|
Natural gas pipeline plans not the same MidAmerican, North Slope producers propose different projects Larry Persily Petroleum News Government Affairs Editor
The two applications for a fiscal contract with the state of Alaska to build and operate a natural gas pipeline propose the same result — moving North Slope gas to mid-America markets — but the proposals are very different in several key aspects.
MidAmerican Energy Holdings Co., a Lower 48 pipeline operator, wants to build the Alaska gas line but is not looking to get into the business of buying and selling the gas and taking the price risk. That would be up to North Slope producers or other shippers on the line who would pay the tariff regardless of the market price for their gas.
“Of necessity, commercialization of the project will require concurrent contractual arrangements by shippers,” the company said in its application.
The producers propose building the line themselves, shipping their own gas and that of any other companies that take capacity during the open season. However, the producers said they still need to overcome the financial fear of the commodity price risk on the $20 billion construction project that could carry more than $5 billion worth of natural gas a year. Without an answer to that problem and other financial and permitting issues, the companies said it’s too soon to talk about breaking ground.
They would have much the same risk whether they build and own the line or guarantee payments to ship their gas on a line owned by MidAmerican. Construction costs still a concern “We still have to make an economic project work,” said Kevin Meyers, president of ConocoPhillips Alaska Inc. The goal isn’t to build a pipeline at any cost, but to build a low-cost line, he said.
In addition to the always present fear of construction cost overruns when working in the Arctic, the producers keep looking at natural gas market demand and price projections.
“The question is not what gas prices are today,” Meyers said. “The question is, what are gas prices going to be in January 2015 or January 2020?”
Despite the initial cheering and optimism of the two competing project applications under Alaska’s Stranded Gas Development Act, the state and project developers still face the dilemma of which company (producers or pipeline operator), and/or which government treasury (state or federal), or all of the above are willing to shoulder or share the risk that at any point in the future gas prices may not cover the pipeline tariff and a reasonable profit for the gas owners.
“We have a long journey ahead of us,” Meyers said. “We want realistic expectations. … You don’t want people making bad personal economic decisions,” based on overly optimistic projections of construction and start-up dates, he said. Partnership depends on value Whether the producers and MidAmerican might eventually join up as partners would depend on whether the pipeline company is willing to accept some risk in the undertaking and whether it could add value to the project or reduce costs, Meyers said.
Simply passing on all the risk to the owners at the wellhead is not adding value, he said.
MidAmerican project leader Kirk Morgan said it’s too early to speculate on the potential for a future partnership between his company and the producers.
The pipeline company already has two Alaska partners in Cook Inlet Region Inc. and Pacific Star Energy, a consortium of regional Alaska Native corporations led by former ARCO Alaska Inc. President Ken Thompson. Pacific Star and CIRI, the regional Native corporation for Cook Inlet, hold options to share a 19.9 percent stake in MidAmerican’s newly formed Alaska Gas Transmission Co.
The Stranded Gas Act allows the state to negotiate a schedule of payments from a pipeline developer in lieu of all state and municipal taxes for the life of the project. In an effort to help move along the project, the state could include a price factor in the contract to help lessen the risk to the gas owners and/or pipeline developer at low prices.
But it’s too early to speculate on what may end up in the contract, said state officials and representatives of the producers and MidAmerican. Neither application provides any details, or even hints, of what the companies might seek in their negotiations with the state. Applicants will not negotiate exact same items A difference between the two applications is how much would be up for negotiation with the state.
MidAmerican, without any gas of its own, mostly would be limited to negotiating a contract to replace state corporate taxes on its profits, state and municipal property taxes and municipal sales taxes on its purchases. The producers, as owners of the gas, could negotiate those same taxes along with a fiscal contract in lieu of production taxes and also terms for the state’s option to take its royalty gas in-kind or in-value.
The state accepted the producers’ application Jan. 23. It received MidAmerican’s application Jan. 22 and formally accepted it Jan. 28, after determining the proposal met the standards required under the law. Gov. Frank Murkowski called the company and its partners “highly qualified to construct the project they have proposed.”
MidAmerican Energy, of Des Moines, Iowa, is proposing to build and operate a 745-mile pipeline to the Alaska-Canada border, where it expects TransCanada or another pipeline company would build an extension of Canada’s network to carry the gas through the Yukon Territory, British Columbia and Alberta on its way to U.S. markets.
Although the company’s project would stop at the border, “the application as written contemplates taking the gas to market,” which is good enough to meet the terms of the Stranded Gas Act, said Steve Porter, deputy commissioner at the Alaska Department of Revenue. MidAmerican sees faster start-up MidAmerican, controlled by Warren Buffet’s Berkshire Hathaway Inc., says it can start moving gas by December 2010.
To meet that hurried schedule, the company needs to quickly hold an open season to collect firm commitments from producers or others to ship gas on the line. Its application to the state shows the open season before the end of June, but Morgan said it wouldn’t do any good to take bids without a solid tariff rate and operation schedule and MidAmerican has pushed back the open season to the end of the year. The delay will not slow down plans to open the line in December 2010, he said.
ConocoPhillips, BP Exploration (Alaska) and ExxonMobil said it will take nine years for design, permitting and construction after the state and federal governments settle on financial issues affecting the project vs. MidAmerican’s six-year estimate. The producers’ application shows the open season in the second year after settling on a government framework for the project.
The producers’ line would run 1,800 miles, carrying 4 billion cubic feet of gas per day to the North American distribution grid in central Alberta. MidAmerican proposes to move 4.5 bcf per day. MidAmerican doesn’t propose building conditioning plant The producers would build a $2.6 billion plant on the North Slope to condition the gas for shipment down the line. MidAmerican, in its application, said it anticipates the producers would take on that assignment even if MidAmerican built the pipeline. However, the company said it “is willing to construct and own such a facility if required.”
The steel pipe would be different, too. The producers propose using 52-inch pipe vs. MidAmerican’s plan for 48-inch pipe. Both lines would be pressurized at about 2,500 pounds per square inch, using gas-turbine compressor stations along the route.
Though MidAmerican’s $6.3 billion project budget is one-third of the producers’ estimate, comparisons are invalid because it does not include the North Slope conditioning plant and 1,100 miles of pipe in Canada.
The state negotiating team will start in early February, meeting with the two applicants separately, Porter said, working toward completing the contracts and bringing them to the Legislature in enough time for consideration and a vote before scheduled adjournment May 12. Before legislative approval, the law requires a 30-day public comment period on the contract, putting negotiations in a tight time squeeze.
State negotiators will include staff from the departments of Revenue, Natural Resources and Law, with team members changing as needed for different issues, Porter said. The state has contracted with international oil and gas tax consultant Pedro van Meurs to lead its negotiating effort. Van Meurs has advised the state on fiscal issues since the mid-1990s. State expects to bring in experts The Stranded Gas Act also allows the lead agency, the Department of Revenue, to charge each applicant up to $1.5 million to cover the state’s cost of hiring consultants for the negotiations. In addition to van Meurs, the state may contract for help on tariffs, a benefits analysis of the project and its effects on municipalities, Porter said. “We could have a lot of technical experts we’d want to bring to the table.”
In addition to whatever is set on the state’s table to help encourage either applicant to build the pipeline, the producers and MidAmerican agree they also need the provisions in the federal energy bill currently stuck in the Senate to help make the project a reality. Those include coordinated and expedited permit reviews, tax savings from accelerated depreciation of the pipeline, tax credits for the North Slope gas treatment plant, and a federal loan guarantee of up to 80 percent of the project debt. Applicants agree on need for federal legislation “We think it’s very critical,” said MidAmerican’s Morgan, who also serves as a vice president for the company’s Kern River Gas Transmission Co., of Salt Lake City, which operates a pipeline from the Rocky Mountain states to California. MidAmerican’s lobbyists will add the Alaska gas line provisions to their work list for the energy bill, Morgan said.
If the energy bill fails to pass, Meyers said, supporters will look for other bills to amend to carry the gas line provisions.
The producers also are looking for technological, cost-saving advancements in pipe welding and high-strength steel, said Dave MacDowell, BP’s gas project spokesman. Lower construction costs would mean lower tariffs and less worry about future commodity prices, he explained.
| 