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Vol. 12, No. 7 Week of February 18, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Marushack: Alaska gas line behind the curve

ConocoPhillips Alaska exec says markets need to know North Slope gas pipeline is coming because of competition from coal

Kristen Nelson

Petroleum News

It’s not yet a train wreck, but “in my personal belief, we have gone from being in front of the curve to being in back of the curve right now,” says Joe Marushack, ConocoPhillips Alaska vice president for Alaska gas development.

Marushack, who has headed up the Alaska gas project for ConocoPhillips for six years, is leaving Alaska within a few weeks to head up the company’s Australia business.

He told Senate Resources Feb. 9 that in the past he didn’t believe there was a window for the Alaska gas project, but “things changed about two years ago” due to growing competition, “not only of gas-on-gas, but of all the other energy sources that are out there. In particular, we’ve got coal-fired plants being permitted right now in Texas and in places they haven’t historically been permitted,” which is a loss of market for Alaska gas.

Once the Alaska gas pipeline starts up, Marushack said, it will flow gas for the next 30 to 50 years. “Coal-fired plants are almost the same way — once you start up a coal-fired plant, you probably don’t go back to gas or anything else and we are seeing clean coal-fired technology now that has the ability to take some of our market.”

Markets aren’t the only competition, Marushack said: there is “massive competition for critical components … steel, machinery, labor, technical engineering and project management.” As prices have risen, projects have moved ahead of the Alaska gas pipeline, he said, “so we’re back in the queue on getting steel and on getting this equipment right now.”

Time is also an issue for the new Legislature and the new administration, Marushack said.

When ConocoPhillips adds people to its gas team — people with 10-15 years project experience — it takes them about a year in order to be productive because of the complexity of the Alaska project, Marushack said.

The new administration and Legislature will require “a certain amount of time to really get comfortable with the issues and be able to move it forward.”

Resource issue critical

The old contract, the one negotiated by the Murkowski administration, addressed the resource issue, he said. “If we can address the resource issue, the pipeline falls out of that.”

“The resource issue is really the critical part of the equation here,” Marushack said. “The resource pays for everything through the shipping commitment.” While the pipeline will provide access to other explorers, the North Slope producers have got the resources and the balance sheets and “the ability to make long-term shipping commitments” if the deal is right. It’s the producers, and the State of Alaska, that “basically are going to pay for this project,” he said.

Pipeline owners, as opposed to the resource owners, receive “a regulated rate of return based on their equity contribution.” If the cost of the project is higher, “they transfer that on to the shippers. … It’s paid by the resource owners.” If market prices for natural gas drop, the pipeline isn’t affected, “because they receive a rate of return off the shipping commitment and off that tariff.”

“So prices go up, prices go down, we have the impact. Costs go up, we have the impact of that.” The risk borne by the pipeline company is for dollars it puts up from the time planning starts to when a successful open season is held, probably between $400 million and $1 billion.

A solution to resource issues has to work for both the producers and the state, Marushack said.

What are the issues? They are addressing taxes and royalty “so the producers can make this massive shipping commitment and be relatively certain that any potential value and upside is simply not going to be taxed away over time.”

Pipeline vs. resource issues

As for the administration’s new proposal for gas line legislation, the Alaska Gasline Inducement Act, “I think the idea of splitting the pipeline issues from the resources issues — and I believe that is going to be part of the proposal based on what I’ve heard so far — that has some merit.”

“You work the pipeline issues, which are actually pretty simple, one way.

“You work the resource issues, which are actually very complicated, and you do those separately.”

Marushack also said he thinks looking at different pipeline proposals makes sense for the state.

“But,” he said, “I really think that the fundamental issue remains you have to address the resource side of the equation. If you’re successful on the resource side, the pipeline will fall out of that.”

Dropping the rhetoric would allow the process to move forward, he said, which will require understanding and working with each other, he said. One example is the term fiscal certainty. “I suspect when producers say fiscal certainty some people think that’s an attack on self-sovereignty.” And from the producers’ side, “when folks say rolled-in rate, I can tell you we think that’s code for subsidizing other companies.”

There is also, he said, a misunderstanding that the project is “wildly economic, obviously economic.” But Marushack said nobody can really say that.

In 2001 the producers did a cost estimate and came up with about $20 billion. “Since then, steel prices have doubled; labor’s gone way up; the queue for equipment has drastically changed; (and) project management skills are much more difficult to find.” To know what a project would cost today, engineering costs have to be redone, and until that is done, he said, “nobody, not us, not any body else, can tell you exactly what their projects cost, until they build all that engineering work.”

Marushack said the cost certainly isn’t $20 billion any more; it’s probably more like $25 billion.

On the market side, gas prices hit $10 last year and they were less than $4: “It’s all over the place and it’s hugely volatile.”

Ensuring a successful open season

Sen. Bert Stedman, R-Sitka, said a major concern was that there could be an open season with no participation and asked what the state could do “to ensure that the major players would be interested in showing up at an open season?”

Marushack said a tax agreement with the state was the first thing because of the long-term shipping commitment and the need of the companies to know what the fiscal terms would be. Cost overruns are also an issue. If ConocoPhillips is managing the project and has ownership in the pipeline, “we’ll take the cost-overrun risk. We do it all over the world; we’ll do it on this one, too.”

ConocoPhillips has a process that the company thinks has the best opportunity of keeping the cost low: “It’s not that we don’t have overruns; it’s that if we have the problem ourselves we’ll pay for it ourselves.”

The same doesn’t hold true, he said, if there is a third-party pipeline builder, because they wouldn’t have the same interest in keeping the cost down and wouldn’t have the same processes.

“It gets into this disconnect, where if you don’t own the resource and yet you are going to be held whole on the pipeline itself, there’s less interest in making absolutely sure that the cost is as low as possible.” There may be ways around this, “but I do think it’s an issue that the producers are very interested in managing that cost and that means matching up throughput with ownership for the most part.”

So how to avoid an open season where nobody shows up? “Let’s get our deal done on the resource side … (and) I think it’s probably best if we’re aligned on the pipeline and the resource and shipping commitments.”

Stedman asked: what if the state decided not to take a shipping commitment, just ownership in the pipeline.

“If that were one of the main issues, the state not wanting … to take that shipping commitment, we’d probably have to have some deal still that addresses issues around the shipping commitment, but there may be ways around that, too,” Marushack said.

Resources Committee Chair Charlie Huggins, R-Wasilla, asked Marushack if there were show stoppers he hadn’t touched on.

Marushack said there were a couple of things that, if they weren’t show stoppers, would be pretty close. “One of which is we have to address the resource issues; there’s no way around addressing the resource issues. It’s too big a project.”

Another one, he said, is “no company, no public company, is going to subsidize another public company.”

And third, “it’s not a show stopper, but it’s a serious issue: I personally have trouble figuring out how you make that shipping commitment if you don’t control the cost.”

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