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Vol. 11, No. 37 Week of September 10, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

ANGDA: Spur line could be first or last

Northern Economics tells Alaska Natural Gas Development Authority board early build could translate into early gas to area

Kristen Nelson

Petroleum News

A spur line to Southcentral Alaska could be built prior to a main line from the North Slope, or starting in the last year of construction of the main line.

That was the conclusion Northern Economics reached in two schedules it presented to the Alaska Natural Gas Development Authority board at an Aug. 28 meeting. Northern Economics is under contract to ANGDA working on proposals for a business plan.

Pat Burden, Northern Economics president and principal economist, used a Venn diagram — overlapping circles — to illustrate the roles ANGDA might play in spur line development: aggregator, facilitator, financier, owner, shipper or sponsor.

“ANGDA is a sponsor right now of the spur line and at some point in time … it could be a facilitator, where it could facilitate and assist people in moving a spur line ahead in different areas. … ANGDA could also act as an aggregator of demand for some of the smaller utilities in Southcentral Alaska; it could also be a shipper, if it (took) confirmed transportation commitments on the line; it could also help to finance the project.” An ownership role is also possible, Burden said.

ANGDA Chief Executive Officer Harold Heinze told board members that he wants to go over the preliminary business plan with them Sept. 11 to see where members are comfortable and where they aren’t. Then, he said, we can go back to the drawing board.

“We have a lot of choices and we don’t want to cross something off the list prematurely,” he said. “On the other hand, we can’t be all things to all people all the time.”

Wyoming authority has played a couple of roles

Heinze said the Wyoming Natural Gas Development Authority has played a couple of roles in natural gas developments: “It has stood between explorers and pipelines when they couldn’t figure out who went first — you know, find me gas and I’ll build a pipeline or build me a pipeline and I’ll look for gas.” In that role, Heinze said, the Wyoming authority put up a line of credit, and while no money was ever drawn down from that amount, it made the project happen.

The other role the Wyoming authority has played was in taking a shipper’s position to help in the building of the Rocky Mountain Express, a $4 billion project. “They actually took 20 percent of the shipping commitment by basically saying they would stand in the shoes of all the small producers,” Heinze said. He said what the Wyoming authority did has some similarities to what is proposed in Alaska with the gas pipeline fiscal contract.

“The difference is that that pipeline was having trouble getting financing and support and other things because there was no ConocoPhillips, Exxon and BP standing up for it.” There were companies with money, he said, “but not a huge amount of money, and so the state coming in through the authority for 20 percent really gave it a shot in the arm.”

Asked by board member Bob Stinson how the small gas producers’ deal with the Wyoming authority worked, Heinze said the producers made contractual commitments, dedicating amounts of gas yet-to-be discovered to the project.

Aggregation could help with commercial aspects

Why would ANGDA act as an aggregator?

“One of the concerns we’ve had is that to play in the open season is a commercial competition,” Heinze said. “Winning pipeline space, gas pipeline space, is to commit yourself to a certain amount of volume for a certain period of time and it becomes a ship-or-pay commitment. In addition, you’ve got to buy the gas,” which is also a long-term commitment, he said.

While gas for in-state use may only be 5 percent of the big deal, “it was going to be a tough 5 percent in terms of the value of our companies vs. the value of the producers … and even the State of Alaska.”

Cal Kerr of Northern Economics said they checked financial statements and built a model to look at natural gas needs and assets, on the presumption that local users would need to buy 75 percent of their gas from the North Slope, a commitment which would total $5 billion to $7 billion over the period of gas purchase and gas shipping commitments.

“None of the companies, including Enstar’s parent, Semco of Michigan, has the asset base for any reasonable lender to loan on that basis,” Kerr said.

A number in that range “was so large compared to their value under any measure we could come up with. … It’s why I keep saying, ‘it’s a bet your company decision’ for them,” Heinze said.

Early or late spur line construction?

Burden said if the producers were to build a main line between 2012 and 2015, as proposed in their May 2006 supplement to their project description, with first gas in 2016, a standard schedule would have the spur line built in 2015, the last year of main line construction. He said that based on discussions with some of the staff at ConocoPhillips, “we think the level of activity in 2015 will be lower than in the first two years and so the competition for the work force,” while still a stretch, won’t be as difficult as in the first two years of construction.

The other option, he said, is to move the spur line construction ahead of the main line, building it in 2010 and 2011.

If the main line and the line to Glennallen were built in the first two years of construction, Burden said, and there is gas to Fairbanks and into Glennallen by 2014, “we could have gas flowing into Southcentral Alaska by 2014.”

The Glennallen to Palmer segment was estimated by Michael Baker at about $613 million, Burden said, which is their mean cost estimate plus 30 percent.

Stinson noted that the schedule is for a Glennallen to Palmer spur line and asked about getting from Delta to Glennallen.

Heinze said it was an alternative, and suggested that “in preserving our route neutrality,” the board should think of a northern spur as Delta to Glennallen and the southern as Glennallen to Palmer, “or if you happen to like coming the other way from Fairbanks down the Parks Highway, think of it as north of the park and south of the park.”

“In either case the segments are about 150 miles which in this type of pipeline ought to be one crew, one year,” he said.

In response to a question from board Chairman Andy Warwick, Heinze said each of the segments would cost some $600 million.

Talking with Alaska Power Association

Asked by board member John Kelsey how utilities were reacting to the notion of ANGDA as an aggregator, Burton said feedback from interviews with the utilities was that they were interested in talking about it, “and reluctant to make any sort of commitment or suggest that they’d be interested.”

Probably, he said, it’s too far in advance for them to make any decisions.

Heinze said he talked to the Alaska Power Association Aug. 24. He said he told them a commitment to North Slope gas wasn’t a decision they needed to make right now, but stressed these decisions would be “the most important decisions your operation, your utility, your business, will ever make — and you need to start preparing to make that decision.”

He said the Alaska Power Association agreed to set up a working group and once ANGDA has a completed business plan, somewhere around the end of September, it can begin education and dialogue with that group.

Where would money come from?

Board Vice Chairman Scott Heyworth asked where the money would come from for the spur line and Burden said equity could come from the state or private partners.

Heinze said there may be private parties who want to finance such a line, but with approval from the Regulatory Commission of Alaska for natural gas coming into Southcentral on a spur line, that’s a commitment of 150,000 households in this area.

He said that when ANGDA asked for preliminary input on financing almost two years ago it was told “if you had a pledge of 150,000 households, that was almost as good a credit rating as Exxon,” which could make 100 percent debt financing possible “at a very low interest rate” and make the cost of service to Southcentral customers “significantly less than a traditional bond.”

Heinze said that in addition to Enstar, companies like Enbridge, TransCanada and MidAmerican may be interested in the spur line: “It fits their kind of pattern and interest — it’s an in-state transmission line.”

Board member Dan Sullivan asked when discussions with those companies would begin. Heinze said they had been invited to this meeting, and while “every one of them took a pass at this time,” he said he reminded them that the spur line opportunity was out there. “It’s always hard over the phone, but I could see the light bulb going on.” He said he has talked to them in the past and has gotten the sense that they may be interested “somewhere down the road.”

Utilities regulated

One thing that makes this tricky, Heinze said, is that in-state utilities are regulated by the Regulatory Commission of Alaska, which needs to approve contracts to buy gas and shipping commitments, both on the main line and on the spur line, as well as rates Enstar would charge for distribution to its customers.

Sullivan asked about getting RCA approval and Heinze said once the ANGDA business plan is adopted “we need a much heavier regulatory plan,” and said he will be recommending a fulltime state employee to work on that.

Heinze said he’ll probably recommend opening a docket at the RCA because their approval will be required for the spur line, which will be RCA-regulated.

Because the cost of the gas will be passed through to the consumer, RCA would approve the gas purchase contract, as well as the shipping costs and transmission to residences or conversion into electricity.

“So you’re going to end up with at least four or five pieces of the puzzle that all have to fit and make sense together in sense of volumes and dollars and commitments. … And … we see ourselves as potentially being the honest broker. … That’s what the aggregator is, in many ways, is the honest broker.”

Any company that wants to take gas off the main line has “to go commercially bid for space in the big pipe.” That bidding is against other potential shippers, “there’s no tilt in your favor other than you have to be allowed to bid and there will be a tariff that is distance-related.”

Stinson asked if an in-state shipper could be added to the RCA-regulated line in an expansion open season. Heinze said once the “big pipe open season opens … you know the tariff to Delta. The spur line open season opens and now you know the tariff to Anchorage. You close the in-state system and that tells you what you have to have then in the big pipe. Then you close the big pipe. So you’ve got to fit in between.”

Expansion, he said, is “a lot trickier” and is “probably going to be a negotiated arrangement.” It’s hard to make a bidding arrangement work for a capacity expansion, Heinze said. “The other thing you have to remember is the state and in-state users have a tremendous advantage in the initial allocation of capacity that does not apply to the expansion.” In expansion open seasons, he said, “we have to take on everybody else head on — there is no ‘gimme’ for Alaska,” which means there is a real advantage to working out in-state needs at the beginning.

Warwick asked if there was a tariff for the spur line and Heinze said the U.S. Department of Energy estimated tariffs to Cook Inlet.

There would be a gas conditioning charge estimated at 25 cents per thousand cubic feet which would apply to all gas, a mainline tariff of 54 cents per mcf to Fairbanks at 100 million mcf, dropping to 45 cents per mcf at 800 million mcf.

From Fairbanks to Southcentral DOE estimated a tariff of $2.64 per mcf at a volume of 100 million mcf, dropping to 73 cents per mcf at 800 million mcf, resulting in Cook Inlet prices ranging from $6.28 per mcf to $4.28 per mcf.

The volume in use in Cook Inlet today is about 500 million cubic feet a day, including all the industrial users, and at that volume the estimated cost would be $4.30 per mcf, with a spur line tariff at about 72 cents per mcf.

“Fairbanks has cheap gas regardless of what you do,” Heinze said, although he said there would be “a cost to get it off the big pipe and that may be high” because of the relatively small volume, but the gas “should be cheap inside the big pipe,” he said.

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