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2000 to today: Alaska gas interest revives Changing gas supply situation in Lower 48 sparks pipeline interest; Far East prices put liquefied natural gas back on the boards Bill White Researcher/writer for the Office of the Federal Coordinator
This is the concluding part of the third installment of this story. See the April 22 issue of Petroleum News for the beginning of “2000 to today.”
Pipeline plans retreat In mid-2001, natural gas prices were in a trough, a temporary one as it turned out.
The big three producers started sending signals that their enthusiasm was ebbing for an Alaska gas pipeline. Preliminary results of their joint study concluded a pipeline project might not be profitable enough to justify taking the huge risks involved, including the gas-price risk.
By 2002, Congress was actively looking for ways to help the project’s economics, estimated by the producers in 2001 to cost almost $20 billion, six times more than the next most expensive North America gas pipeline. Among the options suggested was a federal tax subsidy to producers if gas prices dip below a given floor, repayable when prices break through a ceiling. That idea died but other ideas started to stick, many derived from the Alaska Natural Gas Transportation Act of 1976 that was custom-made to boost projects contemplated back then.
Finally, in 2004, Congress passed the Alaska Natural Gas Pipeline Act, which, like the 1976 law, streamlined government oversight and limited judicial challenges to a pipeline project. But it went further. The law authorized up to $18 billion in federal loan guarantees for a project to move Alaska gas to the Lower 48 (worth almost $22 billion today after adjusting for inflation), and it barred construction of an over-the-top pipeline. (The law also created the Office of the Federal Coordinator.)
The Alaska Legislature was busy, too. In 2003 it revamped 1998’s Stranded Gas Development Act to allow fiscal-term negotiations involving any pipeline project, not just an LNG project as the earlier law specified. The new law bore the same name. The constitutional issue of setting taxes by contract was still unresolved.
Soon, companies and others with gas pipeline ideas lined up to talk terms with the state.
State negotiating team fractures As the state considered the applications to negotiate, it became clear an internal fight was under way in the administration of Gov. Frank Murkowski.
The schism would entangle state government for the next four years.
Some state executives believed reaching terms with the big three producers was key to securing a pipeline.
Others believed that limiting the producers’ control of the pipeline would prompt more companies to explore for North Slope oil and gas. Already the prospects of a gas pipeline had lured new players. In May 2001, after the previous winter’s gas-price spike, six companies acquired North Slope gas exploration leases — the first sold in decades. Anadarko was actively drilling for gas.
The stranded-gas applications stocked each side with ammunition. Their diverse approaches to a pipeline project included:
A pipeline-company project. TransCanada and Foothills Pipe Lines, two Canadian pipeline companies holding rights to the Alaska Highway project and route sanctioned in 1977, blew the dust off of their plans. TransCanada wanted the state to buy gas from the North Slope producers and market it. Later that idea morphed into both TransCanada and the state buying and marketing the gas.
Separately, MidAmerican Energy Holdings Co., a Lower 48 pipeline company, proposed a pipeline to Canada, provided it could get a five-year exclusive deal with the state that would force the producers to negotiate putting gas in the line. MidAmerican teamed with an Alaska Native corporation and an Anchorage startup headed by a former ARCO executive. But the state told MidAmerican it would not get an exclusive deal, and the pipeline company walked away in a public huff.
An LNG project. A trio of Alaska local governments — the Fairbanks North Star Borough, the city of Valdez and the North Slope Borough — formed the Alaska Gasline Port Authority in the late 1990s. Their proposal mutated over the years, but early on they proposed a pipeline and LNG plant at Valdez financed via low-interest debt the authority would issue. Low-cost debt would help the project economics. The LNG could go to Asia or the West Coast, wherever buyers could be found.
The Murkowski administration gave the port authority application an icy reception. Murkowski himself scoffed in 2006: “Would you invest in a project that had no gas, no financing, no contract for the sale of gas, no shipping commitments, no West Coast regasification facilities, no loan guarantee if exported, no Jones Act waivers (so foreign LNG tankers could be used) and no expertise in building a project of this size?”
Separately, in 2002 Alaska voters approved a ballot initiative pushed by LNG fans that created a state agency that could, among other things, buy North Slope gas, pipe it to Prince William Sound for export and finance the project with low-cost revenue bonds. The new agency, the Alaska Natural Gas Development Authority, never gained much momentum and governors downsized its mission over time, although it still exists.
A producer-sponsored project. The Murkowski administration worked hardest on this. Over three years negotiators hammered out key terms — a state equity ownership, gas taxes locked in for 35 years after pipeline startup, much higher oil taxes now but a lockdown on further oil-tax changes for 30 years.
Murkowski made it clear he believed a deal with producers was in Alaska’s best interest. In fall 2005, dissenters within his gas team left their jobs — one fired and the rest resigning in protest. Besides objecting to a producer-owned pipeline, the dissenters believed the contract should have included a commitment to actually build the pipeline.
After much public griping about “Where is the deal?” Murkowski unveiled his proposed contract in spring 2006, with just months left in his gubernatorial term.
Much of the public panned the proposal. The sentiment was that the state got out-negotiated. That the deal came from a politically unpopular governor also made it hard to accept. State legislators never even voted on the contract, although they passed a significant oil-tax increase without the 30-year lockdown. The producers got smacked with the one piece of the deal they didn’t really want but were willing to accept as part of the package. The Legislature just unwrapped the package.
Murkowski lost his re-election bid in the August 2006 Republican primary.
The new governor elected that November, Sarah Palin, was about to usher Alaska’s gas pipeline efforts down a new path.
The Palin plan Early in her 2006 campaign, Palin fell under the spell of Alaska’s LNG boosters, and an LNG project became a central element of her platform.
But later in the campaign she backed off full support for LNG. After being sworn in, she hired all of the Murkowski administration dissenters who had left their jobs a year earlier. They helped guide the state’s Palin-era approach to a gas pipeline project, an approach that continues today.
In May 2007, the Alaska Legislature passed Palin’s Alaska Gasline Inducement Act. AGIA said the state would provide up to $500 million in pre-construction subsidies to a project whose sponsor agreed to certain “must haves.” These included:
North Slope gas would be made available for Alaska use, though someone other than the project developer would need to move the gas from the big pipeline to consumers.
Certain actions to hold down the pipeline tariffs to encourage North Slope exploration and development.
Agreement to hire Alaskans and Alaska companies.
A firm timeline for project development, though no commitment to build the pipeline.
Agreement to expand the pipeline to accommodate future shippers, with all shippers contributing to the expansion cost.
And the biggie: A commitment to continue engineering and other work toward getting federal approval of a pipeline even if shippers fail to pledge enough gas during the initial open season to make the project viable. The state believed shippers eventually would sign up, and getting a federal certificate for a pipeline would keep the project moving forward while negotiations with shippers progressed.
The big three North Slope producers slammed many of the AGIA terms. The deadlines were too inflexible, they said. They ignored economic reality. Where is the fiscal stability they need before committing gas to the line and promising to pay the tariff? Why should original shippers subsidize future shippers? Why continue working on the project if the open season fails?
BP and ConocoPhillips (Conoco and Phillips merged in 2002) announced a non-AGIA sanctioned gas pipeline venture called Denali – The Alaska Gas Pipeline in April 2008, 10 months after AGIA became law. They would look at building a $35 billion project down the Alaska Highway to Alberta, they said. But after a failed 2010 open season, they disbanded Denali in May 2011, citing “a lack of customer support.” The companies spent $165 million on their effort.
The state awarded the AGIA license to TransCanada later in 2008, and ExxonMobil joined that effort the next year. This partnership — called the Alaska Pipeline Project — also held its open season in 2010. It offered two options: A $32 billion to $41 billion Alaska Highway pipeline to Alberta, or a $20 billion to $26 billion pipeline to Valdez, with other companies to bear the additional cost of an LNG plant and tankers.
TransCanada/ExxonMobil negotiated with bidders, but so far has failed to reach any shipper agreements. However, under terms of AGIA, the partners continue working toward the required October 2012 application to the Federal Energy Regulatory Commission despite the lack of pipeline customers. FERC has begun its extensive environmental review for the pipeline to Alberta. Assuming the commission accepts the TransCanada/ExxonMobil application as complete in October, FERC could issue a project certificate by fall 2014. The environmental review and FERC process is looking only at the Albert option; TransCanada/ExxonMobil didn’t submit detailed route plans and data for the Valdez LNG project.
Meanwhile, as was true in the 1970s and again in 2001, the world of natural gas is in flux.
Fears of a Lower 48 natural gas shortage are gone. New supplies of shale gas are more than offsetting declines from aging conventional gas fields. Prices have sunk to late-1990s levels.
Over in Japan, the world’s largest LNG market, prices are sky high. LNG prices there are linked to oil prices, which are soaring. Japan’s disaster at its Fukushima nuclear power plant in 2011 boosted demand for LNG as a fuel at least temporarily, awarding LNG sellers a juicy price premium.
It’s unclear if these developments are adding a new, permanent curve to the 40-year rollercoaster ride that describes the journey to realize an Alaska gas pipeline project. The big three North Slope producers said they might look again at LNG’s potential even as TransCanada and ExxonMobil continue their state-aided pursuit of a FERC certificate for the pipeline to Alberta.
Editor’s note: This is a reprint from the Office of the Federal Coordinator, Alaska Natural Gas Transportation Projects, online at www.arcticgas.gov/print/Interest-in-Alaska-gas-revives-2000-to-today.
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