An Alaska natural gas pipeline project will be so big that, like Denali, it will create its own weather, driving behaviors in steel and labor markets, Chevron’s new ventures manager, Vince LeMieux, told members of the Senate Resources and House Oil and Gas committees at a March 21 hearing.
LeMieux said he’s worried that if Chevron is successful in its North Slope exploration efforts, he would have to get those facilities in before the pipeline comes along because it will take precedence, soaking up resources, and other projects will be put on hold.
David Keane, vice president of policy and corporate affairs for BG America, said the line would be a mega project and require tremendous efforts on a number of fronts. The $500 million in the Alaska Gasline Inducement Act, he said, is an inducement to get serious pipeline companies involved. He said it demonstrates to industry that Alaska is serious about moving the project forward.
Keane said BG won’t be an applicant to build the line, but would sign up for capacity once it finds gas. BG is partnering with Anadarko Petroleum and Petro-Canada in a gas exploration program expected to kick off next winter, he said.
Both companies are potential shippers on an Alaska North Slope gas pipeline.
Chevron: pipeline unique
LeMieux said the Alaska gas pipeline will be a unique undertaking, both from a construction perspective and from the perspective of getting the resource to market. There aren’t many places in the world where you’re trying to move this volume in a multi-nation pipeline, he said.
Chevron is still trying to figure out how to run the economics for the project, LeMieux said, stressing that the company’s comments on AGIA were observations, not conclusions.
Alignment, LeMieux said, is critical in a big project. The alignment is needed both in who is taking the risk and how that risk is being mitigated. If one party is absorbing risk and others aren’t, that is a misalignment and will create complexities in commercial agreements, he said.
How the rent from the project is divided up among participants becomes critical: does everyone share in benefits in an appropriate way or are some people’s benefits to the detriment of other participants?
Cost a huge issue
LeMieux said Chevron starts with big projects by understanding the basic framework, the value composition and how the elements are aligned. He said it is dangerous to get ahead of yourself in large projects if you haven’t done the work to understand the basics and build alignment because that will create problems along the way. Clarity about what the project is, its size and schedule and whether it’s an LNG or gas sales to North America project, are areas Chevron is looking at, and these are large variables, he said.
Then there are the project economics. LeMieux said it amazes him that there isn’t more discussion about the cost of the pipeline. He said cost is a critical element and one he worries about.
Another critical aspect is fiscal certainty: If you’re making a 20-30 year firm transportation commitment, he said, 10 years of certainty on the tax rate doesn’t seem like a lot. The tariff structure will determine how the rent from the project is shared up and down the value chain and there are huge uncertainties about how that will work, how the value will be shared between the parties, LeMieux said.
He said he didn’t have any answers, but that these are areas he’s looking at and trying to evaluate.
Access to the line for explorers is another area where risk is shared and there’s an opportunity for misalignment.
Chevron’s gas position isn’t clear, he said, because of what’s happened at Point Thomson, where Chevron was an owner.
The state declared the unit in default late last year and is in the process of taking back the leases.
LeMieux said Chevron wants to see Point Thomson developed.
There is also uncertainty around access for explorers and rolled-in rates and what that does to initial participants. He said he wants to do both — explore and participate in the initial open season — and is still trying to assess the effect of rolled-in rates as proposed in the bill.
How big projects are handled
Asked by Sen. Bert Stedman, R-Sitka, about how tight he thinks the state could make dates for specific steps in the project, LeMieux said it was important to have planning rigor and allow whoever builds the pipeline to manage the schedule. If the team delivering the pipeline feels the only goal is meeting a deadline you open yourself up to a lot more risk from the cost and quality standpoint, he said.
A higher priority than schedule is alignment of those participating, making sure they are all motivated toward the same end. Then the project is no longer schedule driven, but the alignment around an outcome drives the pace and success of the project, LeMieux said.
Tim Houston, Chevron’s Alaska commercial manager, said it was important on a mega project that you move from phase to phase. On a mega project nothing will come in better than expected, he said: It will be about as you expected or it will be a disaster, so there is a need to manage the expectations of all stakeholders so that they are comfortable moving through the steps of the project in alignment.
Stedman asked how the approval process would work between project phases.
LeMieux said Chevron uses decision review boards with both expert and stakeholder participation. The review board identifies if the project team is taking shortcuts or trying to do something that isn’t up to an acceptable level of rigor. For a large project the review board will be senior management who will assess the team and whether it is doing its job correctly. It is absolutely a go-no go decision, he said.
Rep. Ralph Samuels, R-Anchorage, asked what if there isn’t enough gas committed in an open season, and the project proceeded to Federal Energy Regulatory Commission certification. How much of the project design can you do without talking to your customers, he asked.
Houston said the pipeline has to meet needs of its customers, and the terms and conditions are best worked out by discussion and alignment of stakeholders rather than being dictated.
What else needed?
Sen. Bill Wielechowski, D-Anchorage, asked if Chevron thinks AGIA is headed in the right direction and if the company had any suggestions for changing the bill.
LeMieux said he thinks the bill is a “great step forward.” He said it creates a mechanism to engage people in discussion on how to frame the project.
But one thing the bill can’t do, he said, is to change the fundamental economics. LeMieux said he always returns to asking himself if he understands how the project will work and make money for participants up and down the line. He said he thinks the bill does a good job with inducements, and it’s a firm step in the right direction toward addressing issues that need to be addressed in creating alignment up and down the line.
Senate Resources Chair Charlie Huggins, R-Wasilla, asked about fiscal certainty and LeMieux said it isn’t necessarily about low taxes; it’s about predictable taxes and costs over the long period of time.
In response to a question from Huggins about the open season, Houston said if you’ve met with customers and designed a package that’s responsive to customers, and an open season fails that would not be a good sign: Either you’ve overestimated the market or there is some other misalignment.
There are a number of risks
Other risks, Huggins asked? Houston said fiscal certainty is one because the state is offering 10-year certainty for a 30-year project. There are things that are risks from the customer perspective but aren’t necessarily risks from the pipeline’s perspective, Houston said, such as the wide range of project cost; he called the “width of that range quite scary.”
How much gas there will be to ship is another risk: The tariff for 35 trillion cubic feet will be almost double what it would be if 70 tcf of gas is found to be shipped.
The schedule is another big risk: The customer has to spend money to have the gas ready, but if the project is late and the money is spent too soon, that can hurt or destroy the economics of the gas owner developing the gas.
And how rates are computed is a risk that falls to the customer, or can fall to the customer, depending on alignment, Houston said.
Huggins noted that the state will be asking applicants how they plan to manage the tariff risk, and asked Houston what his experience was with tariff predictions.
Houston said that more than 90 percent of the projects he’s seen have tariff rates higher than the rates customers were told to expect at open season.
LeMieux said there is also a risk around the ability to become aligned by participating in the project and said one aspect of AGIA that needs to be thought through carefully is how alignment will be achieved. He said he thinks alignment creates a risk and said some element of teamwork and ability of the participants to work as a team is needed so that the results of an open season aren’t a surprise.
Access an issue for BG
Keane said BG wants to ensure that as a new explorer the company has access to the pipeline.
He said while the company will not apply under AGIA to build the line, it would apply to ship gas if its exploration is successful. And he said the company plans to participate in the process.
In response to concerns about the open season, he said he thinks the project will get to an open season and people will show up. He said he doesn’t think anything has changed from last year’s supply picture.
He said BG believes AGIA is the right vehicle to get the ball rolling and start discussions.
Asked by Wielechowski about alignment in AGIA, Keane said he agreed with Chevron that alignment is critical. He said the water trough is full and he’s not quite sure what you can do to lead the horses to the water, but he thinks AGIA is a good place to start.
Asked by Samuels if BG, in its role of pipeline owner, would be willing to put up $500 million for a project, Keane said since BG was not going to be an applicant he couldn’t really answer the question, but said he thinks it is an inducement to get serious pipeline companies involved, and that it demonstrates that Alaska is serious about moving the project forward. He said an independent pipeline company coming into the project would have to spend $1 billion to get that $500 million doing the work required so that a tariff discussion could be held.
Why an independent line?
Sen. Tom Wagoner, R-Kenai, asked Keane why BG wanted to see an independent pipeline company build the line, and Keane said more certainty of access. Wagoner asked about the possibility of higher tariffs with an independent pipeline builder and Keane said he’d heard concerns that an independent pipeline company wouldn’t monitor costs. But, he said, at the end of the day BG would be a shipper and would not allow a pipeline company to gold plate the project. He also said he thinks FERC will do a good job of determining what’s in the rate base.
Wielechowski asked about the difference between an independent pipeline and the producers owning the line.
The big difference is that the independent pipeline company will increase its revenue by increasing throughput, Keane said. It is to the advantage of an independent line to have companies like BG find gas on the North Slope.
Keane said he is also a producer, and it may not be in his best interest as a producer to allow other companies to come in. The short version of the answer, he said, is that he’d rather have a pipeline owner with the incentive to increase revenues by increasing throughput, rather than an owner who could increase his revenue by decreasing throughput.
Huggins asked if AGIA provided adequate assurance of access and Keane said once applications had been received they would know more. But Keane said he was much more comfortable today than he was 12 months ago that if BG finds gas on the slope it will be able to get access to the pipeline.
