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Vol. 15, No. 40 Week of October 03, 2010
Providing coverage of Alaska and northern Canada's oil and gas industry

Gas line games continue

Amid glum mood, second open season closes Oct. 4; DOE expands work, one exec says

Wesley Loy

For Petroleum News

Top executives for the two competing Alaska natural gas pipeline projects appeared Sept. 28 at an Anchorage oil industry conference and laid down a carpet of familiar themes.

The project is extraordinarily big and costly.

Building a pipeline will take all stakeholders — energy companies, governments, indigenous peoples — pulling together.

The old headache of fiscal terms — how much of the gas value the state takes — must be cured eventually.

Yes, yes, yes.

So we’ve heard.

But amid the dog-eared remarks, a few bits of news fell onto the carpet for an audience eager for any signs the megaproject is actually making progress.

Bud Fackrell of Denali, the gas line partnership of BP and ConocoPhillips, predicted his venture’s open season would succeed in attracting bids from potential gas shippers. The open season closes Oct. 4.

And Tony Palmer, Alaska point man for the competing pipeline pairing of TransCanada and ExxonMobil, revealed the U.S. Department of Energy recently expanded its work on possible multibillion-dollar federal loan guarantees to support a gas line.

CEO’s deflating comments

Palmer and Fackrell were among speakers at the 6th Annual Alaska Oil & Gas Congress, held at the Marriott hotel in downtown Anchorage. The conference attracted about 160 people, including representatives from the Federal Energy Regulatory Commission and its Canadian counterpart, the National Energy Board.

The gas line execs gave their talks on the very day a rather disconcerting story appeared in the Financial Times.

Jim Mulva, ConocoPhillips chief executive, reportedly indicated in an interview with the British newspaper that his company “would reassess the economics of its project with BP” to build a $30 billion pipeline from Alaska’s North Slope gas fields to the Lower 48.

The article talked of a gas glut, weak prices in the range of $4 per million British thermal units, and surging production of shale gas.

All of this “creates more competitive concerns for Alaska natural gas,” Mulva was quoted as saying. He added that due to abundant cheap gas, ConocoPhillips had shut-in some U.S. and Canadian production, explaining: “We’d rather keep it in the ground for when it will have a greater financial impact.”

Of course, keeping it in the ground is what Alaska politicians and industry boosters have decried for decades. North Slope gas production would mean enormous tax and royalty revenue for the state, not to mention a construction boom to lay a pipeline 1,700 miles from the Slope to Alberta.

If the Financial Times article was a signal the Denali project is going on the shelf, Fackrell didn’t admit it.

Citing Mulva’s comments regarding reassessment, Fackrell told the Oil & Gas Congress: “That’s the reality of where we are today,” with everybody looking at price and supply.

Fackrell spent most of his time talking up Denali’s efforts to put together a viable project.

Second open season nearly done

Denali’s open season opened three months ago, on July 6.

Now, on the eve of its closure, Fackrell expressed some confidence.

“We do expect to have bids, but we believe these bids will be heavily conditioned,” he said.

That was the story when TransCanada and ExxonMobil announced the conclusion of their open season on July 30. Shippers always want a better deal, so it’s common for them to attach conditions to bids, Palmer said.

Once Denali’s open season closes, negotiations will begin with the bidders to try to reach “precedent agreements,” Fackrell said.

The state’s online natural gas glossary defines a precedent agreement as “a contractual agreement signed between a pipeline sponsor and a shipper. Through this agreement, the prospective shipper agrees to underwrite a portion of the future design and permitting cost to move a pipeline project to construction.”

Denali hopes to sign precedent agreements by Feb. 1, Fackrell said.

Both pipeline partnerships are holding their open season bids confidential.

In other remarks, Fackrell said a big concern is the fate of the Point Thomson field on the eastern North Slope. Point Thomson holds about a quarter of the Slope’s known gas reserves, but its status is clouded as ExxonMobil and other leaseholders battle in court to keep a field the state has moved to reclaim for lack of timely development.

The conflict must be resolved, Fackrell said, because the gas line needs reserves from both Point Thomson and Prudhoe Bay.

Fackrell added that when he’s in Washington, D.C., he hears negative remarks about Alaska achieving a gas pipeline. “You guys don’t look like you have your act together,” people say, with two rival projects and division among the three top gas producers — BP, ConocoPhillips and ExxonMobil.

Of course, only one project can go forward in the end, he said.

Uncle Sam’s helping hand

In his speech, TransCanada’s Palmer emphasized federal loan guarantees as a vital part of securing gas line financing.

Congress in 2004 approved up to $18 billion in loan guarantees, and in 2009 a Senate committee passed an energy bill that included a boost to $30 billion plus access to a government corporation called the Federal Financing Bank.

But the legislation fizzled, and uncertainty hovers over the existing loan guarantees, Palmer said. Critical terms and conditions, such as the interest rate and repayment details, were never spelled out, he said.

The project TransCanada and ExxonMobil are proposing will require borrowing a staggering $20 billion to $30 billion, Palmer said.

The partnership has met with more than a dozen financial institutions, and all indicate the financing is achievable but a Herculean task, he said.

The Office of Fossil Energy, part of the U.S. Department of Energy, is designated to set the terms of the loan guarantees, Palmer said.

But in the last month or so, another office within DOE, the Loan Guarantee Program, has gotten involved with the Alaska gas line, he said.

The Energy Policy Act of 2005 established the Loan Guarantee Program to bring “innovative” energy technologies to market.

Bids received during the TransCanada-ExxonMobil open season came with “significant conditions attached,” Palmer said.

Some shippers have fiscal issues to work out with the state, he said, but “I’m not here to tell you the status of those negotiations, because we’re not involved.”

Palmer acknowledged that some people seem “a little down” about the gas line’s chances today. He said the current gas environment just emphasizes that gas is a fungible product, that gas from all regions is pretty much the same, and that Alaska gas will simply have to compete.

Beyond this, Palmer said, “All parties need to achieve commercial and regulatory breakthroughs for this project to succeed.”

Letter from Obama

Larry Persily, federal coordinator for Alaska natural gas transportation projects, delivered a letter from President Obama addressed to Oil & Gas Congress participants.

“As part of Alaska’s contribution to America’s energy needs, I share with you the anticipation that a North Slope natural gas pipeline could finally be on its way south to serve North American markets,” the letter said.

The letter added: “The Office of Federal Coordinator stands ready to help with permitting for the multibillion-dollar pipeline, and my Administration fully supports that office and its objective of coordinating Federal planning to help advance the project.”

In his presentation, Persily said shale gas production is about 10 percent of U.S. supply. “But the truth is, much of shale goes toward replacing declining production from conventional gas wells.”

Shale gas, he noted, also needs billions of dollars worth of new pipelines to reach markets.

As for the ConocoPhillips CEO’s remarks, Persily took them in stride.

“Mr. Mulva said, ‘Gee, today’s market really stinks for gas with oversupply and low prices and shale.’ I guess I just didn’t see it as anything new or shocking.”

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