Oil giants make push for pipeline in Congress
By R. A. Dillon
Published Monday, April 21, 2008
newsminer.com
WASHINGTON — The North Slope’s two biggest oil producers were on Capitol Hill last week pushing their plan to build a $30 billion pipeline to carry Alaska natural gas to markets in the energy-hungry Lower 48.
Doug Suttles, president of BP Alaska, and Jim Bowles, chief executive of ConocoPhillips’ Alaska operations, met with members of Alaska’s congressional delegation Thursday, following meetings the day before with the Federal Energy Regulatory Commission.
Suttles said the Denali Pipeline, as the project has been named by the partners, has been well received by lawmakers and federal officials, who see in it partial relief for the rising energy costs afflicting the nation.
The pipeline would deliver 4 billion cubic feet of gas per day to the Lower 48 market, or about 8 percent of the nation’s daily demand.
“I don’t usually use this word, but I’m excited,” Sen. Ted Stevens, R-Alaska, said. “This is going to put an impetus on the pipeline to make this a project that everyone will be talking about by the end of the year.”
ConocoPhillips and BP say they have the experience and capital necessary to kick-start the pipeline, which has for three decades been one of Alaska’s dearest economic development dreams.
State officials, who are considering a competing proposal by pipeline giant TransCanada, welcomed the ConocoPhillips-BP announcement but said more information was needed to properly evaluate the proposal.
“There are a number of details that are as yet unknown that will ultimately determine whether this is good for the state or not,” said Marty Rutherford, deputy commissioner of the Department of Natural Resources.
Alaskans will be able to see firsthand the commitment on the part of BP and ConocoPhillips as initial design and cost-estimate work on the project gets under way this summer, Suttles said.
Previous negotiations on the pipeline have broken down over the need for fiscal concessions from the state, which the companies maintain are necessary to get shareholders to approve investing the tens of billions of dollars the project will ultimately cost.
Bowles said the difference between where the companies were last year and where they are today comes down to the issue of how much they should pay the state in taxes and royalties for commercializing the gas.
“What ConocoPhillips submitted last year was a proposal (for) ... some discussions we had hoped to enter into with the state on a fiscal framework,” he said. “What we’re doing today is entirely different — the project’s started and we’re actually doing pre-steps to an open season.”
Gov. Sarah Palin’s administration has said it is willing to consider fiscal changes, but only after the companies provide more detailed cost estimates.
“What we’re doing today is moving out on the project without any type of requirement from the state,” Bowles said. “We will come back at some point in the future, as the governor has suggested, and see if we can have a discussion on fiscal framework. But it will be after we have better data on the pipeline.”
In 2001, the pipeline was estimated to cost about $20 billion. Bowles said that number is closer to $30 billion today.
Despite the administration’s tough stance, Bowles and Suttles said they understand Palin’s reasons for pushing for greater competition in the pipeline process.
“The governor’s process has clearly kept a spotlight on it and her,” Suttles said. “She’s clearly committed to doing this, and so are we and a lot of people.”
Investing in the pipeline
Under the ConocoPhillips-BP plan, the companies would stretch a 48-inch diameter pipeline from Prudhoe Bay to Alberta, Canada. From Alberta, the gas would be shipped through existing pipelines to Lower 48 consumers or, if necessary, a new pipeline to Chicago could be constructed.
The pipeline would follow the existing trans-Alaska oil pipeline corridor from the North Slope to Fairbanks, where it would split off alongside the Alaska Highway to Alberta.
ConocoPhillips and BP have promised to spend $600 million during the next two summers to get the project to open season — when gas producers have the opportunity to bid on capacity in the pipeline.
The companies say they will begin field work on the Alaska side of the border and meet with aboriginal groups and other stakeholders in Canada this summer to scope out potential stumbling blocks.
The Tanana Chiefs Conference has already received a contract to conduct right-of-way studies on its land around Fairbanks.
The partners also plan to begin hiring staff for their Anchorage headquarters.
Sen. Lisa Murkowski, R-Alaska, said she left her meeting with Suttles and Bowles “feeling good about the future of the state.”
“This is more than talk,” she said. “There are real things that are happening on the ground that should give the people of Alaska hope for the future of the state.”
The state stands to earn billions of dollars from taxes and royalties on gas production once the pipeline is completed. The project would also inject thousands of construction jobs into the state economy at a time when the nation as a whole is suffering a downturn brought on by the mortgage crisis.
“We’re looking now at certainty that we’re going into a period of real development,” Stevens said. “I think that changes the dynamic of the Alaska economy.”
ConocoPhillips and BP expect it will take three years to reach open season. Assuming enough gas is committed to the pipeline, the next step would be to apply for certification from U.S. and Canadian regulators, a process that is expected to take an additional two years.
At the moment, Bowles and Suttles have their bosses’ approval to each spend $300 million on the project. Before construction can begin, though, they will have to get the OK of each company’s board of directors — a bridge they plan to cross once they’ve received certificates from FERC and Canada’s National Energy Board.
“At that point, you actually have permission to build the line and you can go to sanction,” Suttles said. “You know you have customers — shippers that will bring gas to it — and then you move to construction when a massive amount of money is spent.”
Gas would flow down the pipeline beginning in 2018 if the project stays on its current timeline, Bowles said.
Filing the pipe
ConocoPhillips and BP combined hold rights to about two-thirds of the 35 trillion cubic feet of proven gas reserves on the North Slope. The companies say, like other potential shippers, they will commit their gas to the pipeline once it’s shown to be economical.
“Obviously, we have a lot of confidence we’re going to get there or we wouldn’t be spending $600 million, but we need to go through that step,” Suttles said. “We have to create a schedule, we have to create a cost estimate and convert that to a tariff.”
FERC will determine the tariff based on the cost of the pipeline and the amount of gas it transports and other factors. More gas means lower shipping fees, which will benefit the state and explorers with gas to get to market but no ownership in the pipeline.
The owners of the pipeline also stand to benefit from lower tariffs. However, since they would essentially be paying themselves, some administration officials question whether they would seek the lowest possible shipping rates in an attempt to discourage competition on the North Slope.
“FERC has some really clear (antitrust) rules about how you have to separate your shipper role and your pipeline role,” Suttles said. “I don’t anticipate that will be a problem.”
The companies likely are basing their tariff estimates on 35 Tcf of gas shipped over a 20 year depreciation schedule, though the cost of building the line could be recouped over a longer period.
“I think the 35 Tcf we have now is enough to get this project moving,” Suttles said. “Ideally, over the life of this project, there will be more gas coming. But there’s enough gas to fill the pipeline for the first 20 years.”
Federal geologists estimate the North Slope contains as much as 200 Tcf of as yet undiscovered gas.
“Our challenge right now is to do the proper work, give people confidence at open season that this is going to be a good project and that there’s a tariff which will generate a good return for gas owners,” Suttles said.
Circling tiger
Exxon Mobil remains the biggest question mark surrounding the ConocoPhillips-BP proposal.
The partners believe they have the financial wherewithal and experience to build the pipeline without Exxon, but they still need the world’s largest energy company to commit its gas — a full one-third of the North Slope’s proven reserves — in the line.
“We’d like Exxon to join the project, but it’s not required. If they chose that it’s not the right thing for them to be in the pipe, that’s fine,” Suttles said. “We have the experience, we have the knowledge, we have the fiscal capability ... to do this.”
Bowles agreed that Exxon’s absence would no hinder the project in the early stages.
“While it’s important that we secure them as a shipper in the future, it’s not absolutely necessary that they’re in the pipeline project going forward,” Bowles said.
Even if Exxon doesn’t join the project, BP and ConocoPhillips still need to reach an agreement with the Irvin, Texas-based major on producing gas from the fields — Prudhoe Bay and Point Thomson — where they are co-owners.
“The practicality of having a successful off-take would be greatly enhanced if we had all of the owners aligned on how that gas off-take occurred into a pipeline,” Bowles said.
Point Thomson
The Point Thomson field presents its own unique challenge. Its 9 Tcf of proven gas reserves are crucial to a successful pipeline project.
However, the state is in the process of deciding whether to disband the 106,200-acre field and revoke the underlying leases held by Exxon, BP, ConocoPhillips and others for failure to develop. A decision from the Department of Natural Resources is expected by June.
“The Point Thomson gas is critical to this project,” Bowles said. “We have to know before we get to open season who owns that gas. It’s doubtful the project could move without that gas.”
Contact Washington correspondent R.A. Dillon at dcnews@newsminer.com. |
