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Vol. 11, No. 21 Week of May 21, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Port Authority cries foul

Says consultant used faulty assumptions for LNG project; state disagrees

Rose Ragsdale

For Petroleum News

The Alaska Gasline Port Authority, developer of a proposed liquefied natural gas pipeline project to market North Slope gas, has criticized a recent comparison of its project with a competing raw gas line to the Lower 48, calling the analysis “fundamentally flawed.”

The study, prepared earlier this year by PFC Energy for the Alaska Department of Revenue, concluded that the port authority’s proposed LNG project does not provide a superior netback value for monetizing Alaska’s North Slope gas when compared to a natural gas pipeline to the Chicago area.

PFC, a Washington, D.C.-based consulting firm, estimated a $3.17 per-million-Btu North Slope netback for the port authority project, compared with a netback of $4.69 per-million-Btu for the highway gas pipeline.

The report, released March 17, also concluded there is little likelihood that any of the LNG receiving terminals with which the port authority has agreements will be built in the short term.

(See the April 30 edition of Petroleum News for a report on the PFC analysis.)

In a May 8 letter to Gov. Frank H. Murkowski, the port authority’s attorney, William Walker, outlined the port authority’s reasons for disagreeing with the consultant’s conclusions.

No communication

The port authority said PFC made incorrect assumptions about certain key aspects of the port authority project without contacting AGPA and discussing it.

“Therefore, the PFC report does not accurately reflect AGPA’s project and its conclusions are not based on an accurate representation of AGPA’s assumptions,” Walker said.

When questioned about the port authority’s charges May 17, Steve Porter, deputy commissioner of Revenue, said he could not say why PFC did not contact the AGPA, but the port authority in the past has been unresponsive to the state’s inquiries.

“Their response when we ask for information is that their data is confidential. They are a public entity, and it’s time they started making their information public,” Porter said.

A key omission

The port authority said PFC failed to analyze the delivery of LNG from Alaska to the Sempra receiving facility in Baja, Mexico, just across the border from southern California. The Sempra facility is already under construction and at Sempra LNG’s request, the port authority is participating in the open season the company is planning for expansion capacity of the proposed pipeline, he said. (See May 14 edition of Petroleum News.)

In the analysis, PFC Energy said Alaska officials asked about the likelihood of the construction within the next 10 years of five planned LNG receiving sites on the West Coast with which the port authority had executed nonbinding agreements: Kitimat, British Columbia; Northern Star, Oregon; Clearwater Port, offshore California; Port Penguin, offshore California; and SES, the Mitsubishi project at the Port of Long Beach in southern California. The consultant also was asked to assess West Coast gas marketing issues, the cost of moving propane and butane from Valdez to Asia, the cost of project facilities, the need for Jones Act-compliant tankers for shipments to Kitimat, B.C., and the effect of port authority LNG sales on North American natural gas prices. The omission of the port authority’s relationship with Sempra LNG in the analysis is telling, Walker said May 17.

“It is clearly a results-based study with an intended goal in mind,” Walker added.

But Porter said Revenue directed PFC to study Mitsubishi’s Long Beach project instead of the Sempra project because it seemed more favorable for the port authority.

“I was surprised at this criticism because we provided the Mitsubishi project at Long Beach on the assumption that it is more economic than the Sempra project at Costa Azul,” he said. “The proposed Mitsubishi terminal goes right into the heart of the West Coast market in southern California, so if the economics would work at Costa Azul, which is some miles away and requires construction of additional infrastructure to reach the market, then it would definitely work at Long Beach.”

Shipping analysis faulty

The port authority said PFC failed to correctly analyze shipping arrangements for its project. “AGPA is currently in discussions with world-class participants in the LNG shipping business. AGPA intends to secure LNG shipping services at economically competitive rates, under full compliance with the Jones Act,” Walker said.

PFC also failed to analyze the port authority’s primary project, the Y-line. It calls for LNG shipments from Alaska plus a raw gas pipeline to the Midwest.

Porter said PFC didn’t analyze the Y-line because “it’s hard to know which argument we’re dealing with” when the port authority is promoting two projects.

“The Legislature asked the port authority in February how can they make a Y-line work with 3 billion cubic feet of gas going to Canada when it has to compete with the producers’ proposal for a 4.5 bcf/day line. The numbers just don’t work, and the port authority did not give a good response,” he said. Porter said Revenue ran into the same difficulty when deciding what to ask the consultant to research.

“We gave substantial deference to (the port authority’s) numbers in the study, and frankly, I am surprised they are complaining about the numbers,” he said.

LNG project must be researched

In addition to outlining its reasons for disagreeing with PFC’s findings, the port authority charged PFC with possible interference in the project itself.

Walker said the consultant apparently sent a formal letter to U.S. Customs and Border Protection, seeking a ruling or opinion with respect to the port authority’s project without giving the authority any notice of the communication.

“AGPA views such actions as highly inappropriate, as they effectively constitute interference with its project,” Walker said. “AGPA is looking into this matter. AGPA requests that it be contacted prior to any future communications with official U.S. agencies on matters directly relating to AGPA’s project.”

As of May 17, the port authority had not received a response from Murkowski or PFC, according to Walker. He said AGPA will conduct a more thorough review of the PFC analysis in the near future.

Porter said he is certain the state has sent a response to the letter from the port authority.

State help rebuffed

But dealing with the port authority has been an exercise in frustration, he said, because the entity has repeatedly rebuffed the state’s offers to help with analysis of the project.

“One of the reasons we contracted with PFC Energy was because we could not get the port authority to do the research, themselves. We even offered to pay $25,000 to help them do the scoping to understand their project, and they refused,” he said. “If they won’t do the research, we will. Frankly, I can’t understand why the port authority won’t do the scoping, when, in essence, they could do it for free. The offer still stands.” Porter said Revenue has been stymied in its efforts to analyze the port authority’s project by an ongoing lack of cooperation from the entity.

“We offered to help them get a project manager. Instead they added an additional title of project manager to Bill Walker’s name. That’s not what we meant,” he said. “We need them to move forward with the analysis of their project. It’s very important for the state to understand the LNG project. The port authority has not done it, so we will do it.”

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