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Vol 21, No. 30 Week of July 24, 2016
Providing coverage of Alaska and northern Canada's oil and gas industry

Info squabble

State, producers square off over Prudhoe Bay natural gas marketing plans

TIM BRADNER

For Petroleum News

State officials defended their requests for access to North Slope producers’ confidential Prudhoe Bay gas marketing information in legislative hearings July 19 but the issue appears headed for a showdown, perhaps ultimately in the courts.

Corri Feige, director of the state Division of Oil and Gas, said the state has initiated a new policy of requesting oil and gas marketing information as a condition of annual approvals of Plans of Development.

The request was initiated at the request of “the administration,” Feige said, a reference to the governor’s office and the Department of Law.

A Plan of Development, or POD, is a kind of operating permit for oil and gas fields on state lands. The procedure is routine and is used as way for the division to be updated on field operators’ activities.

This initiative, however, appears mainly aimed at obtaining information on the undeveloped 26 trillion cubic feet of Prudhoe gas that would be marketed through the proposed large Alaska LNG Project, which Gov. Bill Walker is now pushing for the state to take over.

If built, Alaska LNG would export up to 20 million tons of LNG yearly beginning in 2025 under the current schedule.

Prudhoe Bay producers, however, rejected the request for the marketing information in several letters to the state since January citing concerns over antitrust issues and confidentiality of the information.

Prudhoe’s previous Plan of Development was to expire June 30 but the division has extended it temporarily and has meanwhile given the producers, BP, ConocoPhillips and ExxonMobil, until Sept. 1 to comply with the information request.

‘Long range’ plans required

If the demand is not met, Feige explained the procedure for legislators where the state could proceed through a lease default procedure and ultimately to the courts.

She referenced language in state regulations requiring field operators to inform the division on “long range” plans for developing the oil and gas resources.

In a proceeding like that the state would argue the producers are making inadequate efforts to market the gas, although this in unlike any previous action by the state including an earlier controversy over Point Thomson leases.

Hard line from producers

Producers are taking a hard line on the matter, however. “BP and the other PBU working interest owners (mainly ConocoPhillips and ExxonMobil) believe the POD (Plan of Development) submittal is a complete and the POD should be approved,” BP said in a statement issued during the hearing.

“The level of information provided is consistent with the previous PODs that DNR has approved each year since 2000. This POD satisfies all of the Prudhoe Bay Unit Agreement’s and POD regulations’ requirements,” the company said in the statement.

BP is the operator of the Prudhoe Bay field and spoke on behalf of the other gas owners, it said.

One producing company, asking not to be identified, said it is willing to discuss its gas marketing with the state, but terms of confidentiality for the meeting could not be agreed on. Other producers are reported to have made similar offers.

Meanwhile, some meetings with the state have been held on how the companies’ Prudhoe gas could be sold to the state or a third party for a state-led pipeline, state officials said earlier this spring.

Third party sales info

The request for marketing information, spelled out in the division’s June 30 letter to BP, the Prudhoe operator, is specific in not only asking about general marketing information but also on potential sales to a third party such as the state, with a state-led gas project.

The companies and the state are still partners in the Alaska LNG Project at this point, although the partnership may now be strained. The state has a one-fourth interest in Alaska LNG, with ExxonMobil acting as project manager.

Preliminary engineering, or pre-Front End Engineering and Design, is expected to be concluded by the end the year.

To date the LNG project partners, including the state, have spent about $600 million on the pre-FEED, and the producers had earlier invested $150 million in conceptual engineering.

Given record-low LNG prices in Asia, the target market, some of the industry partners have expressed reluctance to spend an estimated $1.5 billion to $2 billion to take the next step to final engineering, at least until there is more clarity as to when LNG prices will improve.

Walker wants to state to assume control of the project and proceed to final engineering, funding the work by bringing in new partners or private equity firms, the governor said July 18 in a speech.

Legislators concerned

State legislators are meanwhile concerned about the possible connection between the state’s regulatory action on the Plan of Development and a state-led gas pipeline and LNG project. The regulatory move is being seen as a step toward pressuring the producers to sell gas to the state-led pipeline.

All three producers have offered in writing to sell gas at the wellhead to the state, but at mutually-agreed prices and terms.

“This is an extraordinary requirement (the request for marketing information). It will be very chilling to the state’s oil and gas industry,” said state Rep. Dan Saddler, R-Eagle River, who attended the Senate committee meeting.

“What’s the end game? What’s the connection to the governor’s plan for a pipeline?” he asked.

Feige defended the request for information, citing language in existing regulations requiring lease owners to provide information on long-range development plans for oil and gas resources. She acknowledged that the interpretation of the regulation is “new policy” and that it was done at the request of the governor.

Responding to questions from Sen. Cathy Giessel, R-Anchorage, the committee chair, Feige also said that the state Department of Law wrote parts of the division’s correspondence with the producers dealing with gas marketing even though the letters went over Feige’s signature.

Houston attorney state lead

The law department’s lead on the issue is Mark Cotham, a Houston-based attorney under contract to the state who specializes in “duty to produce and market” litigation in Texas on behalf of royalty owners, Cotham told the legislators by telephone.

Legislators at the hearing were skeptical of the governor’s gas marketing request.

“You want specific information on gas marketing on LNG that will be sold ten years in the future?” Sen. Anna MacKinnon, R-Anchorage, co-chair of the Senate Finance Committee, asked.

Feige said that is correct.

Sen. John Coghill, R-Fairbanks, majority leader of the Republican-controlled Senate, said the request raises, “ethical, legal and antitrust issues. Once this information is given, it could be used in other ways,” such as by the state in the competitive marketing of its own royalty gas as LNG.

“I think this is a problem. There’s a credibility problem here,” Coghill said.

Sen. Mia Costello, R-Anchorage, was equally critical. “Do you think the governor is being forthright with you, or the Alaska public?” she asked.

“The new policy was launched in January with no discussion with the public or the Legislature,” she said. Costello chairs the senate’s Labor and Commerce Committee.

One legislator at the meeting, Sen. Bill Wielechowski, D-Anchorage, praised the initiative, however. “The division is seeking information on the marketing of state oil and gas resources. I think that is quite reasonable,” he said.

Feige said at the hearing that the division has approved parts of BP’s 2016 Plan of Development that deal with the ongoing development activities and operations of the field, but that the plan did not comply with the request for gas marketing information.

BP and the other companies said they must wait until a gas pipeline is built before conducting major gas sales but also said the gas has historically been used to produce more oil.



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