Friday, August 19, 2011

Legislators queasy over big bucks committed to gaslines

By Tim Bradner
Alaska Journal of Commerce

Alaska legislators are getting queasy over three quarters of a billion dollars the state will have committed to help fund North Slope natural gas pipeline projects. Lawmakers voted to approve the money, but there are no guarantees yet the state will get anything.

"We're being asked to approve substantial appropriations for both a 48-inch pipeline proposed by TransCanada and ExxonMobil and a separate 24-inch pipeline the state itself is pursuing, but we have very little information as to whether either will come to anything," said Sen. Bill Wielechowski, D-Anchorage, during two days of oversight hearings on the two pipeline initiatives held Aug. 15 and Aug. 16.

Legislators are also frustrated with plans for the 24-inch pipeline to charge consumers in Interior Alaska for the cost of a plant to take off and re-inject natural gas liquids at the gas takeoff point west of Fairbanks while the benefits of the gas liquids would be in Southcentral Alaska. The charge helps push the price for gas delivered to Fairbanks through the pipeline above the price for gas to the Anchorage area.

There are also concerns that recent gas discoveries and renewed exploration for gas in Cook Inlet, a plan by utilities to install facilities to import liquefied natural gas, or LNG, and a recently-announced plan by Golden Valley Electric Association and Flint Hills Resources to truck LNG from the North Slope to Fairbanks, could result in "stranded" investments by utilities in those facilities if a gas pipeline is built.

The money is a big worry, though. The state will fund $500 million of TransCanada's and ExxonMobil's expenses for engineering and permits for a planned $40 billion 1,700-mile, 48-inch natural gas pipeline from the North Slope to Alberta, and about $400 million for work on an alternative 737-mile, 24-inch pipeline from the North Slope to Southcentral Alaska that is seen as an alternative for the state if the large pipeline is seriously delayed. The 24-inch pipeline is estimated to cost $7.6 billion.

TransCanada vice president Tony Palmer told the legislators Aug. 16 his company is still negotiating with potential shippers who submitted bids for capacity in the 48-inch pipeline during a 2010 open season, and has recently offered improvements in terms in an attempt to nail down commitments.

Palmer said he could not provide details to legislators on the negotiations or the identities of potential shippers. Under a contract with the state, which provides for the cost-reimbursement, Trans-Canada and ExxonMobil are committed working toward a Federal Energy Regulatory Commission certificate despite the failure so far to secure shipping contracts.

However, some information has been provided to the state administration on the status of negotiations, Palmer said. TransCanada's contract with the state under the Alaska Gasline Inducement Act, or AGIA, provides for certain information to be shared under conditions of confidentiality, he said.

Wielechowski asked if legislators could be given briefings if they signed confidentiality agreements. Palmer said he would not permit that because the AGIA contract makes no provision for legislators to have the information and because of a previous bad experience TransCanada has had with legislators signing confidentiality agreements.

When TransCanada was negotiating several years ago with the state for a gas pipeline license under the Stranded Gas Act legislators signed agreements to get access to TransCanada's proposal to the state, which was confidential. Later, during public hearings, one lawmaker waved the package around, although it was in a large brown envelope, Palmer said. The legislator did not release the information but the experience left a sour taste, Palmer said.

On the state-sponsored 24-inch pipeline Dan Fauske, CEO of the state-owned Alaska Natural Gas Development Corp., the state corporation formed to plan the project, said that an open season planned in 2013 would answer questions on whether gas shippers believe the project is viable. "We have been pleasantly surprised by the interest in the project so far from potential owners and industrial customers for gas," Fauske said.

Fauske said AGDC is proceeding with preparations for an open season to be held in early 2013 and hopes to have commitments from shippers by the end of that year. The project is limited to 500 million cubic feet a day, however, as a condition of the state's agreement with TransCanada on the large pipeline, said Fauske.

The state would fund about $400 million in engineering and permitting for the project through the 2013 open season and then seek proposals from firms to build and own the project, or alternatively to build and operate the pipeline with the state retaining ownership, Fauske said.

Joe Dubler, vice president and chief financial officer of the AGDC, said letters of interest have been received from four companies interested in building and owning. Two of the firms said they can do the project without substantial state financial guarantees, he said. The identities of the interested firms could not be revealed, Dubler said.

Fauske also said there is also interest from potential industrial customers, which are necessary because utilities in Alaska can only purchase about 250 million cubic feet of gas daily, about half the planned throughput of the 24-inch pipeline. There were indications of interest for up to 500 million cubic feet, or mcf, per day for industrial use, although this would exceed the throughput allowed under the TransCanada agreement, Fauske said.

The AGDC has spent about $30 million to date on preliminary engineering and another $240 million will be spent this year and next in more detailed engineering and work on environmental permits to prepare for the 2013 open season, Fauske said. An additional $130 million is needed to do detailed engineering if the open season is successful, but some of this could be paid by a firm interested in owning the project, he said.

If a private firm takes the project over after the open season the expected tariff for moving gas to Southcentral Alaska is estimated at $9.63 per thousand cubic feet, or mcf, but if the state owns and finances the project itself the tariff could drop $1.00 to $1.20 per mcf because the state would not earn a return on an investor's equity and would obtain better financing terms than a private company because of Alaska's strong financial position, Dubler said.

Legislators said the best option for getting gas to Southcentral Alaska is if the 48-inch pipeline is built and a 24-inch spur line is built across 350 miles from Interior to Southcentral Alaska.

"We expect a Draft Environmental Impact Statement to be issued in late August or early September, and for the final EIS to be published early next spring," Fauske told the legislators.

There are concerns from legislators, however, about the economic viability of the 24-inch pipeline because of the 500 million mcf limit in the TransCanada agreement, particularly as to whether there would be enough gas or gas liquids shipped to entice industrial customers to the project. On idustrial customers, Fauske said AGDC has examined liquefied natural gas export sales as the best potential option although sales of natural gas liquids and a gas-to-liquids option were also studied.

Sen. Joe Paskan, D-Fairbanks, who chaired the hearings, asked whether a private company could take the project over and expand the project to ship more than 500 million cubic feet per day. Dave Haugen, the project manager, said this is possible and that there could be proposals for larger throughputs and larger diameters put forth in the 2013 open season.

The planning done so far indicates that as much as 1 billion cubic feet per day could be moved through the 24-inch pipeline if additional compression were added. However, customers could propose larger diameters in the open season, too.

"We could consider a 30-inch or 36-inch pipeline. Anything is negotiable," Haugen said. "The engineering information we have developed is the property of the state," and could be transferred to a private developer.

However, moving more than 500 million cubic feet a day could still violate the state's contract with TransCanada, attorneys for the ADGC said. Palmer, of Trans-Canada, said the 500 million limit was agreed on as an allowable offtake for use in Alaska so that the pipeline could could be assured there would be enough gas from the North Slope, about 4 billion mcf per day, to make its larger project viable.

On the charge to Fairbanks consumers for the natural gas liquids plant, Fauske said the AGDC would have preferred to roll this cost into the overall tariff for moving gas, but that Regulatory Commission of Alaska rules prohibit that. The gas liquids plant is required because of the technical requirements of a planned connection with a 12-inch spur pipeline from the 24-inch pipeline west of Fairbanks to the Interior city.

Rules of the RCA require that consumers who "benefit" from a facility, in this case the pipeline connection, also pay the full cost. Rep. Paul Seaton, R-Homer, said this still seemed unfair.

"Fairbanks is being charged for costs related to natural gas liquids that results in a $1 per mcf high cost for the community," Seaton said.

Republished with the permission of the Alaska Journal of Commerce Tim Bradner can be reached at