It’s going to be historic, and the decision will be made soon, Alaska Gov. Frank Murkowski said April 27 when he updated members of the Alaska Legislature on negotiations under the Alaska Stranded Gas Development Act.
“We stand on the brink of making probably the most important decision in our state’s history relative to the resources within our state,” the governor said. “Actions we soon will be taking are going to have a profound affect on Alaska’s economy for generations to come, and the quality of life for Alaskans as well.”
As to how soon “soon” might be, the governor said he wasn’t yet in a position to help members of the Legislature plan their summers, but he thought they would have at least a couple of months off before they would be called back to consider a gas contract.
The state received an application from the North Slope producers (BP Exploration (Alaska), ConocoPhillips Alaska and ExxonMobil) Jan. 20, 2004, an application from TransCanada Pipeline on June 1, 2004, and an application from the Alaska Gasline Port Authority on March 30, 2005.
The governor said “a decision of this scope and magnitude is surrounded with a great deal of emotion, enthusiasm and deeply held opinions. Some are founded on facts; some are not. As governor I’m charged with the solemn responsibility of evaluating all the gas line development proposals and determining which is in the best interests of all the people of Alaska.”
Once general terms have been agreed to there will be a lot of detail legal work before a contract is ready for a public process. Commissioner of Revenue Bill Corbus said Revenue will do a best interest finding which will go out with the contract for the public process.
Asked if the Legislature might end up looking at two contracts, the governor said there would be input on all three proposals in the public process. “I would hope that I am satisfied with that process and with our own internal review and I can recommend one coming out of the public process to be submitted to the Legislature for your up-down vote.”
Goals include ‘fair share of revenues’
The governor said he would send the Legislature the best contract for Alaska, but he doesn’t expect universal approval: “What is best will be a product of raw economic reality: it will not be one based on emotion. And you should also know that my decision will not be without some second guessing or some criticism, no matter which way we go. And I promise you that my decision, the contract I send to you for your approval, will be based on what I believe is right.”
Murkowski said he had a number of goals in the negotiations: to achieve “a fair share of the revenues for Alaska;” include provisions for in-state use of natural gas; provide pipeline access to companies exploring for gas; have a pipeline that “may be expanded;” have “state equity ownership in the pipeline;” and have jobs, and job training, for Alaskans.
Contracts for an equity share are generally negotiated between project proponents and nations, not states, Murkowski said: This is the “first time a state, to my knowledge, has ever entered into a contract of this nature.”
On the equity issue Corbus said “we would also have to pick up our proportional share of the debt that is issued … (and) probably the federal loan guarantee would come into play there.”
The administration is also pushing the earliest possible in-service date. Murkowski said the administration still favors 2012. Commissioner of Natural Resources Tom Irwin said his department looks at it from the technical side and economic side: net present value makes an early start-up date important to the state. But “if you do something so fast and you start expediting, you can ruin your capital-cost side, and so you’ve got to balance the risks between both, but … sooner is significant to the state.”
Producer application most complex
The producer application is “by far the most complex of the three” because it embraces “every aspect of gas transportation beginning at the bottom of the production well — through the gathering system and the gas conditioning facility — into the proposed pipeline across Canada … and back into the United States, through the marketing process and ending up right on the consumer’s front door,” Murkowski said.
The state is negotiating an equity position in the hope that this will accelerate the project and because it offers an “opportunity to significantly increase the financial benefits of the project to the state of Alaska.” Royalty and taxes would be converted into ownership “of a significant portion of the in-place gas reserves,” taking an equity position in the gas pipeline and processing facilities “proportionate to our gas ownership share;” and marketing the state’s gas and “taking firm transportation capacity in the pipeline” to deliver the gas to purchasers, he said.
The state has made “tremendous progress” in putting these concepts into a contract, Murkowski said. “I’m convinced that the producers are fully committed to successfully concluding these negotiations” and are providing the support necessary for discussions with the state.
The producers’ proposal has “solid financial and technical underpinning,” but this project must deal with regulatory uncertainties in Canada as well as procuring enough steel to construct more than 2,000 miles of 52-inch pipeline.
Equity also in TransCanada discussions
State equity ownership in the gas conditioning facility and the pipeline are also being discussed with TransCanada, Murkowski said, as is “the possibility of the state taking the responsibility for the transportation and marketing of its own gas,” if the producers sell their reserves rather than shipping on an independent pipeline.
Under the TransCanada proposal, the state and the pipeline company would negotiate with the producers for purchase of the gas on the North Slope, or for the producers to make a firm commitment to ship. The governor said the TransCanada negotiations are also “well advanced —very well advanced — with all parties committed to finalizing discussions in the very, very, very near future.”
Murkowski said TransCanada has been working with the state team to create a tariff framework which embraces both his gas development policies and Federal Energy Regulatory Commission regulations.
In addition to regulatory uncertainty in Canada and the need to buy enough steel to built 1,800 miles of 48-inch pipeline, this proposal, the governor said, has the additional challenge of presuming “the producers will be commercially reasonable and either ship their gas on an independent pipeline or sell their gas at a commercially reasonable rate.”
Port authority is an LNG proposal
The Alaska Gasline Port Authority would take gas in a 56-inch pipe to Delta Junction and in a 48-inch pipe from there to Valdez, where the gas would be liquefied and shipped to West Coast or other markets. “And in addition natural gas liquids such as propane, ethane, butane, would be extracted and sold on the markets of the world as well,” Murkowski said.
The port authority would need to buy gas from the producers and the state at the wellhead.
The state would not have direct participation in this project, but the project recognizes “the North Slope producers may need a degree of fiscal certainty on gas production taxation.”
The governor said the state’s analytical team is just beginning to evaluate the port authority proposal “and it is really too early to make any risk or value judgments pertaining to that proposal.”
Challenges to the port authority project include obtaining sales contracts with the producers. “They must also get a formal approval from the Internal Revenue Service to retain their tax-free status.” They need long-term sales contracts and “they must obtain a permanent exemption from the Jones Act,” as well as dealing with LNG terminal site issues on the West Coast.
There have not yet been any detailed negotiations with the port authority, the governor said.
The port authority is “radically different” than the highway pipeline proposals and its risk-reward profile. “Before I will be in a position to make any recommendations on this project we will need to be able to do a comparison, an apples-to-apples comparison, on the risk-reward profiles of all three proposals.”
The spur line to Cook Inlet
While it isn’t part of stranded gas negotiations, the Alaska Natural Gas Development Authority “has been working on a spur line which will bring gas to the lower Cook Inlet area and other parts of Alaska,” the governor said.
He said whatever happens with the three proposals, any agreement will include “an opportunity to construct a pipeline to the Cook Inlet area.” He said he has asked ANGDA to lead that effort.
The governor said the problem with Southcentral is that the industrial facilities need cheap gas because they ship to foreign markets and have to be competitive. As far as bringing in North Slope gas, the Southcentral can’t afford to lose those facilities because they’re the big users of natural gas and would be required to make a spur line economic, “and without their continued operation, it would have a negative effect on the economics.”
—Kristen Nelson
