A Citizen’s Guide

JUNEAU–Two consultants hired by the Legislature claimed Monday that the proposed pipeline contract fails to reflect in legal terms the assurances given by the oil companies regarding the size of the pipeline and the ability for it to be expanded.

The consultants said that the contract with BP, ConocoPhillips and Exxon Mobil to develop North Slope gas reserves offers little assurance that other companies will be able to ship their gas on the pipeline. They questioned the three companies’ motives and argued that they stood to benefit from restricting access to the pipeline.

The financial interests of the three oil companies differ from those of the state, which stands to gain from inexpensive expansions to the pipeline to accommodate smaller companies, according to Don Shepler, an attorney with Greenberg Traurig and one of the consultants.

“The owners really don’t have financial incentive to expand the pipeline,” he said.

Shepler and Rick Harper, the other consultant, both described the proposed project as unprecedented and advised the state to use caution in piecing together its agreement with the companies.

The consultants made their comments Monday at a meeting of the Senate Special Committee on Natural Gas Development. Lawmakers are in Juneau for the summer’s second special session to tackle the proposed gas pipeline contract and changes to the state’s oil production tax.

Shepler built his argument by comparing the incentives of a hypothetical, independent owner of the pipeline with those of the three oil companies, which would own the pipeline along with the state under the proposed contract.

Because an independent owner’s profits would be based on the size of the pipeline, increasing the size would be in the company’s best interest, he said.

“Expansions are critical,” he said. “That’s how they grow their profits.”

The three oil companies, on the other hand, would profit mostly from selling the gas held under their leases and to a lesser degree from ownership in the pipeline. Based on forecast gas prices, the companies would earn about $3 per thousand cubic feet for the development of the gas and only about 25 cents for shipping it, he claimed.

“Clearly the producers have far greater stake in the upstream,” he said.

He said that because the companies would earn so little on their investment, they would have little incentive to expand the pipeline to accommodate other companies wanting to ship gas.

Shepler claimed that there were “many uncertainties” associated with a contract provision outlining pipeline expansion through a process set out by the Federal Energy Regulatory Commission. The process, he said, was prone to delays and susceptible to legal challenges.

Another process for pipeline expansion outlined in the contract also fails to ensure access to smaller companies, he said. The process for expansion initiated by the state imposes a long list of requirements on companies seeking the expansion and could, in many circumstances, require approval of the pipeline owners.

Shepler also echoed a concern raised last week by representatives of the oil company Anadarko Petroleum Corp., which has significant North Slope lease holdings. The company noted that despite assurances that the pipeline would be built a certain size and with a certain capacity for inexpensive expansion, no specific size was mandated in the contract.

“We don’t know what’s actually going to be built,” Shepler said.

Shepler said that because it was unusual to have a gas producer owning a pipeline and because the state was entering into new agreements, the state should make efforts to protect itself.

“Use belts and suspenders,” echoed Harper, “because you are breaking new ground.”

Harper also raised concerns about the state taking its taxes and royalties as gas and not as cash. He urged the state to consider taking its gas once it exited the pipeline instead of on the North Slope and raised concerns about the state’s ability to earn top dollar for its gas in a market with the oil producers.

“These are formidable competitors,” he said.

Harper, who worked for more than three decades in the oil and gas industry, said he could not understand why the companies would want to build the pipeline, which he said would offer a much lower rate of return than other possible investments.

Representatives from the oil companies present at the meeting said that they wanted to own the pipeline because their companies had the necessary expertise and incentives to keep pipeline costs down, which would benefit them as pipeline users.

Staff writer Stefan Milkowski can be reached at smilkowski@newsminer.com.