Slow going: the governor is still looking at three options to get North Slope gas to market.

Commercial development of Alaska's vast North Slope natural gas resources continues to advance in 2005, albeit at a seemingly snail's pace for those expecting contracts for public review during the spring Legislative session, as previously promised by Gov. Frank Murkowski.

Alaska state legislators left Juneau in late May after completing a protracted special session unrelated to North Slope gas development, without considering a natural gas development contract. That's despite months of negotiations between the state and three separate development applications under Alaska's Stranded Gas Act.

A SOUR NOTE

Now, the economic viability of the latest applicant, the Alaska Gasline Port Authority, has become uncertain, as the group's major financial backer, Sempra Energy, announced on May 30 plans to withdraw from the consortium.

Although the Port Authority had just submitted to the state its official pipeline development proposal in late March, Sempra cited as its reason for withdrawing from the Port Authority a lack of progress with major players in the process, namely Gov. Murkowski, Sen. Ted Stevens and the North Slope producers.

"The protracted political wrestling taking place in Alaska is costly and very time consuming, said Sempra President Darcel Hulse in a June 1 press release issued by the Port Authority. "While all of this is taking place, the West Coast market is being actively pursued by others. It is our view that the North Slope producers will not make a decision to send gas to the West Coast. If they ever did, it would be much too late for the market to accept the needed volumes to make the AGPA project economic. Therefore, it is difficult for us to continue to invest in what appears to be a never-ending political process."

Fairbanks North Star Borough Mayor Jim Whitaker, who also serves as the Port Authority chairman, said in that same June 1 press release that the group was "disappointed but not surprised by Sempra's withdrawal."

He said the Port Authority would not give up on its natural gas project. That proposal includes building a pipeline from the North Slope to Valdez, then converting it to a liquefied natural gas, transportable by tanker to West Coast markets or other Pacific Rim buyers. The Port Authority will continue efforts to "get Alaska's gas to market in a manner that best benefits Alaskans," Whitaker said.

Murkowski, in a June 3 radio message, said the state had responded on May 5 to the Port Authority's initial application, received in late March. When Sempra decided to pull out, "clearly we were waiting for their response," Murkowski said. "I want to make sure that everyone understands their application was certainly a legitimate one."

In a June 22 press release, Murkowski indicated his administration was continuing work with the Port Authority, saying that the state has "no less than three applicants to ship North Slope gas to market. We are working to progress all three projects so that ultimately we can decide which one is in the best interest of the state. Completing these negotiations is the state's top priority."

SPECIAL SESSION THIS FALL

In the same press release, Murkowski touted "several important meetings" held in Washington, D.C., in relation to the gas pipeline negotiations. He met with TransCanada's chief executive officer, Hal Kvisle, to discuss that Canadian-based company's proposed project. The two discussed how the project could be "most quickly built through Canada without delay due to litigation," according to Murkowski's statement, and how TransCanada's negotiations with the state could be completed.

Murkowski also led a separate "five-hour discussion" with the North Slope producers' consortium--BP Exploration (Alaska), ExxonMobil Corp. and Conoco Phillips-to advance completion of a Stranded Gas Act contract to present to a special session of the Alaska Legislature this fall, the press release said.

"It is time to complete these negotiations in a way which best meets the needs of the state. I do not intend to allow these negotiations to drag out," Murkowski said.

The June 22 statement was similar to that made by Murkowski last December, when announcing that the three producers had submitted a proposal to construct a gas pipeline from the North Slope to southern markets.

"We will have a lot of tough negotiating to do," said Murkowski, in that Dec. 16 press release. "But we are committed to negotiating a contract that is in the interest of the state and putting it before the Legislature this session."

Murkowski cited the complexity of the development project, estimated to cost some $20 billion for a gas pipeline from the North Slope south to existing infrastructure in southwestern Canada, as a factor in the lengthy negotiations.

In his June 3 radio message about the natural gas development, Murkowski said the timelines "have been worked very diligently. We think, because of the depth and complexity of these negotiations and because this is a long-term contract, obviously it requires a good deal of time."

At a June 27 Anchorage Chamber meeting, Murkowski announced that soon a major company would join the other major players in development of a gas line.

NEGOTIATIONS UPDATE

In late April, Murkowski and key members of his administration's negotiating team provided the state House and Senate Resources committee a non-confidential briefing, updating them about progress with the three development applicants.

In that meeting, Murkowski said the administration stands "on the brink of making the most important decision in our state's history--actions we soon will be taking are going to have a profound effect on Alaska's economy for generations to come."

Murkowski outlined his goals in negotiating contracts under the Stranded Gas Act, which include the following: a fair share of revenues for Alaska, provisions for in-state use of gas, access to the pipeline for others who explore for gas, a pipeline that may be expanded, a state equity ownership in the pipeline and jobs for Alaskans and job training.

Negotiations with the North Slope producers' group are by far the most complex of the three applications, Murkowski said. "That complexity stems from the fact that it embraces every aspect of gas transportation beginning at the bottom of the production well, through the gathering system and the gas conditioning facility, into the proposed pipeline across Alaska, the Yukon, British Columbia, Alberta and back into the United States, through the marketing process, ending up at the gas consumer's front door."

In their Jan. 20, 2004, application, the producers proposed building a 52-inch pipeline constructed along the existing highway system from Prudhoe Bay through Alaska and Canada to existing North American pipeline infrastructure. Initial capacity would begin at 4.5 billion cubic feet per day, expandable through compression up to 5.6 bcf per day.

"Because this pipeline will run through Canada, they must deal with regulatory uncertainty in that country," Murkowski said, during his briefing. "They must also deal with procuring enough steel to construct more than 2,000 miles of 52-inch pipeline."

The state is contemplating departure from its normal royalty and taxation process based on two reasons, the governor said. "The project may be accelerated in the state provides contract provisions beyond the status quo," Murkowski said, adding that the opportunity to significantly increase the financial benefit to the state is the second factor.

Three specific actions are being considered, the governor said. Those include converting royalty and taxes into outright ownership of a significant portion of the in-place gas reserve; taking an equity position in the gas line and processing facility proportionate to the state's gas ownership share and marketing the state's gas, and taking firm transportation capacity in the pipeline to deliver that gas to purchasers.

PROGRESS?

"I am pleased to report that the state has made tremendous progress in putting this very complex concept into the form of a contract. I am convinced that the producers are fully committed to successfully concluding these negotiations and are providing all the supporting resources necessary to support our discussions," Murkowski said. "While there is a solid financial and technical underpinning for the producer proposal, it is not without its challenges."

In its talks with TransCanada, which began with the official application received June 1, 2004, the state is also considering an equity ownership in the gas conditioning facility and pipeline, according to Murkowski.

That contract framework also "envisions the possibility of the state taking the responsibility for the transportation and marketing of its own gas if the producers choose to sell their reserves rather than ship on an independent pipeline," the governor said.

TransCanada proposes building a 48inch pipeline along the existing highway system through Alaska and Canada to existing infrastructure in Alberta.

"Under this proposal, the state and TransCanada would attempt to strike a business deal with the North Slope gas owners to either sell their gas at the wellhead or make a firm commitment to move their gas down the pipeline to market," Murkowski said, noting one challenge to the project. "This proposal presumes the producers will be commercially reasonable and either ship their gas on an independent pipeline or sell their gas at a commercially reasonable rate."

Like the producers, TransCanada must deal with regulatory uncertainty in Canada and procure enough steel to construct 1,800 miles of 48-inch pipeline, Murkowski noted.

TransCanada's opinion about regulatory uncertainty in Canada differs. In an April 7 presentation, CEO Hal Kvisle notes that TransCanada has been "designated as the builder and operator of the Canadian section" of the project under the Northern Pipeline Act, a Canadian law passed years ago that has no expiration date.

Print Get the Mag Weekly Updates