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Gas proposals: what does the state get? Revenue’s Steve Porter gives IOGCC an overview of issues in stranded gas negotiations; warns, ‘it’s not a popularity contest’ Kristen Nelson Petroleum News Editor-in-Chief
The Interstate Oil and Gas Compact Commission held its midyear meeting in Anchorage in mid-May, with a focus on new sources of natural gas. Deputy Commissioner Steve Porter of the Alaska Department of Revenue gave attendees an update on the administration’s goals in negotiations under the Alaska Stranded Gas Development Act, reviewed the governor’s goals for the state in the negotiating process and highlighted strengths and weaknesses of the applicants.
The governor’s goals are a fair share of revenues for Alaska; provisions for in-state gas use; access to the pipeline for others to explore for gas; a pipeline that may be expanded; state equity ownership in the pipeline; and jobs for Alaskans and job training.
A fair share, he said, applies to the pipeline, the owners of the gas and the state. “Each party has to receive a fair share of revenues based on the risk they take to bring Alaska’s gas to market.” That, he said, is the standard the state is looking for across all applicants.
Proposals are compared to the status quo: what would the state receive without a fiscal contract under the stranded gas act. The state is also considering what the municipalities would receive, because it basically represents them in the negotiations and is also looking at the “commercial viability of each project and the likelihood that they can accomplish what they proposed.”
As for the debate swirling around the negotiations, Porter said it’s useful when the public focuses on what its needs are and what it wants the state to accomplish. The debate is not useful when it centers on which project the state should choose. The state is not “persuaded by the debate in the press. It’s not a popularity contest” and “we’re not persuaded by the personalities that step up to endorse one project over the other.”
The state is persuaded by one thing, Porter said: “a commercially viable project that brings more value to the state than any other project.” What the producers bring The producers — ExxonMobil, BP and ConocoPhillips — own the gas: “they have the responsibility to build the pipeline, ship the gas or sell the gas.”
Canada will be a hurdle, Porter said: if TransCanada is right, that it has the exclusive right to build the Canadian segment, then the producers will need to deal with TransCanada. If TransCanada is wrong and doesn’t have exclusive right, the producers still have the option of negotiating with TransCanada or they could permit their own Canadian project. “Permitting your own project in Canada isn’t a simple task,” he said, something the producers can learn from the experience their affiliates are having with the Mackenzie pipeline.
If the producers take 4.5 billion cubic feet a day to Chicago, that volume of gas will cause “at least a short-term depression on price in the Chicago market” and that price depression could last months or years. The producers could mitigate that by taking the gas to Alberta and moving it from there through existing infrastructure perhaps with some incremental expansion, mitigating the Chicago problem by dispersing the gas more widely.
The producers also have a cost hurdle: going all the way to Chicago is very expensive, Porter said. That could be mitigated in the same way as the Chicago price problem, by taking gas only to Alberta and using existing infrastructure. TransCanada brings pipeline experience TransCanada brings “the ability to build a low-cost pipeline with the lowest possible tariff,” Porter said. “And this is where they need to place their focus.”
Their challenge is “to bring a commercially viable proposal to the owners of the gas,” including the state of Alaska, “that will convince them to ship their gas in their pipeline.”
If TransCanada does have exclusive rights to build the Canadian segment of the line, then they bring that value to the project, and if their permits are still effective they could use them to bring Alaska gas to market “sooner than some of the other options.” Port authority The Alaska Gasline Port Authority plans to sell some 2 bcf per day on the West Coast. “Our research indicates that the impact of that amount will have a more depressing effect on the West Coast price than the producers selling 4.5 billion cubic feet a day into the Chicago market, and we also think that that effect may last longer” than the impact of the producers’ project going directly into Chicago, Porter said. That can be mitigated if the port authority finds other markets and by reducing the amount of gas they send into the West Coast “or by figuring out another way to move that gas out of the West Coast.”
The port authority also has to build a liquefaction plant, multiple regasification plants and several Jones Act tankers. “This added transportation cost places them in a position of paying more to get Alaska gas to market and receiving less for it when it gets there.” The port authority would need a Jones Act waiver “or some other form of economic incentive that will reduce the overall cost of the pipeline.”
And because the port authority is proposing to market less than half the gas of the other projects, “they’ll bring in substantially less revenue than the other proposals even if they didn’t have a more depressing effect on the market or the challenge of the transportation.”
Porter said the port authority is also relying on an Internal Revenue ruling that the project is tax exempt, but he said they would need to assure the state that their present project, which is a little bit different than the one the IRS ruled on, would also be tax exempt.
The port authority also faces the regulatory difficulty of permitting regasification plants on the West Coast. “This may be actually their greatest trouble as they break into the gas market,” because new industrial facilities on the West Coast “suffer from substantial opposition from the local communities.”
The last hurdle will be convincing the owners of the gas that the project is commercially viable so the owners will either ship on the pipeline or sell to the port authority. “Basically they have to be competitive,” Porter said. “Any project that’s competitive participates; any project that’s not competitive by its very nature does not participate.”
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