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State natural gas authority thinks bigger New proposal is to build dual-project gas pipeline to share costs Larry Persily Petroleum News Juneau Correspondent
Bigger might be better when it comes to moving North Slope gas to market, says the Alaska Natural Gas Development Authority, which is looking at building a pipeline to handle twice the known reserves on the slope.
The Alaska Big Capacity Line, or ABC Line as it is called by Harold Heinze, the gas authority’s chief executive officer, would run south from Prudhoe Bay about 500 miles to Delta Junction on the Alaska Highway. The state-funded pipeline would downsize at that point, running the rest of the way to Valdez, where the gas authority wants to build a terminal for shipping liquefied natural gas.
Then, the North Slope producers, which have been reluctant to build their own pipeline from Prudhoe to the North America gas grid in Alberta, could save money by starting their project at Delta, tapping into the ABC Line and perhaps paying a lower tariff than if they had built the entire line on their own, Heinze said.
“We’re going to move Prudhoe Bay to Delta,” Heinze told his board members Dec. 15.
“We felt that under a commercial arrangement the costs of both North Slope projects would be lowered by sharing the cost of a larger diameter line carrying gas volumes for delivery in Alaska as well as the U.S. Midwest,” Heinze explained in a memo to the board.
The state gas authority wants to build an LNG project to handle 2 billion cubic feet per day, while the producers favor moving 4.5 billion cubic feet per day to mid-America via a pipeline following the Alaska Highway route. That much gas would consume the 35 trillion cubic feet of North Slope known reserves in less than 15 years. New line would handle twice the reserves “The Alaska Big Capacity Line would be designed to accommodate an expanded reserve base of twice the current 35 tcf,” in addition to saving money by sharing the line, Heinze said.
The board directed Heinze to prepare a draft application for the ABC Line under the state’s Stranded Gas Development Act, which allows gas owners and/or pipeline owners to negotiate a schedule of contractual payments to the state in lieu of all state and municipal taxes on the project.
The board, however, did not discuss how it could benefit from a state stranded gas contract when, by law, the gas authority already is exempt from state and municipal property taxes, sales taxes, and possibly state corporate income taxes too.
Alaska’s Stranded Gas Act also requires that an applicant either own an interest in North Slope natural gas, have gas under contract, or own an equity interest in a pipeline project, none of which appear to apply to the state gas authority. The authority was created by voters in November 2002 to build, own and operate an LNG project, but it has no gas or gas under contract, and has no funds to invest in a pipeline project.
Heinze, however, said applying under the Stranded Gas Act is the best way to accelerate interest in the ABC Line. The application, he said, would allow the state to explore another option for moving gas to market. Official says authority not likely to qualify Steve Porter, deputy commissioner at the Department of Revenue and liaison to the gas authority, cautioned board members that the gas authority “probably does not qualify” under the Stranded Gas Act.
“The key here is to bring the idea forward,” he said, suggesting it would be better to put the ABC Line proposal in a letter to the governor and North Slope producers.
Heinze did not present a cost estimate for the ABC Line vs. the $12 billion estimate for a stand-alone LNG project.
The CEO also said he “chafes” at the thought that a Canadian pipeline company could become involved in negotiating a contract under the Stranded Gas Act, but not the state gas authority. “It’s important to be at least one of the parties in the negotiations.”
Board member Scott Heyworth, who organized the citizens initiative that created the state gas authority, agreed with Heinze. He questioned how the state could consider letting Canadian companies into Stranded Gas Act negotiations but not the voter-approved gas authority.
Heinze said after the meeting he would discuss with Department of Revenue officials what is required in a Stranded Gas Act application and prepare a draft application for the board to consider at its Jan. 12 meeting. Revenue is the lead department in the negotiations.
In other discussions at the Dec. 15 gas authority board meeting: Schedule says first LNG load in five years Heinze presented the board with a work plan that shows the first LNG tanker leaving Valdez in December 2008, though he acknowledged it will be difficult to meet that five-year timetable for designing, financing, permitting and building the 800-mile pipeline to Valdez, the LNG terminal and putting together a fleet of tankers.
“I think the conceptual schedule is quite optimistic,” Porter said.
Heinze said his schedule is based on the assumption that the gas authority can purchase, renovate and reflag several LNG tankers that were built in the United States more than 20 years ago and later converted to foreign-flagged vessels.
The proposed work schedule also assumes the gas authority would start ordering steel pipe and other major pieces of the project in mid-2005, six months before its final “build-it” decision is scheduled in January 2006.
And the plan assumes that construction of U.S.-flagged tankers, required for LNG deliveries to domestic ports, would also start in mid-2005.
Board frustrated with producers Heinze and several board members discussed their frustration over North Slope producers’ reluctance to commit to a $20 billion pipeline to mid-America or to join forces with the state gas authority.
“Very frankly, they have ignored us purposefully,” Heinze said.
Andy Warwick, board president, asked, “What would the process be for condemning the gas? … We can’t build a pipeline without gas.” Other board members discussed how the authority might value North Slope gas if they tried taking it by condemnation and had to compensate the producers.
The board did not take any action on the issue, though Assistant Attorney General Leonard Herzog responded to the concept of taking gas by condemnation: “I don’t think the state is sure at this point what its legal footing would be.” Board may want its own attorney Several board members expressed concern when told of the requirement that the authority must use the attorney general’s office for legal advice and that any outside counsel the board wants to hire must be approved by the attorney general.
“At some point in time our position may differ from the administration’s,” Warwick said. He and Heyworth both said they believe the voter-approved initiative establishing the gas authority gave the board full authority to make its own decisions, including hiring its own attorneys.
“I don’t know what would happen if you tried to hire outside counsel without going through our office,” said Herzog of the attorney general’s office.
Heyworth had an answer. “If a conflict develops between us and the administration,” he said, “we’ll just go find another attorney.” Authority will hire consultants The board directed Heinze to proceed with selecting a consultant for a benefits analysis study of the proposed LNG project, and also a consultant to help the board draft a business plan that would maximize any tax-exempt benefits it might qualify for under federal law.
Obtaining tax-exempt status from federal corporate taxes is key to the gas authority project’s economic viability, Heinze said.
He said the board will need to be careful in how it structures its operations to avoid jeopardizing its chances at winning IRS approval as a tax-exempt entity. “If the Legislature thinks they’re running this business, we may not be tax exempt.”
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