Croft Gasline Update #3

Note: I and my staff will be sending these gasline updates on various aspects of the contract over the next few weeks, to give Alaskans more information about this important topic. Please feel free to forward this to other people who you think would be interested -Eric

State Has Little Power to Force Gasline Expansion

Restricting access for new discoveries would hurt exploration & revenues

After nearly two weeks of one-sided commentary from the Governor's men, the legislature finally had a chance last week to hear from our own consultants. For over three hours on a Sunday night, we heard a different perspective.

You are likely already aware of some of the more troubling aspects of the Governor's draft deal with Big Oil, including the complete lack of any duty to develop. Other issues will be covered in future updates. But one of our consultants focused attention on an issue that hasn't had a lot of attention yet, pipeline expansion.

It is important that the pipeline be built expandable, because of the way pipelines are run. Companies contract for a share of the capacity for a period of time, in what is called an "open season." Since the open season would be before construction, years before gas is actually flowing, the people willing to commit to it are those who already have rights to it (the oil companies), and already have markets for it (also the oil companies). Most likely the initial capacity will be fully "pre-sold" and destined for out of state. The Big Oil companies who will run the pipeline like it this way, it greatly reduces their risk. In general, they are ambivalent or even hostile to expansion, it adds to their uncertainty and could potentially benefit their competitors.

But the state has different interests here. We want other companies to be exploring and finding new gas, creating more jobs and spending the money it takes to develop the fields. But this won't happen if they can't get their gas in the pipeline. We also want gas to be available for Alaskan communities, to reduce their crippling energy costs and to provide gas for new industries. Since few of these entities will be in a position to commit to shipping or buying gas at the very beginning, it is essential the pipeline be expandable.

How Do You Expand a Pipeline?

Expansion would be through one of two methods. At first, additional equipment can compress the gas further, so that more of it can "fit" through the pipe. After that, the way to expand would be through "looping," or building new pieces of pipe alongside the original pipe. Compression is relatively inexpensive, but looping will cost billions.

The proposed pipeline would ship about 4.5 billion cubic feet per day, or bcf. This is about the same, energy wise, as 750,000 barrels of oil. It is estimated that, with added compression, the pipeline could be increased to about 6 bcf and with looping to nearly 8 bcf.

There are two legal methods to make an expansion happen. In a so-called "voluntary" expansion, the owners would agree to go forward, while in a "mandatory" expansion the state can attempt to force it to happen.

The contract has no rules at all for voluntary expansion. But, since Exxon, British Petroleum, and ConocoPhillips would control 80% and the state would have a minority 20%, it is unlikely that the oil companies would ever agree to it. Again, the state and the companies have very different interests. So, it is essential that we have solid mechanisms that enable the state to force a mandatory expansion. Without this, we may never have gas for in-state needs.

What the Federal Energy Regulatory Commission Said

One of the stickiest legal issues with any pipeline is the tariff, or transportation fee. We have been in court for years over oil pipeline tariffs, and have to be prepared for battles with any gasline entity. Expansion questions inevitably lead to how the tariff paid by existing shippers is affected by the cost of the expansion.

The Federal Energy Regulatory Commission, or FERC, regulates pipelines and pipeline tariffs. Last year, they issued rules on how capacity would be sold and regulated in an Alaska Natural Gas Pipeline. In a ruling favorable to the state, the Commission said that they could require design changes to ensure an allocation for new shippers, or shippers seeking to transport gas from areas other than the two biggest known fields, Prudhoe Bay and Point Thomson. They also held that expansion tariffs would be "rolled-in," meaning that the original users and newcomers would be charged the same amount. The oil companies would prefer that expansion tariffs be "incremental," meaning that the newcomers would pay the full cost of the expansion.

The oil companies are appealing FERC's ruling, and the State has not required they drop this appeal as a condition of the contract. If the oil companies win their appeal, we could lose our ability to require access.

Rules for Mandatory Expansion

FERC has eight rules for what needs to happen to force a mandatory expansion, but they boil down to the idea that pre-existing shippers must not subsidize the expansion. Also, there is a vague rule that "facilities will not adversely affect overall operations." This is hard to prove one way or the other and could certainly be used to delay or even stop an expansion wanted by the state. There is an opportunity in this contract to clarify the rules for expansion and make sure the state's rights are protected.

Instead, the contract adds ten additional hurdles before any state initiated expansion can go forward. These go way beyond concerns about subsidy. There could only be one expansion every five years. There are credit and prepayment requirements for expansion shippers. Most importantly, it specifically prohibits any expansion that would increase tariff rates at all, which would all but eliminate the possibility of a "looping" expansion.

Altogether, the contract provisions add up to an all but insurmountable burden that would make it extremely unlikely that the pipeline would ever be expanded beyond 6 bcf, and quite likely never beyond the initial 4.5 bcf.

Conclusion

The bottom line is, many people believe that the 35 trillion cubic feet of proven reserves are just the tip of the iceberg. Without a pipeline, nobody is really looking for gas. Alaska's long term economic security may come down to finding the rest of it, but this will only happen if explorers have the ability to get it to market.

With all the economic concessions the Governor is giving in this contract, even if the oil companies build a pipeline they may be able to prevent future exploration. They could, in effect, still force us to keep the majority of our gas in the ground. With this bad deal, this contract to nowhere, we may never get a gasline, and even if we do most of our gas may still be held hostage.