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Big oil bid lives on

ConocoPhillips still vying for gas pipeline

Posted: Thursday, January 17, 2008

Since Governor Sarah Palin's rejection of ConocoPhillips' pipeline proposal last week, representatives of the company have been on the road discussing the project with Alaskans, including meetings in Kenai and Soldotna over the past two days.

"The first thing we get when we get out to people is, 'Why did you submit a proposal outside AGIA?'" said Wendy King, manager for Alaska North Slope Gas Development.

"We looked hard at it after the bill passed and we said, 'Can we possibly submit a proposal in there?' and we thought that we were going to struggle to make a commercial project under AGIA because it's missing some key things we think customers are going to need to make a gas pipeline happen. If you can't get customers, a piece of pipe's worth nothing."

King said that it didn't surprise her that ConocoPhillips' plan, along with four other proposals, was rejected because the law required rejection if a proposal didn't completely conform to the AGIA bill.

"We thought, 'We'll put a proposal out there outside of AGIA and let people look at that proposal and see whether or not that meets the state's needs in a gas pipeline project,'" she said.

One major issue that ConocoPhillips has with the bill is that it allows for new taxation every year when the Legislature is in session. ConocoPhillips proposes shippers sign up for 20- to 25-year shipping commitments. In King's view, customers will want some fiscal stability before signing up for a long-term commitment.

In the original AGIA plan, Governor Palin recommended a 10-year period of tax stability, but that was changed by the Legislature before approval.

"That lack of fiscal framework is what's going to drive customers to not want to show up under that process," King said.

Unlike ConocoPhillips, TransCanada, whose proposal fit into the AGIA framework and was the only one accepted for review, does not own gas on the North Slope.

"They're not the customers on the line," King said. "They understand that they need customers, but there's not the same commercial drivers there."

One concern with TransCanada's proposal is its ability to hold a successful open season that can draw a customer base. According to Brian Wenzel, Vice President at Alaska North Slope Gas Development, without any fiscal stability, the major owners and shippers of gas won't be placing bids during open season.

"For us to work with TransCanada, it would have to be outside of AGIA," he said. "They've essentially burdened their project with the fact that they can't offer any fiscal stability."

In order to provide this stability, ConocoPhillips has requested a contractual tax system based on the wealth of the pipeline. Wenzel compared it to an income tax. People who make more money, pay more out to the federal government in taxes and people who make less, pay less.

"We're not agreeing to a flat tax system, what we're agreeing is that our tax system will be set and left in place for a predictable period of time," he said. "We're not in the business of taking this kind of fiscal risk in the United States of America."

According to Wenzel, if an AGIA applicant is selected and given a license, that license is relevant for five to 10 years. In the event that a project fails due to an unsuccessful open season or any other reason. and the state chooses to go a different route, the state would be required to pay a trouble damages clause of three times the company's cost.

"Our concern is not that we might be missing the best and the fastest way to move the project ahead, but we might be stepping into a license that ties up the state another 5 to 10 years and continues to delay this project," Wenzel said.

Both King and Wenzel are confident that ConocoPhillips can come to an understanding with the Legislature and get their plan working quickly once their proposal is accepted.

"In a matter of months we think we can get that fiscal framework done, get something in front of the legislature, and parallel to that we can assess the role for the third-party pipeline companies," King said. "Those critical foundations really lead to setting that foundation for a successful open season. Not just any open season, but a successful open season."

Among the reasons that King listed for accepting the ConocoPhillips proposal, is the company's financial strength. ConocoPhillips is a $130 billion market-cap company and it won't be requesting the $500 million offered by the state as part of the AGIA plan.

King also highlighted the company's history in Alaska.

"We know what it takes to make a project happen and be successful in this state," she said. "Prudhoe Bay is probably the most significant chunk of gas that will be needed to make this pipeline project happen, and we're a significant owner in that asset."

Although ConocoPhillips believes its plan is the best for the state, Wenzel realizes that it can't complete the project alone. They are only a 36 percent owner of gas in Prudhoe Bay and they need other shippers on board.

"We definitely do want a partner and think we need a partner to make this project happen," he said. "We need BP and we need Exxon. What we have proposed here is a mechanism to, we think, help the administration negotiate a final position with BP and Exxon and bring this project to fruition. We know this project won't happen without the gas commitments of BP and Exxon."

ConocoPhillps' plan is to run the pipeline through Alaska to the Alberta-British Columbia border before trailing down to the Midwest. At the company's meeting with the public on Tuesday night, many residents were concerned with how this project will affect the economy of Alaska, especially the peninsula, since the resources wont be shipped offshore through Valdez.

"I know the right answer is not to say that we can't let any gas get out to Canada or the Lower 48 because without that bulk volume moving, there won't be the economics to bring a small line down into Southcentral," Wenzel said.

"There's nothing about our project that forces us to take those liquids all the way down to Canada and extract them there. We're happy to extract them here if that makes sense."

Governor Palin has said that she supports a plan to get public feedback from applicants who did not meet AGIA criteria.

"It's not a waste of time," she told the Associated Press. "It's fair to Alaskans and it fulfills our promise that this would be transparent, and it would be competitive."

For the next 60 days, the administration will be conducting a period for the public to weigh in about any views they may have about TransCanada and its proposal. It will also be evaluating TransCanada to see if the company can maximize the benefits of a pipeline project for Alaskans.

Hannahlee Allers can be reached at hannahlee.allers@peninsulaclarion.com



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