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Next move up to gas line owners No price support for natural gas pipeline from Alaska’s North Slope, but federal energy bill includes other incentives Larry Persily Petroleum News Juneau Correspondent
Although the U.S. energy bill includes significant provisions to encourage construction of a natural gas pipeline from Alaska to mid-America, North Slope producers say they still need to answer questions about future market conditions, construction costs and state taxes before making a decision when and if to proceed with the project. (See related energy bill stories on pages 14, 15 and 16 of this issue.)
The legislation, likely on its way to the president’s desk for signature into law before Thanksgiving, grants accelerated depreciation for the project, corporate income tax credits for a North Slope gas treatment plant, federal loan guarantees for corporate bonds issued to fund construction, and streamlined permitting provisions.
It does not, however, include any mechanism to protect producers from the risk of low market prices for their gas, a provision that ConocoPhillips had said is a make-or-break condition for the project to take Alaska gas to the Canadian border and then through new or existing lines to U.S. markets.
ConocoPhillips declined to make any further comment on the legislation, Anchorage spokeswoman Dawn Patience said the day the House passed the energy bill Nov. 18.
The company, however, was willing to comment earlier in the week. “Since Day 1, we have said all along that without the provision, we cannot see how this project can proceed to the next level of development,” said Sam Falcona, a spokesman for ConocoPhillips in Houston. “However, we’re willing to listen to other options.” Provisions help project ExxonMobil, which has consistently opposed federal price supports for the project, called the permitting provisions “a positive development.”
“In and of itself (those provisions) will not provide the sole trigger as to whether a project ultimately goes forward,” said company spokesman Bob Davis of Houston. “Other critical factors must also be achieved — state fiscal certainty, a stable regulatory regime in Canada, significant cost reduction through applied new technologies and continued favorable market outlook.”
BP Exploration (Alaska) offered a similar comment.
“The bill contains regulatory and fiscal provisions that help to reduce risk for this massive project and, as such, represent a meaningful step in the right direction,” said BP Anchorage natural gas project spokesman Dave MacDowell.
“The production tax credit would have provided an additional level of risk mitigation that was viewed favorably by a number of potential investors, including BP,” MacDowell said. “Without it, we must consider how it will affect our view of the project.” State waits for stranded gas application BP and ConocoPhillips said they are continuing to work with the state in anticipation of submitting an application under Alaska’s Stranded Gas Development Act, which allows the producers to negotiate with the state for a long-term schedule of contractual payments in lieu of all state and municipal taxes.
“We don’t have a specific timeline for submittal,” MacDowell said.
“(We) remain optimistic that an application will be submitted soon,” Patience said.
The Legislature, the governor’s office and the Department of Revenue, which would take the lead on contract negotiations, all hope to receive an application and start — if not conclude — negotiations before lawmakers close their session in mid-May.
The Stranded Gas Act does not prohibit, nor does it require, the state to set up some form of price mechanism in its contract in lieu of taxes with the producers. Such a provision could be used to reduce payments during times of low prices, though the state likely would push for a similar provision at the other end to collect a larger take of project revenues when prices are high. Producers worry about price risk ConocoPhillips and BP are worried about committing to a fixed tariff for moving gas down the pipeline and then encountering periods of low market prices for the commodity. The risk is especially worrisome when the companies factor in the possibility of construction cost overruns, which could drive the pipeline tariff higher than current estimates of around $2.50 per thousand cubic feet.
Sen. Jeff Bingaman, D-N.M., the ranking minority member on the Senate Energy and Natural Resources Committee, tried to insert a commodity price-protection section into the bill during the conference committee’s only public session Nov. 17. His attempt failed, with Senate Energy Chair Pete Domenici, R-N.M., calling it a “useless gesture.” Domenici, generally a supporter of energy industry requests, said North Slope producers had never said they would absolutely commit to building the project even if Congress approved the price-protection provision.
In addition to the other federal incentives, the energy bill includes $20 million for job training to prepare Alaskans for work on the project. The money would go toward a state-run training program. Up to $3 million of those funds could go toward construction of a job training facility at Fairbanks.
Among the gas line provisions in the bill are:
• Gas treatment plant tax credits would assist in paying for the estimated $2 billion gas treatment facility on the North Slope. The tax credits could be worth as much as $400 million, said Sen. Lisa Murkowski, R-Alaska.
The provision is listed as enhanced oil recovery tax credits. By removing carbon dioxide from the gas to clean it for shipment down the pipeline, the treatment plant would help oil recovery by supplying carbon dioxide for use as a miscible injectant to boost production at North Slope fields.
• Accelerated depreciation of the pipeline — seven years instead of the usual 15 years — would allow faster cost recovery for investors. The benefit is worth perhaps $200 million in tax savings.
The accelerated depreciation would be limited to a pipeline of at least 42 inches interior diameter.
The Alaska Natural Gas Development Authority, which wants to build a state-owned pipeline from the North Slope to tidewater with a liquefaction plant at Valdez for LNG exports to U.S. West Coast or Asian markets, had wanted the bill’s provisions to cover its project, too, in case it goes ahead separately or in addition to the producers’ gas line to mid-America.
The state authority, however, has based its work to date on a 36-inch line to Valdez to carry 2 billion cubic feet per day. At that size, it would not qualify for the accelerated depreciation.
The producers’ line to mid-America, at 4.5 bcf per day, would use 48-inch pipe.
Regardless of the pipe size, the state authority, if it achieves IRS tax-exempt status, would not be eligible for any savings from accelerated depreciation because it would not have any tax liability to reduce.
The latest presentation from Yukon Pacific Corp., which has trying to put together an Alaska LNG project for more than 20 years, also describes a 36-inch pipeline to Valdez.
• A federal loan guarantee would cover up to 80 percent of $18 billion in borrowing for the pipeline to mid-America. The guarantee could be used for the Alaska portion of the gas line and for any necessary pipe through Canada. It also could be used to cover the cost of the gas treatment plant.
There is a deadline to use the loan provision, which would expire two years after the final U.S. or Canadian certificate is issued for the project.
An LNG project would not qualify for the loan guarantee.
• Gas line provisions also include streamlined permitting and appeal deadlines to speed up the regulatory process.
The bill requires the Federal Energy Regulatory Commission to issue a decision on the project within 60 days after its final environmental statement. FERC also would be required to consolidate environmental reviews of all federal agencies and prepare a single environmental statement.
Any legal action against the project would have to be filed within 60 days of the agency decision that prompted the appeal.
A new position of federal coordinator would be created for the project. And federal agencies would be prohibited from adding to a permit or lease any provision allowed but not required under law if the coordinator determines the condition would slow down expedited work on the project. In-state gas needs and access The project sponsor must conduct a study of in-state natural gas needs, including looking at possible connectors along the line for in-state access to gas. FERC would be required to “provide for reasonable access” to the pipeline for state royalty gas to meet local needs. The bill does not define “reasonable access.”
FERC also would be required to consider and could order an expansion of the line to accommodate new gas supplies. If the commission orders an expansion, it could set new tariffs on an incremental or rolled-in basis to cover the costs, as long as existing shippers are not put in a position of subsidizing expansion shippers.
The bill makes it clear that the state — not FERC — would have jurisdiction over tariffs for in-state delivery of gas. Study of possible federal ownership If, 18 months after the energy bill becomes law, no one applies to build the line, the legislation requires the Energy Secretary to order a study of “alternative approaches to the construction and operation” of the project. The study would look at the feasibility of establishing a federal corporation to build the project, including possible federal financing and ownership.Non-binding statements The bill also includes several “sense of Congress” statements to express lawmakers’ non-binding opinions on issues related to the project, including:
• Project sponsors should use U.S. or Canadian steel pipe.
• Sponsors should negotiate union contracts for construction crews.
• An acknowledgement that the smaller Mackenzie Delta gas line most likely will be built before any Alaska line.
• A recommendation that project sponsors negotiate in good faith with Alaska regional Native corporations that may want to invest in the project.
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