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Vol. 13, No. 23 Week of June 08, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

Alaska not FERC’s job

Consultants: assuring open access, low tariffs for gas line state’s responsibility

Kristen Nelson

Petroleum News

If Alaska wants things like open access, expandability and the lowest possible tariffs for a North Slope gas pipeline, it had better stick with the AGIA process, because those things aren’t FERC’s responsibility.

That was the opinion of consultants who looked at the issue for Gov. Sarah Palin’s gas pipeline team.

Open access and expandability are cited by the administration, along with the lowest possible tariff, as necessary if Alaska’s North Slope is to keep and attract new explorers, a concept frequently described as opening the basin.

What the Federal Energy Regulatory Commission routinely provides and what the Alaska Gasline Inducement Act requires applicants to commit to are different things, consultants said May 28 at the administration’s AGIA public forum in Anchorage.

Scott Hobbs of Energy Capital Advisers, whose firm advises on oil and gas asset acquisitions and divestitures, said federal regulators “will not always take care of Alaska’s interests.”

He described a typical process for negotiating transportation contracts for a major pipeline as one in which the pipeline sponsor identifies a project and market and begins technical work. As the project becomes “more real” — with potential shippers showing strong interest — significant negotiations begin between shippers and the pipeline.

A non-binding open season may be held, followed by more negotiations and then a binding open season to secure firm commitments.

Hobbs said it is natural for parties to try to understand the other parties in a potential deal. As for understanding the project, he noted that this pipeline has probably been studied more than any pipeline in the history of the natural gas pipeline business.

Regulators review, administer

The role of the FERC in the United States and the Northern Pipeline Agency and National Energy Board in Canada include reviewing and approving open season procedures, administering the environmental review process, holding pre-filing conferences, approving the certificate application, monitoring construction and resolving disputes after the pipeline goes into operation, including overseeing rate cases.

But the state can’t rely on FERC to protect its interest because FERC’s job isn’t just to look out for Alaska, Hobbs said.

The regulators don’t control costs (except for disallowing imprudent costs); they don’t set terms for shipping contracts, establish key rates such as capital structures or establish deadlines.

On key rates, such as the debt-equity ratio, rates of 50-50 debt-equity are routinely approved, Hobbs said, so FERC wouldn’t dictate the 70-30 ratio included in AGIA. The administration testified that the difference between the AGIA-required 70-30 debt ratio and 50-50 could be a difference of $1 in the tariff. A higher tariff reduces the wellhead value, and hence the take the state gets from the gas.

Open access up to state

Regulators also won’t ensure physical access to the pipeline or expansions for new shippers.

Hobbs said FERC has limited authority in these areas, and his firm doesn’t think the state should bank on the agency’s authority in those areas.

When we say open access, he said, we say “genuine or enhanced” open access — because what is in AGIA is beyond that FERC would require.

FERC will use conventional recourse rates unless presented with innovative methodologies such as levelized rates (averaging shipping rates over the life of the pipeline, rather than higher rates at the beginning, declining over time), term-differentiated rates, capital structures, cost overrun recovery mechanisms and federal loan guarantees.

Regulators also won’t impose project deadlines.

Hobbs said the “mandatory expansion” provisions in the Alaska Natural Gas Pipeline Act, the basis of FERC’s authority in this area, risk litigation, delay and uncertain outcome.

AGIA vs. FERC Order 2005

A list of items mandated in AGIA but not in FERC Order 2005 includes:

• Sponsors conduct open seasons for the project by any date certain;

• Sponsors hold subsequent open seasons to test market demand for new capacity;

• Sponsors expand to meet new demand in reasonable engineering increments with commercially reasonable terms;

• File for certificate approval or accept certificate;

• Sponsors proposed rolled-in rates for expansions; and

• Project rates be lowest possible, based on 70-30 debt-equity structure.

TransCanada has committed to all of these requirements as part of its AGIA application.

Hobbs said that, as an example of the difference with a producer pipeline, those project sponsors would probably propose incremental rates to FERC, rather than rolled-in rates up to a 15 percent increase over original rates, as required by AGIA. Rolled-in rates are the standard in Canada and are said to encourage access by new shippers. Incremental rates require that new shippers pay the entire cost of any expansion, leaving original shippers at the original rate.

TransCanada and shippers will negotiate terms for line

Although TransCanada has committed to AGIA requirements in its application, TransCanada’s proposal under AGIA isn’t the final word on rates and terms for shipment on the line.

Greg Hopper of Black & Veatch Corp., a global engineering, consulting and construction company, said TransCanada’s proposal will be negotiated with potential shippers and noted that ExxonMobil characterized the proposal in its comments on the TransCanada application as an opening offer.

Different shippers have different interests, and will negotiate agreements based on those interests, he said.

Because a long-term firm contract is important, Hopper said, shippers will have “considerable bargaining power,” and the existence of the Denali pipeline proposal adds negotiating leverage.

He said that while the TransCanada proposal is well within the norm for the industry, the process of negotiating shipping agreements will take time — and a lot of give and take.

Major risks

Ken Minesinger, an attorney with Greenburg Traurig, said the major risks of the gas pipeline include capital costs and potential cost overruns; development costs of gas reserves, and whether new gas is found within economic reach of the pipeline; natural gas prices in Alberta and the U.S.; and schedule delays and the impact of those delays on costs, both for the pipeline and the gas treatment plant and for the development of reserves.

On the subject of risks around finding more gas, Minesinger said if the only gas ever shipped is from known North Slope resources, the project is still very economic for North Slope producers.

TransCanada has proposed measures to share risks and move the project forward, he said, including: equity participation by shippers; negotiated levelized rates; adjustments to return on equity for cost overruns; recovery of cost overruns tied to minimum market prices for gas; the federal loan guarantee; and the bridge shipper concept.

Other terms that may be considered include: improvement in terms offered by TransCanada; depreciation rates and contract terms; project milestones and triggers with termination rights with negotiated sharing of costs; and additional risk sharing on cost overruns.

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