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MidAmerican drops out Firm withdraws state application for Alaska gas line, wanted exclusive position Larry Persily Petroleum News Government Affairs Editor
MidAmerican Energy Holdings Co. has withdrawn its application to the state and shut down its effort to build an Alaska natural gas pipeline, less than two months after state and corporate officials crowded a stage in Fairbanks to loudly announce the proposal amid cheers and congratulations.
The company said it decided to walk away from any further negotiations after the state declined to grant MidAmerican exclusive development rights to the project.
“We are extremely disappointed the state of Alaska rejected this approach, which we had clearly discussed with Governor Murkowski before filing our application,” MidAmerican Chairman David Sokol said in a prepared statement released March 25.
MidAmerican, a pipeline operator and power company based in Des Moines, Iowa, had wanted the state to grant it exclusive five-year development rights for the Alaska gas line, during which time the state could not negotiate with any other potential developer.
“We believed our request to be the state’s sole development partner for the initial project development period was reasonable, given the magnitude of the risk involved,” said Robert Sluder, president of the MidAmerican subsidiary established for the Alaska project. Company: Exclusive rights essential The company needed the five-year exclusive rights to allow three years for permitting, financing and marketing, and two years to order steel pipe and compressors and start construction, said Susan Flaim, spokeswoman for MidAmerican. It needed the assurances of exclusive rights before risking the investment on a multibillion-dollar project, she said.
But it was too much for the state to accept, said Mike Menge, Gov. Frank Murkowski’s special assistant on oil and gas issues.
“He didn’t think it was fair at this time to cut everyone else off at the knees,” Menge said the morning of March 25, just as MidAmerican was distributing its press release.
The state did tell MidAmerican it would grant the company exclusive rights to state processing of right-of-way permits for the pipeline. “That wasn’t good enough,” Menge said.
Winning fully exclusive development rights was crucial to the company’s plans for a pipeline from Alaska’s North Slope to Canada, Sokol said in a March 1 letter to Murkowski. “We will agree to utilize reasonable best efforts to move all of the … project elements forward … in exchange for the exclusive right to own, build and operate the project,” Sokol said. State continues talks with producers While losing MidAmerican as a potential project developer, the state is continuing to negotiate with the three major North Slope producers for a gas line contract. The companies — BP Exploration (Alaska), ExxonMobil and ConocoPhillips — applied about the same time as MidAmerican under Alaska’s Stranded Gas Development Act to negotiate a long-term fiscal contract for payments in lieu of state and municipal taxes on the project.
The state hopes it can reach a draft contract with the producers by the end of the year, Menge said.
“Certainly we’re disappointed,” he said of MidAmerican’s decision, especially after the optimism of January’s press conference in Fairbanks. “There was a high degree of enthusiasm, this was a fresh face in town.”
Though owner of thousands of miles of gas pipe in the Lower 48, MidAmerican is new to Alaska, and the governor, legislators, labor unions and municipal officials had welcomed the company’s interest in building the gas line that Alaskans have been waiting for since the 1970s.
“Gas line development is a very emotional issue,” Menge said. “Everyone will put their own spin on this.”
The state’s negotiations with MidAmerican have been strained for the past several weeks, according to material released by both sides.
In his March 1 letter to the governor, Sokol complained about some of the state’s proposed contract terms. He called the negotiations “misfocused,” and touted his company as a much better choice to build the line than the producers. He said the producers, as owners of the gas, have an inherent conflict of interest in also owning the pipeline.
It appears the governor at least agrees with the company on that point. “We also believe that it is in the best interest of the state for the pipeline to be owned and operated by an unaffiliated pipeline company, assuming that such a company is able to provide the lowest possible tariff,” Murkowski said in a March 25 letter to Sokol.
In a mid-March letter to the governor, Sokol asked if Alaska had a “change of heart” regarding what the company had understood was a commitment to exclusive development rights.
The governor replied he had made no such deal.
“We made no commitment to enter into a contract under the Alaska Stranded Gas Development Act to provide you with an exclusive right to build, own and operate the Alaska portion of the pipeline,” Murkowski said in a March 16 letter to Sokol. “I know this to be the case because the act does not authorize the state to convey such a right. In fact, I know of no authority that would allow the state to convey such a blanket exclusive right.” State OK with limited exclusive rights However, in the March 25 letter to Sokol, the governor acknowledges offering at least a piece of an exclusive deal to MidAmerican.
“We had hoped that our proposal to grant you sole rights to a state pipeline right of way for five years in connection with the commitment of the state to support, and take no action to inhibit, your eventual construction, ownership and operation of the Alaska portion of the gas pipeline would provide you with the security you needed to proceed with development efforts,” the governor said.
The state’s discussions with MidAmerican started back in November, two months before the company submitted its actual Stranded Gas Act application. MidAmerican proposed in November to spend $100 million on gas pipeline development costs over three years if the state would agree to reimburse the company for half the amount if the project did not go forward. Exclusive development rights to the project were part of the company’s proposal.
The governor’s office rejected the reimbursement agreement in December, while encouraging the company to proceed with formal fiscal contract talks.
Murkowski and MidAmerican officials met most of March 22 in Anchorage, discussing the project and contract problems, before exchanging press releases three days later.
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