Gas authority wants in on energy bill

Board wants federal legislation to require state of Alaska-producer partnership

Larry Persily

Petroleum News Juneau Correspondent

The Alaska Natural Gas Development Authority believes the best way to build its project for moving North Slope gas to market would be to share billions of dollars of construction and operating costs with the producers that want to build their own line for carrying gas to mid-America.

The authority figures it’s a natural for the two projects to share the costs of the gas treatment plant needed at Prudhoe Bay and the pipeline as far as Delta Junction, southeast of Fairbanks, where the producers’ line would turn to Canada and the authority’s line would head south to Valdez.

And just to make sure the state doesn’t lose out on the cost-sharing opportunity between the two projects, the gas authority’s board of directors has sent a letter to Alaska’s congressional delegation asking that the federal energy bill include a requirement for such a partnership.

“If we’re willing to pay our share, we get it. No b.s.,” said Harold Heinze, the authority’s chief executive officer.

The board would like to see the governor and Alaska’s congressional delegation push to add the provision to the energy bill currently before a House-Senate conference committee. Time is extremely tight, however, as congressional conferees hope to finish work on the bill by Oct. 3.

“I think we need to raise the flag with the administration,” Heinze said of the authority’s letter to Gov. Frank Murkowski, with a copy to the congressional delegation. “We need frankly to make sure … there is at least the opportunity for the state to invest … at least to get our gas as far as Delta.”

The seven-member board agreed unanimously at its Sept. 22 meeting in Anchorage to have Heinze draft and send the letter. “The easiest protection is for the state to at least be granted the right to become an investor in the project,” Heinze said.

The gas authority may see it as a reasonable request, but North Slope producers see it as a problem.

“ConocoPhillips is opposed to placing any mandates or additional requirements on a project, since it can raise costs and slow or preclude the project from becoming viable,” said company spokeswoman Dawn Patience in Anchorage.

“In particular,” Patience said, “we are concerned with any mandates that could impact the scoring ... for the proposed legislation, and therefore reduce the probability of the legislation being passed.”

Congress “scores,” or estimates, the possible financial cost of each piece of tax-related legislation. The draft energy bill contains several financial incentives and a federal loan guarantee to encourage private investment in the $20 billion Alaska gas project. The score, or price tag, for the bill could increase if congressional staffers believe the state’s own LNG project carries more risk than the stand-alone, producer-owned pipeline to mid-America covered by the legislation.

“The LNG project will have a different risk profile and different costs, which could change the scoring,” Patience said. “We do not see Alaska LNG as a viable alternative.”

BP Exploration (Alaska) also would oppose such a partnership provision in the energy bill. “Mandates are unhelpful for moving a project forward,” said BP gas spokesman Dave MacDowell in Anchorage.

State gas authority board members Sept. 22 discussed their belief that the state could simply pay the producers the amount needed to make the gas treatment plant and pipeline large enough to accommodate the combined gas flow of both projects.

“I think it is a great idea to at least ask for it,” said board member Scott Heyworth.

How much the state would pay for ownership and/or use of the gas treatment plant and pipeline would be subject to negotiation, Heinze said. “I would expect to pay something less than if I were doing it alone,” he said, declining to specify if that meant paying only the additional cost of building a larger plant and pipeline or the average cost of the facility’s handling capacity.

“I would expect to work out some commercial arrangement,” he said.

The state authority wants to build a project that would move 2 billion cubic feet of gas per day from the North Slope to Valdez, where it would be liquefied and shipped aboard LNG tankers to West Coast and/or Far East markets. The producers prefer their project, which would carry 4.5 bcf per day by pipeline to Alberta, where it would feed into the North America gas grid.

If both projects were built, the combined flow of 6.5 bcf per day would drain the North Slope’s proven gas reserves of 35 trillion cubic feet in less than 15 years — far short of the life expectancy of the pipelines and other investments. The gas authority believes there is much more gas on the slope, with state projections ranging as high as 100 tcf, though additional exploration and billions of dollars in investment would be needed to prove the reserves.

If the state fails to convince Congress to include the partnership provision in the energy bill, it could try to add the language to the project contract envisioned in the state’s Stranded Gas Development Act. That law allows the producers and the state to negotiate a long-term contract for payments in lieu of state and municipal taxes on a natural gas project, and Deputy Revenue Commissioner Steve Porter told the gas authority those negotiations would be a more appropriate venue to raise the partnership issue than in the energy bill.

Heinze explained after the meeting that unless the governor were willing to walk away from the bargaining table during the contract negotiations, there would be no way to force the producers to accept the state as a partner unless it were required in federal law.