Providing coverage of Alaska and northern Canada's oil and gas industry
May 2008

Vol. 13, No. 19 Week of May 11, 2008

Alaska gas lines compete in Calgary

Denali to move regardless of special session; state argues against ‘comprehensive’ fiscal terms; TransCanada, BP both tout experience

Gary Park, Eric Lidji & Kay Cashman

Petroleum News

The two North Slope producers looking to build a natural gas pipeline in Alaska plan to move forward even if the state awards a license to a competing project, according to a senior executive.

BP and ConocoPhillips announced plans in early April to spend $600 million over the next several years to prepare for a 2010 open season on a large-diameter pipeline from Alaska’s North Slope to markets in the Lower 48.

But that project is in competition with a state-lead effort to build a similar line under the Alaska Gasline Inducement Act, or AGIA, passed last year.

The state is currently evaluating a proposal from the Canadian pipeline company TransCanada, submitted within the bounds of AGIA, and if the state approves the proposal, lawmakers will have 60 days to decide whether to award TransCanada the license to start work on an open season.

Regardless of the outcome, though, the BP-ConocoPhillips joint venture plans to continue its efforts on “Denali — The Alaska Gas Pipeline,” according to a BP executive speaking at an oil and gas conference in Calgary on May 6.

Asked why the joint venture would “gamble” $600 million of shareholders’ money and later “untold” billions of dollars more on the project when TransCanada seems to hold an edge, Angus Walker, senior vice president at BP in Alaska, said the joint venture believes it has the experience needed to successfully complete the project.

“We’ve never given up on Alaska gas. ... We’ve had a team working on it for decades,” Walker said during the final day of the Interstate Oil and Gas Compact Commission’s midyear issues summit.

Alaska Gov. Sarah Palin is the chairwoman of IOGCC this year.

Competing claims on experience

This summer, BP and ConocoPhillips plan to collect data between Tok and the Canadian border in preparation for the pipeline. Walker said the companies will be working in the field in both Alaska and Canada during the following two summers.

Following the open season in 2010, BP and ConocoPhillips expect to take two more years to complete the regulatory process and more detailed engineering, and another five years after that to finish major construction work, Walker said.

On that schedule, Walker said gas could start flowing through the pipeline as early as 2018, and ramp up to initial capacity of 4 billion cubic feet per day within a year.

With a combined 50,000 miles of oil and gas pipelines, $300 billion in joint market capitalization and a track record in the Arctic, the companies believe they are best suited for the project, according to Walker.

But speaking to the same crowd the day before, Tony Palmer, vice president of Alaska development for TransCanada, made similar arguments, saying his company has been trying to build a gas pipeline in Alaska for 30 years.

“You might also ask, ‘Well TransCanada, have you ever done a project this large?’ And I would tell you, ‘Indeed we have,’” Palmer said, comparing the proposed Alaska natural gas project to previous work done by TransCanada.

At 1,715 miles, the Alaska project would represent less than 5 percent of the existing TransCanada system of 36,500 miles of pipeline running throughout Canada and the United States, Palmer said.

He added that the Alaska pipeline would be shorter than both the original 2,300-mile mainline across Canada that TransCanada built in 1958 and the 2,150-mile Keystone pipeline currently under construction.

However, Palmer’s comparison doesn’t take into account the challenges of building a pipeline across subarctic climates like Alaska and the Yukon, and as of yet TransCanada has not built any pipelines north of the 60th parallel. And Walker does not mention the major problems the subsidiaries of BP, ConocoPhillips and ExxonMobil have had as owners of the trans-Alaska oil pipeline. The TransCanada pipeline, like Denali, could also start moving gas by 2018, Palmer said.

Race to the finish?

With the announcement of the Denali project in early April and the special session approaching in early June, an Alaska natural gas pipeline is starting to look more like a race to the finish line, but both proposals still face significant hurdles before construction.

Walker said the BP-ConocoPhillips joint venture is best prepared to handle unresolved issues because the companies have already started work on their project, a theme he repeated several times in his presentation.

“We believe that this is the route to a successful project, rather than waiting and trying to resolve all of the issues before we start,” Walker said.

Walker wasn’t troubled by the prospect of TransCanada getting a state license because, he said, the BP-ConocoPhillips project doesn’t require state funding, referring to the $500 million subsidy the AGIA license holder will receive in exchange for going forward with an application to the Federal Energy Regulatory Commission even if the initial open season does not result in enough gas being committed, which could happen if BP, ConocoPhillips and ExxonMobil do not commit their North Slope gas reserves from the giant Prudhoe Bay field.

In addition to the project moving forward, the subsidy ensures that there are lower tariffs, expansion commitments and rolled-in rates. Lower tariffs also drive value to the state because the state collects taxes on the net value at the wellhead, which is lower the higher the tariff is; and the state pays tariff on its own royalty gas, Galvin told Alaska legislators last year.

$13 billion subsidy under Murkowski contract

That doesn’t mean BP and ConocoPhillips won’t be making financial requests of the state. Under the Murkowski administration they and partner ExxonMobil insisted on subsidies that state officials said amounted to $13.25 billion. Two of those same officials left the Murkowski administration, later joined the Palin administration, and are among the designers of AGIA — specifically Department of Natural Resources Commissioner Tom Irwin and DNR Deputy Commissioner Marty Rutherford. Galvin was also part of the Murkowski administration, supported Irwin and Rutherford, and was promoted to his present position by Palin and included on her gas line team.

So, one of the biggest issues, at least from a financial aspect, will be new fiscal terms with the state for the Denali pipeline, something BP and ConocoPhillips have demanded in recent pipeline discussions.

The two North Slope oil producers have said the most recent push to move forward on the pipeline doesn’t reflect a willingness to give up on seeking a long-term fiscal package, it only means those talks are being deferred until the joint venture completes initial cost estimates and engineering. With that information, the joint venture believes it has a stronger position in negotiations.

The failed negotiations between the North Slope producers and the state, held under the Murkowski administration in 2006, prompted the Palin administration to draft AGIA in 2007, Galvin said at the Calgary conference.

Describing the negotiations between the producers and the Murkowski administration, Galvin said that while the companies “don’t speak in a single voice” they did “provide a certain message to Alaskans about their interests and their expectations about what was going to be needed in order to move the project ahead.”

Galvin said, “They were clearly looking for a project that they would control... both from the standpoint of controlling the costs and controlling access to the pipeline.”

Some of that control also came from demands for a “comprehensive” definition of “fiscal certainty” over “every interaction between the state and the oil industry, not just on gas, but on all the oil leases as well” and the authority of the court system, Galvin said.

“And all that basically had to be swept aside for a generation,” Galvin said. “And that ultimately proved unacceptable to the State of Alaska, and I think it would be unacceptable to most sovereign governments. And it led to a stalemate, at least as far as the discussions with the producers were concerned.”

Conciliatory comments made by both sides

By the end of this summer, Alaskans should know whether two pipeline proposals remain on the table or not, and Walker isn’t troubled by the very real prospect that TransCanada will get the state license over the coming months.

“From our point of view that’s fine. ... We’re not afraid of competition,” he said.

But Walker wasn’t prepared to close the door on an eventual partnership with a third-party pipeline company like TransCanada or Enbridge, noting two-thirds of an overland pipeline would run through Canada.

And there is always the possibility of a more traditional partnership: the one between pipeline customers and owners. Even if TransCanada is successful with its proposal, individual producers will still determine the fate of the pipeline during an open season.

“We want to get our gas to market and if there’s a commercially viable project, then people are going to make commercial decisions,” Walker said.

TransCanada isn’t opposed to a partnership, either.

Palmer said his company, which specializes in building and operating pipelines, would prefer to hand over the construction and ownership of the North Slope gas treatment plant associated with the gas line, believing “there are other companies better suited than ourselves.”

Walker said the gas plant at Prudhoe Bay would be the largest built anywhere.

TransCanada also plans to offer equity ownership in the pipeline to producers that commit gas during the first open season.

Enbridge wants a piece of the pipeline

The head of the Canadian pipeline firm Enbridge is again expressing interest in owning a piece of a producer-led natural gas pipeline from Alaska’s North Slope, according to media reports.

After an annual meeting on May 7, company CEO Pat Daniel told reporters that Enbridge has had “informal” discussions with BP and ConocoPhillips about possibly participating in their $30 billion “Denali — The Alaska Gas Pipeline,” according to a Calgary Herald report.

“We’ve always said if we were at a position of 10 to 20 percent that would be of interest to us,” Daniel told the Herald. “That would be our objective, but of course it’s all academic at this point — we don’t have a position in the line yet.”

Covering the same event, Reuters reported that BP and ConocoPhillips called Enbridge about the project before announcing it to the public in early April. Media reports around that announcement mentioned Enbridge as a potential partner.

Enbridge has aligned with the North Slope producers in a previous, but failed, gas line effort under the Murkowski administration. And last August, Daniel said his company told the Palin administration it would not participate in any pipeline that did not have the backing of North Slope resource owners.

In developed North Slope oil fields, BP, ConocoPhillips and ExxonMobil currently have under lease roughly 25 percent of northern Alaska’s estimated onshore recoverable natural gas reserves, the bulk of which is contained in the Prudhoe Bay oil field, which contains about 24 trillion cubic feet of natural gas.

The Denali pipeline is rivaling a proposal by the other major Canadian pipeline company TransCanada to build a similar pipeline through a state-led effort.

— Petroleum News

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