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FERC Issues Rules for Allocating Capacity on Alaska Gas Pipe Projects

FERC last Wednesday took a major step towards the realization of an Alaskan natural gas pipeline by issuing a final rule that lays out all the steps that potential sponsors will have to follow when allocating transportation capacity on a long-line system stretching from Alaska's North Slope to markets in the Lower 48 states.

The rule, named Order 2005, seeks to "balance the need to allow project sponsors the flexibility to develop and bring to market Alaska natural gas with the equally compelling needs to ensure fair competition, promote the development of natural gas resources in addition to those in the North Slope, and consider Alaskan in-state requirements," FERC staff said during the regular Commission meeting.

The rule calls on potential sponsors of an Alaska pipeline project to provide a 30-day prior public notice of all the information related to an open season so that interested persons can evaluate whether or not they want to participate. It gives sponsors at least 90 days to conduct an open season. "This 120-day period was proposed as sufficient to level the playing field for all potential shippers whether or not they had any advance information relating to the proposed open season," according to a FERC power-point presentation.

The results of an open season must be made public via the Internet or press releases within 10 days, including the names of prospective shippers, amount of capacity awarded and terms of the agreements. Copies of accepted precedent agreements, as well as correspondence with bidders whose bids were not accepted, are required to be filed at the Federal Energy Regulatory Commission within 20 days, the Commission said.

A bill signed by President Bush in October 2004 supporting the construction of an Alaskan gas pipeline system required FERC to issue regulations governing open seasons for the pipeline by last Thursday.

Alaska's three top producers -- BP, ExxonMobil and ConocoPhillips -- submitted a proposal in December to Alaska Gov. Frank Murkowski to build the long-line gas pipeline from the prolific North Slope region to U.S. markets. The pipeline project would add roughly 1,800 miles of large-diameter pipe to already existing infrastructure for delivery of 4.5 Bcf/d of natural gas to U.S. markets. The proposed pipe is expected to take about eight years or more to build, and will have an estimated price-tag of $15-20 billion.

Competing producers, such as Anadarko Petroleum Corp. and Shell USA, were critical of the Commission's proposed open-season rule, which was issued in mid-November, saying that it favored Alaska's three major producers who own approximately 90-95% of the state's 34 Tcf of proven natural gas reserves and would control most of the transportation capacity on an Alaska pipeline. The Commission sought to address many of these concerns in the final rule.

The final open-season rule applies to any initial capacity on the Alaska gas pipeline or voluntary expansion of the system, FERC said. It requires a prospective sponsor to create or designate an independent unit or division to carry out an open season, as well as identify their affiliates that are involved in the production of natural gas in Alaska. In addition, prospective project sponsors may pre-file their open season proposals for a 45-day Commission review.

FERC's proposed rule was silent on the subject of Alaska's in-state needs, but the final rule requires prospective project sponsors to conduct or adopt a study of Alaska's in-state gas needs and use the study results to design capacity for use within the state, in-state delivery points, and in-state transportation rates as part of their open season, the agency said.

In addition, the Commission said that bidding on in-state capacity must be conducted independently of out-of-state deliveries during a project sponsor's open season.

The final rule also permits pre-subscription (i.e. prearranged deals) by anchor shippers for initial capacity to further the development of an Alaska gas pipeline project, FERC noted. "However, to ensure that all other potential shippers have an equal opportunity to obtain access to capacity on the project in the open season, all pre-subscription agreements must be made public within 10 days of their execution, and capacity on the proposed project must be offered to all prospective qualifying shippers [at] the same rates, terms and conditions as contained in the pre-subscription agreements."

In the event capacity is oversubscribed in an open season and the Alaska project cannot be redesigned to meet all shippers' capacity needs, "capacity bid for in the open season will not be reduced, but all capacity subject to pre-subscription agreements will be allocated pro rata," the Commission said.

In an effort to allow as many potential shippers as possible to acquire capacity in the open season, "the draft final rule adds a new provision requiring that the project sponsor must consider any qualified bids tendered after the expiration of the open season, and may reject them only if they cannot be accommodated due to economic, engineering or operational constraints."

Significantly, the Commission said in the final rule that there "should be a presumption in favor of rolled-in pricing for expansions up to the point that would cause there to be a subsidy of expansion shippers by initial shippers."

FERC's open season regulations hopefully "[will] temper down some of the paranoia about how this [pipeline] will play out" for Alaska, consumers and project sponsors, Chairman Pat Wood said. He expects an open season to be held "next year or so." Getting an Alaska gas pipeline built is the most important thing this country can do today to ensure affordable supplies a decade from now, he noted.

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