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The wait is over Alaska receives two North Slope gas pipeline project applications Larry Persily Petroleum News Government Affairs Editor
The wait is over and negotiations will begin immediately. The state of Alaska has received two separate project applications under the Stranded Gas Development Act to each negotiate a contract for payments in lieu of state and municipal taxes for a North Slope natural gas pipeline.
Gov. Frank Murkowski was scheduled to announce the pipeline company application Jan. 22 in Fairbanks and the producers’ application Jan. 23 in Anchorage. He said state negotiators will start work immediately with both applicants, with the intent of submitting contracts to the Legislature for approval this session. Lawmakers face a May 12 adjournment deadline.
MidAmerican Energy Holdings Co., a pipeline operator and gas and electrical service company controlled by Warren Buffet’s Berkshire Hathaway Inc., is the lead member of the application that also includes Pacific Star Energy LLC and Cook Inlet Region Inc.
MidAmerican holds 80.1 percent of the new limited liability company established with Pacific Star and CIRI, which hold options to take up to the 19.9 percent. The new company is named MEHC Alaska Gas Transmission Co.
Pacific Star, founded by former ARCO Alaska Inc. President Ken Thompson, is a consortium of Alaska Native regional corporations that came together to buy a stake in a natural gas project. CIRI, the regional corporation for Cook Inlet, is taking its own share in the MidAmerican venture. CIRI is the largest private landholder in Southcentral Alaska, with $660 million in shareholder equity as of Dec. 31, 2002. Application covers all three producers The second application is from the three major North Slope producers: ConocoPhillips, BP (Exploration) Alaska and ExxonMobil.
The producers’ application is for a project that would include a gas conditioning plant on the North Slope and an 1,800-mile pipeline capable of carrying 4.5 billion cubic feet per day of gas from the slope to the North American distribution grid at Alberta.
MidAmerican’s proposed project — also at 4.5 bcf per day — does not include a gas conditioning plant, and the 745-mile pipeline would stop at the Alaska/Canada border.
Getting two applications to negotiate a gas line fiscal contract with the state is more than just good news, the governor said. “It gives us leverage we’ve never had before.”
Though it doesn’t mean any of the companies have decided to build the multibillion-dollar project or start ordering miles of steel pipe, it is the most visible step forward in years.
Industry and administration officials said it could take eight to nine years to plan, design, permit and build the gas line.
In addition to state fiscal contract negotiations, natural gas market price and demand projections, and construction cost cutting, Senate action on the federal energy bill also could affect the eventual decision for an Alaska pipeline. The energy bill, which includes substantial tax incentives and expedited permitting provisions for the project, is stuck in the Senate, at least three votes short of passage. A vote is not expected before the end of February.
Alaska has been waiting for a gas pipeline ever since explorers found oil and gas on the North Slope 35 years ago. A strong effort failed in the mid- and late-’70s, and subsequent attempts at a project in the 1980s and 1990s always fell short of proving it could be done at a profit. The natural gas price spike of 2000-2001 and continued projections of gas shortages and high prices in North America have rekindled hope this might be the decade that Alaskans see steel pipe come ashore for the line.
“There are all kinds of potentials” from the two applications, said Murkowski’s chief of staff Jim Clark.
MidAmerican Energy Holdings, based in Des Moines, Iowa, has $19 billion in assets and owns the Kern River Gas Transmission Co., which it bought from Williams Cos. in 2002. The line runs almost 1,700 miles from the gas fields of Wyoming to Bakersfield, Calif., carrying 1.7 bcf per day.
“This is a well capitalized organization,” Murkowski said of MidAmerican. “They are certainly a legitimate and experienced performer in pipeline and gas transportation.” MidAmerican has 38,000 miles of pipe In total, MidAmerican has 38,000 miles of gas pipeline, serves 5 million gas and electric customers in the United States and England, and has 11,000 employees.
In addition to picking up the Kern River line from Williams in 2002 for almost $1 billion, MidAmerican bought the Northern Natural Gas pipeline from Dynegy Inc. the same year for just under $2 billion. Northern Natural Gas is a 16,600 mile interstate pipeline transporting 4.3 bcf per day from the Permian Basin in Texas to the upper Midwest.
MidAmerican, CIRI and Pacific Star officials were scheduled to present their stranded gas application to the state Jan. 22 in Fairbanks. The state received the producers’ application Jan. 13 and, after approving it for completeness, was scheduled to formally accept it at a press conference in Anchorage on Jan. 23. The producers amended their application Jan. 20 to add Exxon, which had been holding out from joining the effort. TransCanada in on the talks Although not named in the pipeline company application, Calgary-based TransCanada has been talking with the MidAmerican venture and the state about joining the project to move the gas through Canada.The company and its wholly owned subsidiary Foothills Pipe Lines Ltd. operate more than 24,000 miles of natural gas pipeline across Canada. It also holds partial interest in half a dozen other companies that own 4,500 miles of gas pipe in the United States.
TransCanada assumed 100 percent ownership of Foothills last summer. As the owner of Foothills, TransCanada holds the 1978 Canadian regulatory certificate that granted Foothills exclusive rights for the Canadian portion of the Alaska Natural Gas Transportation System, the U.S. and Canadian governments’ name for the Alaska Highway gas line route from Alaska to the North America distribution grid in Alberta and Lower 48 markets.
Any effort to build a gas pipeline from Alaska through Canada will have to deal with the U.S.-Canada treaty that set out the rules to build and operate the line. And while TransCanada believes its rights are still valid more than 25 years later, other observers question whether the deal is enforceable and even whether the latest proposal for a much larger gas line falls under the jurisdiction of the treaty.
And while MidAmerican’s application stops at the Canadian border, the producers’ application has a bit of its own geography issue, too. Pipeline route unsettled Although the application refers to two possible pipeline routes, ConocoPhillips said in a letter to the state that it is applying for only the route along the Alaska Highway into Canada, Murkowski said. BP, according to the governor, indicated the application could apply to either the highway route or the so-called over-the-top route, while also acknowledging that state law bans permitting of that route.
The Legislature in 2002 prohibited permitting of any route from Prudhoe Bay, “over the top” to connect with proposed natural gas development and a pipeline at Canada’s Mackenzie River delta.
Exxon has always said it wants to keep its options open for any economical North Slope gas line project, and there is nothing with the application to indicate the company has changed its position, Murkowski said. Nor has the state changed its opposition to the over-the-top route.
The state negotiating team, led by the Department of Revenue with the departments of Law and Natural Resources also on the team, will start separate negotiations with the two applicants, the governor said. It could result in two contracts coming to the Legislature for approval.
“There are a lot of possibilities at this point,” the chief of staff said.
“It suggests a competitive component we didn’t have before,” Murkowski said. Talks under way for months The governor said state officials have been talking with the producers for several months, reviewing what would be needed in a project application. Talks with MidAmerican also have been under way since late last year.
The Stranded Gas Act, adopted in 1998 and amended last year, allows the state and a project sponsor to negotiate a contract for payments in lieu of all state production, property and corporate income taxes, municipal sales taxes, and any other state or municipal levies. The intent is to provide a more certain fiscal structure for the project than the assortment of taxes subject to annual change.
Under the law, the contract, which is negotiated in private, is subject to at least a 30-day public comment period before going to the Legislature. Lawmakers cannot amend the contract; they can either approve it or reject it and recommend the administration make changes. Municipalities will be involved Because municipalities along the pipeline route would be affected by the negotiations to trade their property tax revenues for contractual payments, the act includes a provision for a municipal advisory group to assist the Department of Revenue in the negotiations. That group held its first meeting last fall.
The receipt of two private-industry applications for a gas pipeline to the Lower 48 could dampen legislators’ enthusiasm to give more money to the Alaska Natural Gas Development Authority’s effort to build a state-owned line to Valdez for shipping liquefied natural gas around the Pacific Rim. The authority, however, believes there is enough gas on the North Slope to supply both projects, and it is proceeding with its quest for $2.15 million in additional state funds for its planning work this session.
The governor was hesitant to comment on the future of a state-owned project, now that he has applications for two private proposals to move gas to market.
“The economics have to make the determination of how Alaska gas finds its way into the markets,” he said.
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