With their backs to the wall, the three main North Slope producers are not likely to withhold their vast reserves of Alaskan gas from a pipeline going south to market because they could be accused of antitrust behavior, and it would work against the interest of their shareholders to pass up the opportunity to monetize stranded gas, an executive of MidAmerican Energy Holdings Co. told Alaska legislators Thursday.

Kirk Morgan, president of Mid-American's Kern River Gas Transmission Co., said his company would be willing to go ahead and seek a certificate from the Federal Energy Regulatory Commission, with the backing of the state of Alaska, even if an open season for the mega-pipeline project was initially unsuccessful. Earlier in the week representatives of BP, ExxonMobil and ConocoPhillips said they are not likely to commit to transportation capacity on the multi-billion dollar pipeline project under the terms currently proposed by the state (see Daily GPI, May 3).

"I don't think it's a sustainable position for producers to withhold gas," Morgan said. "It's their duty to develop and market gas. For them to withhold gas would be engaging in the type of behavior that is clearly anticompetitive. The Energy Department, FERC and the companies' shareholders, all would be concerned with them not developing their gas," he said, describing their current stance as "posturing. They won't pass up an opportunity to make $3-4 a dekatherm on their gas."

Under the plan put forward by Alaska's governor, following a determination that the project is economically feasible, the state would pay 80% of the $500 million cost of taking the project to the point of obtaining a FERC certificate. The pipeline project developer would pay the other $100 million. Morgan said MidAmerican, which is owned by the $37 billion conglomerate Berkshire Hathaway, would have no problem going forward on that basis even if an initial open season was unsuccessful in signing up producers. The producers have been arguing for upstream commitments from the state to provide certainty on taxes and royalties on their gas before they can take the risk of going forward.

The MidAmerican position was in contrast to testimony from a TransCanada PipeLines representative, who wanted the state plan, the Alaska Gasline Inducement Act (AGIA), changed so that the pipeline company would not be required to continue and seek a FERC certificate if the three major North Slope producers, who hold more than 90% of gas reserves in Alaska, did not sign up for capacity during an initial open season.

Tony Palmer, TransCanada vice president for Alaska business development, said the AGIA requirement to seek the certificate without the producers constituted a significant risk. TransCanada would prefer to continue to try to get the producers to sign on before proceeding. He asked legislators on the state House Finance Committee to amend that portion of the AGIA, although he admitted he had been unsuccessful in convincing the administration of Gov. Sarah Palin to do just that. "We are concerned about development of the pipeline if it has not attracted enough of a commitment to make the project viable," Palmer said, advising that TransCanada's board of directors would have trouble committing $100 million without more certainty.

TransCanada has held a certificate for the pipeline in Canada for 30 years, Palmer said. The problem has been it has not been able to attract customers or shippers on a pipeline.

Morgan wanted a provision added to the AGIA that would require applicants to disclose if any of their other business interests around the world conflict with the objectives of the pipeline project. He also said he did not believe the pipeline should provide "a bullet ride to Chicago." That would put too much gas into one market and depress the price there. Rather the pipe should go to the Alberta Hub for takeaway on various pipes to different markets.

One version of the project being contemplated would be a 1,750-mile, 48-inch diameter pipe from the North Slope to Alberta. Initial throughput would be 4.5 Bcf/d, with a potential to go to nearly 7 Bcf/d.

Anadarko Petroleum, which has a large acreage position in Alaska but no production, told legislators it probably would not be a bidder in the initial open season, but it wants to see the possibility for rolled-in rates included, since it could seek an expansion within two years of the project going forward, even before construction has started. The company already has done geologic and seismic work, but probably would not start serious drilling until it was likely the project was viable.

Mark Hanley, Anadarko manager of public affairs, said the AGIA should require the pipeline developer to seek rolled-in rates from FERC for expansions. Then it would be up to FERC to decide if the use of rolled-in rates would constitute a subsidy. He postulated, for instance, that if the initial tariff were $1.62/Mcf and the first addition of compression cost another $1.07/Mcf, the average of those costs rolled in would result in a lower tariff of $1.47/Mcf. If the next compression addition cost $1.73, that still would average out to $1.51, which is below the initial rate. The sticking point likely would come with looping, which could cost $3.25/Mcf. But FERC would have to decide if subsidizing the looping addition would increase the reliability of the pipe for all customers.

Hanley said Anadarko would like to see the AGIA stipulate that the pipeline developer may not negotiate rates that would not allow for rolling in. Also, the authority of FERC to order a design change should be preserved, for instance, if the agency decided the pipe was underdesigned with only 42 inch diameter pipe, which when fully compressed would only carry 4.5 Bcf/d, Hanley added. He said the large producers are challenging FERC's authority to order a design change in the U.S. Circuit Court in the District of Columbia, calling this "a real red flag."

Hanley also said Anadarko was concerned if the "inducements," such as a locked-in tax rate would go only to the initial shippers, that would make it hard for expansion shippers to compete.

Finance Committee lawmakers, saying they believed ConocoPhillips might go forward with a commitment to the project, even if BP and ExxonMobil did not, asked if the pipeline would be feasible at only one-third the planned size. Morgan said it could possibly be "doable" with two-thirds the size, but they wouldn't get the financing with only one-third. He noted there are doubts that the Mackenzie Pipeline, which is proposing to carry 1-2 Bcf/d, might not have sufficient economies of scale to be built.

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