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Little truth in ads? Conoco, BP: Port authority ads inaccurate in describing producers’ highway plan Kristen Nelson Petroleum News Editor-in-Chief
Truth in advertising appears to be an issue for Alaska’s North Slope producers when it comes to recent ads by the Alaska Gasline Port Authority.
ConocoPhillips Alaska and BP Exploration (Alaska) have begun to respond to the port authority’s ad blitz, telling industry and employees the ads mischaracterize the BP-ConocoPhillips-ExxonMobil proposal to take Alaska North Slope natural gas by pipeline to Lower 48 markets.
ConocoPhillips doesn’t comment on other people’s projects — it works on its own, Joe Marushack, the company’s ANS gas development vice president told the Alaska Support Industry Alliance in Anchorage May 18. But, he said, the company does want to set the record straight about what the Alaska Gasline Port Authority has been saying in its ads.
He used the term “absolutely false” several times in describing the port authority’s comments on the producers’ project.
On the issue of when work would begin, the port authority said the producers would start some studies within two years.
About three and a half years ago BP, ConocoPhillips and ExxonMobil formed a team to study the project — 600 contractors and 100 company employees — and spent $125 million studying the project, Marushack said.
“This is old hat to all of you because many of you worked on this,” he told the Alliance audience. Out of that study came the recognition that federal legislation was needed, legislation which the producers drafted. Since that legislation was passed last October, most projects have shown an interest in using it, he said.
The companies are now negotiating a deal with the state and once a contract is approved the next step forward would be about a billion dollars spent on engineering, design, procurement and open season.
There has been “a tremendous amount of work in the past,” there is a lot of work going on now and “the idea of saying that we’re just talking about doing some studies after we get our deal done with the state is absolutely false,” he said.
BP has not responded to the port authority ads publicly, but a May 11 e-mail from Ken Konrad to BP employees went through the port authority contentions one by one. That e-mail has been circulating in the contractor community.
In response to the port authority’s assertion that the producers would do some studies within two years Konrad, BP Exploration (Alaska)’s senior vice president in charge of the company’s North Slope gas project, said the producers have already spent more than 1 million hours on studies and engineering, contrasted to the 55,000 hours of work the port authority reports for its own studies. How long before gas flows? “The issue about who can deliver gas first has really become an exercise in who can better capitalize on the desires of the public and the politicians for perceived gain,” Marushack said in response to the port authority assertion that the producers couldn’t deliver gas until 2016 at the earliest. He said the current estimate is nine to 10 years before the first gas.
“Many of you’ve actually helped us with the Gantt chart that’s thousands of lines long, that demonstrates the organized planning process,” Marushack said to the Alliance audience. “That’s what it’s going to take and there really are no shortcuts.”
Konrad said the sponsor group’s Stranded Gas Development Act application includes a project timeline showing first gas could occur nine years from establishment of government frameworks. “If a fiscal contract with the State of Alaska is completed this year, gas could be flowing in 2014,” he said.
The real issue, Marushack said, is “who can deliver the project most efficiently.” The schedule can’t be “artificially accelerated,” he said: “It takes time to do engineering, the EIS, the open season, procurement of steel, procurement of compressors.” The time projected for this project “is not inconsistent with other mega projects that we do worldwide,” Marushack said. How many construction jobs? The port authority ad said the sponsor group project would have 2,600 Alaska jobs during construction.
Marushack said the actual number of construction jobs won’t be known until detailed engineering is completed, but “work we’ve done to date actually indicates we’d need about 6,500 construction jobs in Alaska: 6,500 not 2,600.” In addition, he said, some 4,000 jobs would be involved in module construction and other activities and “potentially a lot of those could be done in Alaska.”
Konrad put it a different way: more than “7,000 work years of direct construction labor, plus thousands more indirect and induced jobs in Alaska.”
And, he said, “the Sponsor Group (BP-ConocoPhillips-ExxonMobil) project, by delivering significantly higher netbacks than LNG, will encourage exploration for gas that can provide long-term sustainable development and operations jobs for Alaskans.” How much in royalties, severance, taxes? The port authority said the producer highway project would deliver less than half as much value to the state in royalties, severances and taxes.
Marushack said value to the state is maximized by a high wellhead price: “the project that results in the lowest tariff to market creates the highest wellhead,” resulting in the highest royalties to the state, the highest severance taxes and the highest corporate income tax.
Konrad said the sponsor group project “moves a much higher volume of gas to market at significantly lower unit costs than the proposed LNG scheme. This means higher volumes with higher netbacks.” And higher netbacks encourage exploration, with more revenues to the state, he said.
The port authority ad said the producers’ project produces zero in revenue sharing.
Marushack said local governments along the pipeline route will get an ad valorem tax, which is shared with the state, and the stranded gas act “accounts for municipal sharing,” so there will be payments to the municipalities.
As to how much of the ad valorem tax goes to the municipalities, Marushack said ConocoPhillips thinks “it’s the state’s decision on how to share that value with the municipalities, and that’s what the stranded gas act actually does. It’s not our job to say how those revenues ought to be split up amongst the various municipalities.”
Konrad also noted provisions in the stranded gas act for payments to Alaska municipalities. He said the sponsor group has met with the Municipal Advisory Board and provided information the municipalities can use to plan for potential impacts. Where will NGLs be removed? The port authority said the producer project would strip natural gas liquids off in Canada, with no petrochemical jobs created in Alaska.
Marushack said “the idea that the liquids must be retained in Alaska in order to maximize the value is false.”
The state will receive value for the liquids wherever they are sold, he said. The NGLs can be stripped off in Canada or in the Lower 48, or in Alaska and shipped to foreign markets. If shipped to foreign markets, then transportation has to be taken into account, he said, but “the idea that we’re not getting paid for the NGL liquids is absolutely wrong.”
Marushack said it was difficult for him to see petrochemicals creating a lot of value in Alaska because of the infrastructure needed for a petrochemical’s industry. But, he said, “if it makes sense for somebody to do it, the … NGLs are there to do that.”
Konrad said the sponsor group proposal “is for an open access pipeline.” NGLs can be removed wherever “it makes commercial sense to do so,” he said. Because Alberta has an established “processing, transportation, storage and petrochemical infrastructure … it may be economically advantageous for NGL removal to occur there.” Would Alaskans really have to pay Chicago prices? The port authority ad said Alaskans would pay Chicago prices for Alaska gas.
“At no time, and at no place, has ConocoPhillips ever said that Alaskans would have to pay Chicago price for gas, and I’m not aware I’ve heard any other producer or actually any of the other project proponents say that. That is an absolute misnomer,” Marushack said.
There will be a base price for the gas, he said, with differential for transportation. If people sign up early in the process, “that differential will only account for that incremental transportation from Prudhoe Bay to wherever it lands here. So the idea that we’re going to pay Chicago price is absolutely false…”
Konrad said gas supply far from demand sells for less than gas near demand centers “due to transportation differentials.” BP, he said, “would welcome the opportunity to competitively market its gas to consumers as close as possible to the point of production so as to avoid the cost of transportation.” Would others have access? The port authority ad said there would be no access to the pipeline for anybody else.
“No, again, this is just absolutely false,” Marushack said. The federal enabling legislation addresses access to the pipeline for third parties, including explorers who don’t have gas now, and access for taking gas off the pipeline. The legislation gives the Federal Energy Regulatory Commission authority to regulate access, he said, and the Regulatory Commission of Alaska will be responsible for regulating in-state use. The federal legislation is “absolutely clear that access in and access out is part of the base project,” he said.
Konrad said the stranded gas application from the sponsor group is for an open access pipeline regulated by FERC. “BP has testified to the FERC that we fully support an open access pipeline.” Marushack: experience needed Marushack said experience is fundamental to being able to do this project.
“ConocoPhillips and you in the Alliance — you, our contractors — have been working Alaska for a long time. We’re the people that have Arctic experience. Arctic experience is rare and it’s valuable.
“Mega-project management is limited: major oil companies have mega-project experience not only here but all over the world.”
Even with that combined experience, an Alaska gas project is “challenging,” Marushack said. The project must “utilize the best practices” and experience of all the companies.
As for investment, there will be a very limited number of players paying for this project, and those, he said, are primarily the resource owners: the state and the major North Slope gas owners.
As for ownership of a gas pipeline, ConocoPhillips tries “to match up our throughput commitment to our long-term shipping commitment … with our ownership position. So if we’re going to produce 25 percent of the gas, we want to own 25 percent of the pipeline generally.”
The initial pipeline owners, including the state, might sell off portions of their ownership down the line he said, citing the example of what happened with the Alliance pipeline. “The producers started it, they got the project going, they were able — in their mind — to control enough of the costs and then they sold out of it when it made sense for them to do that.”
That is probably a more likely scenario for Alaska than a pipeline initially owned by a third party, Marushack said.
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