Alaska gas pipeline application in works

State asks North Slope producers to provide answers for stranded gas project

Larry Persily

Petroleum News Juneau Correspondent

The three major North Slope oil and gas producers are working through a long list of detailed questions presented by the state as they prepare a pipeline project application under Alaska’s Stranded Gas Development Act.

Among the information the state wants to see in the application are details on how the producers would make natural gas available to Fairbanks and Southcentral Alaska, including Kenai; options to ease the financial effects on municipalities along the route of the proposed gas pipeline; and a timeline for construction of the project.

The state and North Slope gas owners agree the project sponsors will submit an application under the Stranded Gas Act soon, though defining “soon” ranges from the end of this month to the end of November — to just plain soon.

The act, amended this past session by the Legislature, allows project sponsors to negotiate with the state for a long-term contract for payments in lieu of all state and municipal taxes — providing the so-called fiscal certainty that the producers say they want before deciding whether to build the multibillion-dollar gas pipeline from the North Slope to Lower 48 markets.

Supporters of a pipeline to move Alaska’s stranded gas to North America markets also are waiting to see if Congress can put together a national energy bill this session that would include substantial tax incentives and permitting provisions to promote construction of the project.

The state is working toward its fiscal contract separate from the federal legislation.

State waiting for application

Gov. Frank Murkowski’s press secretary was a little more cautious in his expectations for a project application. “I think we’re looking at one by the end of November,” said John Manly.

None of the three major producers — ExxonMobil, ConocoPhillips Alaska or BP Exploration (Alaska) — were willing to predict a date for a pipeline project application, though Exxon spokesman Bob Davis of Houston said he anticipates it will be a joint application, submitted by all three companies. “We anticipate it will be soon,” he said.

State and company officials last met July 23 in Anchorage to review what the state wants to see in an application, Porter said. The departments of Law and Natural Resources also are involved in the talks, as is Pedro van Meurs, of Van Meurs & Associates, who is under contract to the Department of Revenue to assist in Stranded Gas Act negotiations.

Van Meurs, who has advised on oil and gas laws and projects worldwide including Kuwait, Bolivia, China and Mexico, moved from Calgary, Alberta, to the Bahamas almost two years ago. He has assisted the state on several issues over the past eight years, including a 1997 report on how Alaska’s fiscal system compared to potential competitors in the Pacific Rim liquefied natural gas market. Van Meurs also advised the state when the Legislature adopted the Stranded Gas Development Act in 1998.

After the state receives a project application, it can begin to bill the sponsors for van Meurs’ consulting fees and the cost of other contractors it may use to review the application.

Additional talks to discuss what is needed in an application are likely, perhaps later this month, said Dave Van Tuyl, commercial manager for BP’s gas group in Anchorage.

“Everybody wants an application that is submitted to be approved,” Van Tuyl said, adding that the producers want to ensure their application answers all of the state’s questions rather than risk delays in approval.

State provides list of questions

The state provided guidelines of how many pages it would take to answer the questions — 26 pages, plus attachments — though the commissioner explained the sponsors could submit as much information as they want.

“A lot of these subjects, you could write one page or 100 pages,” Van Tuyl said.

The state wants information on:

• Pipeline routing.

• Markets for the gas.

• Amount of gas to be produced.

• Development schedule, leading to a start-up date for commercial operations.

• How the project would meet “reasonably foreseeable demand for gas” in the Fairbanks area and Southcentral. This would include a description of any connecting lines or access points, and terms under which the project sponsors would make gas available for in-state use.

• Availability of natural gas to other areas of the state within the “economic proximity of the project,” which, under the Stranded Gas Act, is defined as any area close enough to the pipeline that “a person may be willing to design, construct and operate a gasline to provide service to a local consumer.”

• Summaries of all work undertaken on the project by the sponsors during the past five years.

• Options available to ease the financial effects on municipalities along the project route, specifically those municipalities that anticipate increased demands for public services during construction and pipeline operation.

• The producers’ plans for an open season for gas owners to bid for capacity in the pipeline, including information on access to the line by companies not part of the project ownership.

• Possible expansion of the line after initial construction, including timing, size, cost and any potential mechanical issues. This is of key importance to those companies exploring for gas in Alaska that fear they could be left out of the gasline if the major producers fill it to capacity.

• A description of all leases and properties containing natural gas that would feed the pipeline, including estimates of proven and probable gas reserves that would be dedicated to the project and the owners of those leases or properties.

• Estimates of oil production that would be lost from taking natural gas out of the reservoirs, thereby reducing well pressure, and the project’s overall effect on North Slope oil and gas liquid production.

• How Point Thomson gas would be used for the project. Exxon, the majority owner of the proposed Point Thomson field east of Prudhoe Bay, recently asked the state for an extension of time to develop the field, citing cost and reservoir challenges.

• Whether the producers would need to request any amendments to existing field or pool rules by the Alaska Oil and Gas Conservation Commission.

Taxes and royalty gas

Key to the negotiations will be how to structure predictable payments to the state — and municipalities — in lieu of those taxes.

State royalty payments are not eligible for negotiation under the act, though the method for determining the value of the state’s royalty share is eligible for inclusion in the project contract.

Also open to negotiation under the law is timing of the state’s decision whether to take its royalty gas in kind or in value, which could affect the sponsors’ ability to move their own gas through the line.

“The royalty issue certainly is going to have to be addressed,” said Davis of Exxon.

Confidentiality concerns

Revenue Commissioner Corbus responded in a July 24 letter to the companies that they could request confidential treatment of some of the information under terms of the Stranded Gas Act. The statute allows an applicant to request confidentiality for trade secrets, proprietary research or information that could affect the company’s competitive position or would lose its commercial value if made public.

Porter said he expects the administration and project sponsors will be able to negotiate a contract in time to present to the Legislature during the 2004 session. The Legislature may vote up or down the contract, but is not allowed to amend it.

Legislative support was strong for this year’s amendments to the Stranded Gas Act, which passed the House and Senate without one dissenting vote. The bill moved in just 36 days between its first hearing in the House and the final Senate vote.