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Port authority offers to buy gas Alaska Gasline Port Authority, Sempra aim for window of opportunity to take North Slope gas to West Coast as LNG; application under Stranded Gas Development Act reactivated Kristen Nelson Petroleum News Editor-in-Chief
The Alaska Gasline Port Authority again became a visible player in efforts to get Alaska North Slope natural gas to market when it hooked up with Sempra LNG in December, giving it access to gas markets on the West Coast.
On March 30 the port authority reactivated its application to the state under the Alaska Stranded Gas Development Act and on April 4 it made an offer to the Prudhoe Bay natural gas owners to buy gas on a netback basis, subtracting project costs from the market price for the gas.
The port authority said it is proposing an initial purchase of some 4 billion cubic feet a day of wellhead gas on the North Slope for 30 years.
The port authority’s board chairman, Mayor Jim Whitaker of the Fairbanks North Star Borough, called it “an historic event” that for the first time an offer to purchase has been made for Alaska North Slope natural gas.
The authority said that at a base case, where the gas price is $4.50 per million British thermal units and $23.97 per barrel for liquefied natural gas, and at 2005 material and construction costs, the estimated netback would be $1.02 per million Btu at the entrance to the conditioning plant. Proposal received by gas owners ConocoPhillips Alaska spokeswoman Dawn Patience told Petroleum News April 5 that the company has received the document Mayor Whitaker passed out at the press conference, but said she had no additional comments beyond that.
ExxonMobil spokeswoman Susan Reeves said April 5 that ExxonMobil hasn’t had an opportunity to review the port authority proposal, but said that over the years ExxonMobil has studied various technologies for commercializing Alaska gas, including liquefied natural gas, gas-to-liquids technology and pipelines, and “believes that a pipeline to transport the gas to market in North America is the most promising alternative for the commercialization of Alaska gas.”
BP Exploration (Alaska) gas spokesman Dave MacDowell said April 5 that BP had not yet had an opportunity to review the document and couldn’t comment on proposal details.
“We have always said that we would welcome discussions regarding credible project proposals to commercialize Alaska’s North Slope natural gas,” MacDowell said. “While it is not clear to us that this proposal is commercially viable, we would be happy to meet with the AGPA to learn more.”
MacDowell said the port authority did not request discussions with BP prior to the purchase offer and that there have been no discussions since the offer was made. Port authority a municipal group The port authority was formed in 1999 when residents of the city of Valdez, the Fairbanks North Star Borough and the North Slope Borough voted to approve its formation. The authority’s initial proposal was to take gas both to Valdez for liquefaction and to the Lower 48 by pipeline.
The present project would go to Valdez first, paralleling the trans-Alaska oil pipeline. The port authority told the state in its stranded gas application that it is willing to oversize the pipe as far as Delta Junction to allow a future line from Delta Junction along the highway to take gas to the Midwest. The authority also told the state that a spur line would be built from Glennallen into the Matanuska and Susitna valleys to connect with the existing Southcentral gas grid.
In 2000 the Internal Revenue Service issued a private letter ruling declaring that the port authority’s income would be exempt from federal taxes.
The port authority engaged Bechtel Corp. to provide an engineering, procurement and construction study for the project and Taylor-DeJongh to develop an economic model incorporating Bechtel’s work. The port authority told the state that the economic model will be updated to reflect new Bechtel numbers and new data will be submitted by mid-April.
Late last year, after Congress passed loan guarantees for an Alaska gas project, the port authority cut a deal with Sempra LNG to buy and market LNG from the port authority. West Coast market the goal At a community presentation on the port authority plan in Valdez April 2, Valdez Mayor Bert Cottle, vice-chairman of the authority board of directors, said the authority’s mission statement is to develop Alaska North Slope gas “to the maximum benefit of all Alaskans, including project revenues, Alaska hire through construction, operation and additional petrochemical industries.” The authority is also promoting “maximum access to Alaska’s natural gas throughout the state,” he said.
The port authority plan would split revenues from the project between the state and Alaska municipalities.
Mike Morgan, vice president of special projects for Sempra LNG, said at the Valdez presentation that mega projects, such as commercializing North Slope gas, “can take years to happen, but when you finally get the right group working on them with the right motivations … they can be put together.” If projects “make sense, they do eventually happen,” he said.
“And I think for the Alaska gas pipeline that time has come.”
Morgan said the gas would be liquefied at Valdez and shipped on seven or eight tankers to West Coast regasification terminals. Sempra is building a plant near Ensenada, Mexico, he said, and that plant could be expanded. “It will probably take at least two sites if not more to handle all the regasification needs of the project.” Importance to Alaska Whitaker said at the Valdez presentation that issues for gas development include: who controls Alaska’s gas resource, how does it go to market; and “is the free enterprise system working?”
In the port authority project, he said, the value from different parts of the project goes to different entities: the wellhead value of the gas goes to the producers and the state; the value from the conditioning plant on the North Slope to the producers; the value associated with building the pipeline goes to the contractors; pipeline operations will go to a contract operator, “and it will be an Alaskan contractor;” pipeline transportation value, through ownership of the pipeline, would go to the port authority and to the state; liquefaction processing value will go to Sempra; tanker transportation would be on a contract basis; the value from regasification goes to Sempra; and value from gas trading to the producers and Sempra.
“That’s the free enterprise system at work: many competitors with an opportunity to compete,” Whitaker said.
If the producers own the project, he said, the wellhead value is still split between the producers and the state; the value from pipeline construction still goes to contractors. But the value from conditioning, pipeline operation, pipeline transportation, liquefaction (if any; the producers have said they do not find an LNG project to be economic), tanker transportation, regasification (if any) and gas trading would all go to the producers.
“This,” Whitaker said, “is not the free enterprise system. That’s a very closed value chain. Some would define that as a monopoly. And that’s what we’re trying to avoid. We want the free enterprise system to work and we think we have the means by which to do that.” Why now? There is an opportunity now to catch West Coast markets for LNG, Cottle said. “If we miss this window of opportunity the next window of opportunity could be 15 to 20 years farther out; we may never get it, so it’s basically now or never.”
The big hurdle now, Cottle said, is purchasing the gas from the producers.
Whitaker said the state owns 100 percent of the gas, it’s just leased to the producers and while they have a leasehold right they also have an obligation.
“The inferred obligation of the lease it that it will be produced,” he said, and “the state can exert, and should exert, and must exert, its ownership responsibility — given that there is a means to market.”
The port authority project “is a midstream and a downstream project; we’re not producers, we don’t own gas, so we have to talk to and work with producers in order to have gas to develop our project,” said Sempra’s Morgan. “The producers want to develop the midstream and the downstream themselves so they’ve been very reluctant to talk to us because they have their own project.”
Morgan said the state will have to sort out which is the best project. If the state decides that the port authority has the best project, “then the producers will be happy to sit down and talk to us because they’ll want to sell their gas if they know that they’re not going to get the midstream.” What’s the biggest risk? Rigdon Boykin of O’Melveny and Myers, the port authority’s special counsel, said he doesn’t think it is the state’s job to pick the best project. “I think the problem that has existed here is so far the producers do not believe it is economic for a line to go through” and they are trying to do things to make it economic, or wait until it is economic “or they want to supply the various markets that we’re talking about from other sources.” Until now, Boykin said, “the port authority has not been in a position to make an offer to the producers to produce the gas.” Once that offer is made, he said at the April 2 Valdez presentation, “then the producers have to decide whether to sell. I think at that point in time basically the issue is forced here in Alaska. They either have to sell to us or they have to go ahead and develop themselves. And that will potentially get this off the dime.”
Bill Walker of Walker and Levesque, general counsel to the port authority, said Alaska LNG needs to get into the West Coast market — “it’s a sweet spot of the United States as far as getting your gas into that market,” he said. The West Coast is a 9 bcf a day market, “and if you’re going to put 3 or 4 bcf into a market, you need a big market to put it into. If you’re going to have an 800-mile tail on your LNG plant, you need a big volume to do that.”
What Alaska should be doing, Walker said, is marketing its gas in California the way the Australians are. “We should be going after a market: we should be going after the West Coast market — that’s our market to lose. If we lose the West Coast market to Australia, that’s a sad day for Alaska,” he said.
If we lose that market, he said, then our only option is to go through Canada, and the “only benefit is … what’s left at the wellhead. We hear lots of talk about the risks of the project — all the risks … and how you do the risk sharing,” Walker said. “The risk I have is risk that we don’t do a project.”
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