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A sweet deal? Some say the pipeline consortium’s proposal to the North Slope gas owners is a super deal; others say it’s incomplete, too costly, a disappointment Kay Cashman PNA Publisher
One of the best kept secrets in the oil patch is the proposal the gas pipeline consortium made to the North Slope producers in late December. The producers told PNA the gas pipeline proposal was more of “a framework for discussion,” versus a formal proposition. (See story in the Jan. 20 issue of PNA.)
The pipeline consortium said the proposal was exactly what it was supposed to be — a commercial proposal to build a North Slope gasline. Both sides agreed not to negotiate the deal in the press. PNA gets copy of proposal In mid-March PNA received a copy of the seven-page executive summary of the proposal from a state Department of Revenue official.
Dated Dec. 21, 2001, and titled “Executive Summary of the Alaska Natural Gas Transportation System Commercial Proposal to the Alaska North Slope Shippers,” it contains a lot more numbers than the producers suggested it did but it did not, as they contended, include a tariff — the amount the pipeline companies would charge to ship North Slope gas to market. It did, however, say the pipeline companies were ready to talk about “transportation tolling options” at a Jan. 8 meeting.
Former ARCO executive Ken Thompson, who says he has “lost patience with the North Slope producers,” calls the proposal a “sweet deal.” Just a good start A former BP Exploration (Alaska) Inc. executive who has kept abreast of gasline developments says the proposal is just a beginning: “It’s a good start. A very good start. But it sounds like they need more specifics about line capacity, and so forth, from BP, Phillips and Exxon before they can quote a tariff. … I’d call this more of a framework for the beginnings of a joint venture than a formal proposal to ship gas.”
When asked what the rest of the proposal looked like, Cavan Carlton, Arctic project director of gas pipeline business development for Williams, a principal member of the pipeline consortium, told PNA it “was not our intention” for the proposal to be made public. “Specific to your question, however, our overall proposal was several hundred pages in length, including considerable technical detail and numbers. I believe it would be appropriate to characterize it as a legitimate commercial proposal.”
He did say, however, that there are “a tremendous number of hurdles that have to be cleared for this project to happen. In no way should its development be taken for granted.”
The former BP executive agreed: “It’s premature to say this project is economic because all the elements that would make it economic — that give the companies a reasonable rate of return for such a high risk endeavor — are not in place. An acceptable energy bill hasn’t been signed into law. The railroad bonding isn’t a sure thing.” Gas flowing by mid-2008 In its proposal the ANGTS group says it offers the “shortest project timeline” — gas flowing by mid-2008 — because it already has the certificates and many of the required permits for the project, an approved route, and a significant portion of the pipeline rights of way.
The pipeline companies also tout their vast experience in building and operating North America’s largest gas pipelines and the “substantial development work” they have done to date on the ANGTS project which they say “will result in greater certainty and lower cost going forward.” Carlton said the price tag on the group’s investment is $400 million; $60 million of which was spent by Williams.
But gas flowing at full capacity by mid-2008 is only possible “assuming the final design parameters are agreed to by the end of the first quarter of 2002 and execution of a commercial arrangement between the ANGTS group and the ANS shippers is accomplished by mid-year 2002,” something that both Carlton and Exxon Mobil Corp. spokesman Bob Davis say has not yet happened.
Davis agrees with Carlton’s assessment that the parties have been, and expect to continue, having “discussions,” not negotiating. Price tag of $11.2 billion for 48-inch line The ANGTS group’s proposal calls for an “open access,” 1,750 mile line from Prudhoe Bay to Boundary Lake/Gordondale, Alberta. The 48-inch line “can initially deliver 4.334 billion cubic feet per day (4.5 Bcf per day receipt) and can be cost effectively expanded to 5.122 Bcf per day (5.4 Bcf per day receipt).”
The 4.334 Bcf per day system would have 2,050 psig maximum operating pressure with 28 compressor stations – a total “installed horsepower of 1,258,000.”
Capacity could be expanded to “5.122 Bcf per day by adding 18 compressor units,” the proposal said.
The ANGTS group estimated 2002 capital costs for the 48-inch, 4.334 Bcf line to be $11.2 billion. An expanded line would increase the cost to $12.3 billion.
The producers’ August estimates for a 4.0 Bcf line from Prudhoe Bay to Alberta was $9 million. Use of existing lines south While the proposal does not include building a new pipeline to deliver gas to the Lower 48, which is something the North Slope gas owners are considering, it points out the “superior downstream options in Alberta for both gas pipeline facilities and natural gas liquids handling.”
The proposal says at Boundary Lake/Gordondale, North Slope gas “can continue along the ANGTS route to connect with the existing ANGTS pre-build facilities” to multiple markets in the Lower 48 and Canada. Some of those options include connecting with Foothills’ eastern and western systems (see map), existing and expanded NOVA facilities, and the Alliance Pipeline and the Westcoast Energy System.
The use of existing pipelines to carry North Slope gas from Alberta to the Lower 48 versus the producers proposed $5.3 billion new line to the states from Alberta is one of the main ways the producers can cut the costs of the project, Thompson says.
One of the members of the ANGTS group, TransCanada PipeLines Ltd., has a separate proposal on the table that would expand existing lines from Alberta to the Lower 48 for a cost of between $1-2 billion, a significant savings over the producers’ $5.3 billion plan. Equity position offered The ANGTS proposal offers the North Slope shippers “potential project equity participation,” meaning they can join with an investment interest in the line to have a say so in operations, costs and tariffs.
“This is very generous, and it means the producers do not have to take a big investment risk — they can invest only enough capital as they feel comfortable relative to the perceived risk,” Thompson says.
He considers the ANGTS group’s transportation toll approach “very innovative” in that, “aware of producer concerns, the pipeline companies offer to discuss ‘mechanisms of sharing certain elements of risk,’ such as capital cost, annual operating cost, initial on-stream timing and transportation contract renewal. This is quite creative and really addresses key concerns producers have voiced about a pipeline company operated line.”
Thompson estimates — from numbers he received from the producers and pipeline companies as a member of the Governor’s gas policy council and from the ANGTS proposal — that ANGTS will charge a toll of “ slightly less than $2 per thousand cubic feet although this is not stated anywhere” in the proposal.
“If gas price is $3 per Mcf as forecast by the EIA, … the wellhead netback would be around $1 Mcf,” a reasonable price, Thompson says. Proposal a disappointment But ExxonMobil officials were disappointed with the results of the Jan. 8 meeting between North Slope gas owners and the pipeline consortium at which the ANGTS proposal was first discussed.
“At issue were the costs and the tariffs to deliver the gas into Alberta,” Davis told PNA March 28. “Both the costs and tariffs were higher than what was calculated in preliminary producers’ costs estimates released last summer and fall. Even with those numbers, at that time the project wasn’t economic. … It was made even less economic with the Jan. 8 proposal.”
The producers estimated a tariff of $2.38 last fall.
Although the ANGTS proposal says the pipeline companies are willing to share the risk of the venture — which is normally borne by the gas producers — Davis says in the Jan. 8 meeting the pipeline companies expected the producers to “underwrite the project and carry virtually all the risk of the project — and that involves cost overrun guarantees, a 25 year shipping commitment and a low rate return — around 14 percent.”
Thompson told Alliance members on March 14 that a project of the magnitude of the North Slope gasline could be expected to have a 15 percent rate of return on capital before it was considered feasible by the majors.
He contends, however, that the risk will be brought down to a much lower level with federal enabling legislation (which he thinks will contain a gas price floor guarantee), the railroad bonds and a strong outlook for natural gas demand and prices.
Davis says his company has “not wanted to be specific about an acceptable rate of return but we have said it is an extremely expensive, very high risk project: The higher the risk, the higher the rate of return should be.”
ExxonMobil is also “ very disappointed” with the federal enabling legislation “in its current form and especially disappointed in the fact that the legislation specifies a specific route.”
Davis said the legislation does not adequately address “certain aspects of dispute resolution and expediting a permitting process….
“This project is so extraordinarily capital intensive that once you … embark on the project and run into delays in permitting, which are to be expected with no fast track process or no process to resolve those potential delays, it is going to contribute to potential cost overruns. And that contributes to the risk. … It is a very, very high risk project,” Davis said. ExxonMobil wants to sell North Slope gas “Now having said that, we are still very interested in selling the gas off the North Slope and we … remain open to listening to all reasonable offers on how to do that,” he said.
Discussions are continuing with the ANGTS group, Davis and Carlton said.
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