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Phillips, EnCana take opposite sides on gas pipeline issues Will tax credit help or hurt? Will gas be stranded in Canada? EnCana: No guarantees of pipelines to Lower 48; Phillips: Taking gas to Lower 48 part of the plan Kristen Nelson PNA Editor-in-Chief
There were other players, but the Aug. 19 meeting of the Alaska Legislature’s Joint Committee on Natural Gas Pipelines was primarily a duel between EnCana and Phillips.
The committee had asked pipeline companies, explorers and producers to comment on effects of tax credits based on the Alberta hub price of natural gas and other incentives that are part of the proposal being considered in Congress.
Not everyone invited appeared, but among those who did Alan Sharp, director of northern business development for EnCana Marketing (USA) Inc., and Joe Marushack, vice president of ANS gas commercialization for Phillips Alaska Inc. drew the most questions from committee members.
Phillips is one of the three major owners of North Slope natural gas.
EnCana — among other Alaska projects — is exploring for gas in the Foothills and in partnership with Anadarko Petroleum Corp. placed the winning bid in a state sale of some of its North Slope royalty gas.
Both EnCana and Anadarko have expressed concern about access to a gas pipeline for as-yet-unidentified volumes of natural gas the two may discover in the Foothills.
Subsidy ill-conceived Sharp said EnCana opposes any subsidy to an Alaska gasline because it would strand gas in Canada and raise the cost of gas to consumers.
Sharp said a “gas floor-price would provide an advantage to an Alaska gas producer to the detriment of all other North American gas producers and ultimately the consumer” and also said “subsidized Alaska natural gas would distort the gas price and disrupt the efficient operation of the market.”
In response to a question from Rep. John Davies, D-Fairbanks, about appropriate government assistance, Sharp said “the floor price is benefiting the producer and if it’s really the pipeline that you want to go ahead, then shouldn’t … the subsidy be credited directly towards the pipeline owner and the pipeline itself?”
EnCana is concerned about the pipeline infrastructure, Sharp said: “provide the credits directly to the pipeline if it’s needed.”
Committee Chair John Torgerson, R-Kasilof, asked Sharp if EnCana objected to all subsidies. Sharp acknowledged there are royalty holidays in Canada, but said that if more energy is the goal, a credit should be applied at the source.
Torgerson said the price-floor mechanism is “not different than subsidizing through royalty relief… (it) has the same effect of stabilizing gas price. …
“You’re just splitting hairs on where it’s at in the tax code,” he told Sharp.
Phillips says it’s risk mitigation “It’s not a floor,” Marushack said of the tax credit in the Senate version of the energy bill, “it’s a tax mechanism that triggers at a certain price, on tax credits.
“The market will be what the market is,” he sold the committee. “What happens is when you get the $3.25 AECO (Alberta hub price) mechanism you get a federal tax credit…”
“When you say floor,” he said, “that means things to people in the Lower 48: that they are going to have to pay a higher price for gas than they want.”
The tax credit provision is a risk mitigation measure, he said, and would be repaid if gas prices went above specified levels.
Marushack also said the tax credit “is not for the three big producers. This is for all Alaska gas that comes in for a certain period of time. And the Lower 48 — they want more gas, they see benefit of more gas, not less gas.”
Marushack told the committee he believes that if this tax mechanism doesn’t happen, this project won’t happen.
Will gas be stranded in Canada? EnCana’s Sharp said his company is also concerned that the proposals now in Congress will strand Alaska gas in Canada. The Senate proposal, he said, “presumes that sufficient downstream pipeline capacity will exist to transport Alaska gas past Canada to U.S. markets. The Alaska gas floor price removes the natural incentive for an Alaska producer/shipper to ensure adequate capacity will exist.”
Torgerson told Sharp: “I’m a bit perplexed at your comments that you think this might strand Canadian gas. We’ve sat through a lot of presentations from the Alberta government that the hub currently established in Alberta can — with a few modifications — handle the gas now.”
Sharp said EnCana’s concern is based on the fact that nothing in the proposed U.S. federal legislation requires building additional pipelines to move the gas to the Lower 48.
If a pipeline is built to move the gas out of Canada, then the gas would not be stranded and would not impact the market, Sharp told Torgerson, “…but there is nothing as far as I’m aware in the act that actually would force that to happen… (and) our projections show that with 4 bcf of Alaska gas coming down you will strand gas…”
Canadians could build infrastructure Marushack denied that gas would be stranded in Canada.
“Phillips and BP and Exxon did design a pipeline all the way to Chicago,” he said.
“The idea that we’re going to strand Canadian gas is nonsense.”
The producers have looked at building a line into the Lower 48, he said.
“But a better solution,” Marushack said, “is that the Canadian infrastructure, the pipeline companies — TransCanada, Foothills, Duke, Williams, all those companies — expand their systems so we aren’t just going to Chicago, but we’re going to other places.”
That, he said, is how to get the best price for the gas.
And it’s also an opportunity for Canada.
“This is a once-in-a-generation opportunity for Canadian pipeline companies to have 4 bcf” of gas and to expand their systems to deliver that gas into the Lower 48, he said.
State fiscal issues In addition to the low-gas-price tax credit, Phillips will also be pursuing federal investment tax credits on the gas treatment facility and seven-year depreciation on the pipeline and will be talking to the state about fiscal issues, Marushack said.
Marushack also told Torgerson that the discussion the state had with the producers July 24 was based on a BP presentation.
“It was not a Phillips presentation. I was invited to sit in on that and I did sit in on that but I do not agree, necessarily, with all of the points that are in here,” Marushack said.
“Clearly there was nothing in there about state fiscal incentives,” he said, “and we think we would be pursuing those.”
Phillips doesn’t agree with all of the things in the presentation, Marushack said, but it was a starting point, although “we didn’t think the timing was necessarily appropriate.”
HB 519 timing also wasn’t good Marushack said that once federal enabling legislation is in place, Phillips would be pursuing a state fiscal package and legislation similar to House Bill 519 which was introduced late last session and was not passed by the Legislature.
“We thought that was a good approach,” he said. “We thought it made use of existing state processes to enter into confidentiality agreements, to share information” and provide for “a public process and a way of negotiating and ultimately bringing forward a contract” or other agreement for legislative approval.
Rep. Reggie Joule, D-Kotzebue, told Marushack that HB 519 came so late in the session that there wasn’t much chance for consultation.
The North Slope strives for partnerships in resource development, Joule said. “And I would hope that as we develop legislation that people are brought into the conversations and to the table earlier as opposed to being dragged into these partnerships kicking and screaming — because there were some concerns with that.”
HB 519 was not Phillips’ bill, Marushack said, although the company weighed in on it after it was put forward.
He said he agreed with Joule that more people need to be drawn discussions on such a bill next time.
Phillips doesn’t want changes Torgerson pressed Marushack on what changes Phillips would accept to the energy bill now in Congress.
“The White House isn’t really keen on the tax price floor,” Torgerson said. “They’ve asked … BP to come up with an alternative — maybe even you. So, the question is, are there any alternatives that are being proposed” and if so, “what is your position?”
Marushack told Torgerson that Phillips has been asked for alternatives by both the administration and by the Senate Energy Committee and the company stands committed to the provisions of the Senate bill.
“I don’t think anyone is completely happy with the Senate version, but we have a delicate compromise and we don’t think that it’s appropriate at this point in time to try to be makings changes on this on the conference floor,” he said.
Phillips has been clear on what it needed to move forward with the project, Marushack said, and has been pursuing federal legislation for more than a year.
“The worst thing in the world that can happen is we throw up a bunch of alternatives,” he said, and in conference committee “people pick and choose a few things” which could produce a result, he said, that doesn’t meet Phillips’ basic requirements.
“We do have a plan of how to do it. We’ve been clear on how to do it. But we’re concerned about giving people the opportunity to cut and paste, pick and choose,” he said.
BP proposal Torgerson noted that BP’s proposal, based on wellhead values, was what Phillips originally proposed.
“It was very, very close to what we developed,” Marushack said.
Torgerson asked if Phillips could support the BP proposal, if that was what came out of Congress.
Marushack said that Phillips has worked this project clear to its chairman level and has said, “here’s a plan to move forward… if all these things happen, we’ll invest another several million dollars in this project.”
That, he said, “takes a firm commitment on someone’s part.”
Phillips understands what BP’s proposal is, he said, but Phillips continues to support no changes to the Senate proposal.
Marushack also said that Phillips has been clear in discussions with Alaska’s Congressional delegation that the tax credit mechanism based on the AECO price “is where we think we need to go and the reason primarily is so we don’t get into a confusing situation where people cut and paste and something doesn’t happen.”
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