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Vol. 12, No. 31 Week of August 05, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

FERC can’t force expansion

Court upholds rules regulating Alaska gas line, while quieting owners’ fears

Rose Ragsdale

For Petroleum News

A federal appeals court rejected an effort July 27 by three major gas owners in Alaska to overturn two rules governing access to a potential multibillion-dollar pipeline that would transport natural gas from the North Slope to the Midwest.

But the import of the decision by the U.S. Court of Appeals for the District of Columbia Circuit may actually be good news for BP, ConocoPhillips and ExxonMobil. The three companies, which produce most of Alaska’s oil and lease a large chunk of the North Slope acreage with known gas reserves, have been insistent that they own majority interest in a gas pipeline from the North Slope.

Alaska has struggled for decades to develop its abundant natural gas resources in the Arctic — estimated to exceed 100 trillion cubic feet of recoverable reserves and nearly 40 tcf in recoverable known reserves — by trying to strike a deal with either gas owners or with independent pipeline companies for construction of the project.

An agreement inked with former Alaska Gov. Frank Murkowski for BP, ConocoPhillips and ExxonMobil to build the 3,600-mile gas line unraveled last year in the face of political and public complaints that the three owners of the proposed pipeline were given billions in unwarranted concessions.

In 2005, the Federal Energy Regulatory Commission, under a mandate from Congress to expedite development of Alaska natural gas, adopted rules for regulating an Alaska gas pipeline system.

BP, Conoco, Exxon challenge FERC regulations

BP, ConocoPhillips and ExxonMobil, worried that FERC overstepped its authority with two of the new rules, challenged the regulations in the appeals court last summer.

Regulations 157.36 and 157.37 are designed to protect the ability of Alaska energy suppliers that do not own the gas pipeline to deliver their fuel to market, according to the commission. Part of a set of 10 regulations, the rules are guidelines for allocating capacity in open seasons held for the proposed 52-inch-diameter pipeline.

Open seasons 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.

E&P companies with prospective natural gas acreage in northern Alaska, including Anadarko Petroleum, are concerned the companies that ultimately build the pipeline would limit access to it, especially if the pipeline owners are BP, ConocoPhillips and ExxonMobil, their competitors in gas production.

Court: owners misinterpreted rules

In a 12-page opinion written by Chief Judge Douglas H. Ginsburg on behalf of a three-judge panel in the consolidated case, the appeals court found that BP, ConocoPhillips and ExxonMobil misinterpreted the two rules in question.

The three companies argued that FERC’s rules would force the pipeline’s sponsor to build a larger pipeline than necessary to carry natural gas that might never be discovered, according to the court decision. The companies also argued that the large costs of paying to build the pipeline for companies that hadn’t committed to use it might make the project too risky to continue.

The court disagreed.

“The petitioners’ facial challenge to (sections) 157.36 and 157.37 is based upon a misreading of these regulations,” wrote Ginsburg. “They misread (section) 157.37 as asserting the commission has authority to condition the issuance of an initial certificate upon the project sponsor’s agreement to build a pipeline capable of carrying more gas than the project sponsor proposes. … As commission counsel acknowledged at oral argument, (section) 157.36 purports only to allow the commission, in order to introduce new competitors into the market, to allocate such capacity as the sponsor itself proposes to add. So understood, the regulation ensures that a new shipper willing to sign a long-term contract may gain access to a portion of any proposed expansion capacity.

“Indeed, it would not make sense for the commission to rely upon (section) 157.36 to order an increase in expansion capacity above that proposed by the sponsor,” Ginsburg observed.

Court: federal law prohibits compelling enlargement

Though FERC’s attorney argued that the last clause of 157.37 could be interpreted to authorize the commission to require an unwilling expansion of capacity before issuing a certificate only in the interest of promoting competition, the court said the commission itself has not taken that position and may never do so, particularly in view of a prohibition in federal law against compelling the enlargement of transportation facilities.

Reacting to the appeals court ruling July 31, ExxonMobil spokeswoman Margaret Ross said, “We respect the court’s finding that under applicable law the commission does not have the authority to compel the enlargement of transportation facilities in the initial project design.”

A FERC spokeswoman Aug. 2 said the commission declined to comment on the ruling.

ConocoPhillips and Anadarko declined to comment, and BP could not be reached for comment by press time.

In July, Alaska Gov. Sarah Palin said the state is again prepared to receive applications to build the proposed gas pipeline system.

—The Associated Press contributed to this report.

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