Gibson touts TransCanada line progress

Alaska Gas Pipeline Project Office director calls for continued focus on North Slope to market gas line despite uncertain economics

Stefan Milkowski

For Petroleum News

Driven in part by a lack of faith in the Alaska Gasline Inducement Act, the Alaska House voted March 27 to move forward with a smaller, in-state gas line.

But Kurt Gibson, director of the Alaska Gas Pipeline Project Office, argues it’s premature to give up on a large-scale pipeline. Alaska’s AGIA licensee, TransCanada, has met its commitments under the law and is moving ahead with regulatory and technical work, he says. And regulation of hydraulic fracturing and shifts in global gas markets could still make a big line economic.

According to Gibson, who has worked as a natural gas trader and served as deputy director of the Division of Oil and Gas, the underlying volatility of energy markets is an essential driver of investment.

Petroleum News spoke with Gibson on March 21.

Petroleum News: I want to start by asking who you are and what your office does.

Gibson: I’m Kurt Gibson. I’m the director of the Gas Pipeline Project Office, the office that exists as part of Alaska Statute 43.90, the Alaska Gasline Inducement Act.

We monitor progress on the pipeline project undertaken by our licensee TransCanada, in partnership with ExxonMobil. We also coordinate among agencies within the state where public comment and FERC (Federal Energy Regulatory Commission) interaction is involved. And we coordinate among the various state stakeholders regarding commercial advancement of the project.

We have a technical, a regulatory, and a commercial role in the project.

Petroleum News: Let’s start with the regulatory side. Where is the Alaska Pipeline Project in the regulatory process?

Gibson: On the 13th of January, the APP project filed its draft resource reports with the FERC. That was an important milestone that set off a scoping process by the FERC in which they visited affected communities along the pipeline project route and have been receiving public comments.

We have been coordinating with other state agencies to provide state agency comments, and we expect to hear back from FERC within the next few weeks regarding gaps and overlaps in the work.

Petroleum News: What’s in those draft resource reports?

Gibson: There’s a host of information ranging from project design and project route to subsistence information. There is archeological and cultural information, habitat information, that is all intended to provide FERC with the required level of comfort that the project is acting in a prudent fashion and complying with federal standards and state standards.

Petroleum News: And final versions of those reports will be included in the application for a FERC certificate?

Gibson: That is correct. The draft resource reports generally result in feedback from the public and state agencies that results in a shoring up of those reports. A final submittal of those reports will happen in concert with APP’s application for a FERC certificate of public convenience and necessity.

That’s currently scheduled for October of this year.

Petroleum News: Is TransCanada on track to meet that deadline?

Gibson: Yeah. We’ve seen nothing that would indicate they are in any danger of missing that deadline.

Petroleum News: TransCanada delayed submitting the reports so they could talk with North Slope producers about a liquefied natural gas export option. Do you have any concern about that delay?

Gibson: No. In my opinion, there are things we should be encouraged by. First of all, the reports were intended to be filed by the end of the year and they were filed on the 13th of January, so they missed by a couple weeks.

Those couple weeks didn’t cost the project any time in any meaningful sense. What they did do is allow for the project to engage in substantive conversation with other important stakeholders, namely the upstream producers, to determine their interest in pursuing an alternative route.

In the end, the decision was made by the project that submitting those draft resource reports wouldn’t in any way frustrate a parallel effort to pursue a project to tidewater.

Petroleum News: If that turns out to be a more viable project, would TransCanada need to update its resource reports?

Gibson: There are some additional resource reports that would need to be compiled. There’s a liquefaction plant involved with the tidewater project, so that would be brand new work. On the other hand, there’s also a lot of work that’s been done that’s applicable regardless of the project configuration.

Petroleum News: FERC held scoping meetings around the state in January and February and took public comments through February 27. What can you tell me about the comments?

Gibson: From my perspective, the turnout to a lot of those meetings was low. I think that may be because there’s a little confusion in some of those communities about which project is which, and some frustration over the fact they’ve been visited many, many times over the last several decades regarding this project and have not seen any material progress.

Most of the comments we received or that went on record with FERC had to do with the opportunity for jobs on the project, access to affordable energy from the project, and the impact on the livelihood of communities in the vicinity of the project.

Petroleum News: Let’s switch to the commercial side. APP’s open season closed in July, 2010, and we still haven’t heard what kind of commitments were made. What can you tell me about any progress made on the commercial side?

Gibson: I can tell you the same thing we’ve heard from the project, which is that bids were received from significant players on the North Slope, substantial interest was expressed.

Generally open seasons result in that type of expression of interest, and then are followed by in-depth negotiations between the project and the customers. To date, we have not heard that those negotiations have resulted in commitments on the part of potential shippers.

But I want to emphasize that conversations are ongoing. Whether it relates to an overland route to Alberta or a potential project to tidewater, it’s critical that that conversation continue in order for us to keep the ball moving down the field on this project.

Petroleum News: TransCanada says it’s doing what it can, but that some of the conditions on the bids are out of its control, such as fiscal terms and access to Point Thomson gas. What’s the state doing to help resolve those issues?

Gibson: The state’s been involved in negotiations with the Point Thomson working interest owners for some time. I think all the parties hope that that will be resolved in the not-too-distant future.

The fiscal issue is one that’s been kicked around for a number of years. It’s maybe a matter of opinion as to whether that’s something that needs to be dealt with today or whether it’s something that can be dealt with once the project takes on a little better focus.

The governor has indicated that he’s willing to entertain some kind of a fiscal package for gas commercialization once the parties align behind a single project.

The notion that a capacity commitment on a project like this would be conditioned on those types of things is fairly novel. You don’t see that elsewhere. It’s something that’s unique to the state of Alaska.

Gibson: The governor has indicated to potential shippers, the upstream stakeholders in this project, that if they align, then he will entertain some fiscal proposal, but not until then.

I’ve heard him say that certain things have to happen in a particular sequence: resolution of Point Thomson, alignment among the project stakeholders — the upstream shippers and the midstream players — within an AGIA framework, and once those things have happened, then it’s possible for the Legislature to take up the question of fiscals, or fiscal certainty.

I can’t tell you anything about progress that’s being made because frankly, the governor has been clear that that’s not something he’s driving. It’s something he’s strongly encouraging — encouraging them by telling them that if they’ll do that, in exchange he’ll do certain things, and among those things is entertain the concept of a fiscal package.

Petroleum News: What are your predictions for U.S. and global markets for natural gas?

Gibson: I traded natural gas in the Lower 48 for 10 years, and I can’t say I was any better at predicting the future than any of my peers.

What I can tell you for certain is that global energy markets are dynamic, and that’s what attracts investment. The fact that they are different today than they were yesterday and are in all likelihood going to be different tomorrow is what makes it an attractive opportunity for investors.

There’s risk and volatility, and volatility is essential to attracting investment capital. It’s something that has to be dealt with, but it’s also something that presents great opportunity.

Roughly five years ago, we saw North American gas prices in the neighborhood of $12 to $15. There were some basic, very fundamental factors that drove that. You had hurricanes in the Gulf that were taking production offline, driving up North American natural gas prices.

Since that time, you’ve seen technological advances that have again fundamentally changed some things in the Lower 48 that have driven prices downward.

What the fundamental driver will be tomorrow and how that will impact the supply-demand balance, I can’t tell you. But certainly when you look at prices where they are today in North America, they appear to be at or near the bottom end of a price range.

Globally, natural gas is becoming more and more fungible, the way crude oil has been for many years. Consequently I think you’ll see a leveling out of the price differentials between various parts of the planet.

That’s not to say there won’t still be a basis differential between a supply basin and a consuming region, but these massive disparities that we’ve seen in the past may be an artifact of a period from before natural gas was fungible. LNG is much more prolific globally today than it was even five years ago.

Petroleum News: Is that a good thing for an Alaska pipeline?

Gibson: I don’t think you can say whether it’s a good thing or a bad thing. I question anybody who claims to be able to predict the future.

I do know that in order to capitalize on opportunities, market players have to be nimble and decisive. I think sometimes in Alaska, we have a tendency to be influenced by the events of the day rather than staying focused on a long-term goal. And that long-term goal for the state, I think, is commercialization of North Slope gas.

Whatever we’re doing should be focused on that goal.

Petroleum News: Is an Alaska gas pipeline project economic?

Gibson: Well, inasmuch as the project won’t deliver gas to any market, North American or otherwise, for another 8 to 10 years, I’ll put the question back to you. If you can tell me what prices are in North America or Japan or China 8 to 10 years from now, I’ll tell you with certainty whether or not the project is economic.

In the meantime, what’s important is that we narrow the scope of uncertainty around this project. You point to questions around price, but there are other uncertainties that need to be reduced to get to a point where companies that are going to make massive investments can pull the trigger on those decisions.

Continued progress on the technical and regulatory fronts is essential so we can get to the time when commercial players can make a decision about the economic viability of the project. That’s when the project is only four years away from first gas, rather than when it’s 8 or 10 years away from first gas.

Petroleum News: The EIA’s annual energy outlook last year predicted an Alaska gas line wouldn’t be built in the next 25 years. The new early release for 2012 predicts even higher domestic gas production, making the U.S. a net exporter of gas in less than a decade, and it keeps the Alaska gas line off the list. What are they missing?

Gibson: Well, I’m not sure they’re missing anything. Again, I go back to my experience as a trader. There are fundamental factor inputs that go into your view of the future. When you look at the EIA, they’re obviously weighing very heavily the fundamental impact of shale gas in North America. But there are other factors that could impact the production of shale gas in North America, not least of which is potential changes to the regulatory environment.

I think it’s undeniable there are questions yet to be answered regarding what’s going to happen regulatorily to shale gas in North America. From a pure price perspective, I can tell you that nobody’s exploring for shale gas at $2.

Petroleum News: And these EIA outlooks don’t try to predict regulatory changes, right?

Gibson: That’s correct. They look at the existing regulatory environment and they extrapolate out as far as the eye can see, and then they change it when the facts change.

That’s a perfectly legitimate way of forecasting. But I always like to remind people that forecasts all have one thing in common, and that is that they’re all wrong.

Petroleum News: There’s a bill in the Legislature that would essentially force the administration and TransCanada to prove the project is still economic (HB 142). What would you say to people who’ve given up hope on an AGIA pipeline?

Gibson: Well, I think it’s premature to give up hope on an AGIA pipeline in general, an Alberta route in particular. I think it’s premature to give up on anything.

I’d say those that want to change the fundamental bargain struck with our licensee are doing just that, changing the fundamental bargain, and I disagree with it.

Petroleum News: Does your office coordinate with the Alaska Gasline Development Corporation?

Gibson: Constantly. We have a very good, solid working relationship with that project. We have a great deal of respect for the team that Dan Fauske has put together and the work they’ve done.

We have worked fairly tirelessly to keep the projects from being in conflict with one another and, where possible, to try to find efficiencies so the state’s money is used in the wisest possible way.

Petroleum News: Some would like to see alignment between those two projects. How would that work?

Gibson: There are a number of different ways you could consolidate the efforts, but it might be premature to go down that road. What we’d like to do is see how the alignment between the APP and upstream stakeholders takes shape over the very near term. Once that comes into greater focus, we’ll be able to figure out how we may be able to better coordinate or consolidate efforts between gas pipeline projects.