|
Alaska senators ask who should build gas pipeline Legislators hear pros and cons of producer- vs. non-producer-owned natural gas pipeline; Alaska’s best interests at issue Larry Persily Petroleum News Government Affairs Editor
It’s more important to think about building the lowest-tariff pipeline to carry North Slope natural gas to market than worrying about who owns the line, Alaska legislators were told recently.
“The real issue is it doesn’t matter to us so much who owns the pipeline as long as it has the lowest rate,” said Mark Hanley, spokesman for Anadarko Petroleum in Anchorage.
The lower the tariff, the higher the state’s royalty and production tax revenues, which are based on the wellhead value of the gas. And the same is true for gas producers, whether they are majors or independents — they would make more money with a lower gas line tariff.
“The only successful project will be the one that has the lowest cost of service to market,” said Joe Marushack, vice president for gas development at ConocoPhillips Alaska.
Marushack, Hanley and Kirk Morgan of MidAmerican Energy Holdings Co. testified March 31 before the Alaska Senate Resources Committee at a session called to discuss whether it’s in the state’s best interests to have a producer-owned gas line or a project owned by pipeline companies.
After 30 years of waiting, the Legislature hopes that growing market demand and declining North American supplies from mature fields will finally conspire to entice companies to build an Alaska natural gas line this decade.
Resources Chair Scott Ogan said he called the meeting not to debate or “Monday morning quarterback” the governor’s decision to reject MidAmerican’s demand for sole development rights to the North Slope project or the pipeline company’s subsequent decision to walk away from negotiations and abandon its Alaska gas pipeline proposal.
Rather, the Palmer Republican said, he called the meeting because it’s important for the Legislature to understand the policy issues of a producer- vs. non-producer-owned pipeline. FERC rules will govern gas line “The pipeline will be regulated by the Federal Energy Regulatory Commission, regardless who owns it,” Marushack said. Under federal laws, pipeline owners cannot discriminate against non-owners that want to move gas through the line, he said. “Open access means any party can purchase access.”
Ogan asked how that is different from the trans-Alaska oil pipeline and its longstanding tariff disputes.
Marushack answered in two parts. First, he explained, the oil pipeline is a common carrier, open to all shippers. Under common carrier rules, if the pipeline were at capacity when it opened and a company wanted to add more oil to the flow, all shippers would have been required to scale back on a prorated basis to make room.
The gas line would be an open-access contract carrier, meaning anyone could bid for capacity and would hold that capacity for as long as their contract terms allowed.
And, unlike a declining tariff structure designed to lower shipping costs over time, Marushack said the gas line would work better with a flat tariff. Otherwise, the shipping charges in the early years would be too high. Anadarko worries about access Regardless of FERC oversight, Anadarko worries that it could find it hard to get access to the pipeline, or at least at terms and rates that it likes, Hanley said. The independent, with about 20,000 barrels a day of North Slope oil production, will not drill for gas until it sees pipeline tariff and access terms, he said.
Reluctance to spend money on exploring gas prospects could be a problem for the company and others in the same situation of holding North Slope leases but no proven gas reserves.
If the three majors build the line — BP Exploration (Alaska), ExxonMobil and ConocoPhillips — they could schedule an open season for bidding on gas line capacity too soon or too short for independents to make informed commitments on supplying gas for the line, Hanley said.
Or the producers could decide to base the tariff on British thermal units instead of cubic feet of gas, favoring their own liquid- and Btu-rich Prudhoe Bay gas over dry gas that Anadarko and others may find in their lease areas, he said.
All things considered, Hanley is less comfortable with a producer-owned line, although he said cost is a key issue, acknowledging the perception that pipeline companies might be less concerned about low tariffs since their profits are not dependent on the value of the gas after transportation costs.
It was a point that Marushack emphasized in his presentation to the committee. A pipeline company’s profit is simply a return on its investment in the line. The more expensive the project, the larger the company’s profit, Marushack said, eliminating any incentive for a pipeline company to push as hard as producers for the lowest-cost line possible. MidAmerican favors non-producer-owned line MidAmerican’s Morgan, however, said his company believes the state would be better served if the majors do not own the gas line. A producer-owned line would give the companies more market concentration, he said.
But it’s questionable how pipeline ownership would give the producers more of the natural gas market. Ownership of the line wouldn’t have anything to do with ownership of the gas, which would remain under producer control unless a pipeline company stepped forward and offered to buy the gas at the wellhead and take all of the market price risk in the years ahead — something no pipeline company has offered to take on for the Alaska project.
BP was the largest U.S. producer of natural gas in 2002, according to federal Energy Information Administration statistics. The company produced an average of 5.5 billion cubic feet of gas per day in 2002, with ExxonMobil in second place at 3.1 bcf per day. ConocoPhillips placed fourth, at 2.45 bcf per day.
Though it’s a lot of gas, the three companies’ total production was just about 20 percent of domestic gas flow in 2002, equal to the market share of the next five top producers: ChevronTexaco (No. 3) and Nos. 5-8 Shell Oil, Devon Energy, El Paso and Burlington Northern. Anadarko Petroleum was listed at No. 9 on the 2002 federal report, at 1.776 bcf per day.
The talk of market share provoked pointed questions from two Democratic legislators, who questioned the North Slope producers’ motives regarding an Alaska gas project. Legislators question producers’ motives Why would the majors want to move Alaska gas to market, where it might compete with their existing North America production and new supplies the companies plan to import into the United States as liquefied natural gas, asked Sen. Kim Elton.
“We are motivated to sell the gas,” Marushack told the Juneau lawmaker. Turning Alaska’s stranded gas reserves into cash would boost ConocoPhillips’ profits and its stock price, the vice president said.
“I’m not worried about LNG,” Marushack said. “We need Alaska gas to happen too.”
But couldn’t a producer-owned line hinder and delay independents from finding and supplying their own Alaska gas to North American markets, asked Anchorage Rep. Eric Croft.
The producers, if they owned the line, Marushack said, would want independents to explore and find more gas on the slope. At 4.5 bcf per day, the project would need at least 50 trillion cubic feet of reserves to run for 30 years, yet proven reserves on the North Slope total only 35 tcf, he said. Several options to gain access Although independents may not want to bid for pipeline capacity during the open season that would be held in advance of construction, he said, they would have several options to get gas into the line:
• “Companies can explore for gas so they are ready for the open season.” At the earliest, an open season is at least two years away, according to the producers’ application to the state for a fiscal contract governing the project.
• “Companies could take capacity on the come,” betting they’ll find gas or, if not, selling their capacity rights to others.
• The producers expect the flow from their own proven North Slope reserves would start declining about 12 years after the line goes into operation, creating space for new shippers.
• Or, if there is enough demand, the producers could hold an open season to expand the line.
Regardless of the options, “there is an advantage to a pipeline company building the line because of that expertise,” Hanley said.
But pipeline-building expertise maybe isn’t as important as experience in Alaska, Marushack said. “Alaska isn’t like Wyoming,” he said, an apparent reference to MidAmerican’s recent pipeline expansion in Wyoming. “BP and Phillips are operators on the North Slope,” with experience in working through the winter and building over permafrost.
| 