If producers control gas, they control gasline, attorney says

Because there will only be one Alaska North Slope gas pipeline for the foreseeable future, federal legislation and FERC rules needed, D.C. attorney Karol Newman tells joint committee

Kristen Nelson

PNA Editor-in-Chief

Without statutory changes by Congress and rulemaking by the Federal Energy Regulatory Commission, the state has no chance of controlling access to a gas pipeline from the North Slope, the Legislature’s Joint Committee on Natural Gas Pipelines heard from committee attorney Karol Lyn Newman Feb. 15.

An Alaska gas pipeline needs new rules and needs them up front, Newman told the committee, because — for the foreseeable future — there is only going to be one pipeline, and that one pipeline is going to have finite capacity.

Newman, a partner in Washington, D.C., law firm Hogan & Hartson L.L.P., practices before the FERC and was hired by the joint committee to provide legal counsel on natural gas pipeline issues.

Open season the first hurdle

That generally means advance negotiations with anchor shippers, she said, including “what I refer to as pre-subscriptions of capacity.”

Tariff and terms and conditions of service for gas pipelines “are all set in advance with the anchor shippers to make sure that the system works,” Newman said.

“Now this is a perspective that makes eminently good sense,” she said, except that “from the perspective of people who need access to one pipeline it doesn’t work.”

Because there is only one Alaska line planned — and will be only one line for the foreseeable future — “there need to be some special rules at least for that particular line.

“Otherwise, the process will be totally controlled by the three large producers in the area. And most likely the existing initial capacity … that’s proposed as well as expanded capacity, could easily be contracted for before anyone else, including the state for its royalty gas, would have a chance to get in the line, except on perhaps some onerous conditions.”

Authority to expand?

“FERC clearly does not,” Newman said.

Those claims are based on FERC Order 637, she said, which involves situations where pipelines had made commitments. The Natural Gas Act “is inherently a regulatory scheme that is superimposed on private contracts.” And some pipelines have “contracted for firm capacity well in excess of what they even have the ability to provide.”

In Order 637, FERC said that, in circumstances where contracts are signed for delivery, it may be able to force expansion to make the pipeline honor its commitments.

“But if a pipeline will not contract for more capacity than it has and if a pipeline doesn’t contract for more capacity than it has, there is nothing in any statute that FERC administers or has the direct statutory authority from which would allow the FERC to order a mainline expansion.”

Committee vice-chair Rep. Joe Green, R-Anchorage, asked Newman if FERC had any control over allocation of expansion capacity.

“As a practical matter, FERC has not really been confronted with the situation that you’re going to face… And that is because in the Lower 48 and even in the outer continental shelf, there are multiple lines.” FERC has some authority under the Outer Continental Shelf Lands Act to prorate capacity and to require expansion, she said, but not under the Natural Gas Act.

Deal killer?

Newman said the first thing would be for Congress to require FERC to write regulations governing the timing, structure and minimum criteria for conduct of an open season.

“But you need more than that. You need the commission to require that the open season be filed with FERC.” Because open season information is not currently publicly available, she said.

An open season for an Alaska pipeline should be filed 90 days in advance of the open season, so people can look at bidding criteria and object if they are “discriminatory or preferential.”

That doesn’t, she said, stop the financing from going forward.

Who controls?

The wording the committee is looking at for Energy Act amendments says “one of the purposes of this act is to ensure access on an equal and non-discriminatory basis and to promote competition,” Newman said, but absent federal legislation that reserves capacity for non-Prudhoe Bay producers, “you may have a very difficult time of it.”

Torgerson said allocation of initial capacity is very controversial and has been described by the producers as a deal killer.

It’s not a financing problem, Newman said, because “we have enough volume to fill the pipe… (and) people who are doing the financing are looking at whether or not you’ve got the volume that their revenue comes from.”

So allocating capacity won’t kill the pipe, because if you’re allocating, “it means there’s more volume out there than you have capacity for.

“And if that’s the case, we don’t have a financing problem.

“What we have is a problem of the three producers who want to monopolize the pipe not being in a position to do it.”

It’s a business issue for the producers, Torgerson said, and affects the net back built into their business plan.

“That’s right,” Newman said. “That is dependent on their being in control of this asset.”

“I look at this as fundamentally a question of whether or not… these three… have the capacity to or the capability or the authority… whether they can, in fact, just shut their gas in and say, fine, we just won’t produce it.

“And if they can do that, then I don’t know how you can eliminate their control. Unless something happens that takes that power away from them.

“If they don’t have that power then they’re bluffing.”