A Citizen’s Guide

JUNEAU—The proposed gas pipeline contract fails to sufficiently protect the interests of smaller oil companies, argued representatives from the oil company Anadarko Petroleum Corp. at a Senate meeting Thursday.

Smaller oil and gas producers such as Anadarko could have a hard time getting their gas into the proposed pipeline if the oil companies negotiating the deal decide to build a smaller pipeline than planned or refuse to accommodate inexpensive expansions to the line, they claimed.

Mark Hanley, the company’s public affairs manager for Alaska, said the oil companies’ failure to specify in the contract the size and expandability of the pipeline put up a “red flag” for his company.

“How that pipe is designed is critical,” he said.

Because many smaller companies would not be ready to make commitments to ship gas when space is first offered, they would rely on the ability of the line to be expanded in the future. A larger initial line could be expanded more than a smaller one.

Hanley argued that the administration accepted the oil companies’ pipeline deal in part because of the proposed size of the pipeline and its ability to be expanded economically. “If it’s being sold as expandable, then let’s put it in writing,” he said.

Hanley also expressed concerns about the proposed date for making shipping commitments. Anadarko wants the pipeline built as soon as possible, he said, but doesn’t want the so-called open season to happen any earlier than necessary. Smaller producers would be less likely to have proven gas reserves for an earlier open season.

Anadarko holds leases for about 2 million acres on the North Slope and plans to drill its first natural gas exploration wells this winter, according to Hanley. At best, the company would not be prepared to make a shipping commitment until 2009 or 2010.

Hanley argued the contract should include measures to protect against a “premature” open season. State-allowable gas production rates should be determined and certain engineering work done before an open season is held, he argued. The state should also have the ability to postpone the open season.

Sen. President Ben Stevens, R-Anchorage, challenged the company’s concerns, arguing that their recommendations were unnecessary and pointing to protections provided by federal regulations. Regarding the size of the pipe, he asked why the companies would say one thing and do another, especially when they would risk litigation over anti-competitive behavior.

Karol Lyn Newman, a lawyer for Anadarko, explained the company’s concern.

When a pipeline is owned by an independent company, that company has the incentive to build the largest pipe possible and welcome everyone who wants to use it, she argued. When the pipeline is owned by companies that also produce the gas, other priorities could take that incentive away.

Newman also pointed to the oil companies’ legal challenge against federal regulations meant to ensure pipeline access for the smaller companies.

“Until the Court of Appeals decides that case, that issue is up in the air,” she said.

Bill McMahon of Exxon Mobil said giving the Federal Energy Regulatory Commission the right to mandate changes in the pipeline design put an undue risk on companies shipping gas on the pipeline. If FERC mandated a larger pipe than could be filled, shippers would have to pay a higher shipping fee.

“That’s why we’re fighting that unprecedented right,” he said.

Bob Loeffler, a lawyer working for the administration, said after the meeting that the state opposed the companies’ appeal and would file a brief against it. “I think it’s a very weak argument,” he said.

Dave Van Tuyl of BP responded to the concern over not specifying the pipeline size in the contract.

He said the companies didn’t want to “pre-empt the open season process.” While BP wanted the large pipe, changes in technology or the price of steel could make other options better, he explained. State-determined production rates could make the gas supply lower and big discoveries could increase it.

“We just don’t know,” he said. “And because of that, we don’t want to mandate limitations.”

He also defended the companies against Anadarko’s suggestion that they would shrink the pipeline to keep the smaller companies out.

“This is simply not the case,” he said. The companies proposed a larger pipe to take advantage of the economies of scale, he said, and it would not make sense to build an uneconomic line just to block others.

Sen. Kim Elton, D-Juneau, pushed the question. Knowing that the companies could change the pipeline plan in the contract, why would they oppose including the expected size of the pipe?

“We didn’t want to impose the additional burden (of changing the plan),” he said.

The Anadarko representatives also took issue with the contract’s blocking of state regulation over certain gas infrastructure and its provisions for expanding the pipeline and managing the state’s gas in the pipeline.

When he came to the table to respond, Loeffler said Anadarko’s description of the contract made the document he knew as his own child seem unknown to him.

“Where’s the beef?” he asked of one of the company’s concerns.

At the start of the meeting, Sen. Thomas Wagoner, R-Kenai, requested that consultants hired by the Legislature present their views on federal regulation and pipeline capacity early next week.

Stefan Milkowski can be reached at smilkowski@newsminer.com or 459-7577.