"Thanks, but no thanks" was Alaska Gov. Sarah Palin's response last Wednesday to ConocoPhillips and its proposal for a natural gas pipeline to commercialize the state's vast North Slope reserves. Palin wrote CEO James Mulva to let him know the state is now only considering a proposal from TransCanada Alaska Co. LLC and Foothills Pipe Lines Ltd.
Nevertheless, Alaska lawmakers have said they will try to look at the company's proposal in committee early in their regular session, which begins this week.
The TransCanada/Foothills proposal is the only one of five proposals the state received under its Alaska Gasline Inducement Act (AGIA) provisions that made it through a pre-screening process (see NGI, Jan. 7). ConocoPhillips submitted its proposal outside of the AGIA process (see NGI, Dec. 10, 2007). From the start the ConocoPhillips proposal received a lukewarm reception from Palin and other officials as it was not compliant with AGIA.
"Unfortunately, the alternative ConocoPhillips has proposed continues the approach advanced by the producers in the Stranded Gas Development Act (SGDA) negotiations," Palin wrote Mulva, alluding to the gas commercialization plan developed under the watch of her predecessor, Gov. Frank Murkowski. Palin campaigned on the promise of wide-open competition to develop the gasline (see NGI, Sept. 11, 2006).
"This [ConocoPhillips proposal] does not meet the terms the Legislature established in AGIA to ensure that an open access gas pipeline is built on competitive terms, provides the maximum benefit to the people of Alaska, and fully promotes the development of Alaska's vast natural gas resources," Palin wrote.
Palin favors the AGIA structure because it separates the development of the gasline from the development of Alaska's gas reserves. "The economic terms under which oil and gas is produced 'upstream' and the construction of a pipeline should be independent," Palin wrote.
"The response to the AGIA request for applications evidences that the state was correct in distinguishing upstream development economics from pipeline construction economics. The state does not need to backtrack to the SGDA approach of mixing production economics (i.e., production taxes and royalties) with pipeline development."
Further, Palin asserted in her letter that regulation by the Federal Energy Regulatory Commission by itself is not enough to ensure that a project such as that proposed by ConocoPhillips would be truly open-access. "A producer-owned pipeline has the motive and ability to create roadblocks to access for explorer producers who are competitors of the producer-owners," she wrote. She cited the state's experience with the Trans Alaska Pipeline System, which she said "has shown that producer-owned pipelines also have an incentive to set rates unreasonably high, and to discriminate against smaller producers through other means which effectively exclude non-pipeline owner production from the line, even though the pipeline's rates are regulated by FERC."
Palin did commend the company for "commitments to training, local project headquarters in Anchorage and Fairbanks, and opportunities for in-state delivery points and pricing..." contained in its proposal. She also invited ConocoPhillips to become a shipper on whatever, if any, pipeline is built. "...I hope you will take advantage of the opportunity to commit the gas you are currently producing on the North Slope to the AGIA pipeline during the first open season held by an AGIA licensee."
ConocoPhillips holds about one-third of the 35 Tcf of proven gas reserves on the North Slope with ExxonMobil and BP holding most of the rest. None of the producers submitted pipeline proposals under the AGIA process, and some saw this as a failure of the Palin administration (see NGI, Dec. 10, 2007).
"We're disappointed with the governor's letter," said ConocoPhillips spokesman Charlie Rowton. "We believe ConocoPhillips' proposal provides the greatest opportunity for a successful gas pipeline project."
The company's proposal will almost surely get an airing in the state Legislature, at least in committee, during its regular session, which begins Tuesday. Several Republican lawmakers were quoted as saying they want to review the proposal. House Speaker John Harris (R-Valdez) noted that no matter what, the producers are needed if the state is to have a gasline.
If the producers won't play ball with the state on filling a gasline if/when built, the state should consider taking back the North Slope leases, some have said. The government has revoked the companies' leases in the North Slope's Point Thomson field and dissolved the unit for failure to develop the reserves (see NGI, Jan. 7). A Natural Resources Commission hearing on the fate of the leases could take place in the next few weeks.
Meanwhile, the TransCanada gasline proposal is subject to public comment until March 6. The Palin administration is not expected to complete its review of the proposal until after the regular legislative session, which ends April 13.
The full text of Palin's letter is available on the AGIA website, www.dog.dnr.state.ak.us/agia/. Details of the ConocoPhillips proposal are available from the company's project website, www.ansnaturalgaspipeline.com/.
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