Horizontal Wells and Gas Shales

This post is one of my series of tech talks, describing some of the ways in which fossil fuels are produced. In the current part of the series we are focusing a little more on the procedures that are being used to recover natural gas from formations such as the Barnett, Fayetteville, Marcellus, Haynesville and Woodford shales. In this particular post I am going to concentrate more on the benefits of horizontal drilling through these shale reservoirs, rather than using the more conventional vertical wells that were used historically. This, and the next three posts in the series are likely to be a bit more technically dense than earlier posts, but I am trying to illustrate some of the problems of production, and some of the gains that technology is bringing to help solve some of them. And while the reason for the horizontal wells can be simplified in this graph from Chris McGill, there are a lot of other things that have to be considered in deciding whether or not the horizontal well is going to be worth developing.

Comparative production from a vertical and horizontal natural gas well (Chris McGill).
Full Article

Alaska's Natural Gas Pipeline: A Reality Check

Alaska poorer for outdated oil attitude

COMPASS: Other points of view

By BRAD KEITHLEY Brad Keithley heads the oil and gas law practice at Perkins Coie, LLC, from its Anchorage offices.

(10/07/09 19:31:30)

A recent New York Times article should make Alaskans think. The headline was "The Oil Industry is on a Roll This Year with New Discoveries."

The first sentence captures the thrust: "The oil industry has been on a hot streak this year, thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy." The article reports 200 significant discoveries so far this year in dozens of countries, including Australia, Brazil, Norway, Ghana and Russia.

Alaska receives mention only as a historical footnote.

Why has Alaska become an historical footnote? Perhaps unintentionally, the article provides the answer. As explained by an oil company CEO, "That's the wonderful thing about price signals in a free market -- it puts people in a better position to take more exploration risk."

To put it bluntly, for the past several years, Alaska's exploration signals to the industry have said "go elsewhere."

Recent legislative enactments, such as the Alaska Gasline Inducement Act and the ACES oil tax, come to mind as examples. The root cause runs deeper, however.

Alaska has become smug and arrogant about the industry legislatively, administratively and even on the editorial pages of some newspapers. A good example is the attitude expressed earlier this year by one of the governor's "energy" advisers, Joe Balash.

In a recent international survey conducted by a Canadian institute, Alaska ranked 78th out of 143 states and governments in an assessment of policies designed to encourage oil and gas production. When asked to comment on the results, Balash said, "Alaska is right where it ought to be. 'We ... have tough terms; we set the bar high. ... We have world-class resources. Arkansas and Mississippi don't.'"

Unfortunately, that worldview is outdated. Alaska has 35 trillion cubic feet of reserves on the North Slope. To pick an example, recent discoveries of shale gas from Arkansas' Fayetteville shale formation alone are estimated at 20 Tcf, and additional amounts exist in the Woodford shale formation in eastern Arkansas and the potentially gigantic Haynesville shale formation located, in part, in southern Arkansas.

That story repeats across several states and the globe generally. Against these alternatives, Alaska's "tough terms" have shot Alaskans in the foot.

This situation poses a serious threat. Ninety percent of Alaska's general state government revenues and one-third of Alaska jobs derive from the oil industry. Undeniably, Alaska's economy runs on oil.

But, this linchpin is on a very steep decline. At its peak, the North Slope produced in excess of 2 million barrels per day; now, it produces roughly 700,000 barrels per day and is declining rapidly at the rate of 10 percent per year. The two new high-profile projects currently under development will not offset even one year's reduction. At its peak, BP's Liberty project is estimated to produce 40,000 barrels a day; Port Thomson is estimated to produce 10,000 barrels a day of liquids.

To overcome these declines -- and preserve its economy -- Alaska must renew its commitment to encouraging oil development; Alaska's "price signals" must indicate Alaska is open for business.

One question often asked is "who's responsible" for maintaining the "revenue side" of Alaska's economy. Sometimes, Alaskans assume it is the oil industry's responsibility. The correct answer, however, is that we -- Alaskans -- are. Alaska's political leaders set the "price signals" for development in Alaska; industry only responds to them.

The upcoming Legislature session and 2010 elections are critical. Without maintaining oil revenues, state services will decline, income and sales taxes will become a reality, and current residents will leave the state in large numbers, resulting in the collapse of housing prices and the economic well-being of scores of Alaska's businesses.

The revenue side of Alaska is on the line. Alaska's founding generation set the right price signals to sustain Alaska's first 50 years. The current generation must step up to put Alaska on track for the next 50.

Peak Oil- How will you ride the slide?

ExxonMobil: Green Company of the Year

Oil from algae? Just a sideshow, Exxon's real thrust into green energy is a big bet on natural gas.



Sea of green: In Qatar, Exxon is building the world's largest plants to make liquefied natural gas.

Christopher Helman, 08.05.09, 06:00 PM EDT Forbes Magazine dated August 24, 2009
Oil from algae? Just a sideshow, Exxon's real thrust into green energy is a big bet on natural gas.
Sea of green: In Qatar, Exxon is building the world's largest plants to make liquefied natural gas.
There are two ways for a big oil company to go green. There is the political approach and there is the engineer's approach.

Purely political: the grand announcement in July that ExxonMobil would put $600 million into algae farms that would turn sunlight into automotive fuel. It takes a leap of faith to think tanks of algae can compete with oil wells, even allowing for the advantage that biofuels would have in a world of carbon permits (or carbon taxes). But the algae project buys ExxonMobil some peace with environmentalists. Since taking the helm in 2006, ExxonMobil boss Rex W. Tillerson has worked hard to soften the company's stance on climate change; he is not as gruff and forceful as his predecessor Lee R. Raymond in dismissing global-warming alarmists.
The engineering solution to the matter of carbon in the atmosphere: Drill for natural gas. Per unit of energy delivered, methane releases 40% to 50% less carbon dioxide than coal and a quarter less than petroleum. Coal fuels half of U.S. power generation. Replacing all of it with methane would cut CO2 emissions by 1 billion tons a year. Could windmills come close to that in reducing greenhouse gases? Not easily. To get the same emissions reduction you would have to replace half of power plant coal with 80,000 giant turbines covering 400,000 acres of ground. "Natural gas is the answer to green-energy low-carbon concerns," says Neil Duffin, president of ExxonMobil's project development company.
ExxonMobil's bet on natural gas best comes into focus 7,900 miles away from its Irving, Tex. headquarters, in the Persian Gulf state of Qatar. There ExxonMobil is nearing completion of a $30 billion project to develop the world's biggest natural gas field. Four giant plants, the biggest of their kind, will chill the gas into liquefied natural gas for loading onto thermos-bottle tankers (also the biggest) and shipment to ports around the world.
The Qatar megaproject will by next year boost ExxonMobil's gas production 12% to 9.9 billion cubic feet a day, and vault the company into first place as the world's biggest natural gas producer not controlled by a government. Qatar volumes will help increase total oil and gas output roughly 5% to the energy equivalent of 4.3 million barrels of oil a day. The country will contribute an estimated 7% of ExxonMobil's pretax earnings (which were $55 billion in the last 12 months). All the big oil companies are drifting away from petroleum into natural gas, and for the same two reasons that Exxon is: Gas is cleaner-burning and still plentiful. With Qatar, Exxon has gotten ahead of its competition.
At the moment natural gas looks like a terrible business. The recession has led to a 10% drop this year in industrial demand. In the U.S. the price of gas has plunged to $3.50 per million British thermal units (more or less the same as 1,000 cubic feet), from a peak of $11 a year ago. This contributed to Exxon's 66% plunge in second-quarter earnings. A surge in supply could send prices even lower. New projects in such countries as Yemen, Russia and Indonesia are expected to push up volumes of liquefied natural gas 50% in the next two years. At that point LNG will account for 12% of global gas supply. Meanwhile, drillers are using innovative rock-cracking techniques in the tricky shale deposits of Texas, Pennsylvania and elsewhere; in five years they've found at least 500 trillion cubic feet of recoverable gas, roughly 20 years of U.S. demand.

Page: 1 2 Next >

Twelve Principles to Guide U.S. Energy Policy

Americans are growing increasingly concerned about energy. Their demand for energy is increasing faster than secure supplies. Much of the world's sup­ply of oil is delivered in a restrictive market dominated by unstable or hostile nations, some of which are using energy as a tool to frustrate U.S. national secu­rity and foreign policy objectives.
Meanwhile, many Americans harbor misunder­standings and myths about energy and market forces. They want low energy prices and plentiful supply but resist the steps that energy companies must take to achieve these goals. This confusion leads their repre­sentatives in Congress to enact conflicting policies that harm America's ability to meet its energy needs. This has to change.
Sound national energy policies must enable Amer­ica to obtain energy supplies from a wide range of sources in a way that is best for the economy and at the same time addresses homeland and national secu­rity considerations. An abundant, diverse energy sup­ply is central to America's freedom and prosperity.
The guiding principles for an energy strategy that advances freedom and prosperity should emphasize three themes:
Unleashing free enterprise,
Protecting America's energy interests, and
Advancing free global energy markets.
Unleashing Free EnterpriseU.S. energy policy should recognize that the cre­ativity of free enterprise is best suited to building the infrastructure that is needed for exploration and distribution, producing domestic supplies safely, and developing viable new energy sources.
To unleash American entrepreneurship, Congress and the Administration should let the free market do its job. Central planning frustrates the functioning of markets and undermines security by limiting oppor­tunities to adapt and innovate. Washington must clear away the red tape that obstructs energy pro­duction and innovation while also assuring safety and appropriate environmental protection.
Specifically, Congress and the Administration should:
1. Avoid costly environmental regulatory man­dates that will achieve little environmental gain. Numerous costly regulations have been proposed or implemented to address various environmental goals, from water quality to glo­bal warming. However, past experience—such as with the morass of gasoline regulations that push up the price at the pump and the require­ments that have stopped construction of any new coal-fired power plants for the past 15 years—shows that mandates can be expensive and economically harmful while making only marginal progress toward environmental goals. The full cost of current and proposed regula­tions and mandates, including the economic and security impact, should be evaluated and compared with the likely environmental gain.
2. Rely on the private sector's research and development capabilities. The competitive pri­vate sector is best able to improve fuel efficiency and develop the next generation of fuels. There are many guesses as to what the “new oil” might be, but no one knows for certain—least of all the federal government. We do know, however, that finding and commercializing these new fuels is crucially important to our economic future. The best way to secure abundant energy sources in the future is to encourage entrepreneurs to dis­cover them, not for agencies and congressional committees to try to pick winners with directed research, regulations, mandates, and subsidies. Entrepreneurs need a regulatory, trade, and tax system that creates the best climate for private-sector innovation.3. Urge government agencies to learn from the private sector. The U.S. government is one of the world's largest consumers of energy. In par­ticular, the Department of Defense is one of the world's biggest customers for petroleum prod­ucts, but it does a poor job of thinking about long-term energy costs. It relies heavily on leg­acy equipment that is very energy inefficient, assumes that it will always have plentiful sup­plies of petroleum products to support opera­tions at reasonable prices, and does not adequately consider the life-cycle energy costs associated with developing, procuring, and maintaining new military capabilities. The mil­itary and the rest of government should adopt the best practices of the private sector to enable them to make smart buying decisions.
Protecting America's Energy InterestsIn today's dangerous world, policymakers must take steps to secure America's energy sources and protect the nation's energy infrastructure. However, they also need to keep down the economic cost of achieving security by enabling the energy produc­tion and distribution market to operate as efficiently as possible. Markets function most efficiently when they are transparent and predictable and when busi­nesses can respond to market incentives.
Therefore, while pursuing the goal of security, government should:
4. Make all sources of energy within U.S. bor­ders accessible.The federal government has placed too many restrictions on domestic oil and natural gas production. Failure to make full use of these domestic energy resources exacer­bates the security and cost problems caused by geopolitical events and makes America more vulnerable to supply disruptions and price increases. All U.S. lands and waters should be made accessible for appropriate exploration and production, which could be done using technologies that are far safer and more efficient than those that were available in the past.
5. Remove artificial constraints on the domes­tic energy infrastructure, including unneces­sarily severe environmental regulations.Red tape has restrained the expansion of refineries, construction of new pipelines and electricity transmission lines, and construction of new power plants. Several key domestic energy sources, particularly coal and nuclear power, can fulfill their potential and thus help to achieve energy security only if costly regula­tions and procedural requirements are revised or eliminated. Thus, new legislative initiatives such as streamlining requirements under the Clean Air Act and rethinking requirements for reprocessing nuclear fuel and the storage of nuclear waste should be considered.
6. Ensure that any effort to reduce reliance on foreign oil is grounded in policies that are best for the economy. Reducing oil imports from unstable or unfriendly regimes should be done in a way that minimizes the economic cost to Americans. Policies such as raising taxes on gasoline while mandating or subsidizing expensive or unproven alternative fuels and vehicles lead to large costs with marginal—or even negative—results. The first steps in reduc­ing reliance on foreign oil are to make full use of domestic petroleum reserves and to remove disincentives to investment in oil production from friendly nations. These should be coupled with efforts to encourage diversification away from petroleum, which will be best achieved not by government fiat, but by the private sec­tor–led development of alternatives that can compete in their own right. Domestically, the federal role should be limited to conducting basic research and removing regulatory and tax barriers that impede private-sector innovation. In addition, restrictions on international growth in alternatives, such as the tariffs that limit ethanol imports into the United States, should be eliminated.
7. Manage risks to critical energy infrastruc­ture as a responsibility shared jointly by the government and the private sector. Assessing the risks to critical infrastructure is a task that should be shared jointly by government, which best represents the national interest, and the private sector, which best understands how to deliver goods and services efficiently and effec­tively. Government can best understand threats and take steps to reduce them, while businesses can best assess their own vulnerabilities and address them effectively. Government should establish reasonable due-diligence standards for safety, security, and environmental con­cerns. This will require a high degree of trans­parency and effective information-sharing between government and industry, a mecha­nism to assess compliance and performance, and a non-bureaucratic way to enforce regula­tions. Optimal requirements would be perfor­mance-based (i.e., setting clear standards and allowing the private sector to determine how best to achieve them).
8. Establish effective risk communications for energy issues.Educating Americans on the facts is essential. In particular, Americans should be better educated about energy policy and the changes likely in the pattern of energy supply and prices before disruptions or crises occur. In the event of a crisis, information that is credible, understandable, and actionable should be provided to Americans so that they can make the best-informed decisions.
9. Develop foreign policies that thwart the capacity of coercive regimes to employ energy supplies as an economic weapon. America should be concerned not only about the dependability of its own energy, but also about that of its friends and allies. Regimes that withhold or restrict energy supplies as an instrument of national policy threaten not only regional stability and prosperity, but also the economy and national interests of the United States. The United States should develop strong bilateral measures to deal with efforts by coer­cive regimes to wage economic warfare. These might include joint contingency planning, public–private initiatives, and research and development initiatives.
Advancing Free Global Energy MarketsAmerica cannot ensure freedom solely from within its own borders. It must be willing to engage internationally to create the conditions for free enterprise to prosper.
This means that the government must act to:
10. Sustain access to the global marketplace.Remaining an integral part of the global econ­omyis vital to long-term U.S. national security and the country's continuing economic com­petitiveness. Rather than attempting to defend, protect, or secure any means of domestic or global production, the greatest degree of secu­rity comes from having access to the global marketplace and obtaining goods, resources, and services based on market decisions from friendly suppliers. It is in the vital interest of the United States to uphold the principle of free­dom of the seas and to promote and protect the ways and means of free trade among nations acting in accordance with the rule of law.To accomplish this, the United States should retain the capability to use all of the instruments of national power—including military, diplomatic, law enforcement, intelligence, economic, and informational power—in any theater where U.S. interests could be at risk.
11. Discourage restrictive international regimes.OPEC and non-OPEC countries with restrictive foreign investment laws, state monopolies, and excessive government intervention undermine the U.S. effort to promote free markets. U.S. economic and foreign policy should seek to discourage these practices.
12. Recognize that not all trading partners are equal.Free people have the right to decide with whom to conduct business, but trade in critical but vulnerable goods and services is best conducted with other free peoples. Amer­ica's closest friends and allies should be viewed as the most reliable trading partners for supply­ing oil and other energy supplies. Geostrategic military and economic alliances will change, of course, and the U.S. should be prepared to adapt, but Americans should seek to conduct energy business with countries that respect the rule of law, combat corruption and terrorism, and foster economic opportunity, democracy, and justice.
ConclusionAmericans clearly understand that freedom, opportunity, and their very quality of life suffer when abundant, affordable energy supplies are threatened. They expect Washington to enact poli­cies that protect their interests. Congress and the Administration would do this best by following these 12 principles to unleash the power of free enterprise, protect America's energy interests, and advance freedom in energy markets not just at home, but worldwide.
Stuart M. Butler, Ph.D., is Vice President for Domestic and Economic Policy Studies, and Kim R. Holmes, Ph.D., is Vice President for Foreign and Defense Policy Studies and Director of the Kathryn and Shelby Cullom Davis Institute for International Studies, at The Heritage Foundation.

Exxon & TransCanada: Back to the Future

Exxon & TransCanada: Back to the Future
Welcome to the strange days of pipeline politics that provides a twist to the old saying, "there are no permanent friends only permanent interests."


In April of 2007, I sat in an airport conference room with Department of Revenue Commissioner Tom Irwin and Deputy Commissioner Marty Rutherford so they could explain their AGIA concept.

During the two hour sit down, I asked Commissioner Irwin why he didn't believe Governor Sarah Palin was capable of sitting down and negotiating with the producers over pipeline terms. After all, the governor would be the perfect ambassador coming to negotiate armed with a reservoir of goodwill and trust from fellow Alaskans and the desire to strike a deal.

Irwin's face went blank almost as if I had said something unkind about his mother.

"Do you know how Exxon negotiates," Irwin asked rhetorically. They're the worst, they squeeze and squeeze, they keep asking for more and more he said. When they don't get what they want, they'll get up and walk away from the table. Then, in order to dramatize his point, Irwin abruptly abruptly stood up from his chair and walked away from the conference table thus punctuating the message.

Across the table, Lt. Governor Sean Parnell just shook his head and said yeah they're tough.


It was clear from my two hour meeting that whatever dynamic existed between Irwin and Exxon, his dislike for the Houston based oil giant was personal.

It was also clear that Irwin's AGIA was specifically designed to avoid face to face negotiations with companies like Exxon.


The ongoing war between Exxon and the Palin administration seemed to escalate over the last year with tough exchanges regarding both AGIA and the on going litigation surrounding Exxon's Point Thomson development.

In April of 2008, Commissioner Irwin rejected Exxon's proposal to bring Point Thomson under development saying he couldn't trust Exxon while accusing them of misleading Alaskans about their Point Thomson intentions.


The intense dislike held by the Palin administration for Exxon was put on public display when emails were released as part of a legal filing in the Point Thomson court case. Internal DNR emails revealed state oil & gas executives were slow rolling Exxon's permitting requests while openly mocking the company's commitment to develop Point Thomson. Governor Sarah Palin also criticized Exxon, saying the company shouldn't let the door hit them on their way out.


Meanwhile, Exxon was critical of Palin's gas pipeline plan, AGIA.


During the two years of legislative testimony on AGIA, Exxon repeatedly warned the Palin administration that AGIA would not work. "AGIA does not provide for a commercially viable project," Exxon's Marty Massey testified over and over again during hearings on AGIA.

Massey along with other producers all testified that those hurdles to development included fiscal certainty, unrealistic terms regarding rolled in rates and ownership issues concerning the pipeline itself. The concerns voiced by Exxon and the other producers were the same reasons why none of the producers bid on AGIA to begin with.

Last week the news broke that Exxon had joined TransCanada while declaring that AGIA was the way to the promised pipeline land. Some interpreted the announcement as much to do about nothing while the Palin administration referred to it as an historic event.


At the press conference announcing the new partnership, DNR Commissioner Irwin spoked glowingly about Exxon's professionalism and then appeared is if he might just reach out and give Exxon's Massey a bear hug. Meanwhile, the governor was issuing a press statement lauding Exxon and saying how this proves AGIA is working.

Exxon's Massey then stepped to the microphone to announce the partnership with TransCanada and then proclaimed that AGIA was the best way to get a successful natural gas pipeline project in their mind.

So what happened to the distrust that the Palin administration held for Exxon and the economic concerns that Exxon held for the Palin administration's AGIA?

According to an Anchorage lawmaker, during a briefing on the new partnership an Exxon representative was asked if their new found support for AGIA represented a retraction of their legislative testimony that AGIA is not a commercially viable approach to getting a pipeline built. The response from the company representative was that Exxon stood behind their legislative testimony 100%.

A twist if you'll allow me;

there are no permanent enemies, only permanent interests.



Permanent Interests


For Exxon this is a brilliant business move and one that should be understood in complete context of protecting their permanent interests.

During Exxon's press conference, company executives stressed one of their permanent interest quite clearly; the state must negotiate a fiscal framework with gas shippers so Exxon can accurately evaluate the projects economics. An Exxon spokesman said during the news conference that "predictable and durable" tax terms with the state will have to be dealt with before Exxon becomes a full participant.

During the State's press conference, Palin's gas line team stressed their permanent interest; AGIA was working and the state's pipeline mandates were still in place with the new partnership between Exxon and TransCanada. Even the governor's press release threw a little AGIA bone to the faithful, “Alaskans will also be pleased to know that TransCanada’s obligations to the state as the AGIA licensee are 100 percent intact and unaltered by this alignment with ExxonMobil.”


AGIA was specifically created by the Palin administration to lock producers out of pipeline ownership while avoiding ever having to negotiate fiscal terms.

After all, it was DNR's Irwin and his Deputy Rutherford who famously said that the state was “outclassed” at the negotiating table and that was why the AGIA mandates were so critical.


However Exxon's reiteration that fiscal terms must be agreed upon to move the project forward is a clear sign that their engagement with TransCanada is simply a new approach to getting back to where Frank Murkowski left us four years ago; needing to negotiate a fiscal framework with the companies that will assume the risk of building the largest oil & gas project in the world.


Before last weeks announcement of a joint cooperative agreement between Exxon and TransCanada, the AGIA process was beginning to draw criticism. Concerns had been growing from various corners of the political landscape about the slow pace of work and the overall attractiveness of the project with stagnant natural gas prices and increasing reports of a glut of natural gas in the lower 48.

Exxon comes along at a time when TransCanada needed a friend with deep pockets and the Palin administration needed some positive news to tell about AGIA.


With Exxon joining TransCanada they now have a seat at the table and can basically control the ground game preparing for scheduled open season in July of 2010. The agreement between the two companies as introduced last week was fairly vague but the intent was clear.

Exxon will control the work behind the scenes as a subcontractor managing the project design and costing while TransCanada wears the public face of the AGIA license holder.

In 2000, Exxon was partners with BP and Conoco in a pipeline working group when they spent roughly $120 million studying costs for the natural gas pipeline. Industry insiders have said that TransCanada has been actively pursuing the producers with an offer to buy the 2000 study materials.

Exxon's contribution to TransCanada will more than likely include dusting off these studies, updating the information and then selling it to TransCanada. The irony is that according to AGIA, if this represents a qualified expense, the state could end up paying for 50% of the cost.


According to their agreement, “TransCanada can progress the project independently if it so elects, using all jointly developed assets/information.” This means that when open season fail to attract firm gas commitments next summer, it will be TransCanada who will then be forced to carry on to FERC permitting according to their AGIA requirements.


You might remember two years ago when DNR Commissioner Irwin told a room full of lawmakers that the strategy was to have a failed open season for AGIA, so the administration could use public, government and stockholder pressure to force Exxon, BP and Conoco into playing ball.

But now all of the producers are in the game, all slugging away with their play. This means there is nobody left on the sidewalk for the Palin administration to blame or threaten when TransCanada's open season fails next July.

If TransCanada's open season fails it won't be because Exxon didn't play, it will be because the state's AGIA mandates don't provide for a commercially viable project.

If Denali's open season fails it won't be because BP and ConocoPhillips didn't play, it will be because the state's AGIA mandates don't provide for a commercially viable project.

And while many of you might say, "Whoa Andrew, Denali is outside of AGIA so there will be no mandates," lest you forget that one of AGIA's mandates will prohibit the state from negotiating with a competing project (Denali) at the risk of having to pay TransCanada treble damages.

Even ignoring the fact that all three producers will have to all be in agreement in order to greenlight the $30 plus billion project, if Exxon did step out and commit gas to the AGIA based project on their own, they'd tag on a massive contingency; the state must negotiate viable commercial terms before project commencement.

The same contingency will accompany any gas commitments to the Denali pipeline project from BP and Conoco as well.

The problem for the Palin administration is that adopting what the producers need to commit gas and build the pipeline would mean gutting AGIA, thus rendering the entire exercise meaningless.

Meanwhile, with a new partnership with TransCanada and a key role in managing design and engineering work, Exxon will be able to walk away with a much clearer understanding of just how much the AGIA mandates will impact their bottom line while at the same time gaining a higher comfort level with the project cost estimates since they had a hand in developing them.


Value Added


Since the day TransCanada has been announced as the only AGIA applicant that made it through the process, producers have been asked repeatedly if they envisioned a time when they might join up with the Canadian pipeline building company under AGIA.


“We're interested in any partner who can bring value to the project,” has been the standard industry reply. The problem for TransCanada is they don't bring any value to the project.

TransCanada has world class pipeline building skills but so do the producers. But more importantly, the producers have what TransCanada does not; deep pockets and natural gas supplies. In fact TransCanada offers little more than a shaky claim to decade old Canadian permits.

In an interview on the Dan Fagan Radio Show, Revenue Commissioner Pat Galvin said that Exxon was going to participate via subcontractor status by taking the lead role in designing and engineering the gas treatment plant. This isn't a surprise, because the gas treatment plant is traditionally oil field equipment, not pipeline equipment.

Just one bit of irony.

Back in February, Governor Palin was informed by a reporter at the beginning of a press conference that Denali had just announced awarding a contract to a local engineering firm to design and engineer the gas treatment plant. Big deal Palin said, it's just a contract to design not a contract to build. Four months later, TransCanada announces their subcontractor and the response from Palin is dramatically different.

But in this partnershop, TransCanada offers Exxon some excellent short term value. TransCanada provides Exxon with a lane to drive in during the journey towards AGIA's scheduled open season.

With BP and Conoco driving their Denali project ahead, Exxon needed a seat at the wheel and TransCanada desperately needed a driver.

With Exxon's new partnership based on their assets and management policies, even though on the outside it's being packaged as TransCanada is still in command, the tiger is actually driving the bus.

Not to mention the fact that Exxon is now in a position to get reimbursed for half of the costs of its pipeline design and engineering studies under the terms of AGIA.

And while Exxon scores positive press for siding with the state and progressing the pipeline project, they have left themselves plenty of room to jump off the AGIA train before the crash.

Looking ahead, after the two failed open seasons in 2010, the next move in the quest for a natural gas pipeline will land Alaska and the producers right back at square one where Frank Murkowski left us four years ago; negotiating a fiscal framework with those that will assume the risk of building the largest oil & gas project in the world.

And it will have only taken us four years to come full circle and make it right back to where we began.