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Vol. 11, No. 30 Week of July 23, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Will the pipeline open or close basin?

Administration, producers tell legislators gas line will open North Slope; legislative consultants concerned about control

Kristen Nelson

Petroleum News

Whether a producer-owned gas pipeline will open or close the North Slope has been one of the hotly debated issues around the proposed gas pipeline fiscal contract.

Will owning the majority of a gas pipeline to the Lower 48 allow the producers to control access, restricting others from sending gas down the pipeline? Would the Federal Energy Regulatory Commission ensure equal access?

Or will having a gas pipeline open up the North Slope to exploration from existing and new players, creating a whole new industry — gas exploration and production — in the state?

The Senate Special Committee on Natural Gas Development heard old, and some new, arguments around those issues when it met July 13-14.

Bob Loeffler, a partner in the law firm of Morrison & Foerster, Washington, D.C., has represented the state in FERC matters since the 1970s, and is working with the administration of Gov. Frank Murkowski on the fiscal contract.

Loeffler told the committee that this pipeline would be the most scrutinized pipeline in history over its lifetime — in the United States and also probably in Canada. This will start, he said, prior to the open season with a requirement that the methodology of bid evaluation be revealed. Typically, he said, this will be a net present value based on the amount of gas and the duration in a bid. The pipeline will have to propose a tariff rate when it applies to hold the open season, he said. If it tells potential shippers one proposed tariff and the tariff is a lot more after the line is built, then shippers can usually get out of a firm commitment contract to ship gas.

Loeffler also said that under its new chairman the FERC has been extraordinarily strict in enforcing some of its rules.

FERC toolbox

He said FERC has a toolbox of authorities to prevent basin control — the potential ability of the pipeline owner to exclude independents from the line. And for this pipeline only, because it is expected to be the only gas pipeline from the North Slope, Congress has given FERC the ability to order expansion.

Loeffler said he thinks discussions of basin mastery — a somewhat different issue — are largely about international development and reflect conditions worldwide. “This is not a Third-World country,” he said. Alaska has a transparent legal system, FERC regulation of gas pipelines and open bidding for leases. International concerns are often about over-building of infrastructure for control; with the Alaska gas pipeline, the concern is the opposite — under building. FERC wouldn’t allow overbuilding because shippers would then have too high a tariff, he said. Loeffler said basin mastery issues apply to a different world than the situation in Alaska.

On the issue of access to acreage, Ken Griffin, deputy commissioner of the Department of Natural Resources, noted that the state’s competitive leasing program will remain as it is today.

In response to a question about where FERC control starts, Loeffler said that in the post-Enron world, under the Energy Policy Act, FERC can reach people who are beyond its traditional jurisdiction if market manipulation is an issue.

Concerns about contract, FERC

The committee heard continued access concerns from consultants for the Legislature.

Don Shepler of the law firm of Greenberg Traurig said he was concerned about expansion after the initial open season and about the fact that the FERC was a long ways away and was both expensive and time consuming.

Rick Harper, formerly in charge of all of Atlantic Richfield’s North American natural gas activities, and now a member of the Econ One team, said the contract was not particularly expansion friendly.

He urged legislators to remember that natural gas pipelines are contract carriers, not common carriers like crude oil lines and not public utilities. They generally pursue enlightened self interest, he said. This is a different business model, but he said it still raises issues and concerns.

Jim Clark, the governor’s chief of staff, said the administration is taking concerns about the contract seriously. It is talking with Anadarko Petroleum about concerns that company has about section 8.7, he said, and at the request of Tesoro Petroleum has committed to providing assistance for companies that need help in understanding how to bid in the in-state open season.

BP’s response

Brad Keithley, a partner in the law firm of Jones Day, and BP’s FERC attorney, told legislators the FERC is already positioned to deal with post-open season expansion concerns of companies not affiliated with the pipeline owners. It has rules to deal with non-affiliate issues in the Lower 48, where 16 pipelines have 37 percent of their gas capacity held by affiliates and six gas pipelines have more than 60 percent held by affiliates.

FERC Order 2004 specifically deals with expansion after the initial open season, requiring pipelines to treat all shippers on a non-discriminatory basis, he said. Keithley said FERC Order 670 has rules regarding market manipulation, such as refusing access to force sales of leases from non-affiliates.

He said the FERC can deal with issues on a real-time basis and has a hot line staffed by its enforcement division. Hundreds of disputes have been resolved informally, he said, specifically issues regarding affiliates, because FERC staffers on the hotline turn around and call the pipeline immediately.

FERC also has “very active” on-site audit teams, Keithley said.

The state will also have enforcement power as a pipeline owner, he said. It will be well positioned to help resolve issues and will have immediate access to information. The state will also be well positioned to refer issues to FERC, and with the state as an owner it will be able to obtain information quickly without having to wait for FERC discovery.

In response to a suggestion that the tariff for the line be developed now, Keithley said you need costs, design and operating parameters in order to build a tariff, information which isn’t yet available. A proposed tariff is part of a pipeline’s open season filing.

The basin-opening argument

Wendy King, ConocoPhillips Alaska’s director of external strategies for Alaska North Slope gas development, said she sees the gas line as basin opening. There will be significant new opportunities for oil and gas exploration, she said.

She said she believes there will be a lot of FERC scrutiny of an Alaska gas pipeline because if will be moving so much gas.

King also said that a 4.5 billion cubic-feet-a-day line would be expanded to 5.6 bcf with incremental compression — compression stations added between existing compressors.

Expansion is not one size fits all, King said, telling the committee that she’s been asked about expanding the line from the North Slope to Fairbanks, from Fairbanks south (in the event of a large discovery in Interior Alaska) and from the Yukon south, should discoveries be made there.

Bill McMahon, ExxonMobil’s Alaska gas commercial manager, said that in addition to voluntary expansion — the normal business deal — and FERC-mandated and state-initiated expansions, there are three ways capacity could be available outside of an open season. Excess capacity could be released; a reverse auction could occur to make that capacity available; and there could be business deals, such as gas sold to someone with capacity.

King noted that fields decline; when you commit to ship from a field you won’t always have the same volume and reverse auctions occur as fields decline.

A pipeline’s capacity is described by the capacity at a bottleneck point, Griffin said. Those bottlenecks are a function of temperature and terrain so 4.5 bcf a day would be the capacity at the bottleneck, probably in the Brooks Range because of the terrain, he said.

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