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Alaska Governor Leverages Prudhoe Bay For Producer NatGas Plans

Alaska Gov. Bill Walker is attempting to push ahead commercialization of North Slope natural gas reserves by holding back, at least for awhile, a necessary plan of development (POD) approval of the oil-producing Prudhoe Bay Unit (PBU), which is operated by BP Exploration (Alaska).

Under Walker's administration, the state's Division of Oil and Gas is withholding approval of the POD until it is revised to include plans for "major gas sales" (MGS) from the unit. BP and its producer partners were given until Sept. 1, to comply. The current PBU POD expires Nov. 1. Walker administration critics in Alaska have accused the governor of going "full Venezuela" and have said the state could be heading toward a legal battle with the producers.

While the state said the POD is complete as far as it concerns oil production from the PBU, it asserts that the producers are obligated to provide information on their plans for selling natural gas.

"While DNR acknowledges the proposed use of gas in the current POD time period to enhance the production of oil, the state and the WIOs [working interest owners] must prepare for the time when such use will no longer be necessary appropriate," the Division of Oil and Gas, a unit of the state Department of Natural Resources, said in a 15-page letter to BP on June 30. "Major gas sales, in the relatively near future, are necessary to realize the benefit of the enormous gas resource within the PBU to the people of Alaska, and planning for MGS must be done now."

A DNR spokesperson said, "We fully expect the owners will provide the requested information and see no need to speculate otherwise." A BP spokesperson said the company is reviewing the DNR response but had no further comment.

This isn't the first time that Walker has gotten tough with producers such as BP, ConocoPhillips and ExxonMobil Corp.

One year ago, Walker told NGI that Alaska needed to act like a "sovereign" in its dealings with producers operating in the state (see Daily GPIJuly 10, 2015). While the state is a partner in a large-scale project to pipe North Slope gas for liquefaction at a to-be-constructed terminal and then exported to Asia, the governor has also proposed the scaling-up of an in-state pipeline project to include liquefaction and exports. This has been viewed (and criticized) as a means to pressure producers at the table for the larger project (see Daily GPIAug. 12, 2015).

More recently, the future of the large-scale AK LNG project has become more clouded due to depressed commodity prices and a global glut of liquefied natural gas (see Daily GPIFeb. 17).

It the letter to BP, the state asserts that when the PBU was formed decades ago, it was "...with the understanding that MGS were both important and an entirely proper subject for a POD." Working interest owners "...assured Alaska that MGS would occur within five years after first oil production at Prudhoe Bay," the state said, citing a 1977 document. "'It is planned to commence gas pipeline deliveries of 2 Bcf/d as soon as pipeline and plant to condition the gas to specification can be completed. This is currently estimated to be about five (5) years after the state of oil production.'"

As everyone in Alaska knows, the state has worked for years, under multiple governors, to advance a project that would commercialize North Slope gas reserves, a goal that has always been viewed as having only marginal economics. Private pipeline company and producer plans have been introduced and withdrawn over the last 30-plus years, as gas prices and state tax and revenue demands fluctuated.

"Given the importance of PBU MGS to the state of Alaska and the necessity that WIOs actively commit the PBU gas for MGS to occur, the plans to make this happen are of vital interest to DNR and Alaska," the agency told BP.

Suzanne Downing, who was a speechwriter for former Gov. Sean Parnell, edits a website called Must Read Alaska. In a July 1 post she wrote, "The governor has chosen a route of planned uncertainty by rejecting the required plan [of development] and extending the existing operating agreement until November. This is a step a sovereign might take if it planned to 'nationalize' its oil. It's the Hugo Chavez move of the century and will send shock waves throughout the energy sector."

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