discussion of a link to Point Thomson and no discussion of a link with fiscal certainty.

On the issue of state review of the deal, Galvin said the state looked in detail and because no control was passed it didn’t rise to the level of requiring state review.

He said if it reached the point where ExxonMobil moved into a voting interest, it would require public notice and determination by the commissioners under AGIA.

Sen. Bill Wielechowski, D-Anchorage, asked Galvin what happens next year with gas commitments in an open season contingent on fiscal certainty.

Galvin said it is the administration’s view that the state has an adequate fiscal system and if the producers believe something else is needed it is up to them to present it to the state. The purpose of AGIA, he said, is to move forward past an unsuccessful open season. The state has no obligation to put itself in the position of being desperate for a deal, Galvin said.

Therriault asked Ken Minesinger, an attorney with Greenburg Traurig, which works with the administration gas line team, if the firm found any red flags in the agreement between TransCanada and ExxonMobil.

Minesinger said the short answer was no. Greenberg Traurig thoroughly reviewed the agreement

He said AGIA did contemplate bringing producers onboard, and it wasn’t something the administration or legislators didn’t expect.

AGIA was open for anyone to apply, Minesinger said, and the “must haves” — the requirements in AGIA — ensured that those who came in would in effect act as an independent pipeline.

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