l G O V E R N M E N T

l G O V E R N M E N T

l N A T U R A L G A S

page3

Q&A: Hawker sees possibility inNorth Slope natural gas project

Vol. 19, No. 13 • www.PetroleumNews.com A weekly oil & gas newspaper based in Anchorage, Alaska Week of March 30, 2014 • $2.50

The March issue of North of 60 Mining News is enclosed.

March Mining News inside

SHANE LASLEY PHOTO

Drilling Carlin-style gold discovered at Atac Resources’ Rackla Gold project,situated between the Peel Watershed and contiguous road system in centralYukon Territory. Mining executives ranked Alaska and Canada’s North amongthe richest jurisdictions on Earth in terms of pure mineral potential in theFraser Institute’s Survey of Mining Companies 2013. Land disputes, environ-mental policy and lack of infrastructure in northern jurisdictions, however,concern the survey respondents. Page 10.

A special supplement to Petroleum NewsWEEK OF

March 30, 2014

3 Lawmakers turn up heat on EPA Signs of foregone decision to ban Pebble emerge; subpoena seeks evidence

12 Bornite tops 6B pounds copper NovaCopper expands Ambler deposits; AIDEA at road permitting trailhead

14 New nuclear may jolt uranium price Nunavut set to reap benefits of reactor restarts, construction and tighter supply

Seeking clarificationProposed new rule for US waters would impact federal permitting in Alaska

By ALAN BAILEYPetroleum News

O n March 25 the Environmental ProtectionAgency and the U.S. Army Corps of

Engineers published a proposed rule aimed at clar-ifying some prevailing confusion over what consti-tutes the “waters of the United States.” This appar-ently esoteric question is of fundamental impor-tance in determining where the federal agencieshave jurisdiction over waterway and wetlands per-mitting, especially in Alaska with the state’s myri-ad rivers, creeks, lakes and swamps. If a plannedproject will impact water deemed to be under fed-eral jurisdiction, federal permits will be required.And with those permits come a National

Environmental Policy Act review, a federal envi-ronmental assessment and possibly an environmen-tal impact statement that may take a couple of yearsto complete.

Sen. Lisa Murkowski, R-Alaska, rankingmember of the Senate Energy and Natural

Resources Committee, slammed theproposed rule, saying that it would place

most rain-dependent and seasonal pools, aswell as wetlands near rivers and streams,

under federal permitting jurisdiction.

see WATER RULE page 20

Canada seeks new toneCabinet shuffle opportunity to smooth rough edges with aboriginal communities

By GARY PARKFor Petroleum News

The Canadian government has landeda fresh chance to overcome aborigi-

nal opposition to major pipelines out ofthe Alberta oil sands.

In a surprise move Jim Flahertyresigned after eight years as finance min-ister, allowing Prime Minister StephenHarper to shuffle his cabinet and removesome of the bad feelings that have been buildingbetween his government and First Nations overthree projects — Enbridge’s Northern Gateway,Kinder Morgan’s Trans Mountain expansion andTransCanada’s Energy East.

The biggest obstacle was a fractiousrelationship over three years betweenFirst Nations and Natural ResourcesMinister Joe Oliver.

The low point was reached whenOliver labeled opponents of NorthernGateway as “foreign radicals (who were)hijacking” Canada’s regulatory processbased on evidence that they were beingfunded and advised by sources in theUnited States who were attempting to fil-

ibuster public hearings.He was never able to rebuild trust, which may

have prompted Harper to select him for the finance

GREG RICKFORD

see NEW TONE page 20

TransCanada big issueConsultants talk to committee about value of partnership in Alaska LNG Project

By KRISTEN NELSONPetroleum News

Senate Bill 138, Gov. Sean Parnell’s enablinglegislation for state equity participation in a

North Slope liquefied natural gas project, is inHouse Resources, its first stop of three committeeassignments in the House.

Resources co-Chair Eric Feige, R-Chickaloon,said in a press availability March 20 that the com-mittee would be meeting almost every day, with thegoal of moving the bill April 4. The bill then goesto House Labor and Commerce before it reachesthe Finance Committee.

Resources co-Chair Dan Saddler, R-EagleRiver, said they’d been studying the bill prior toreceiving it from the Senate. House Resources held

hearings on the memorandum of understandingand heads of agreement while SB 138 was in theSenate.

The bill passed the Senate March 18; HouseResources held its first hearing on the bill March

see TC PARTNERSHIP page 18

Black & Veatch, the administrationconsultants, said the economic impact to

the state of partnering with TransCanadainclude TransCanada investing 60-100

percent of the state’s upfront capital costsfor the GTP and pipeline (the variable isbuyback by the state of up to 40 percent).

Linc flow testing at Umiat fieldLinc Energy Inc. is flow testing the Umiat No. 23H well.The Australian independent said it began testing the hori-

zontal well at the Umiat oil field on March 21 and planned torelease results soon after completing and analyzing the test.

The flow test is the first on a well in the Umiat field in atleast 35 years, and the first ever on a horizontal well at thefield, which is in the foothills of the Brooks Range Mountains.

While Linc drilled the Umiat No. 18 vertical well last win-ter, the company was unable to complete a planned flow testbecause of mechanical problems. To avoid those problems thistime around, Linc is using a slotted liner to mimic an open-hole completion scheme.

“The horizontal well and slotted liner philosophy that have

China surges to the very top asnet importer of oil, other liquids

We’ve seen plenty of evidence of China’s phenomenal eco-nomic growth. Here’s a little more.

China is now the world’s largest net importer of crude oiland other liquid fuels, the U.S. Energy InformationAdministration says.

In September 2013, China’s net imports exceeded thoseeven of the United States on a monthly basis, the EIA said ina note posted on its website March 24.

The agency defines net imports as total liquid fuels con-sumption minus domestic production.

Steady economic growth is driving China’s rise in netimports, the EIA said. But important factors in the UnitedStates also have worked to elevate China to the top spot.

see FLOW TESTING page 19

see CHINA’S SURGE page 19

2 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

Petroleum News North America’s source for oil and gas newscontents

14 ORPC plans to install Alaska river turbine

10 Filing details Chugach deal for CIE gas

11 RCA issues LNG certificates

13 Parnell establishes gas advisory board

13 Beaudreau to leave BOEM following promotion

14 EPA reconsidering Arctic discharge permit schedule

14 New info requested for fall lease sales

7 Stirring Canadian M&A activity

7 JIP to investigate offshore leak detection

ENVIRONMENT & SAFETY

ALTERNATIVE ENERGY

11 Valdez nonprofit wins new lease on life

Coast Guard recertifies Prince William Sound RegionalCitizens’ Advisory Council; public comments are unanimous in support

14 CINGSA applies for higher gas pressure

Says higher maximum allowed pressure in reservoir will enable facility to safely achieve requiredcontracted storage capacity

3 Hawker sees hope for gas project

What’s different this time is Point Thomson resolution, producers working together and innovative concept of pipe within a pipe

5 Screws turned on BC pipeline, LNG plans

City of Burnaby says Kinder Morgan filed insufficientpipeline expansion information; BC government under fire over water permits

6 US senators hear LNG export testimony

Experts express views on world LNG trade, the US gas industry and the potential to impact Russia’s European gas dominance

8 Forgotten Nikiski LNG targeted West Coast

1970s proposal, a project of California utilities, had full environmental review under the new National Environmental Policy Act

NATURAL GAS

GOVERNMENT

LAND & LEASING

4 Breakthrough for Asians, aboriginals

PetroChina poised to take over oil sands project; First Nation counting on operation jobs, economicbenefits; Ivanhoe shelves work

5 EIA projects continued production growth

Energy Information Administration says domesticincrease in production from Bakken, Eagle Ford, Permian to continue through 2015

FINANCE & ECONOMY

China surges to the very top asnet importer of oil, other liquids

Linc flow testing at Umiat field

Seeking clarification

Proposed new rule for US waters wouldimpact federal permitting in Alaska

Canada seeks new tone

Cabinet shuffle opportunity to smooth rough edges with aboriginal communities

TransCanada big issue

Consultants talk to committee about value of partnership in Alaska LNG Project

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By STEVE QUINNFor Petroleum News

O ne look at Rep. Mike Hawker’soffice bookshelves and the story of

a debate on an Alaska natural gas pipelineunfolds.

The shelves are teeming with three-ring binders on pipeline and oil tax legis-lation since he took office in 2003. Thisyear, the Legislature is again debating apipeline project, this time looking at theprospects of a liquefied natural gasexport proposal in Senate Bill 138.

Hawker was one of the authors ofHouse Bill 4 last year when theLegislature gave the Alaska GaslineDevelopment Corp. the authority toadvance an in-state gas line while havinga role in the larger line that has eludedthe state for decades.

Hawker, who serves on the HouseResources Committee, will need moreshelf space soon. For now the SB138binders are within reach while the billsits in the Resources Committee.

Hawker, an Anchorage Republican,sat down with Petroleum News to dis-cuss the prospects of the Legislatureadvancing a pipeline project.

Petroleum News: What gives you con-fidence that this time around a projectcan be advanced?

Hawker: The biggest things changedthis time are we have the Point Thomsondevelopment issues behind us. That’s thefirst time that has occurred in this entireprocess. We do have all three of the pro-ducers working together, albeit they havethe differences as well they need to. Andthird we have a really innovative conceptcoming out of the state and that’s a pipewithin a pipe concept.

This pipe within a pipe concept hasallowed each of the producers its quartershare of the pipe — round numbers —and the state to have its quarter share ofthe pipe, and the state to do whatever wewant with our quarter without imposingour must-haves on industry. They eachare allowed to operate their piece of thepipe the way they need to for their bestinterests. We, the state, get to operateours for what we perceive is our bestinterest. That structural concept — it justhas unlocked everything and made thisproject possible.

In 2003, we were having LB&A hear-ings and literally the Legislature wasgetting introduced to all of the terms rel-evant to making these decisions: capaci-ty; route; regulatory structure; financing;expansion. From 2003-2014, the ques-tions haven’t changed an iota. We’velooked at an awful lot of alternatives,and the root issues have not changed abit.

Petroleum News: Questions for thelegislators, the administration or theindustry?

Hawker: The questions about how doyou build a pipeline. Nothing haschanged. Building pipelines hasn’tchanged. We’ve been through so manydifferent efforts. We’ve been through theStranded Gas Act. We’ve been throughAGIA. We certainly have the AGDCeffort moving forward. Now we’ve gotthe post-AGIA Parnell effort moving for-ward — AKLNG if you want to call itthat. Still, the root of every one of these

projects — theunderpinning eco-nomics, the under-pinning decisionsthat have to bemade to build apipeline project —nothing haschanged. Over thelast 12 to 14 years,we’ve sure looked ata lot of alternatives and developed a tonof paper and frankly, at this juncturewith both the AGDC project going for-ward and the AKLNG where it’s at, Ireally think we are finally on the vergeof getting a project moving.

Petroleum News: Let’s talk about thestate’s one-quarter. Are we equipped tomarket our own gas or is that getting alittle ahead?

Hawker: We don’t need to be. That isa decision for down the road and wehave a lot of options in front of us. Wecan develop in-house expertise. We cancontract with the producers and piggy-back our gas sales onto theirs. We can goout and contract a third-party as a mar-keting agent. We’ve got plenty of optionsfor getting our gas intothe market in a mannerthat is competitive andthat does not leave us at adisadvantage to the pro-ducers or anyone else.No, we don’t have tomake that decision today. The decisiontoday for everyone is the aggregate deci-sion both for the producers and the state:Is there a market for Alaska gas in theworld? To build a natural gas pipeline,you have an absolutely linked valuechain from the wellhead all the way to

the consumer and that’s tied down in 30-plus year contracts. So our question isn’tnecessarily how we market the gas, butcan we get those 30-year, long-term takeor pay shipping commitments that under-pin a pipeline project.

Petroleum News: You talked aboutwhat you feel good aboutwhat’s moving a project for-ward. Do you have any con-cerns that are in moving inparallel to you optimism?

Hawker: Absolutely. I’mnot rubberstamping the gov-

ernor’s proposal. Yes, I do have concerns.We are working through those in com-mittee. We are able to get our questionsanswered. There are two elements in playin this process. Those two elements that

l G O V E R N M E N T

Hawker sees hope for gas projectWhat’s different this time is Point Thomson resolution, producers working together and innovative concept of pipe within a pipe

PETROLEUM NEWS • WEEK OF MARCH 30, 2014 3

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see HAWKER Q&A page 15

By GARY PARKFor Petroleum News

A sian investment and participationby Canadian First Nations in the

development of Alberta’s oil sands arebucking the trend of recent years as anew project moves closer to obtainingregulatory approvals.

At a time when the Canadian govern-ment has slammed the door on oil sandstakeovers by foreign state-owned enter-prises, effectively turning the taps off bil-lions of dollars from China in particular,and First Nations are mounting chal-lenges to all major resource plans, a250,000 barrel per day project is givingnew hope to the industry.

An Alberta government cabinet order

has given the go-ahead to Brion Energy’ssteam-driven Dover bitumen project, set-ting the stage for PetroChina to acquirethe 40 percent of Dover that it does notalready own, giving Athabasca Oil Corp.,AOC, the money it needs to developother prospects, notably Alberta’s liq-uids-rich Duvernay formation.

That came on the heels of an end to atwo-year legal showdown between Brionand the Fort McKay First Nation, FMFN,a community of 700 people in theAthabasca oil sands region of northeast-ern Alberta.

In February, FMFN settled a disagree-ment with Brion over the size of a pro-tective zone between the oil sands opera-tion and the aboriginal community’shunting territory.

Up to C$700 million per yearIt was yet another victory for FMFN,

which estimates its Fort McKay Group ofCos. collects up to C$700 million a yearin revenues from nine joint ventures ithas created to provide services to the oilsands industry, including accommoda-tion for oil sands workers hired bySuncor Energy and Canadian NaturalResources, drilling and service rigs,long-haul fleet service, cement and grav-el and an industrial park.

FMFN has broken ranks with many ofits peers by opting to take advantage ofresource development, in return for whatFMFN Chief Jim Boucher said is anopportunity to provide employment,hope and opportunities for his communi-ty.

He is unable because of a non-disclo-sure clause to divulge the commercialdetails of the joint ventures, but saidFMFN is holding discussions with otherFirst Nations on ways to exploit opportu-nities and establish partnerships to “man-age the risks associated with resourcedevelopment.”

The Brion-FMFN deal, which coversenvironmental protection, fiscal termsand business opportunities — “shows theindustry that it is all about relationshipmanagement,” said Phil Skolnick, ananalyst with Canaccord Genuity.

He also said the sale of the Doverproject to PetroChina should lead to ajoint venture for AOC in the Duvernay byremoving a financial overhang.

Bill Gallagher, a lawyer who handlesaboriginal issues, told the Financial Postthat Brion and FMFN have both achieveda “social license” victory and taken a“huge step on the greening of the oilsands internationally.”

Final decisionsOn the Brion side, the project applica-

tion has been turned over to the govern-ment’s Alberta Energy Regulator for a

final decision on environmental issues.“The approval process has been long,

but we have achieved the expected out-come,” said AOC Chief ExecutiveOfficer Sveinung Svarte.

For AOC the deal is becoming a mat-ter of pressing importance, with the com-pany posting a loss of C$40.1 million inthe fourth quarter, compared with a year-earlier profit of C$306 million, as it livesin hopes of the oil sands transitions.

If PetroChina concludes its transac-tion with AOC it will have shown Asiancompanies there is more than one way togain a foothold in the oil sands. Anotheris the accumulation of exploration rightsthrough government land auctions.

Ivanhoe suspends workBut the headwinds faced by smaller

oil sands players took their toll on a proj-ect operated by Ivanhoe Energy, whichsuspended work on its C$1.37 billionTamarack steam-powered project thatwas planned to deliver its first oil in 2017and to eventually yield 20,000 barrels perday.

The company was aiming to attain fullcommercialization by using its patentedand proprietary heavy-to-light upgradingtechnology.

It said 2013 was a “challenging year,”because of government regulatoryprocesses, market conditions and diffi-culties raising capital.

In particular, Ivanhoe pinned theblame on the government’s AlbertaEnergy Regulator, which has stalledreview of five applications for shallowthermal projects while it studies factorsthat could affect reservoir containment inthe operations that are designed to pro-duce a combined 1 million bpd.

The company said in a news release itwas forced to sideline the project becausethe AER had declined to set a timelinefor a new regulatory framework.

Ivanhoe’s strategy is to acquire regula-tory approvals, then arrange financing orfind a partner to develop a project.

The company, which has interests inEcuador and Mongolia, reported a netloss for 2013 of US$143.8 million com-pared with a loss of US$64 million in2012. Its capital spending had beenscaled back to US$17 million fromUS$47.4 million in 2012. l

l F I N A N C E & E C O N O M Y

Breakthrough for Asians, aboriginalsPetroChina poised to take over oil sands project; First Nation counting on operation jobs, economic benefits; Ivanhoe shelves work

4 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

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FMFN has broken ranks withmany of its peers by opting to take

advantage of resourcedevelopment, in return for whatFMFN Chief Jim Boucher said is

an opportunity to provideemployment, hope and

opportunities for his community.

By KRISTEN NELSONPetroleum News

T he U.S. Energy Information Administration expectsstrong domestic crude production growth through

2015 primarily from the Bakken, Eagle Ford and Permianregions. In its Short-Term Energy Outlook, publishedMarch 11, EIA said domestic production was some 7.5million barrels per day in 2013 and is estimated to grow to8.4 million bpd this year and 9.2 million bpd in 2015. Theagency said domestic production peaked at 9.6 millionbpd in 1970.

Bakken production averaged 0.9 million bpd in 2013;the Eagle Ford formation in South Texas averaged 1.1 mil-lion bpd; and U.S. federal Gulf of Mexico productionaveraged 1.3 million bpd.

“Over the next two years U.S. refining capacity andcrude oil inputs to refineries are expected to increase ascompanies expand and build capacity to process the lightcrude oil from rising domestic production,” EIAAdministrator Adam Sieminski said in a March 11 state-ment. “Crude oil inputs to refineries should exceed theprevious high in 2004 and reach 15.6 million barrels perday by 2015.”

EIA said Marathon and Kinder Morgan haveannounced plans to build condensate splitters in 2014 and2015 to process production from the Utica and Eagle Fordformations, small topping refineries are being built inNorth Dakota to process Bakken crude and Valero isexpanding its Gulf Coast refining capacity.

Brent projected to weakenBrent crude oil spot prices averaged from $108 to $112

a barrel in February for the eighth consecutive month, butEIA said it “expects the Brent crude oil price to weaken asnon-OPEC supply growth exceeds growth in world con-sumption,” with average Brent prices of $105 this year and$101 in 2015 expected.

West Texas Intermediate fell to $95 a barrel in Januaryand increased to an average of $101 per barrel in February“as a result of strong Midwestern refinery runs after cold-weather-related disruptions in January,” EIA said.

“EIA expects strong U.S. crude oil production growthwill help reduce WTI prices to an average of $95 a barrelthis year,” Sieminski said.

WTI is expected to average $90 per barrel in 2015. The WTI discount to Brent averaged $8 per barrel in

February after averaging more than $13 per barrel over theprevious three months and EIA said it expects the discountto average $10 per barrel this year and $11 in 2015,“reflecting the economics of transporting and processingthe growing production of light sweet crude oil in U.S. andCanadian refineries.”

Natural gas storage lowMore cold weather in February led to more draws on

natural gas storage, EIA said, and to a downward revisionof its projection for working natural gas inventories, whichare now expected to end March at 965 billion cubic feet,ending the heating season below 1 trillion cubic feet for

the first time since 2003. EIA said data from Bentek Energy shows that three of

the top five months for total natural gas demand over thelast 8 years have occurred this heating season.

“The stage is now set for a record stock build over theinjection season,” the agency said, with a build of almost2.5 tcf projected by the end of October.

Domestic natural gas consumption is projected to aver-age 71.3 bcf per day this year, down 0.1 bcf from 2013,with “projected year-over-year increases in natural gasprices” contributing to a drop in natural gas usage for elec-tric power generation.

EIA expects natural gas marketed production to growat an average rate of 2.5 percent in 2014 and 1.1 percent in2015, with rapid production growth in the Marcellus for-mation “causing natural gas forward prices in theNortheast to fall even with or below Henry Hub pricesoutside of peak-demand winter months,” and possiblycausing some drilling to shift “from the Marcellus back toGulf Coast plays such as the Haynesville and Barnett,where prices are closer to the Henry Hub spot price.”

Natural gas spot prices averaged $6 million Btu at theHenry Hub in February, up $1.29 from January due to bit-terly cold weather, the agency said.

EIA said it is projecting a March spot price averaging$4.48 per million Btu, down from February, and continuingto decline into the spring, with Henry Hub projected toaverage $4.44 per million Btu in 2014 and $4.14 in 2015. l

l F I N A N C E & E C O N O M Y

EIA projects continued production growthEnergy Information Administration says domestic increase in production from Bakken, Eagle Ford, Permian to continue through 2015

PETROLEUM NEWS • WEEK OF MARCH 30, 2014 5

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l G O V E R N M E N T

Screws turned on BC pipeline, LNG plansCity of Burnaby says Kinder Morgan filed insufficient pipeline expansion information; BC government under fire over water permits

By GARY PARKFor Petroleum News

T he opposition keeps piling up against plans to exportoil sands bitumen and LNG from the British Columbia

coast.Under the gun are Kinder Morgan’s plans to almost triple

capacity on its Trans Mountain pipeline system to 890,000barrels per day and both the British Columbia governmentand natural gas producer Encana, which could be one of theleading sources of gas for LNG.

Three months after submitting an application to Canada’sNational Energy Board to add 590,000 bpd of crude bitumento its plans for twinning the Trans Mountain system, KinderMorgan is being accused of failing to provide sufficientinformation in its filing on how it will handle pipeline spillsor what environmental impact the C$5 billion will have.

The City of Burnaby — a city of 250,000 within theGreater Vancouver region — initiated the complaint on

behalf of its residents, who live alongside the WestridgeMarine Terminal and storage tanks in Port Metro Vancouver.

It said Kinder Morgan’s plan lacks critical details, includ-ing safety measures and a clear indication of what route itwill take through the city.

Greg McDade, the city’s attorney, requested that the ini-tial application be rejected, arguing residents have been ledto believe that the new pipeline will follow the existing rightof way in Burnaby when 90 percent will follow one of twopossible new routes.

He said the project involves major expansion of a tankfarm to store 15 million barrels of crude for loading ontankers.

Burnaby Mayor Derek Corrigan said the company hasbeen less than candid about its safety record.

He said Kinder Morgan claims Trans Mountain has beenoperated safely for 60 years, when more than one spill hasoccurred in Burnaby, the latest happening in 2007 when1,500 barrels spilled, damaging a neighborhood and a fish

habitat and costing C$15 million to clean up.Two contractors and Trans Mountain eventually pleaded

guilty to 21 charges in a British Columbia court.“Kinder Morgan’s application is incomplete, which

makes it impossible to know the extent of the impacts thepipeline would have on our city,” Corrigan said in a release.

Government chargedSeparately, two environmental groups — the Western

Canada Wilderness Committee and the Sierra Club ofBritish Columbia — claim the British Columbia govern-ment is sidestepping its own laws by allowing explorationand development companies to use large volume of freshwater to extract gas without having to apply for long-termwater licenses.

The suits filed in the British Columbia Supreme Courttarget the use of hydraulic fracturing, which they claim islinked to problems such as water pollution, and requested

see SCREWS TURNED page 6

6 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

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that permits issued to Encana be withdrawn.Under provincial water legislation, com-

panies that need fresh water for their opera-tions can either apply for a long-term waterpermit or seek short-term approval for aterm of up to two years.

Karen Campbell, an attorney for theenvironmental groups, said that obtaining afull license requires people who are poten-tially affected to be notified and given thechance to provide input or submit objec-tions.

The short-term approvals can be issuedby the British Columbia Oil and GasCommission, which has the option to keeprenewing the same licenses, allowing com-panies to use thousands of gallons of waterwithout facing a full-scale hearing.

Campbell said any company planning touse water beyond two years should only beallowed to do so through licenses.

She said her groups have discovered that83 percent of short-term permits wererenewed at least once, some as many as sixtimes.

Encana said 82 of those 83 approvalsinvolved drawing water from excavated pitsthat collect water naturally, rather than fromlakes, rivers or streams.

The government countered that its offi-cials have acted within the terms of theWater Act, which “contains no express pro-hibition on repeats of approvals.”

It is also planning a major overhaul of itswater legislation, including the right to issueconsecutive short-term approvals to thesame company. l

continued from page 5

SCREWS TURNED

By ALAN BAILEYPetroleum News

Given European dependence on Russian natural gas,especially in the central and eastern parts of the

continent, Moscow’s belligerence over the Ukraine hasadded a new twist to a continuing debate over the meritsor otherwise of exporting U.S. gas into the worldwideliquefied natural gas market. Could the availability ofU.S. LNG in world markets hit Russia’s gas exports, amajor component of the Russian economy? And whatwould be the impact of the export of U.S. gas on the U.S.economy?

Expert testimonyOn March 25 the U.S. Senate Energy and Natural

Resources Committee heard testimony from severalexpert witnesses on this difficult issue. In response to amassive upsurge in U.S. gas production, thanks largely tothe development of new techniques for producing gasfrom hydrocarbon-bearing shales, the U.S. Departmentof Energy has been processing license applications for anumber of proposed LNG export facilities. On March 24the agency issued an export license for an LNG facilityat Jordan Cove in Oregon.

In his written testimony Edward Chow, senior fellowfor the Energy and National Security Program in theCenter for Strategic and International Studies, told thecommittee that the Department of Energy has now grant-ed conditional approval for six LNG export projects.

Adam Sieminski, administrator in the EnergyInformation Administration, or EIA, presented data fromEIA’s 2014 energy outlook. That data predicts a continu-ing rise in U.S. shale-gas production, while also showinga modest Alaska contribution to U.S. gas production after

2025, on the assumption that the future export of LNGfrom Alaska proves viable.

Exports beneficialWitnesses generally agreed that the unfettered export

of LNG from the United States would be beneficial tothe U.S. economy by providing new markets for U.S. gas,supporting new U.S. industrial opportunities and sustain-ing investment in gas production for applications such aspower generation. David Montgomery, economist andsenior vice president at NERA Economic Consulting,debunked some arguments that have been leveled at U.S.LNG exports. Rather than causing high U.S. gas prices,competition in the worldwide LNG market would damp-en prices rather than encourage them to rise,Montgomery said. And rather than creating U.S. gasshortage risks, gas earmarked for export could provide asupply buffer against peaks in U.S. internal gas demand,he said.

And Jaroslav Neverovic, minister of energy for theRepublic of Lithuania, pleaded for the export of U.S.LNG, to help diversify his country’s energy supplies.Lithuania, having achieved its independence after beingpart of the Soviet Union, remains totally dependent onRussian gas. Lithuania is in the process of developing itsfirst LNG import facility, Neverovic said.

Price impactMontgomery and David Goldwyn, a senior fellow at

the Brookings Institute, both told the committee that theythink that the export of U.S. LNG would create interna-tional competition for Russian gas, thus lowering theprice that Russia could obtain for its gas and weakeningthe stranglehold that Russia’s gas holds over Russia’sEuropean neighbors.

Long-term international gas prices are based onfuture price and supply expectations, so that any oil orgas investment decision, including the construction ofLNG facilities, can have long-term price impacts,Montgomery said. And, with most energy consumersalready having gas supplies under contract through toaround 2016, it is important to consider longer-termprojects in degrading Russia’s market share by diversify-ing gas supply sources, he said. Although high gas pricesin Asia currently make the Asian market particularlyattractive for U.S. LNG, European gas prices are alsoquite high — any disruption to Russian gas supplies as aconsequence of the current political crisis would pushEuropean prices higher, he said.

Montgomery said that his firm had estimated that inthe next five years U.S. competition could drive downRussia’s gas revenues by as much as 30 percent, with thepotential of a 60 percent impact in the longer term.

Difficult to competeBut Chow expressed caution over the assumption that

U.S. LNG would compete successfully with Russian gas,given the unlikelihood that U.S. gas exports could makemuch of a dent in the near future in the large quantitiesof gas that Russia currently exports. Russia and Europehave a status of mutual dependence, with Europedepending on Russian gas and Russia depending onEuropean gas sales, Chow said. And future U.S. LNGexports are currently committed to Asian buyers, giventhat the price of gas in Asia is significantly higher thanin Europe, he said.

If Russia sees the possibility of having to competewith U.S. LNG exports as an empty threat that could

l N A T U R A L G A S

US senators hear LNG export testimonyExperts express views on world LNG trade, the US gas industry and the potential to impact Russia’s European gas dominance

see LNG TESTIMONY page 8

By GARY PARKFor Petroleum News

A move by Whitecap Resources tosolidify its place in the ranks of

Canada’s mid-size oil and natural gas pro-ducers by acquiring Western Canadianproperties from Imperial Oil has alsohelped break a dam of pent-up investordemand.

The C$855 million deal is the latestsign that Canadian-based companies havedeveloped a taste for tight oil and shalegas resource plays and are being wel-comed by investors.

Whitecap issued subscription receiptsof C$500 million to help finance thetransaction and investment industrysources reported that the offer generatedorders of C$1 billion within two hours.

Ryan Ferguson Young, a manager atSayer Energy Advisors, said the responseshows that strengthened commodityprices and the view of a rebounding indus-try is leading to a more positive investorsentiment.

On the same day that Whitecap andImperial made their announcement, InterPipeline issued C$300 million of shares topay down bank debt and help fund itsC$3.2 billion expansion of its oil sandspipeline network in Alberta.

Earlier this year, Canadian NaturalResources locked up a C$3.13 billion dealto acquire Devon Energy’s conventionalbusiness in Canada and Baytex Energyannounced a C$2.6 billion purchase ofAustralia’s Aurora Oil & Gas, a majoroperator in the Texas Eagle Ford play.

Nudging C$7 billionSayer estimates that petroleum indus-

try mergers and acquisitions in Canada arenudging C$7 billion so far this year, upten-fold from a year earlier.

Investment banker Peters & Co. is fore-casting an increase in M&A activity thisyear, stimulated by the number of assetson the market as larger producers refocustheir operations, while others are eager totake a place in newer areas.

Peters said “one of the most significantdrivers for a longer-term increase in M&Aactivity will be the progression of thenumerous LNG projects on the (BritishColumbia) coast, as we believe there is asignificant gap between the resourcesrequired to underpin these proposed facil-

ities and the resources currently held bythe producers seeking to export naturalgas.”

It estimates that total production of63,000 barrels of oil equivalent per day ison the public market — led by Apacheassets — with more being offered private-ly.

Grant Fagerheim, Whitecap’s chiefexecutive officer, said that if a trend tomore stable oil and gas prices can holdfirm there “could be more institutionalinvestor demand coming into the overallenergy sector.”

On the transaction side “there has beenan industry grab for good-quality assets,”he said.

Whitecap will sell some assetsWhitecap will help pay for the Imperial

purchase by selling off some assets,including stakes in gas plants, oil batter-ies, compressors and pipelines and 8,700boe per day of gas-weighted production toKeyera, one of Canada’s largest mid-stream energy companies, for C$113 mil-lion at an average C$57,000 per flowingboe.

Attracted by the high percentage oflight oil production, low decline rates andstrong cash generation from the Imperialproperties, Whitecap made a successfuloffer after Imperial fell short of its expec-tations in the fall when it invited proposalsfor the assets.

Fagerheim said Whitecap will injectmore capital than Imperial was preparedto into the assets it retains, notablyCardium formation light oil prospects.

Whitecap said that if the deal closes asexpected in May, it will raise its 2014 cap-ital spending to C$307 million from

C$255 million and expects its productionfor this year to grow by 13 percent to31,600 boe per day, three-quarters ofwhich will be oil and natural gas liquids.

The production being transferred toWhitecap is about 5 percent of Imperial’soverall output, leaving Canada’s third-largest producer, 69.6 percent owned byExxonMobil, free to concentrate on itshigh-profile ventures, including theAlberta oil sands, Arctic interests that are

dominated by a venture with ExxonMobiland BP to explore in the Beaufort Sea,unconventional resource plays in Albertaand British Columbia and the early evalu-ation of the WCC LNG project, a jointventure with ExxonMobil to export 30million metric tons per year over 25years. l

l F I N A N C E & E C O N O M Y

Stirring Canadian M&A activityMid-size Whitecap Resources succeeds with C$855M bid for assets accounting for 5% of Imperial production; analysts see more deals

PETROLEUM NEWS • WEEK OF MARCH 30, 2014 7

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ENVIRONMENT & SAFETYJIP to investigate offshore leak detection

A new joint industry project, or JIP, is to develop a best practice for designingand implementing offshore leak detection systems, DNV GL, a global ship andoffshore classification organization, announced March 18. DNV GL said 20 com-panies and government regulators are participating in the project.

DNV GL said that, following several offshore oil releases, operators and gov-ernment authorities have paid increasing attention to the impact of offshore oiland gas activities on the environment. And, as industry attention moves to theArctic and other environmentally sensitive areas, the question of detecting theleakage of hydrocarbons from offshore facilities is becoming increasingly impor-tant, the organization said.

Currently available leak detection sensors tend to have limited application cov-erage, with some only detecting gas, some providing a high level of sensitivityover small areas, and some covering large areas but with low sensitivity — thechallenge is to integrate the existing designs to achieve a complete system thatprovides the required coverage and sensitivity, without generating frequent falsealarms, DNV GL said. And gaps in the design, engineering, commissioning andoperation of existing systems need to be filled, the organization said.

Christian Markussen, DNV GL’s business development manager for subsea,said the objective of the JIP is to develop a recommended practice that will ensuresafe and environmentally sound operations by limiting hydrocarbon spills throughthe detection of acute discharges as early as possible after they occur, and with ahigh level of certainty.

—ALAN BAILEY

By BILL WHITEResearcher/writer for the Office

of the Federal Coordinator

The Coast Guard’s anxiety Among agencies, only the Coast

Guard seemed to get its pulse rate racingover the Western LNG project. But onlyfor a while before it, too, signed off.

In October 1975,the Federal PowerCommission staffwrote to the CoastGuard asking ques-tions about the safety hazards of ice,tides and currents at the Nikiski port andthe wisdom of putting a second LNG ter-minal there.

On Nov. 14, 1975, the blunt responsecame from Rear Adm. J.B. Hayes, com-mander of the 17th Coast Guard District,

which patrols thevast Alaska coast.

“The addition ofany other LNGfacility in this loca-tion will substantial-ly increase the riskto life, property andthe environment.”Hayes wrote.“Nikiski is quitefrankly, a poor choice. I strongly recom-mend that cognizant officials of youragency visit Nikiski during winter condi-tions before any decision is made in thismatter.”

Here’s the deal, Hayes wrote.Incoming tides — called flood tides —typically sweep up the east side of CookInlet. That’s where the three existingdocks are, for the fertilizer plant,ConocoPhillips LNG plant and oil refin-ery, in that order from south to north. A

strong flood tide can flow at up to 7knots. When pushed by brisk southwestwinds, the flow can near 11 knots. In thepresence of winter ice cakes — some ahalf-mile wide moving at or near surface-current velocities — and when two ormore ships are docked, the potential fortrouble is high.

“The ultimate danger is that of a largecake of ice or a buildup of smaller cakesand brash striking a moored vessel andcausing it to break away from its moor-ing,” Hayes wrote. “The primary hazardis the inability of the vessels torn awayfrom their loading berth or executingemergency break away procedures, tomaneuver in heavy ice so as to preventcollision with other pier facilities or ves-sels in the area.”

Putting another dock at the southernend of this line of dominos seemsunwise, Hayes suggested.

To support his point, the admiral

attached a letter from the LNG tankerPolar Alaska’s captain concerning anincident 10 months earlier, on Jan. 8,1975.

An oil tanker, docked north of hisLNG ship, broke loose and started drift-ing toward the LNG pier, the captainwrote in the letter to his boss. At thatmoment, the Polar Alaska was loadingLNG. They swiftly shut off the LNGflow. “The entire crew of the SS ‘PolarAlaska’ was immediately alerted for anemergency cast off.” Before the shipcould leave, though, the runaway oiltanker gained engine and steering con-trols. It skirted “dangerously close” pastthe LNG ship without hitting it.Especially in winter, “there is a constantdanger when two or more ships aremoored at Nikiski Pier and I beg you totake all the steps to avoid a situationwhich jeopardize the ships and theircrews,” the LNG tanker captain wrote.

Hayes also attached a series of logreports of ice problems Nikiski shipsendured in the frigid winter of 1971.

The Western LNG sponsors got busy.They developed emergency-response

plans. They got all Nikiski port users toagree to port protocols when ice dangeris high, including closing the port if nec-essary. Then they invited Coast Guardofficials for a show-and-tell of the newsafety culture.

The Coast Guard was mollified.“Since November 1975 a number of

significant changes have taken place,”Hayes wrote to the power commission onMarch 9, 1977. “These include formationof the Nikiski Operators’ SafetyCommittee, the adoption of voluntaryoperating procedures by the Committee,the upgrading of existing facilities at theport complex, and further studies byPacific Alaska Company regarding cur-rents and ship breakaways. As a result ofthese steps, and under existing CoastGuard regulatory authority, I am nowconvinced that present and future Nikiskioperations can be conducted safely,though perhaps under conditions of con-siderable economic burden to the opera-tors.”

Unchanging tidesFerocious tides, currents and ice

surges remain a hazard at Nikiski today,even though shippers have had an addi-

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Better.embolden Russia to act more recklesslyand could distract people from shoring upUkraine’s economy, Chow warned.

The optimum solution is to helpUkraine become more self-sufficient inmeeting its energy needs, by encouragingthe country to remove some wastefulenergy price regulations and by facilitat-ing reform of the country’s energy indus-try, enabling the country to exploit itsown, known oil and gas resources, Chowargued. And Europe, in general, would dowell to focus on developing its indige-nous energy resources, including shale-gas development using hydraulic fractur-ing techniques, he said. l

continued from page 6

LNG TESTIMONY

l N A T U R A L G A S

Forgotten Nikiski LNG targeted West Coast1970s proposal, a project of California utilities, had full environmental review under the new National Environmental Policy Act

see WESTERN LNG page 9

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tional three decades of experience withCook Inlet.

In the frigid predawn of Feb. 2, 2006,a surging tide and ice floes pressedagainst the docked tanker Seabulk Prideas it loaded fuel oil and gasoline from theTesoro oil refinery. Mooring linessnapped along its hull until the ship drift-ed away. The tanker finally beached ahalf-mile north of the dock.

The Coast Guard investigation con-cluded the port’s severe-ice rules wereadequate, the ship’s crew just didn’t fol-low them. The vessel and its engine roomwere inadequately manned. The crewmembers weren’t trained for dealing withheavy ice. They didn’t know how to moora ship for the strain it would endure.

A 2007 study of ways to make theNikiski port safer in light of the SeabulkPride accident concluded that in manyways the docks there are models of prop-er design. The authors found it interest-ing that mooring-line failures haveoccurred at the refinery and fertilizerdock but not the LNG dock betweenthem.

“It may be that ConocoPhillips,because they employ only two identicalships whose crew have extensive experi-ence in Cook Inlet and working with thefacility dock force, have substantiallyreduced the risk from the ‘human ele-ment,’” the report said.

The report noted the absence of tugsto back up tankers at Nikiski, an unusualomission among northern-latitude portsworldwide studied. Four months later, theTesoro refinery announced it woulddeploy a tractor tug year-round to helptankers arriving and leaving its dock.

Alternatives to NikiskiAs mandated by NEPA, the impact

statement considered alternatives tobuilding the Western LNG plan:

Other Cook Inlet sites had inferiorgeologic, climatic or oceanographic qual-ities, or had technical problems, the studyconcluded. The alternate getting closestscrutiny was Cape Starichkof, farthersouth Cook Inlet’s east bank, near thetown of Anchor Point. Fewer ice prob-lems there, the study found. But a plantthere would be more conspicuous than inindustrial Nikiski, and it would be morelikely to clash with the local salmonindustry.

Expanding the ConocoPhillips plantsounded good on paper. But the plantwould have to be redesigned and updated,requiring it to be shut down for a time,

interrupting its ongoing contract to deliv-er LNG to Tokyo utilities. Besides, theplant owners might be unwilling.

Cook Inlet gas instead could be pipednorth to Fairbanks or northeast to Tok,where it could feed into the big proposedAlaskan Northwest gas pipeline projectfrom Prudhoe Bay to the Lower 48. Eachidea had its problems, particularly lands-liding and faulting on the route to Tok,where the environmental impact wouldbe greater.

Always an option is to do nothing, tobuild no project. “Inasmuch as there is aneed for natural gas, this alternativewould appear to be unacceptable,” thestudy said.

Impact statements then, and today,also discuss what unavoidable environ-mental changes would occur if a projectgets built.

For Western LNG, most were prettyobvious:

The pipeline corridors would bestripped of trees. The LNG plant sitewould have buildings and paving wherenone existed before; surface water wouldrun off differently. Land would not reveg-etate naturally. Some of the nearby bluff

would be excavated for an access road todeliver plant modules. The plant wouldsolidify the neighborhood as an industri-al center and further discourage nearbyland use for recreation and homes. Moreships at Nikiski “would largely precludeboating activities in the tanker mooringarea” and “would interfere with set netfishermen who have previously utilizedthe immediate area.”

For the project, the FERC staff recom-mended Pacific Alaska take 24 actions tomitigate environmental impacts.

Some involved pipeline routing. Someconcerned safety designs, emergencyplans and timing of report filings.Several specified how to avoid damagingstreams or disturbing nesting birds dur-ing construction — such as via winterconstruction. For fuel, the tankers shouldburn LNG that has revaporized — calledboil-off gas — when docked orapproaching Nikiski rather than morepolluting bunker-C oil, the impact state-ment said.

What’s different todayMuch has changed since the late

1970s in understanding of Cook Inlet

tides and navigation, as was mentioned,as well as in the ships that carry LNG.

In January 2014, Steve Butt, seniorproject manager for Alaska LNG, told anAlaska business group he’s confidenttankers calling at the liquefaction plantwill handle the Inlet’s worst. His team hasbeen consulting with ship pilots who dealwith the world’s most treacherous tidesand currents, and it has planted a buoy inthe Inlet to harvest contemporary data onebbs and flows there.

The tankers calling at Nikiski forAlaska LNG will be larger and morepowerful that the 1970s-era tankers. Butthey shouldn’t draw much more of adraft.

The Western LNG EIS said the ship-ping channel then would need a mini-mum depth of 42 feet — 47 to 57 feetwhere the wave action is lively. Thetankers Western LNG was looking tobuild would have sailed with perhaps a35-foot draft when loaded. Althoughlarger, the Alaska LNG tankers likelywould have drafts of less than 40 feet,based on what’s getting built today. Asmall increase in draft can allow a lotmore breadth and capacity in the ships.The world’s largest LNG tankers — theQ-Max ships sailing out of Qatar and farlarger than what Alaska LNG proposes— have about a 40-foot draft.

Much also has changed in how gov-ernment agencies scrutinize large devel-opment projects.

More now is known about the soils,wetlands, water quality and water bodies,vegetation, air, wildlife, geologic haz-ards, archeological sites, other land usesand other environmental facets of theCook Inlet region. That is because overthe years more information has been col-lected about them — all for studies ofother projects.

And the people preparing the studieshave gotten more sophisticated at under-standing these topics in all their sub-tleties and nuances.

If a generalization can be made aboutenvironmental impact statements overtime, it’s that each new one raises the bara little bit for all those that follow.

In contrast to the 334-page WesternLNG environmental impact statement,the 2007 EIS for the proposed Knik Armbridge ran more than 1,000 pages, notcounting thousands more in appendicesand technical reports attached to it.

The Western LNG environmentalimpact statement makes only the briefestcitation of the Marine MammalProtection Act — in fact just a singlemention. And it never mentions theEndangered Species Act. Both will play

continued from page 8

WESTERN LNG

see WESTERN LNG page 10

The proposed Western LNG plant would have added a fourth shipping dock to the Nikiskiport, initially causing Coast Guard safety concerns when the plant was proposed in the mid-1970s.

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into permitting of the Alaska LNG proj-ect.

Cook Inlet hosts at least two endan-gered species, beluga whales listed in2008, and western Steller sea lions listedin 1997. (The sea lions have only a scantpresence in the upper Inlet.) Under theselaws, the Alaska LNG project likelywould need a “biological opinion” — astudy by federal agencies — that wouldconsider whether the project would fur-ther jeopardize the belugas and sea lionsor the whales’ critical habitat in the Inlet.Under the Marine Mammal Act, the proj-ect would need a permit allowing an acci-dental harming or harassing of the mam-mals.

Biological opinions examiningwhether the endangered species will beOK are big deals.

When Apache Alaska Corp. wanted toconduct 3-D seismic surveys of its CookInlet oil and gas leases in 2013, theNational Marine Fisheries Service andU.S. Army Corps of Engineers tackledthe subject.

The 137-page joint opinion wasalmost one-third as long as the entireWestern LNG EIS circa 1978.

These studies and others would con-sider the cumulative impacts of the LNGproject with other oil and gas develop-ment, fishing, tourism and various com-mercial activities in Cook Inlet. This col-lective look at how one project interactswith others on the Inlet’s environmentdidn’t really happen back in the 1970s.

Government reviews today also take asharper look at how development affectsNative communities and their cultures,and on minorities and low-income popu-lations. FERC now formally consultswith nearby Native communities on agovernment-to-government basis to gaintheir input on projects. That didn’t hap-pen in 1978.

Climate-change analyses and spill-response capabilities also are loominglarger in environmental analyses.

And air-quality standards are strictertoday ... plus they continue to evolve.

As one agency official involved inAlaska environmental studies put it:Compared to the 1970s, there’s more datain the baseline, more baseline monitoringand more information to regurgitate in anenvironmental impact statement.

Western LNG fades awayUltimately, the Western LNG project

died quietly, like the Alaskan Northwestproject to pipe North Slope gas to Lower48 markets through Canada.

With gas-industry price deregulation,drillers found and produced more low-cost natural gas. North America didn’tneed expensive Alaska gas.

Eventually, by the early 1980s, bothprojects’ sponsors just stopped filingtheir paperwork with the regulators. (Thelower one-third of the North Slope gaspipeline — from Alberta to the Lower 48— actually was built and has been flow-ing Western Canada gas for 30 years.)

Even before markets killed it, theWestern LNG project almost ran agroundon a soap opera of local and state politicsin California, where the gas would havebeen received and used.

Originally, three LNG receiving siteswere proposed, including PointConception northwest of Santa Barbara.The California Coastal Commission hadsiting authority for LNG receiving termi-nals. But the panel’s mission also includ-ed protecting the marine life, spectacularviews and other assets of PointConception. Getting site approval forthere would be no walk on the beach.

The other two proposed sites were tothe south, in Oxnard and Los Angeles,where a lot more people lived. Whilesome local leaders wanted the jobs andcited the industry’s low safety risk, othersnoted the area’s earthquake hazards andthe thousands who could die in a worst-case disaster scenario.

To avert a stalemate and force a deci-sion, the California Legislature in 1977mandated a study to rank the best sitesfor LNG receiving terminals. Of 82 sitesevaluated, Point Conception was one ofonly four that met all environmental cri-teria. Eventually, both the state andFERC sanctioned the site.

But by the time court appeals hadbeen exhausted, “increasing domesticnatural gas supplies had rendered theproject uneconomic,” as the CaliforniaEnergy Commission later put it.

Plans for the Western LNG project gotstacked away on library shelves. l

Part 1 of this story appeared in theMarch 9 issue.

Editor’s note: This is a reprint from theOffice of the Federal Coordinator, AlaskaNatural Gas Transportation Projects,online at www.arcticgas.gov/forgotten-nikiski-lng-proposal-had-full-environmen-tal-review

10 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

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continued from page 9

WESTERN LNG

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The Seabulk Pride beached along Cook Inlet north of the Tesoro oil refinery dock afterpressure from ice and a surging tide snapped lines mooring the tanker to the refinery’spier in 2006.

The ConocoPhillips LNG plant operated continuously from 1969 through 2013 and is currentlyidle. For a time in the 1970s and early 1980s, a larger Western LNG plant was proposed for justsouth of the ConocoPhillips site.

NATURAL GASFiling details Chugach deal for CIE gas

Chugach Electric Association recently filed documents with utility regulatorsdetailing a deal to purchase natural gas from small producer Cook Inlet EnergyLLC.

The Regulatory Commission of Alaska in late 2013 approved a gas sale andpurchase agreement between Chugach and Cook Inlet Energy.

On March 20, Chugach filed an executed “transaction confirmation” with thecommission.

The confirmation provides for interruptible gas purchases of up to 10,000 mcfper day for a period beginning April 1 and extending through 2018. Contractualprices start at $6.12 per mcf the first year, climbing to $6.62 in 2018.

Chugach is the largest electric utility in Alaska’s largest city, Anchorage.Cook Inlet Energy is the Anchorage-based subsidiary of Tennessee-based, pub-

licly traded Miller Energy Resources Inc.Cook Inlet Energy produces oil and gas from two fields on the west side of the

inlet, and recently acquired the North Fork gas field on the southern KenaiPeninsula.

—WESLEY LOY

l E N V I R O N M E N T & S A F E T Y

Valdez nonprofit wins

new lease on lifeCoast Guard recertifies Prince William Sound Regional Citizens’Advisory Council; public comments are unanimous in support

By WESLEY LOYFor Petroleum News

The U.S. Coast Guard has recertifieda nonprofit group that monitors

Alaska’s primary oil terminal at Valdez.The action coincides with the 25th

anniversary of the devastating oil spillresulting from the wreck of the tankerExxon Valdez on March 24, 1989.

Following that event, Congress man-dated the Prince William Sound RegionalCitizens’ Advisory Council.

The council has 19 voting membersrepresenting local governments and com-mercial fishing, tourism and other inter-ests. It sponsors research and offers inputto regulators and the oil industry on issuessuch as spill response readiness.

Council funding comes through a con-tract with Alyeska Pipeline Service Co.,the oil company consortium that operatesthe 800-mile trans-Alaska pipeline andValdez tanker terminal.

The council is subject to annual CoastGuard recertification, and every thirdyear it must submit a “comprehensive”application. This was one of those years.

To earn recertification, the councilmust show it is “broadly representative ofthe interests and communities in the area”and is meeting its responsibilities underthe Oil Pollution Act of 1990.

Lawmakers endorse councilThe Coast Guard’s Alaska commander,

Rear Adm. Thomas P. Ostebo, recertifiedthe council with a March 15 letter to thegroup’s executive director, MarkSwanson.

Swanson himself was once a CoastGuard commander in Valdez, where thecouncil is based.

Ostebo, in his letter, said all 71 publiccomments received were supportive ofcouncil recertification.

“Since your last triennial recertifica-tion in 2011, the council has continued itsefforts to improve communications andcultivate collaborations through partner-ships with industry, government, andlocal communities,” Ostebo wrote.

The recertification is good until Feb.28, 2015.

Among those submitting letters in sup-port of recertification were Alaska’sentire bipartisan congressional delega-tion, plus leading state legislators includ-ing House Speaker Mike Chenault, R-Nikiski, and Rep. Eric Feige, R-Chickaloon, co-chair of the HouseResources Committee.

State Sen. Peter Micciche, R-Soldotna,also submitted a letter. He’s an employeeof ConocoPhillips, the state’s top oil pro-ducer. ConocoPhillips, through its PolarTankers subsidiary, operates a fleet ofdouble-hull ships that carry North Slopecrude from Valdez to West Coast refiner-ies.

“Programs should only survive bydemonstrating high performance whilesupporting a specific and valuable mis-sion,” Micciche wrote. He said the coun-cil “has contributed significantly toresearch, system integrity inspections,ice-detecting radar systems, the coordina-tion of firefighting capabilities and

numerous other accomplishments.”

‘Eyes and ears’Another letter in support came from

Crowley Maritime Corp. The Florida-based company, under contract with

PETROLEUM NEWS • WEEK OF MARCH 30, 2014 11

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BP Alaska

NATURAL GASRCA issues LNG certificates

The Regulatory Commission of Alaska has officially allowed two utilities to oper-ate separate transmission lines to move natural gas across a small area of the NorthSlope.

The regulators have issued certificates of public convenience and necessity forPolar LNG LLC and Spectrum Alaska LLC to operate short pipelines at Prudhoe Bay.

The first certificate allows Polar to operate an 8-inch gas pipeline running some18,691 feet from Prudhoe Bay Flow Station 1 to the Polar LNG Pad, which was pre-viously known as Child’s Pad. The second certificate allows Spectrum to operate an8-inch gas pipeline running some 1,100 feet from Prudhoe Bay Flow Station 3 to aproposed pad.

Earlier this year, the Alaska Industrial Development and Export Authority startednegotiations with MWH Americas Inc. to partner on an operation that would truckNorth Slope liquefied natural gas to the Interior region for space heating and powergeneration.

Both Spectrum Alaska and the Polar LNG parent company Pentex Alaska NaturalGas Co. LLC were in the running for the contract, but were passed over in favor ofMWH.

The certificates are not entirely moot, though.In an attempt to move quickly and account for contingencies, the AIDEA process

allows the public corporation to negotiate with Spectrum or Pentex should the MWHarrangement fall through. The prioritization favors Pentex first, followed by Spectrum.

The Pentex subsidiary and Polar affiliate Fairbanks Natural Gas LLC recently toldregulators it no longer plans to pursue a North Slope project, given the stateinvolvement.

—ERIC LIDJI

A resolution from the Valdez CityCouncil said “the primary goal of

the Prince William Sound RCAC isto prevent complacency in the oilindustry and government agencies

so that it shall never become afactor in a future oil spill.”

see RCAC page 13

12 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

Flint Hills Resources AlaskaJenner & Block LLPKoniag Inc.Northern Economics Inc.Pacific Star EnergyStoel Rives LLPTrident Seafoods CorporationUdelhoven Oilfield System Services Inc.

Lead Corporate Partners ($25,000 & above)

Alaska Airlines & Horizon Air. . Alaska Journal of CommerceBP . ConocoPhillips Alaska, Inc. . Petroleum News

Corporate PartnersABR Inc.Alaska Business MonthlyAlaska Journal of CommerceAlaska Rubber & Supply Inc.Alaska Wildland AdventuresBear Track InnBooz Allen HamiltonBristol Bay Native Corporation

Calista CorporationCarlile Transportation Systems Inc.CIRIClark James Mishler PhotographyCONAM Construction CompanyCopper Whale InnDenali National Park Wilderness Centers Ltd.Fairweather LLC

Thank You

The mission of The Nature Conservancy is to conserve the lands and waters on which all life depends.

715 L Street . Suite 100 . Anchorage, AK 99501 . alaska@tnc.org . 907-276-3133 . nature.org/alaska

Corporate Council on the Environment

The Nature Conservancy is proud to collaborate with a wide range of partners to ensure Alaska’s lands and waters continue to support abundant salmon and wildlife populations. We thank these corporations for sharing

our vision of a healthy and productive Alaska for many generations to come.

CA

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Alyeska, has tugs at Valdez to escort andassist oil tankers.

“I believe that citizen involvement playsan important role in preventing oil spills andensuring that strong oil spill response meas-ures are in place should prevention effortsfail,” wrote Crowley’s Charles Nalen.“Since PWSRCAC’s creation, it has provid-ed a voice for citizens to provide advice andinput into the safe movement of oil throughPrince William Sound. As a citizen inValdez, Alaska from May 2009 to February2014 as well as Crowley’s Vice PresidentValdez Operations I have a great respect forthe environmental stewardship of PWSR-CAC in their industry advisory role.”

Commercial fishing interests and sever-al municipal and tribal governments alsooffered support for recertification. A resolu-tion from the Valdez City Council said “theprimary goal of the Prince William SoundRCAC is to prevent complacency in the oilindustry and government agencies so that itshall never become a factor in a future oilspill.”

Larry Evanoff, Chenega IRA Councilpresident, said in a letter to the Coast Guard:“Chenega Bay was the first community tobe hit by the 1989 Exxon Valdez oil spill.That incident has had a devastating impact

on our way of life. We rely on PWSRCACto be our ‘eyes and ears’ and look forwardto working with them for many years tocome.”

Dan Lawn, a former oil industry regula-tor in Valdez for the Alaska Department ofEnvironmental Conservation, also submit-ted a letter.

“Over the past several years PWSRCAChas advocated for a better accounting ofdeferred maintenance, increased frequencyand technical rigor for piping and tankinspections, and a review of the adequacy ofthe remote control capabilities of key sys-tems at the Valdez Marine Terminal,” hewrote.

Some of the council’s efforts recently“have been met with resistance by Alyeska,”Lawn added.

Dan Hisey, formerly chief operatingofficer for Alyeska, also endorsed recertifi-cation. He’s lately done some consultingwork for the council.

Hisey said the council’s focus on “pro-tecting Alaska’s environment through posi-tive engagement with industry is a modelAlaska should be proud to continue.”

Alyeska and the major owners of thepipeline and terminal — BP,ConocoPhillips and ExxonMobil — did notcomment on the recertification. l

PETROLEUM NEWS • WEEK OF MARCH 30, 2014 13

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NATURAL GASParnell establishes gas advisory board

Alaska Gov. Sean Parnell has established the Municipal Advisory Gas ProjectReview Board to address municipal concerns around property taxes and impactpayments for a proposed Alaska LNG Project. The heads of agreement for theproject calls for payments in lieu of property taxes, and for the governor to con-sult with affected municipalities on property taxes.

In hearings on enabling legislation for state equity participation in the project,municipalities objected to the PILT proposal and demanded a role in negotiationsfor the project.

The governor’s office said Parnell metMarch 25 with Mat-Su Borough Mayor LarryDeVilbiss, Fairbanks North Star BoroughMayor Luke Hopkins, Kenai PeninsulaBorough Mayor Mike Navarre, AnchorageMayor Dan Sullivan, North Slope BoroughMayor Charlotte Brower and Denali BoroughMay Clay Walker “to ensure meaningful localinput in a gas project.”

The governor signed an administrative order establishing the board after themeeting. The board will develop a framework for assessing the impact and bene-fits of a future Alaska natural gas project, especially on communities.

Local participationParnell said he is “committed to ensuring local participation” as the gas proj-

ect continues. “The Municipal Advisory Gas Project Review Board will provide a meaning-

ful venue for mayors, communities and my administration,” he said. The board will be chaired by the commissioner of the Department of Revenue,

and also includes the commissioners of the Department of Natural Resources andthe Department of Commerce, Community and Economic Development; mayorsfrom the North Slope, Fairbanks North Star, Denali, Mat-Su, Kenai Peninsula andAnchorage boroughs; one member of an organization representing all municipal-ities in the state; and two members of the public who do not reside in the six bor-oughs already represented.

The board will report to the governor and Legislature by Dec. 15 of each yearon potential benefits and impacts of North Slope natural gas development andnew infrastructure, recommendations for changes to property tax statutes relatedto a natural gas project and other issues dealing with effects of a major gas proj-ect on Alaska communities.

—PETROLEUM NEWS

The board will develop aframework for assessing the

impact and benefits of afuture Alaska natural gas

project, especially oncommunities.

continued from page 11

RCAC

GOVERNMENTBeaudreau to leave BOEM followingpromotion to Interior Department

Tommy Beaudreau is to leave his position as director of the Bureau of OceanEnergy Management, or BOEM, to become chief of staff to Interior SecretarySally Jewell, BOEM spokesman John Callahan confirmed in a March 21 email.Interior has not yet announced a date for the transfer.

Beaudreau, who was brought up in Alaska and attendedAnchorage’s Service High School, has headed BOEM sincethe agency was formed in 2011, following the breakup of theU.S. Minerals Management Service in the wake of theDeepwater Horizon disaster. During Beaudreau’s time at thehelm of BOEM the agency has dealt with such issues as thedevelopment of BOEM’s next five-year outer continentalshelf oil and gas leasing program; approval of Shell’s Arcticoffshore drilling plans; the aftermath of Shell’s 2012 Arcticdrilling season; and the development of new Arctic offshoredrilling regulations.

Beaudreau has also co-chaired the federal Interagency Working Group forcoordinating the permitting of oil and gas projects in Arctic Alaska.

In a March 20 press release U.S. Sen. Mark Begich, D-Alaska, praisedBeaudreau for his work at BOEM.

“Tommy Beaudreau has deep Alaskan ties and continues to be a great resourceto our state at the Department of the Interior,” Begich said. “He has done goodwork in his current position at Interior and I am confident his knowledge ofAlaska’s unique conditions and needs will carry over into his new role as chief ofstaff. Tommy has been a fair advocate for responsible oil and gas development soI hope his influence will be broad in his new position.”

—ALAN BAILEY

TOMMY BEAUDREAU

JUD

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14 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

/ / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / /

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environmental response services on the North Slope of Alaska.

LAND & LEASINGNew info requested for fall lease sales

The Alaska Department of Natural Resources Division of Oil and Gas has putout a call for new information for its 2014 fall oil and gas lease sales — theBeaufort Sea, North Slope and North Slope Foothills areawide sales.

The March 21 call says the division is requesting “substantial new informationconcerning these areas that has become available over the past year.” Based oninformation which it receives, the division will issue supplements to final bestinterest findings for the sale areas or decisions of no substantive new information.

The most recent BIFs for the North Slope and Beaufort Sea areawide saleswere issued in 2008 and 2009, respectively; the latest supplement to those find-ings was issued in July 2011. The most recent BIF for the North Slope Foothillswas issued in 2011. The findings and supplements are available on the division’swebsite at http://dog.dnr.alaska.gov/Leasing/BestInterestFindings.htm.

The deadline for receipt of new information is 5 p.m. April 21. —PETROLEUM NEWS

EPA reconsidering Arctic dischargepermit schedule based on comments

Faced with numerous comments on its proposed general permit for wastewater dis-charges from geotechnical activities in the federal waters of the Beaufort and Chukchiseas, the Environmental Protection Agency is evaluating the comments and maydevelop a new schedule for issuing the permit, the agency announced March 21. Oilcompanies typically conduct offshore geotechnical surveys to characterize the natureof the seafloor in an area of planned drilling or offshore infrastructure construction.Compliance with the terms of a general permit would enable a company to conductsurveys without having to seek a specific permit for its operations.

Under the current schedule, the public comment period for the proposed permitended on Feb, 19, having previously been extended from an original closing date ofJan. 27. EPA now says that some of the information it has received from the publicadds to that used in preparing the draft permit and requires further evaluation. Gaininga thorough understanding of the information received will require more time, EPAsaid.

EPA is developing its permit in coordination with the development by the AlaskaDepartment of Environmental Conservation of a similar wastewater discharge permitfor state waters offshore the Beaufort and Chukchi sea coastlines. Alaska has takenover from the EPA the permitting in Alaska of discharges into U.S. waters — state landextends three nautical miles out from the coast.

—ALAN BAILEY

GOVERNMENT

ALTERNATIVE ENERGYORPC plans to install Alaska river turbine

Ocean Renewable Power Co. has completed testing of its in-river turbine powergeneration system in Maine and plans to start testing the system in Alaska this sum-mer, the company announced March 18. Known as a hydrokinetic system, the deviceworks something like an underwater windmill, using the natural flow of a river to turna turbine and hence generate electricity. Devices of this type could become energysources for rural villages, ORPC said.

The plan is to ship the device to Anchorage in June and then install the device inthe Kvichak River at the village of Igiugig at the southern end of Lake Iliamna, thecompany said.

“We couldn't be more excited to be working with the Village of Igiugig, the DenaliCommission, Alaska Energy Authority and our 49 partners and contractors through-out the state, including the University of Alaska at Fairbanks and Anchorage, tolaunch ORPC's first project here,” said Doug Johnson, ORPC’s director of businessdevelopment for Alaska.

ORPC, in conjunction with Homer Electric Association, has been planning thetrial implementation of an in-current generation system using Cook Inlet tidal cur-rents at East Foreland on the west side of the Kenai Peninsula, with power from thatsystem feeding into the Railbelt power grid. However, the company is also very inter-ested in pursuing the possibility of using in-river systems for rural energy supplies.

The company had originally hoped to carry out a pilot project in the Tanana Rivernear the village of Nenana in Alaska’s Interior. But, after discovering significantproblems associated with silt and debris in the Tanana, the company decided to testits system at Igiugig instead.

“Igiugig has discussed hydrokinetic potential for the last decade. We are thrilledto finally deploy a device and work towards harnessing a reliable and renewable ener-gy source,” said Igiugig Village Council president AlexAnna Salmon.

—ALAN BAILEY

l N A T U R A L G A S

CINGSA applies for higher gas pressureSays higher maximum allowed pressure in reservoir will enablefacility to safely achieve required contracted storage capacity

By ALAN BAILEYPetroleum News

Cook Inlet Natural Gas Storage Inc.,known as CINGSA, has applied to

the Alaska Oil and Gas ConservationCommission for permission to increasethe maximum allowed pressure in its nat-ural gas storage facility south of the Cityof Kenai on the Kenai Peninsula. Thefacility, which went into operation in2012, enables Southcentral Alaska gasand power utilities to warehouse gas pro-duced in the summer for use in the winter,when utility gas demand is especiallyhigh.

When CINGSA shut the facility for afew days in November for pressure andmass balance testing, the company report-ed that the pressure in the reservoir may

have exceeded the maximum allowedpressure of 1,700 pounds per square inch.At the time of the pressure measurementsthe gas pressure was still stabilizingacross the reservoir, as injected gasmoved through the underground reservoirrock — CINGSA said that it was unlikelythat the maximum pressure would havebeen exceeded, once the pressure had

CINGSA has applied to thecommission to permit pressures of

up to 2,200 pounds per squareinch, the gas pressure in the

Cannery Loop field when the fieldwas discovered.

see CINGSA PRESSURE page 20

PETROLEUM NEWS • WEEK OF MARCH 30, 2014 15

will be triggered by the passage of theenabling legislation, SB138. One side ofthat is it will provide a basis for the stateexecuting its memorandum of under-standing with TransCanada, which willbe contractual agreements between thestate and TransCanada that will not comeback before the Legislature. On the otherhand, it will also be the legislationthat the producers need to work amongthemselves and with the state to actuallymove the project forward.

In that capacity the state will be rep-resented by the partnership established inthe MOU. The details of that MOU stillhave concerns to folks. I have concernsabout ownership versus control. Whilethe state potentially will own up to 40percent of the limited liability partner-ship of the state’s quarter of interest,control will vest totally withTransCanada. I’m not yet convinced thestate giving up all control is the rightthing to do. I’m still looking at it andtrying to figure my way through it.

Within the legislation, we are stillworking to resolve a number of issuesrelated to AGDC, so the bill we passedlast year — HB4 — that set up AGDCand empowered it to move forward is notcompromised unintentionally by the lan-guage in SB138. We are working throughthose points. I have concerns about thetax code revisions in SB138 that are crit-ical to moving forward. While I don’tknow if the provisions in SB 138 areright or wrong, there are just questionsyet to be answered about how this newregime will affect not only the NorthSlope but the rest of the state. What arethe consequences of making this changeon a universal basis. Those questions areyet to be answered.

If you pull back to the 10,000-footlevel, and ask ourselves, what did wegive and what did we get with this deal?There’s the ultimate question. All ofthese nits we can be looking at: AGDC,taxes, control, ownership, corporatestructure. At the end of the day, the bigquestion is what are we as a state givingup and what are we getting. In the broad-est sense, what we are getting is the pos-sibility of a pipeline.

What are we giving to get that? Somefolks argue we are giving too much toTransCanada. TransCanada does have anexclusive contract under AGIA. Thatexclusive contract provides trebled dam-ages for us breaking that contract, sothey have a huge amount of leverage.

Their willingness to abandon thatcontract and abandon that leverage hasgreat value. One of those things we get is

relief from those punitive provisions inAGIA. What did we have to give to getrelief from those punitive provisions?Well, part of it is the involvement ofTransCanada in this project. If this oneblows up again, then for the next fiveyears they get a right to participate onsimilar terms on any similar project.Those are understandable business trade-offs. If they are going to give up theirhold on the state and trebled damagesclause of AGIA, they want to be sure wecan’t pull out the rug from under themand say so long, Charlie. It’s all of theseon-going tradeoffs. Looping back to thebalance we have to determine as legisla-tors, it’s what are we giving, what aregetting and is it a transaction that we canaccept.

Petroleum News: You talked aboutprospective unintended consequences.What are some of those?

Hawker: AGDC which had been origi-nally designed to be a company thatcould not only develop an in-statepipeline but also develop connectinglines from a backbone to communities inthe future, lost the ability to get gas outthrough those connecting lines to the restof the state. Unintended, but the wayterms were redefined in SB138, it hadthe unintentional consequence of nar-rowing what AGDC could do. Therewere constraints placed on the board ofdirector’s ability to manage and controlall aspects of AGDC’s operations. We areworking very productively with theadministration to find common groundlanguage that continues to make sureAGDC is the state’s oil and gas pipelinecompany and that it is there with a mis-sion to get Alaska gas to Alaskans, butit’s also nimble and flexible enough to bepart of any viable project that comes intobeing no matter what the size of the proj-ect is, which is exactly what we set upAGDC to be.

Petroleum News: Still on AGDC, lastweek Sen. (Pete) Kelly talked about howhis committee thought it was importantto keep AGDC nimble by removing theoriginally proposed subsidiary. Is that anexample of what you’re citing?

Hawker: That’s where SB138 as it gotintroduced I think got into problems. Ittried to micromanage and establish a cor-porate structure by statute. It said bystatute we will establish this subsidiaryin this manner and it’s going to be con-trolled by a completely different set ofboard of directors outside of corporatestructure and board of directors atAGDC. Any businessman knows youcan’t have two different boards of direc-tors operating the main company and thesubsidiary company if there is not a line

of authority in command.That’s one of the things the Senate

helped us clean up by re-establishing aproper corporate organization and struc-ture by having linear management andreporting trails from the board of direc-tors at the top down through the execu-tive director down through the manage-ment and operations of subsidiary organ-izations. It went back to allowing AGDCto use its corporate powers to create asubsidiary to operate rather than to cre-ate a subsidiary in statute and try to dic-tate how it was going to operate.

Again, we’ve been working very pro-ductively with the administration to re-establish a proper corporate organizationand management — an administrativeand financial control structure — thatassures that we continue to have atAGDC the ability to pursue the in-stategas pipeline project to get Alaskans gasinto Alaskans hands, but at the sametime be a partner and a player in thislarger project that we all hope comes tofruition and if it does, AGDC has thecapacity becomes the state’s agent as isappropriate.

If the larger project falters one moretime for whatever reason, be it marketconditions or the producers failure toreach consensus on commercial agree-ments, AGDC is ready, prepared and ableto keep moving forward a project so wearen’t, one more time, aren’t sitting heregoing, ‘no gas line, start over. What arewe doing?’ We are making great progresswith AGDC. We hope it morphs into thislarger project and we all get this large-scale pipeline with huge export capacity.I’ve been watching this now for 12 years.We’ve had a lot of false starts. I’m notprepared to abandon AGDC and have nointention of abandoning AGDC on thepromise of a new project, a bigger proj-ect. I believe we can get there. It’s goingto take a lot of work from all parties. Butwe are prepared whether we do get thereor whether we don’t. The state has thebest resources applied, most productivelyand affectively.

Petroleum News: Six months after theAGDC board gets appointed, one ofthose appointments comes under ques-tion for living out of state. Are you sur-prised this happened six months laterrather than immediately?

Hawker: That’s just bad politics inaction. We testified during the creationof AGDC, and as one of the sponsors ofthe legislation that created AGDC, it wasabsolutely my intent that the governorwould be empowered to appoint the best,most competent and qualified board withno restrictions placed on those decisionsbased on residency. We wanted him to beable to pick the best pipeline people in

the world, the best finance people in theworld, the best construction people in theworld. He came up with a balancedboard.

He did put a lot of Alaskans on theboard. He happened to have one guywho has a resume that is just spectacularin the gas pipeline world. It’s unfortunatethat politics played against that individ-ual. As Rep. Chenault, my cosponsor onHB4, has said, we are looking into othervehicles at this time to pass clarifyinglegislation that makes it very clear thegovernor has the authority to appoint themost competent and qualified board onAGDC from anywhere in the world.

Petroleum News: The speaker(Chenault) also noted who better to goup against formidable companies thansomeone who came from one of thosecompanies. Can someone like that doboth?

Hawker: I agree with the speaker. Ifyou want someone experienced inpipelines where do you get it? You don’tgo to the ice cream shop. You go to thebiggest pipeline companies in the worldand hire someone from that environment.It’s politically easy to say they are com-promised but the fact is true profession-als know who they work for. That’s whypeople change jobs in their careers. Justbecause somebody started a career withBP and moved over to Exxon, the dayhe’s working for Exxon doesn’t meanhe’s loyal to BP. We the state of Alaskahire who came out of Exxon, in this caseas a retired individual, to work as aboard member for AGDC, his loyalty isto the state of Alaska. I believe thesecompetent, qualified experienced profes-sionals do take this seriously, and thatindividual is dedicated to Alaska, not tohis former employer.

Petroleum News: You’ve got tworeports critical SB138 posted with theLegislative Budget & Audit Committee,one each by Roger Marks and RickHarper. What are your thoughts on each,starting with Mr. Marks?

Hawker: I’m a little hesitant to criti-cize somebody else’s report because theyhave their perspective. It’s one we’ll takeinto consideration. Mr. Marks is verycompetent and very qualified. His per-spective will help us ask the right ques-tions and will help us get to answers thatwill help us make our decisions.

Petroleum News: And Mr. Harper?Hawker: I think Mr. Harper’s report

did not quite demonstrate the same graspof the facts and circumstances we arelooking at that Mr. Marks’ did so it’s alittle harder to work with Mr. Harper’s

continued from page 3

HAWKER Q&A

see HAWKER Q&A page 19

16 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

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Alaska Resource Education to host auction in AprilAlaska Resource Education will be hosting the Roger Burggraf Raffle & Auction at the

Alaska Miners Association Convention on April 7-11 at the Westmark Hotel in Fairbanks. ARE said it will be raffling off two round-trip tickets on Alaska Airlines as well as other

great prizes at the convention banquet on theevening of April 10. There will also be silent and liveauctions of other items donated from around thestate. Raffle tickets will be on sale in Anchorageuntil April 4 and in Fairbanks the week of the con-vention at the Alaska Miners Association Tradeshowbeing held at the Carlson Center.

Alaska Resource Education is a 501(c)(3) educa-tional organization whose mission is to teach students about Alaska’s natural resources.With a K-8 and adaptable 9-12 curriculums on mineral, energy and forestry resources, ateacher training course, youth programs, and kit distributed throughout the state, thissmall organization seeks to ignite young minds and inspire students about Alaska’s naturalresources.

ARE is seeking donations for the raffle and auctions, welcoming all donations, however,art and prints, Alaskan items, historical pieces, tickets, tours and passes are especially pop-ular. For more information visit www.akresources.org for more information or to download

a donation form, or call 907-276-KITS (5487).

Calista Corp. sets record shareholder dividendCalista Corp. said its largest shareholder dividend in corporate history was approved by

its board of directors. The 2014 shareholder dividend distribution totals $4.65 million and is the ninth divi-

dend since inception. The total distribution of shareholder dividends is $24.6 million, withnearly 53 percent of that total provided in the last three years.

With more than 12,000 individuals Calista has one of the largest populations of share-holders among the Alaska Native corporations. This distribution equates to $3.50 pershare, an 8 percent increase from 2013. Checks are expected to be mailed out by the closeof business April 15.

“By diversifying our operations and targeting acquisitions Calista is navigating therough economic climate,” said Calista Corp. Board Chair Willie Kasayulie. “While the aver-age business generally focuses on fiscal results, as an ANCSA corporation we must alsobalance socio-economic support for our Shareholders and our region.”

In April 2013 Calista provided a shareholder dividend totaling $4.3 million. InDecember 2013 Calista also provided a distribution of more than $590,000 through the

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19, and beginning the week of March 24has met every day, taking testimony fromthe administration, Legislative Budget &Audit consultants and the administration’sconsultants.

TransCanada a big concernA big concern aired in House Resources

was the value to the state of partnering withTransCanada, rather than going it alone tofinance and manage its approximately 25percent share of the proposed Alaska LNGProject.

The MOU and HOA presented by thegovernor in January, and enabled by SB138, propose that the state would take itsroyalty and production tax in kind ratherthan in value, giving the state a 20-25 per-cent ownership in natural gas from thePrudhoe Bay and Point Thomson fields, thevariation based on the production taximposed on natural gas. The state wouldthen take a comparable equity share in theproject, which includes a gas treatmentplant on the North Slope, a gas pipelinefrom the North Slope to Nikiski and a liq-uefied natural gas plant at Nikiski.

TransCanada has been involved with thestate through AGIA — the Alaska GaslineInducement Act — and a license whichTransCanada took under that legislation fora pipeline into Canada to deliver AlaskaNorth Slope natural gas to the contiguousUnited States. New natural gas develop-ment in the Lower 48 made that projectuneconomic, and Parnell asked the NorthSlope producers and TransCanada to col-lectively consider an LNG project to takenatural gas to Asian markets, while alsoproviding natural gas for use within thestate.

Parties representing the state — thedepartments of Natural Resources andRevenue and the Alaska GaslineDevelopment Corp. — then negotiatedwith the North Slope producers — BP,ConocoPhillips and ExxonMobil — andTransCanada, producing the two agree-ments which would be ratified by SB 138,the heads of agreement or HOA and thememorandum of understanding or MOU.

Going it aloneThe MOU provides the basis for the

state and TransCanada to exit the AGIAagreement, with TransCanada holding thestate’s equity interest in the gas treatmentplant, or GTP, and the pipeline; the AlaskaGasline Development Corp. would hold thestate’s interest in the liquefaction facility.

The MOU provides that the state couldbuy back up to 40 percent of the GTP andpipeline interests from TransCanada, leav-ing TransCanada with minimum interestsof 14 percent in those portions of the proj-ect. In committee discussions in both theHouse and Senate consultants have toldlegislators that the state will likely haveopportunities to sell part of its interest inthe LNG facility as it negotiates the sale ofits gas, since LNG buyers frequently wantto hold an equity position in the project.

If the state were to back out of the MOUit would be faced with exiting AGIA, andcould face arbitration and possibly litiga-tion over the issue of whether the project isuneconomic; it would also have to payTransCanada for information that companyhas developed which would be contributedto the AKLNG Project if the MOU issigned.

If the state goes it alone it would have tofully fund its participation in the pre-FEED,pre-front-end engineering and design por-tion of the project, estimated at $104 mil-lion and $486 million for FEED, as well as

fully funding its share of construction costs,some $12 billion (estimates by enalytica,the LB&A consultants) and at $108 millionand $450 million, respectively for pre-FEED and FEED (estimates by the admin-istration’s consultants, Black & Veatch) andan estimated $13.2 billion in constructioncosts.

If the project did not continue beyondpre-FEED, the state would oweTransCanada some $50-60 million forwork done to that point, and if the projectwere abandoned after FEED, the statewould owe TransCanada $150-400 million,with the variations — these are from ena-lytica estimates — based on whether thestate allows TransCanada to carry all of itsGTP and pipeline interest, or buys back 40percent of that interest.

Both consultants have said that all num-bers at this early stage of the project are cer-tainly wrong, and are useful for showingdirection.

Advantages of TransCanadaEstimates from enalytica show that state

equity leads to higher government take onaverage, with the state taking a larger pro-portion than the producers combined, dueto its dual role as equity participant andsovereign — the state would still collectcorporate income taxes and property tax —and the fact that the state would not payfederal income tax. These estimates showthe state taking up to 35 percent at high gasprices while the combined producer takewould be less than 30 percent at the samegas price. That was for a 25 percent stateequity share, and was higher than the state’stake at 20 percent. Compared to the state’stake in-value, i.e. without an equity stake,at high gas prices the state would take more— although it would take much less at lowgas prices — but without state equity par-ticipation there might not be a project.

TransCanada’s share of the cash fromthe project ranges from 1-7 percent, basedon enalytica modeling, varying dependenton price levels and the level of buybackwhich the state exercises. TransCanada’scash share is lowest with buyback and athigh gas prices.

Black & Veatch, the administration con-sultants, said the economic impact to thestate of partnering with TransCanadainclude TransCanada investing 60-100 per-cent of the state’s upfront capital costs forthe GTP and pipeline (the variable is buy-back by the state of up to 40 percent).

Once the project is in operation, the statewould pay TransCanada a negotiated tarifffor 60-100 percent of the GTP and pipelinecapacity used to move state gas, againdependent on whether the state exercises itsbuyback option.

Black & Veatch concluded that the eco-nomic impact to the state fromTransCanada’s involvement would be areduction of some $4 billion in total cashflows. But the firm said the net presentvalue impact would be marginal becauseupfront money carries more weight thancash flow over 25 years of operation.

Black & Veatch said TransCanada couldreduce the state’s investment in the projectby $4-7 billion (depending on buyback),said the state might hit debt limits going italone and also noted TransCanada’s valueas a partner, citing experience, keepingmomentum going and the pipeline compa-ny’s bias toward expansion of the project,something it shares with the state.

TransCanada has committed to a tarifffor state gas based on financing, and achange in TransCanada’s ability to getfinancing could lower its return on equityand net present value, Black & Veatchsaid. l

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shareholder-supported Elders’ Benefit Program. Additionally, more than $200,000 wasdonated to key regional and state organizations including the Bethel Senior Center,Emmonak Women’s Shelter, search and rescue teams, plus an additional donation of$300,000 for Calista Heritage Foundation’s scholarship program.

Vigor’s first Olympic-class ferry christenedWashington state elected offi-

cials, transportation and manufac-turing leaders were on hand March20 to celebrate the christening ofthe state’s first 144-car Olympicclass ferry, the M/V Tokitae, at VigorIndustrial’s shipyard in Seattle.

Lynn Peterson, Washington’s sec-retary of transportation, served asthe ship’s sponsor and broke a bot-tle to christen the new ferry before acrowd of more than 200 people.

The Tokitae is the first of three 144-car ferries planned to replace the state’s agingEvergreen State-class 87-car ferries, all of which are about 60 years old. The second 144-car ferry, the Samish, is under construction now at Vigor Industrial.

Following sea trials and crew training, the Tokitae will enter service on the Mukilteo-Clinton route in June. The Samish is expected to serve the San Juan Islands beginningearly next year.

“This is more than just a ferry,” said Frank Foti, CEO of Vigor Industrial. “The vessel isa vital economic, social and transportation link to the ferry communities across PugetSound.”

Washington lawmakers also approved funding for a third 144-car ferry during therecently completed legislative session. The 144-car third ferry, still unnamed, will be builtby Vigor and likely serve the Seattle-Bremerton route.

Editor’s note: All of these news items — some in expanded form — will appear inthe next Arctic Oil & Gas Directory, a full color magazine that serves as a marketingtool for Petroleum News’ contracted advertisers. The next edition will be released inSeptember.

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OIL PATCH BITS

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report, so we’ll look at it, consider it andtake it for what it’s worth.

Petroleum News: Do you have any con-cluding thoughts?

Hawker: This entire debate still and willcontinue through the rest of the session,hinges on what did we give and what didwe get and becoming comfortable withwhat we are getting is what we are giving.I know I’m repeating myself a bit. There isa huge amount of detail embedded in the

HOA and the MOU and our understandingit and the details of the transactions thatwill be precipitated if we pass the enablinglegislation. It’s a daunting task for us tounderstand all of this, analyze it, dissect it,evaluate it in the timeframe that we have inthis legislative session. That’s why we aremeeting seven days a week on this. I thinkwe will do something that will continue toenable the AKLNG project to move on tothe next phase, which will then be broughtback to us for the next step in the decision-making in 2015. l

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HAWKER Q&A

been used on this well No. 23H are alsoan important factor, as this combination isa large part of the development philoso-phy of the Umiat field going forward,”CEO Peter Bond said in a statement.

The Umiat oil field is generally con-sidered to be the largest known and unde-veloped oil field in Alaska, with 154.5million proved and probable barrels of oilequivalent.

—ERIC LIDJI

U.S. total annual petroleum and other liquids production is expected to reach13.3 million barrels per day in 2014, a 31 percent rise from 2011. The increase isprimarily from tight oil plays.

In contrast, China’s production over the same time period will see only a 5 per-cent increase and is forecast to be only a third of U.S. production in 2014, the EIAsaid.

“On the demand side, China’s liquid fuels use is expected to reach more than11 million barrels per day in 2014, while U.S. demand hovers close to 18.9 mil-lion barrels per day, well below the peak U.S. consumption level of 20.8 millionbarrels per day in 2005,” the agency said. “U.S. refined petroleum product exportsincreased by more than 173 percent between 2005 and 2013, lowering total netU.S. imports of petroleum and other liquids.”

China has been diversifying the sources of its crude oil imports in recent yearsin response to robust oil demand and geopolitical uncertainty, the EIA said.

Saudi Arabia is the largest supplier of crude to China.“Because production levels from Iran, Libya, and Sudan and South Sudan

dropped since 2011, China replaced the lost shares of crude oil and other liquidsimports from these countries with imports from Oman, Iraq, the United ArabEmirates, Angola, Venezuela, and Russia,” the EIA said.

The EIA is the statistical and analytical agency within the Department ofEnergy. By law, its data, analyses and forecasts are independent of approval by anyother officer or employee of the U.S. government.

—WESLEY LOY

Source: U.S. Energy Information Administration, Short-Term Energy Outlook, March 2014

Note: Net petroleum and other liquids imports are defined as total liquid fuels consumption minus domestic production.

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CHINA’S SURGE

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FLOW TESTING

portfolio, while filling the naturalresources post with Greg Rickford, whobefore he entered politics worked as botha nurse and lawyer among aboriginalcommunities in northern Ontario.

Rickford entered government promisingto try and improve the economy and infra-

structure in First Nations by drawing on hisunderstanding of how important resourcedevelopment could be to remote areas.

He inherits Harper’s grand plan to trans-form Canada into an energy exporting“superpower” through C$650 billion ininvestment over the next decade.

Entrenched resistanceBut he was immediately confronted with the entrenched resistance among First

Nations to Northern Gateway.Art Sterritt, executive director of Coastal

First Nations, an alliance of nine communi-ties on the British Columbia coast, said acondition of working with the governmenton future projects as that “NorthernGateway has to be put to bed.”

“There’s no way anybody in BritishColumbia is going to be supporting thatproject any time soon.”

Sterritt said Rickford’s job will be madegreatly more difficult if the governmentapproves the Enbridge pipeline by the mid-June deadline set by the National EnergyBoard.

He said that building a relationshipamong government, industry and FirstNations is a careful process that requirestime and sensitivity.

“You don’t show up with the project andthen try to build a relationship just to get theproject through. That’s not the way itworks,” he said.

Sterritt reiterated that his communities

remain willing to “do whatever it takes tomake sure this project doesn’t go ahead.”

Joseph Doucet, the dean of the AlbertaSchool of Business at the University ofAlberta, told the Globe and Mail that extentto which Rickford has shown an under-standing of the aboriginal issues “that couldbe really, really valuable.”

CAPP: Critical periodDavid Collyer, president of the Canadian

Association of Petroleum Producers, saidCanada is facing a critical period in its nat-ural resource development, requiringRickford “to get up to speed quickly on anumber of files.”

CAPP said the new minister’s experiencein aboriginal affairs and northern develop-ment, and also as Minister of State forScience and Technology, are “all very rele-vant to the success of the oil and gas indus-try.”

A spokeswoman for the Alberta-basedPembina Institute, an independent environ-mental think tank, said the big hope is thatRickford “will listen to and understandsome of the (environmental and aboriginal)perspectives of people who do have con-cerns, whether that be about pipelines or thepace and scale of oil sands development.”

The government has been provided witha blueprint by Douglas Eyford, its own spe-cial representative on West Coast energyinfrastructure, who completed an eight-month study last year by concluding thatthere “has not been constructive dialogue”with aboriginal communities.

“Canada must take decisive steps tobuild trust with aboriginal Canadians, tofoster their inclusion into the economy andto advance that reconciliation of aboriginalpeople and non-aboriginal people inCanadian society.”

Rickford has yet to lay out his strategyfor dealing with his biggest challenge. Hisoffice said he would need more time toreview the issues before making any publicstatements. l

20 PETROLEUM NEWS • WEEK OF MARCH 30, 2014

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Which water?At its core, the concept of U.S. waters

is straightforward: They are waters thatcould be used for interstate or foreigncommerce, including traditional naviga-ble waters and the territorial seas aroundthe country. But since these watersinclude, for example, navigable rivers, thequestion arises of the source of the waterin the navigable water body — pollutionin a water source can flow into the navi-gable water and hence pollute the water-way. Consequently, tributaries of naviga-ble rivers have also fallen within thescope of U.S. waters, as have wetlandsconnected to those tributaries, and so on.

Confusion over exactly where watersof the U.S. end and state waters begin hasinevitably led to litigation, with individualfederal decisions over the scope of waterpermitting being challenged through thecourts. But, when a dispute over federalwater jurisdiction reached the U.S.Supreme Court in 2006, the justices didlittle to settle the water-borne confusionwhen they failed to reach a majority deci-sion, instead publishing two distinct opin-ions on the subject.

Since then the EPA and the Corps ofEngineers have only proposed non-bind-ing guidance on the jurisdiction question.But, with their March 25 announcement,the agencies have now proposed a firmrule that would govern future jurisdictiondecisions.

Proposed ruleUnder the proposed rule, all territorial

seas, navigable waters, interstate waterand tributaries of these waters, would beconsidered to be U.S. waters, as wouldnavigable water impounded behind astructure such as a dam. And the rule pro-vides a definition of what is meant by atributary.

In addition, all waters, including wet-lands, adjacent to this first tranche ofwater categories would also fall withinthe U.S. waters definition — the ruledefines “adjacent” to mean “bordering,contiguous or neighboring,” and the rulespecifies what it means by “neighboring.”

The rule says that any body of waterwithin the above categories would auto-matically be considered to come underfederal jurisdiction without further analy-sis in a permitting situation.

Other watersHowever, there are “other waters” that

may or may not be waters of the U.S.,depending on whether they have what istermed “a significant nexus” to a naviga-ble water, interstate water or territorialsea, the proposed rule says. These waterswould require individual determinationsof whether they fall under federal juris-diction, on a case-by-case basis. Theagencies accept that “significant nexus”is not a scientific term, but they say thatthe term refers to “water, including wet-lands, either alone or in combination withother similarly situated waters in theregion” that “significantly affects the

chemical, physical or biological integrity”of any territorial sea, interstate water ornavigable water.

The proposed rule also spells out spe-cific types of water bodies which will notcome under federal jurisdiction, includingpermitted waste treatment systems andwater in certain types of agricultural situ-ation.

Seeking suggestionsThe agencies say that they are seeking

suggestions on other ways of determining“other waters” that might come under fed-eral jurisdiction. To this end, the agenciesare inviting the public to submit com-ments, scientific data, technical data andexamples from case law that might addfurther clarity to the “other waters” spec-ification. The agencies are also lookingfor suggestions for other categories ofwater that might be excluded from feder-al jurisdiction.

The agencies say that they will be pub-lishing their proposed rule in the FederalRegister, with a 90-day public commentperiod.

Varied commentsSen. Lisa Murkowski, R-Alaska, rank-

ing member of the Senate Energy andNatural Resources Committee, slammedthe proposed rule, saying that it wouldplace most rain-dependent and seasonalpools, as well as wetlands near rivers andstreams, under federal permitting juris-diction.

“While I certainly agree that the feder-al regulatory process needs greater effi-

ciency and certainty, it appears unlikelythat this new rule will help meet either ofthose goals,” Murkowski said. “Instead, itappears that the EPA is seeking to dra-matically expand its jurisdictional reachunder the Clean Water Act. If allowed tostand this could result in serious collater-al damage to our economy, for a widerange of states, and for a wide range ofindividuals — including our nation’ssportsmen.”

Sen. Mary Landrieu, D-La., chair ofthe Senate Energy and Natural ResourcesCommittee, described the new rule as anexample of “agency overreach” that “willhamper our nation’s efforts to increasedomestic energy production, create jobs,reduce our dependence on foreign oil andbreak the oppressive grip of tyrants anddictators across the globe.”

Environmental organizations havepraised what they characterize asimproved and better defined protectionfor the nation’s water.

“This is good news for boaters,anglers, swimmers and families who relyon clean drinking water,” said PeterLehner, executive director of the NaturalResources Defense Council. “EPA tookan important step to finally rescue thesewaters from legal limbo. Even thoughthese are common-sense protections, thepolluters are sure to attack them. Peoplewho care about clean water need to maketheir voices heard in the comment peri-od.” l

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WATER RULE

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NEW TONE

evened out and stabilized.

Isolated pocketBut the company now says that fur-

ther analysis has suggested that one ofthe facility’s wells had encountered anisolated pocket of relatively high pres-sure gas from the original CanneryLoop gas field within which the stor-age reservoir is located. The facilityuses a depleted reservoir within thefield.

CINGSA says that, as a conse-quence of this isolated pocket of gas,the facility does not have the capabilityto store the entire 11 billion cubic feetof gas that the facility was designed to

hold and that CINGSA has contractedwith its customers for storage, unlessthe gas pressure is allowed to exceed1,700 pounds per square inch.CINGSA has applied to the commis-sion to permit pressures of up to 2,200pounds per square inch, the gas pres-sure in the Cannery Loop field whenthe field was discovered. CINGSA saysthat the 2,200 pounds-per-square-inchpressure is well below the pressurethreshold at which the rock of the reser-voir might fracture.

CINGSA also told the commissionthat pressure testing and other monitor-ing has indicated that there has been noleakage of gas from the storage facilitysince the facility went into operation. l

continued from page 14

CINGSA PRESSURE

Rickford entered governmentpromising to try and improve the

economy and infrastructure inFirst Nations by drawing on hisunderstanding of how importantresource development could be to

remote areas.