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Fiscal certainty part of commerciality ExxonMobil, Chevron tell legislators what companies consider before committing natural gas to a pipeline anywhere in the world Kristen Nelson Petroleum News
BP, ConocoPhillips and ExxonMobil have a lot of natural gas on Alaska’s North Slope to ship to market once a gas pipeline is in place. Chevron has a lot — or very little — depending on the outcome of the current Point Thomson litigation, because Point Thomson holds the bulk of Chevron’s natural gas.
If Point Thomson “gets resolved favorably from our side then we’d be a significant player in a pipeline. If it doesn’t, we’re just going to be a little trivial part” of gas shipments, Chevron’s Alaska manager, John Zager, told legislators in Anchorage June 17. The gas Chevron would have to ship without Point Thomson is based on the company’s small interest in Prudhoe Bay.
The Alaska Department of Natural Resources has terminated the Point Thomson unit, a decision which is being litigated, and is in the process of taking back the leases. ExxonMobil (36 percent), BP (32 percent), Chevron (25 percent) and ConocoPhillips (5 percent) are the largest leaseholders at Point Thomson.
Chevron’s potential share of Point Thomson gas is some 2 trillion cubic feet, and if it has that gas, there is a pipeline coming and a development plan for Point Thomson, Chevron would nominate natural gas in an open season, Zager said.
“We will commit to firm transportation for our known gas reserves in a pipeline we are confident provides reasonable upstream economics and terms,” he said.
Zager said Chevron isn’t involved in either the TransCanada or the Denali gas pipeline projects, but might have an interest in equity ownership “roughly commensurate” with a ship-or-pay commitment.
“The reason for that is not to control this industry or the basin; the reason for that is more financial,” he said. Chevron likes to see a “big debt, which is what a ship-or-pay commitment is” offset with equity in the pipeline “so it matches up and doesn’t really change a company’s debt-to-equity ratio,” Zager said.
Reasonable upstream economics “We will commit to firm transportation for our known gas reserves to a pipeline we are confident provides reasonable upstream economics and returns,” he said.
Zager said “known gas” is important. If Point Thomson is resolved so that Chevron retains its interest in that gas, that would be about 2 tcf, and if “we’ve got a pipeline coming and we have a development plan (for Point Thomson), then we would be sure we’d want to nominate and save space for our 2 tcf of gas.”
But that’s known gas, he said. Chevron won’t be nominating any yet-to-be-found gas. Zager said that beyond known reserves at Prudhoe Bay and Point Thomson, there is a “big wedge” of gas needed to fill the expected life of a gas pipeline “and I don’t think we have any responsibility” for nominating beyond the company’s known gas.
As far as “reasonable upstream economics and returns,” for Chevron that means “reasonable economics” for Point Thomson, because that is where Chevron has the bulk of its gas.
What kind of confidence does Chevron need to have? Zager said the company will look at the open season materials and evaluate the quality of those materials.
One issue is, are the key variables controllable. He said that doesn’t mean controllable by Chevron or controllable by the state, but whether all of the parties could get together and solve the problem.
The Point Thomson issue is controllable: “We could get together and we could solve that and we’d have confidence going forward in what our reserves are going to be” for an open season two or three years out.
Future gas prices are not controllable: It’s a big risk, but it is one companies in the business are used to taking, Zager said.
Construction cost is partially controllable. Steel and labor costs are not controllable, he said, but pipeline design and project management are controllable.
One thing Chevron will look at is the pipeline cost that’s included in the open season: “How confident are we that that number will not be exceeded when the actual bill comes due?” Zager said when you sign a shipping commitment “you’re giving a blank check” to the pipeline developer and if a $30 billion project becomes a $40 billion project, “your ship-and-pay commitment just went up commensurately. Your wellhead price went down commensurately. And what you thought was an economic project at Point Thomson may not be anymore.”
What Chevron will look at is the quality of work done before the open season and its confidence in the pipeline developer. It will also do its own assessment as to whether it thinks the number in the open season will be met.
Referring to the Alaska Gasline Inducement Act provision that an AGIA-licensed pipeline would price expansions using rolled-in tariff rates (the cost is spread over all shippers) for increases of up to 15 percent beyond the original tariff, Zager said Chevron would look at the tariff assuming that at some point there would be a 15 percent increase.
Much alignment with state Cost risk is another issue Chevron will look at.
“Right now it looks like basically it’s borne by the shipper” in the TransCanada proposal, with “maybe a little wedge of it” going to TransCanada.
“We’d like to see that spread out so that there’s some real incentive for the developer to meet the number that they put into the open season proposal. If there’s going to be pain to go around the person that’s putting together the proposal should share in that, at least proportionately to the other parties and the state.” Between current production taxes and royalties “most of that money will directly or indirectly be coming out of the state’s pocket,” Zager said.
State taxes, fiscal certainty, is an issue that’s been discussed and “it’s going to be a real issue,” he said.
Zager said Chevron wants to do projects “in the most economic way. And the state, given the ACES (production) tax, certainly should want us to do projects in the most economic way” because “a certain percent of the capital investment is going to be basically picked up by the state in the form of credit” for upstream development projects.
Essentially the state is “a co-investor with us,” Zager said, and noted that “I haven’t seen that reality being percolated down in behaviors yet.”
Referring to Point Thomson he said the state should want to see a pilot project done first to prove up the development plan, “because if it doesn’t work, we’ve just put $10 billion into something we could have found out for a billion-two, a billion-three, and you know, we need to be aligned on this and start thinking like investors what’s the right and most prudent investment for all of us.”
Exxon: commercial includes taxes ExxonMobil has indicated its willingness to commit its gas to a line on commercial terms.
Craig Haymes, ExxonMobil Production’s Alaska production manager, said in response to a question from Sen. Bert Stedman, R-Sitka, at a June 18 legislative hearing in Anchorage, that firm transportation commitments create a liability for the company.
Referring to information in the state’s finding on TransCanada Alaska’s application for an AGIA license, Haymes noted that the state’s consultants document the amount of yet-to-be-found gas that would be required to keep a gas pipeline full for 35 years: 57.5 trillion cubic feet for a 4.5-billion-cubic-foot-a-day line, 22 tcf more than known reserves.
However, the Brown, Williams, Moorhead & Quinn report notes that more than 57.5 tcf will be required “because gas production eventually declines for each vintage of proved reserves,” so actually 70-80 tcf would be required to fill a 4.5 tcf a day line for 35 years.
Shippers make a commitment for firm transportation, knowing fields will decline, so a commitment includes an unknown amount of yet-to-be-discovered gas. ExxonMobil will back that commitment and finance it and carry it as a liability, Haymes said.
The company has “to cover that firm transportation commitment whether we’ve got the gas or not,” he said, giving the company the incentive to explore for more gas and to encourage others to explore for more gas.
He said ExxonMobil has stated its willingness to sell gas at the wellhead or commit to a pipeline.
Stedman asked if that meant ExxonMobil will be making commitments for yet-to-find gas or just the known.
Haymes said it revolves around the market: A utility company would be looking for long-term commitments, 25 to 35 years, in buying gas from a producer.
If ExxonMobil committed 1 bcf or 1.5 bcf a day for 25 to 30 years, the company would be “on the hook for that all the way through and we know today we don’t have that much gas.”
There would be exploration for more gas, but the liability is with the company that committed to the utility, and if no more gas is found, the utility would buy on the spot market, paying a premium. Ultimately the producer that committed to provide the gas pays, he said.
Haymes said there are “substantial uncovered commitments” which ExxonMobil would have to underwrite.
Commitments conditional
ExxonMobil will be able to make commitments in an upcoming open season, Haymes said, noting that: “Those commitments will be conditional.”
They would be “conditional on reasonable commercial terms,” as anywhere else in the world where the company does business.
“And those conditions would be conditional on reaching a unanimous conclusion between the various agencies on the right offtake rate.” That’s no different than what ExxonMobil does anywhere in the world, Haymes said.
The Alaska Oil and Gas Conservation Commission’s “mantra, as we know, is to maximize resource recovery,” so there will be a tradeoff between gas and oil. “In an ideal world you’d like to have both, but reality, anywhere in the world, you never get both. And so at some point there’s a tradeoff,” he said, since there is never complete recovery from reservoirs.
Are taxes included? Rep. Carl Gatto, R-Palmer, asked Haymes if commercially reasonable terms would include state tax terms.
Haymes said yes. “When we talk about commercial terms, we’re talking about all commercial terms that would impact economics or cash flow for a producer such as ourselves. So yes, it would include the fiscal terms.”
He compared it to going to a bank for a home loan — you would want to know the interest rate going in; “this is no different — on a much larger scale.”
Gatto pointed out that the state offered 10 years of certainty under AGIA; is 10 years not enough, he asked Haymes.
“If we had firm transportation commitments that were for 10 years, then that would be sufficient,” Haymes said. But firm transportation commitments are likely to be for much longer, he said.
Asked by Rep. Les Gara, D-Anchorage, if “Exxon at this point is not interested in the British Petroleum and Conoco deal but is interested in possibly becoming a part owner of the TransCanada deal?” Haymes said ExxonMobil is “looking at both proposals; we’re evaluating both proposals very, very carefully. We believe that eventually a gas pipeline will need all of the producers and the state to come together. So we’re looking at both. We haven’t ruled out either option at this point in time.”
Gara asked if reasonably commercial terms would mean production tax cuts.
“I’m not sure yet what those reasonably commercial terms would be,” Haymes said. “They would be worked by our gas marketing company and they would look at that and just like they do for every gas deal in the world they will do the commitment on the same basis.”
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