Exxon Mobil Corp., BP and ConocoPhillips Inc., the three companies that are dickering with the State of Alaska over a contract to build a natural gas pipeline from Alaska to the Lower 48, are also fighting in Washington, D.C., for more control over the project.
The companies, which own the right to produce most of the 35 trillion cubic feet of known gas reserves on Alaska’s North Slope, are challenging two of a slew of rules established recently by the Federal Energy Regulatory Commission under a mandate from Congress. The regulations aim to govern federal oversight of the proposed Alaska gas transportation project, an estimated $20 billion enterprise that Capitol Hill has encouraged with $18 billion in loan guarantees and other incentives.
The rules in question are among 10 regulations FERC crafted as a blueprint for conducting open seasons for the mammoth project, including procedures for allocating capacity on the proposed 52-inch-diameter pipeline.
Open seasons are held to allow shippers to bid for space on pipelines to transport their oil, gas or other products to market. Pipeline owners then build or expand a line to meet the demand it attracts during that period.
Appeals court to hear arguments Dec. 5
The North Slope’s big three oil producers — BP, ConocoPhillips and Exxon — say the new FERC rules are unreasonable and discourage construction of the pipeline.
Not so, say would-be gas producers and shippers like Anadarko Petroleum Corp., which with its partners owns some of the most gas-prone acreage on the North Slope, thought to hold a chunk of northern Alaska’s estimated 227 tcf of undiscovered gas reserves. Anadarko says the commission’s rules, in fact, will encourage new gas exploration in Alaska by ensuring that gas producers other than the big three get access to the pipeline to ship their reserves.
Under the two rules being challenged, the commission may grant a certificate to build the gas pipeline on the condition that the would-be builder agrees to make design changes that the federal agency deems necessary to ensure competition and access for other shippers.
BP, ConocoPhillips and Exxon argued in an appeal filed in the U.S. Circuit Court of Appeals for the District of Columbia this summer that FERC has no authority to require such design changes or expansions of the project as a condition of granting a certificate.
The commission countered the argument with a lengthy response in September, observing that any applicant that is unhappy about the requirement to make design changes or expand the pipeline need only reject FERC’s certificate.
The State of Alaska under the Murkowski administration, the state Legislature’s Budget and Audit Committee, Anadarko and the pipeline company, TransCanada, also oppose BP, ConocoPhillips and Exxon in the complaint.
The appeals court has scheduled oral arguments in the case for Dec. 5.
The Big 3: FERC goes too far
In challenging the commission’s rules, the big three cited several reasons why FERC overstepped its authority. They said the commission lacks jurisdiction to require a mandatory expansion of a proposed pipeline, and cannot force companies to spend capital or take on significant business risk.
BP, ConocoPhillips and Exxon further argued that the FERC regulations could impose undue economic risk on project sponsors and initial shippers by forcing them to pay for capacity and expandability that will go unused initially and maybe for the life of the project.
They also claimed that FERC’s authority to issue open season regulations does not extend to attaching conditions to the granting of its certificates.
In response, FERC said it refined one of the two rules that the big three are challenging and added the other after receiving public comments and further testimony at a technical conference in Anchorage. The feedback reflected concern that the BP, ConocoPhillips and Exxon, either as project sponsors or as producers whose gas reserves will support the initial development of the gas line, will use the flexibility to develop open season rules to accommodate their own interests, to the exclusion and detriment of other explorers, developers and producers of Alaska natural gas.
FERC said the commenters pointed out that BP, ConocoPhillips and Exxon controlled enough gas to keep the proposed 4.5 billion cubic feet per day pipeline filled with their own reserves for 15 years. They said proven reserves are only the tip of the iceberg, referring to the sum of mean estimates from the U.S. Department of Interior for onshore and offshore northern Alaska, which is 227 tcf. According to Dave Houseknecht with Interior’s U.S. Geological Survey, that amount is expected to be recoverable by conventional means and does not include any gas hydrates.
FERC: Rules aim to balance interests
FERC said it learned from public comments that exploration of these potential gas reserves is largely in the hands of companies other than BP, ConocoPhillips and Exxon, and BP and Exxon have publicly stated that they are not interested in exploring for additional Alaska gas reserves at this time.
The commission said commenters also contended that unless FERC regulations provide assurance to companies of pipeline access, the exploration and competition that Congress intended to encourage with development of an Alaska gas transportation project will not occur.
FERC said it revised the two proposed regulations in response to the unique competitive conditions in Alaska, the Pipeline Act mandate to promote competition and the concerns expressed in the public comments. The agency wished to “make clear that it will examine proposed pipeline designs, as well as expansion proposals, to ensure that all interested shippers are given a fair opportunity to obtain capacity both on an initial project and on any voluntary expansion.”
The open season rules sought “to balance the need to allow project sponsors the flexibility to develop and bring to market Alaska natural gas with the equally competing needs to ensure fair competition in the transportation and sale of natural gas, promote the development of natural gas resources in addition to those in the North Slope, and consider Alaskan in-state requirements,” the commission explained.
FERC also said it routinely imposes design changes to support findings of public convenience and necessity and noted that in this case, no application has been filed, no certificate has been issued, and no conditions have been imposed.
“Should all of these events occur and an aggrieved party believes that specific conditions imposed are arbitrary and capricious, it may seek judicial review at that time,” the agency concluded.
