While they believe a North Slope gas pipeline is essential for Alaska’s future — and to meet natural gas needs in the Lower 48 — the North Slope producers don’t think AGIA is the way to get that line built.
That was the reaction legislators heard to the governor’s Alaska Gasline Inducement Act from BP, ConocoPhillips and ExxonMobil beginning March 23.
Marty Massey, U.S. joint interest manager for ExxonMobil, said the State of Alaska needs to provide fiscal certainty for the upstream — not just the 10-year natural gas production tax freeze proposed in AGIA. “Without stable fiscal terms I don’t know how to make adequate investment decisions,” he told Senate Resources. The project is so huge, he said, that it will impact even ExxonMobil. “We can’t make that capital investment and then a few years later that capital investment is no longer valid. We have to know that it’s going to be viable in the long term so that we can make an adequate decision.”
He told the House Special Committee on Oil and Gas that the state has struggled with locking in oil and gas taxes and said he would propose that fiscal certainty not be mandated in AGIA. Each applicant should describe in its AGIA application what fiscal terms are necessary and the state would evaluate that as part of the applications, he said.
Massey said the gas tax rate in the Petroleum Profits Tax is too high and will not result in an economic or viable project.
He said ExxonMobil does not believe the gas pipeline project will be successful unless the state, ExxonMobil, BP and ConocoPhillips are aligned. This is a basin-opening project, he said: The North Slope has been opened to oil; this will open it to gas.
Because the costs and risks of basin-opening projects are so high, the leaseholder generally takes on such projects, Massey said.
Administration: Exxon message ‘consistent’
Commissioner of Revenue Pat Galvin told legislators the Exxon message “is consistent.”
This is what the company has been telling the state for a number of years — fiscal certainty not just on gas production taxes but on property tax, corporate income tax and royalties, he said: “Clearly that is their stated position.”
The changes that Exxon is proposing to AGIA are basically on the model of the Stranded Gas Development Act, a model Exxon was comfortable with, Galvin said. Under that model applicants would respond to broad requirements and the administration would probably have to negotiate and bring those results back to the Legislature.
Exxon is a successful company, Galvin said, and one reason they are successful is leverage in negotiations: They position themselves so their position has the greatest strength.
Galvin said the state has a choice: it can do what it did before with the stranded gas act, trying to negotiate with the producers, or it can try something different as proposed in AGIA, where the state’s requirements — in exchange for incentives — are stated up front.
On the state’s specific requirements in AGIA, and whether those requirements might eliminate potentially good proposals, Commissioner of Natural Resources Tom Irwin said the administration carefully considered that. Very large companies have multiple ways to work the issues in a response, he said, and if they really want to work in Alaska they will meet the requirements.
Galvin said the administration believes the AGIA requirements are in the ballpark for the commercial world to participate.
BP also opposes AGIA
BP, like ExxonMobil, told legislators it wants to see a gas pipeline happen, stressing that the line needs “to be built for low capital cost and be operated efficiently,” something the producers have said they are most motivated to do, since they are the ones who will be paying for the line through their shipping commitments.
Dave van Tuyl, gas commercialization manager for BP in Alaska, told legislators BP believes AGIA “may create some unintended consequences that could jeopardize the vision of getting Alaska’s gas to market quickly and at low cost.”
He said BP is concerned that AGIA “would result in an exclusive winner before any real work is done and it awards state funds based on promises, not on results.”
AGIA proposes that the state, on a cost-sharing basis, would put as much as $500 million into the process of getting through an open season and up to a FERC application. Van Tuyl said BP did not request the $500 million and said it “may be attractive to underfinanced project sponsors or companies not willing to risk all of their own money.”
BP suggests, van Tuyl said, that “rather than specifying in advance what inducements are needed, the state could ask project sponsors to propose their own specific midstream inducements.”
That, he said, “would give the free market the opportunity to do what it does best. The state could then determine what inducements to offer and perhaps make those available to all parties to allow competition.”
BP is also opposed to the requirement in AGIA that applicants commit to advocating rolled-in rates in their FERC application. Van Tuyl said FERC already has a rebuttable presumption of rolled-in rates for expansions of an Alaska gas line project in its rules, provided those rolled-in rates do not subsidize initial shippers.
Like ExxonMobil, BP said AGIA “doesn’t sufficiently address the resource framework.” Resource owners pay the cost and bear the risk of the pipeline, whether they own it or not, van Tuyl said.
He said “resource issues have to be resolved for the project to proceed and to ensure the resource owners have sufficient confidence to make the necessary long-term financial commitments in an open season required to advance the project.”
ConocoPhillips opposes exclusivity
Wendy King, director of state negotiations for ConocoPhillips, told legislators that ConocoPhillips agrees with the state that timing is important for the project. She said the company is committed to developing ANS gas resources and willing to consider creative solutions.
ConocoPhillips is eager to find a framework by which both the midstream and the resource parts of the project can be advanced; the resource portion of the project is the upstream assets that would be asked to make shipping commitments, King said.
She said ConocoPhillips has gas resources at Prudhoe Bay, but is also an active explorer, so likely would be both an initial shipper and an expansion shipper on the line.
King said ConocoPhillips is concerned about the exclusivity created in AGIA by the selection of a single project, and asked why the state would want to block competing projects with inducements such as training provided only to the selected project.
If the state chooses the wrong winner, and that project doesn’t advance, other projects could be blocked for 10 years she said, the total time available to an applicant who does not have a successful initial open season or alternate credit backing.
AGIA provides that such a project would have up to five years after obtaining a FERC certificate to complete financing, and the state estimates five years to hold an initial open season and gain a certificate.
On the question of what it would cost to complete an open season, King said the 2001-02 cost study the companies did estimated $400 million to $500 million to complete an open season, roughly two years work prior to beginning the FERC process. She said it appears that AGIA would allow a company to hold an open season after spending only some $10 million — and then state matching funds would move from the 50-50 prior open season match to a match of up to 80 percent on the state’s part after the open season.
Governor: AGIA is the way
“It’s no surprise that the producers and those independents wanting to do business with the producers, would acknowledge how good they had it, I guess, under the Murkowski administration, in terms of what was being given to them in order to induce them to perhaps, someday, build a gas line,” Alaska Gov. Sarah Palin said at a March 28 press conference.
“They’re not comfortable, necessarily, with the process that we have laid out — evidently, by their testimony — because our process is a fair and transparent process where we’re not going to be giving away the farm in order to induce or entice three big producers to come to the State of Alaska and help develop our gas resources. So it’s no surprise what their testimony is,” the governor said.
Palin said the state has “good support” for AGIA on the national level, and said she updated Vice President Cheney on progress earlier in the week. “He continued to express his support for getting a gas line built, knowing that it is in the nation’s best interest.”
She said she believes the Alaska public is supportive of AGIA because “it’s open, it’s transparent, it’s competitive.”
“And I am convinced and very committed to AGIA and convinced this is the right road to go down.”
Palin said her concern is that Alaskans are able to benefit from the gas resources. “I want to make sure that there is in-state use of gas; I want to make sure that there are the jobs for Alaskans.”
“No surprises so far with the producers’ testimony,” she said, “but I am pleased with the progress of AGIA and I think legislators are asking really good questions.”
