The Federal Energy Regulatory Commission issued an order May 25 reaffirming and clarifying its rules governing open seasons for natural gas shipments via future Alaska pipeline projects.
The action culminated seven months of intensive work by the commission to establish requirements for capacity in an Alaska natural gas transportation project and could open the door for the next step in development of a proposed Alaska-Lower 48 natural gas pipeline.
However, the end of the federal rulemaking process also could signal the beginning of a court fight, observers say.
The Order No. 2005 rules, issued Feb. 9, provide standards for allocating the capacity to ensure nondiscriminatory access to any Alaska gas transportation projects. They also are designed to promote competition, exploration, development and production of Alaska natural gas, FERC said. Alaska has 35 trillion cubic feet of proven gas reserves and upwards of 200 tcf of unproven reserves on the North Slope, geologists say.
The State of Alaska, Enbridge Inc., Chevron/Texaco Natural Gas, a division of Chevron U.S.A. Inc., and a joint filing by North Slope producers — ExxonMobil Corp., BP Exploration (Alaska) Inc. and ConocoPhillips Alaska Inc. — requested either clarification or repeal of certain aspects of the open season rules in March.
The commission heard a report May 25 from staffers that outlined clarifications it made in the rules. Under the changes, the commission:
• May require design changes necessary to ensure that some portion of a proposed voluntary expansion will be allocated to new shippers, or shippers seeking to transport gas from areas other than the Prudhoe Bay or Point Thomson areas, provided they agree to sign qualifying, long-term transportation contracts.
FERC said parties had maintained the rules erred by allowing commission-mandated design changes at the conclusion of the open season process and that design changes would be an illegal extension of FERC authority. But the commission rejected those arguments, citing legal precedent that any design change would not constitute a mandatory expansion of any project and that the Natural Gas Act provides FERC authority to attach to any certificate of public convenience and necessity any conditions it deems necessary to meet the public interest.
• Expanded criteria for evaluating late bids for capacity and imposed a requirement that any late bid contain a good-faith showing. Parties had asserted the rule needed additional standards to encourage participation in the initial open season and to address late bidding for capacity, the commission said.
• Clarified that the open-season plan must contain the actual open-season notice and eliminates the 30-day advance notice requirement that applicants must file open-season procedures to FERC. Parties had contended the original 90-day advance filing time frame could potentially result in unnecessary delays in FERC’s processing of their request;
• Clarified that applicants must establish a separate entity to conduct the open season; and
• Clarified that open season notices need not include a cap on contract terms.
“To sum up, the commission has done the job Congress mandated, and it’s now up to the market,” counsel Jon Katz told the commission after listing the clarifications.
“I’m thrilled to see it and eager to see how it will play out for the future,” FERC Chairman Patrick Wood said.
The revisions to Order No. 2005 become effective on the date the order is published in the Federal Register, either in late May or early June, according to FERC spokeswoman Tamara Young-Allen.
State leaders like rules
Early reactions to the new federal open season rules varied, from unqualified approval to reserved comment.
“The governor is very pleased. We had asked for clarification on certain points. (FERC) clarified those points, and in both cases, the clarifications were favorable to the state,” said Mike Menge, special assistant on natural resources issues to Alaska Gov. Frank H. Murkowski. “The commission acted quickly and their decisions were in line with the governor’s view on how those issues should be regulated.”
Joe Balash, an aide with the Legislative Budget and Audit Committee of the Alaska Legislature, said FERC’s final rules appear to be a “win.”
Balash said Sen. Gene Therriault, the committee’s chairman, wished to review the commission’s actual order before making a formal comment. “But if it turns out to be as good as the press release, then it’s very good for the state,” he explained.
Industry reserves comment
BP and Chevron were reviewing the FERC rehearing order, company spokesmen said May 26.
“We will be deciding our next steps in due course,” said BP’s North Slope gas project spokesman Dave MacDowell.
“We should be finished with our review next week,” said Steve Wright of Chevron.
Observers say the outcome of the rehearing is what many expected.
“FERC took another look, listened patiently to the objections and decided, ‘no, we got it right’,” said Harold Heinze, chief executive officer of the Alaska Natural Gas Development Authority. “The next move is up to the folks who were troubled by the rules.”
One feature of the new regulation — rolled-in pricing vs. incremental pricing — could be a sticking point for the producers, Heinze said.
Next stop, the courts?
“If it’s really troubling, they may decide to take their case to court,” he said. “If so, they’re going to have to convince a judge that FERC went too far. That may be difficult to do because FERC was following instructions from Congress.”
“It will be interesting to see what the producers do,” said former state Oil and Gas Division director Ken Boyd. “The producers have said FERC had the ability to expand the pipeline to provide access, so why would they be upset now that FERC said they will provide the access?
“I do know that anytime the producers see anything they think creates uncertainty, they will see it as a threat,” he said, citing the state’s attempt to establish open-season rules for pipeline access to sell its royalty gas a few years ago.
“They said, ‘this could jeopardize the gas line.’ I can’t believe we won’t hear that again,” he added.
Still, the producers may think twice about litigation, observed one insider. “There is rising momentum to impose a gas reserves tax, so I think they see the handwriting on the wall. That gas didn’t cost them a penny to find, so there’s some good hard economics in this for the producers.”
Would litigation slow development of the proposed gas line?
Maybe. But one legal expert told the Legislature earlier this year that even with a court challenge, federal regulations for the gas pipeline should be in place by year’s end, Heinze said.
“I would like it finalized so we can proceed with (ANGDA’s) plans,” he said. We need to do open-season rules for in-state use of the gas at some point, and we probably need to do them inside the federal parameters.”
