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Vol. 11, No. 12 Week of March 19, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Clock ticks for Alaska gas

ANGDA: Alaskans must bid in open season to keep some NS gas in state

Alan Bailey

Petroleum News

With the current oil industry production profits tax debate and speculation about the stranded gas contract for the North Slope gas line consuming the attention of many Alaskans, there is a danger of missing the boat for booking intrastate capacity in the proposed North Slope gas pipeline. That was a key message during one of the sessions at the Alaska Natural Gas Development Authority’s March 13 board meeting.

Intrastate capacity is North Slope natural gas that would be used in Alaska vs. for being shipped through Canada to the Lower 48 states.

ANGDA is a public corporation of the State of Alaska, established in 2003 to bring North Slope natural gas to market via a trans-Alaska pipeline route to Valdez. The corporation is currently in the process of applying for a state right of way for a spur gas pipeline between Glennallen and Palmer that would bring North Slope gas into the Southcentral Alaska gas distribution network.

Regulatory issues

In the ANGDA board meeting Steve Pratt of Steve Pratt Enterprises presented a preliminary report on the regulatory issues that relate to obtaining gas for in-state delivery from a North Slope line.

Pratt emphasized the importance of Alaska businesses booking intrastate capacity in the line by bidding during the Federal Energy Regulatory Commission open season.

“To pull gas off at a state off-take point somehow we’ve got to get gas on that interstate pipeline to that off-take point,” he said.

And that will require Alaska commercial commitment to the use of the pipeline.

“Unless a commercial player shows up at the door you’re out,” said Steve Porter, deputy commissioner of the Alaska Department of Revenue.

The FERC rules for a North Slope line include opportunities for people to obtain in-state off-take of gas, Pratt said. Book in-state capacity on the line during the FERC open season and you’ll get it. Don’t book it and you’ll miss out.

FERC process

Pratt went on to describe the FERC open season process for a North Slope pipeline.

The first step consists of pre-subscription capacity negotiations that can happen any time between pipeline sponsors and potential shippers. At some point the sponsors will then trigger a 180-day period. The first 60 days of that period will allow public comments and will enable the rules for conducting the open season to be defined, prior to issuance of a pending open season notice. Thirty days after that notice a 90-day open season will start.

Anyone who wants to ship gas on the pipeline will need to submit bids during those 90 days. And after the open season ends the pipeline sponsors will start the final planning and design of the pipeline, to accommodate the required capacity.

“If we don’t tell them how much we want delivered at that point then they will design the pipeline for the same volume downstream of that point that they did getting to that point,” ANGDA CEO Harold Heinze said. “If you come back to them later and say ‘gee, I need some capacity to get off at Delta,’ they’re going to say ‘$2.50 please’ (the full pipeline tariff).”

Pratt even emphasized the value of becoming involved in the pre-subscription negotiations, rather than waiting for the open season to occur.

“(Then) I’m not bound by tariffs. I’m not bound by anything. I can negotiate on anything,” he said. “… I really think we should think about (whether we can) … play in this game,” he said.

Late bidding

The FERC rules do allow bids for capacity after the end of the open season and before the completion of pipeline design. However, the pipeline sponsor need only accommodate late bids if the additional requirements don’t adversely impact the pipeline economics and operation, Pratt said. Moreover, the late bidder has to provide a solid justification for bidding late.

Heinze also pointed out that the open season process in the Lower 48 normally only runs for 30 to 60 days.

“We fought hard to get this to be a 180-day process. Nobody’s going to give us 1 second longer,” he said. “… The only guarantee we’ve got is between day zero and day 180. … It’s unclear what happens after that.”

The board discussed the potential ramifications of not bidding during the open season. These ramifications could include the need for pipeline expansion or having to negotiate to lease someone else’s booked capacity.

2007 timeframe

But when might the open season happen?

“Our view is spring ’07,” Heinze said. “That is the scenario that is consistent in our minds with the Legislature passing the production tax, a gas contract coming about sometime during late summer, fall. … You’re out of this process by the winter of ’07.”

Part of the reasoning behind this prediction is the benefit to a pipeline sponsor of an early open season.

“In my estimate they would be foolish not to have the open season process as early in this as they could for a whole bunch of reasons, not the least of which is that it’s the key thing that influences (pipeline) design,” Heinze said.

But the clock is steadily ticking towards that 2007 timeframe and Pratt outlined a list of things that need to happen, to prepare for the open season:

* Completion of changes to the Alaska Pipeline Act (in November RCA recommended repeal of two amendments to the act);

• Completion of a U.S. Department of the Environment Study into Alaska in-state natural gas needs;

• RCA approval of gas utility supply contracts;

• The identification of commercial and industrial natural gas needs; and

• Alaska Department of Natural Resources and RCA approval of ANGDA’s Glennallen spur line.

Credible bids

However, a key problem is that a bidder for North Slope pipeline capacity needs to establish a credible business plan and funding before the open season starts.

“The commitment is for capacity in the pipeline, volume and time,” Heinze said. “… You could be bidding easily for 20 years worth of capacity and a tariff number, that in the case of our local utilities could (add to) hundreds of millions of dollars, far exceeding their worth.”

A bidder needs to be able to provide financial instruments to guarantee a bid, he said. And bidders need to establish markets for the gas and determine their shipment requirements.

Heinze sees ANGDA possibly helping businesses learn how to bid for capacity — and perhaps combining the capacity requirements of several businesses. The corporation, he said, could also help in discussions with RCA regarding approval of utility contracts.

“The difficulty we see is for all the regulated utilities to make this pledge (for pipeline capacity and tariff),” Heinze said. “Whatever pledge is made it has to be approved by RCA.”

Heinze also expressed concern about the availability of contractors to work on spur line projects once work on the North Slope gas line is under way.

“If there is a deal struck say late summer, early fall (this year) … the sucking up of contractors will get so huge that we’ll be shut down,” he said. “If we don’t have it done by … spring of ’07 we’re not going to get anybody for our work.”

Parks Highway pipeline route

With the help of federal funding Enstar Natural Gas Co. is studying a gas pipeline route along the Parks Highway to the Nenana basin and Fairbanks. That pipeline could act as an alternative gas spur line for shipping gas to Southcentral Alaska from a North Slope gas line.

One outcome of the study of the Parks Highway route will be a comparison between the merits of that route and the merits of the ANGDA Glennallen spur line route. However, Heinze is concerned about the possibility that fieldwork needed for the Parks Highway route right-of-way application will not be completed before a North Slope pipeline project absorbs all available contractors. He is also concerned that the Parks Highway route will miss a 2007 open season for the North Slope pipeline.

Enstar spokesman Curtis Thayer has told Petroleum News that the studies into the Parks Highway route will not likely be completed until the end of 2007, although an initial study funded by the U.S. Department of Energy will finish in August 2006. Enstar anticipates having adequate staffing for all of the work.

“Our company has been in the business for 45 years and we anticipate using our own employees and contractors for the work,” he said.

Thayer said that the availability of government funds is driving the timeframe of the Parks Highway gas line project. However, he thinks that some of the concerns about the availability of North Slope pipeline capacity are premature, given the number of unknown variables that play into the situation. For example, current exploration in the Nenana basin, southwest of Fairbanks, may discover sufficient gas to meet Enstar’s needs. In that case Enstar may not require North Slope gas for 20 years, he said.

Thayer also expects the state to take account of intra-state gas transportation needs in its contract with the North Slope pipeline sponsors.

Create awareness

At the ANGDA board meeting Pratt also talked about the number of unknowns in the intra-state gas equation.

“There are questions but not a lot of answers, but these are things that we’re trying to figure out, understand and just create an awareness with all the in-state stakeholders,” he said.

It would be possible for a utility, for example, to make a business decision not to opt for intrastate gas from the North Slope gas line until the first expansion opportunity, perhaps after 10 years, he said. But “if you want gas in the 2016 to 2020 timeframe, you’ve got to be at the table,” he said.

Heinze sees the current situation as a defining point for ANGDA, a point where the corporation needs to decide how it will help ensure a successful future for the natural gas industry in Alaska. And an ANGDA aggregating and facilitating role in intra-state gas transportation may become part of that future.

“If we cause it to happen, and happen in a good sort of way, that is sufficient,” Heinze said. “We do not need to be the actual owner-operator of the pipeline.”

Board members questioned how ANGDA would be able to move ahead of the North Slope pipeline deal.

“Work like hell,” was Heinze’s response.

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