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Thompson: Gasline commercial now; time to get tough with producers Prudhoe Bay lease terms require gasline to be commercial, not competitive with other projects; a gas reserves tax would tip scales in favor of Alaska line Kay Cashman PNA Publisher
It’s time to get tough with the big three North Slope gas owners and force them to sell their gas, says Ken Thompson, former ARCO Alaska Inc. president and head of global gas marketing for Atlantic Richfield just prior to its sale to BP in 1999.
“This project is a go now. It can be commercial now. … It’s time to get very, very tough and enforce the lease terms the producers agreed to 25 years ago. The lease terms call for the project to be ‘commercial,’ not ‘competitive,” he told PNA Feb. 18.
The North Slope gas owners — BP, ExxonMobil and Phillips — are not going to approve a gas pipeline from Alaska to Lower 48 markets, Thompson said, because they can get a better rate of return from other projects around the world.
“These companies are bringing competitive sources of gas into the United States. BP is expanding its LNG from Trinidad and other sources. Exxon, BP and Phillips are looking at other billion dollar gas projects in the Gulf of Mexico deepwater. Phillips is talking about LNG to the West Coast from foreign sources.
“They can always put Alaska last because these other nations get tough with them. You either do a project or lose your leases or lose the deal. I think they find when they have everything up in the air, Alaska can wait,” Thompson said.
“The majors, particularly BP and Exxon, have such huge portfolios that this project is not competitive with some of their capital projects in other countries.” A 12 percent rate of return But if you add up what has transpired in the last few months, a gas pipeline from the North Slope to the Lower 48 can be commercial “at about a 12 percent rate of return,” he said.
A year ago, he said, BP, ExxonMobil and Phillips said they needed a cost reduction in the capital cost of the gasline.
“I understand the pipeline companies — Williams and others — are estimating lower capital costs than the producers,” Thompson said.
In his 20 years in the natural gas industry, he said it was his experience that pipeline companies were able to build and operate pipelines less expensively than oil companies.
“Pipelines are just a side business to BP, Exxon and Phillips,” he explained.
The big three North Slope gas owners have also said they needed cheaper financing.
“I think the governor’s initiative on the bonds use by the Alaska Railroad trims interest costs. … And then there would be federal incentives, such as accelerated depreciation or a tax credit if the gas price drops below a certain floor. I think the federal government will do that.
“When you add those things together — lower capital or operating costs and the cheaper financing, it’s a commercial project now,” he said.
“It’s a good rate of return, but companies like BP and Exxon might be able to get 15 percent somewhere else,” Thompson said.
But, the project doesn’t have to be competitive to force the producers to sell their gas.
“There is nowhere in the leases — and I am very familiar with them from my years at ARCO — that say investments must be competitive with worldwide investments. Actually the lease terms just say that projects that are commercial must move ahead to develop the resource or lose the lease or face other consequences,” Thompson said. Gas reserves tax makes project ‘competitive’ When Rep. Jim Whitaker first proposed a tax on North Slope gas reserves tax in House Bill 190 in March 2001, Thompson was “strongly opposed” to such a tax.
He has changed his mind.
“I am concerned now. … I have run out of patience” with the North Slope gas owners, Thompson said.
“If the producers have not announced a project by the end of next year I believe a gas reserves tax should be imposed effective in 2008.”
And a gas reserves tax should help make the sale of North Slope gas ‘competitive’ for the gas owners, he said.
If BP, Exxon Mobil and Phillips have to start penciling in a tax on gas in the ground starting in 2008, he said, “it will improve the rate of return” for selling North Slope gas because the cost of keeping it in the ground has to be factored in.
Let the state, producers and pipeline companies “try to work out compromise prior to the end of next year — December 2003. If no project has been announced by then, the 2004 Legislature should enact the reimbursable gas reserves tax,” Thompson said.
He recommends a tax that “would kick in taxing reserves beginning Jan. 1, 2009, if there is not gas flowing to the Lower 48 by the end of 2008. …
“The tax principal amounts (but not the interest) would be reimbursable once gas sales did occur and would be reimbursed over the same number of years as the number of years the tax was paid in.
“The state should cooperate with the North Slope gas owners as much as they can — certainly keep the great relationships going on oil. But on natural gas the state is going to have to get very tough and enforce the leases,” Thompson said. The answer is a consortium “What is the real answer though, so that we can have cooperation with the gas owners and not get into the boat of forcing a gas reserves tax?
“Number one, we have to put together a consortium of investors to build the pipeline,” Thompson said, suggesting “pipeline companies such as Williams who are experienced at building and operating pipelines, at least one producer such as Phillips, Native corporations and possibly even a foreign company that would invest 5-10 percent could be involved.
“Find these investors who are willing to make a gasline happen and get a decision by the end of 2003 about moving forward.”
The state should set a goal, he said: “Gas to the state by 2008.” The producers have to sell the gas But do BP, ExxonMobil and Phillips have to sell their gas?
“The answer under the lease terms is yes, if a ‘reasonable price’ is offered.” Thompson said the state can dictate and determine what a reasonable price at the wellhead is.
“The leases have implied covenants that say the producers must market their gas — it doesn’t say they have to build a pipeline — but it does say that they have to market the gas to someone if two conditions are met: One, if they are given reasonable time and, two, a reasonable price.
“I think a judge and jury would certainly agree that 25 years since the start-up of Prudhoe Bay is a reasonable time for marketing gas,” Thompson said. Pipeline companies make offer The gas owners have never received a valid, written price offer for their gas, he said, and that’s what is needed.
“If the pipelines were to lay a gas price on the table, then if the state deemed that the price was reasonable from their perspective for royalty-in-kind or royalty-in-value, for example, then that crosses the threshold. While the producers might want a higher price, in reality, the lease terms are clear. If the state accepts a price, then the producers must.
“Again it’s not a measure of international competitiveness.” The state, Thompson said, has the power to set the price and make a gas line happen.
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