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Providing coverage of Alaska and northern Canada's oil and gas industry
March 2008

Vol. 13, No. 11 Week of March 16, 2008

Rate, cost issues raised in comments from public on AGIA

The administration is getting a lot of detailed questions and not a lot of positive feedback if the first few public comments to surface on the TransCanada AGIA application are any indication.

With more than 300 public comments on TransCanada’s Alaska Gasline Inducement Act application received by the public comment closing date of March 6, only the tip of the iceberg is visible. The Department of Natural Resources and the Department of Revenue said March 7 that comments on TransCanada’s application for an AGIA license to build a natural gas pipeline will be posted on the state’s AGIA Web site at www.gov.state.ak.us/agia/ no later than March 14. As Petroleum News went to press March 13, that had not occurred.

Based on a very limited sample of the comments the commissioners of Revenue and Natural Resources will consider as they evaluate whether TransCanada’s application will sufficiently maximize the benefits to Alaskans and merit issuance of the AGIA license, the state is getting serious discussions from companies with an interest in shipping gas and-or taking an ownership position in the line.

Some of those concerns, such as contingent liabilities to prior ANNGTC partners, have already been voiced.

BP, ConocoPhillips and ExxonMobil all mentioned the potential liability of some TransCanada affiliates related to the Alaska Northwest Natural Gas Transportation Co., the entity which attempted to build a North Slope to market project in the late 1970s and early 1980s.

In addition to the ANNGTC issue, ConocoPhillips also told the state that it should fully understand the ConocoPhillips’ pipeline proposal before it “can adequately assess the likelihood of success of the remaining AGIA applicant or determine whether its proposal sufficiently maximizes benefits to Alaska and merits the issuance of an AGIA license.”

The Resource Development Council noted it objected to AGIA and said it now questions the administration’s completeness review of the TransCanada application. It said the administration “was inconsistent” in allowing a liquefied natural gas straw man to be created for comparison with the TransCanada proposal, yet not allowing ConocoPhillips’ non-AGIA proposal to be reviewed. RDC also said a fiscal framework would be a requirement before a gas pipeline project can be developed.

BP: serious concerns with TransCanada

BP told the state it “has serious concerns with the potential award of an AGIA license to TransCanada,” warning that “would expose the State of Alaska, potential future shippers, and potential partners to significant risks.”

BP also said it believes the TransCanada application violates both AGIA and the state’s request for applications.

In addition to imposing requirements on the state, BP said, “TransCanada has not committed to build a pipeline. In fact, TransCanada’s application provides that its Board of Directors retains sole discretion to determine whether or not it will build a pipeline.”

The Canadian section of the line would be built by Foothills under the Northern Pipeline Act, and BP said NPA could impose costs associated with the Dempster Lateral on Alaska shippers, which, if that occurred, would reduce netback to shippers — including the state — by more than $1 billion.

Among other concerns BP expressed was that the “Class 4” cost estimate TransCanada will have available at open season “is a cost estimate with significant uncertainty, meaning that shippers will be asked to make binding commitments to a service with a low quality cost estimate.”

Anadarko pleased; lots of questions

Anadarko Petroleum, currently exploring for gas on the North Slope, said it is “greatly encouraged” by AGIA and the TransCanada application and believes the application “reflects TransCanada’s capability for the task at hand.”

Anadarko said that, given the length and complexity of the application, it “has not been able to come to a full understanding” of all of the provisions; it also said some complex provisions lack a full explanation in the application and it isn’t possible to do a full analysis of other aspects without substantial briefings by TransCanada. Anadarko said it is reserving the right to make further comments on any issues arising out of the application “when the appropriate filings are made with FERC and the NEB.” The company said it hopes the state would also reserve the right “to raise further issues and concerns as they come to light in due process, or as they are raised by other stakeholders.”

Issues Anadarko identified include: development of precedent agreement and meetings with “interested stakeholders” to develop the agreement — TransCanada does not identify with whom it intends to meet which raises concerns for explorers; the appearance that TransCanada will not accept bids after the close of an open season, when FERC said such bids will be considered; no offering of interruptible transportation service; ownership opportunity only for anchor shippers; and transportation rates which may not be consistent with goals of AGIA to encourage exploration.

Based on the amount of space it devotes to the issue, Anadarko appears to have the most concern with the proposed rates.

ExxonMobil: commercial terms important for both owners, shippers

ExxonMobil commented on commercial terms from both the perspective of pipeline owners — noting that TransCanada has proposed making pipeline ownership available to anchor shippers — and shippers.

The company said it was “encouraged by TransCanada’s recognition that the potential shippers should have aligned interests with the project sponsor and the state. Those aligned interests are best achieved if anchor shippers hold ownership interests commensurate with their prospective shipping commitments on a successful ANS gas pipeline project.” ExxonMobil said that since ownership is being offered to anchor shippers, the state would presumably not be eligible for ownership, which means the state “would forego a substantial source of revenue.”

There are several terms which would negatively impact an owner-shipper, ExxonMobil said, including: contingent liabilities; the proposal to tie gas deliveries exclusively into TransCanada’s existing Alberta pipeline system; and the “proposed precedent agreement termination terms” and AGIA’s rolled-in rate agreements, “neither of which seem equitable from either an owner or shipper perspective.”

From the shipper’s perspective — and shippers would include “gas shipper affiliates of the ANS producers” — since Federal Energy Regulatory Commission and National Energy Board require agreement among transporter, shippers and regulators on whether commercial terms are just and reasonable, and this formal ratemaking process has not yet begun, “TransCanada’s proposed terms are perhaps best viewed as an ‘opening offer’ in that process,” ExxonMobil said.

Terms favor transporter

ExxonMobil said its review of terms indicates TransCanada’s “proposed commercial terms favor the transporter at the expense of the potential shippers.” The company said TransCanada’s proposal shifts “risk to its customers through ‘negotiated rate’ terms” but then proposes a return on equity at the high end of rates previously approved by FERC “and well above ROEs typically approved by the NEB. Also, TransCanada’s proposed capital cost overrun penalty requirement would actually lead to increased TransCanada profits in the event of capital cost overruns.”

Because the proposed terms would reduce the netback to ANS gas producers, and given TransCanada’s estimate that the state takes some one-third of netback profits as royalty payments, the state’s share under the proposed terms would be reduced, ExxonMobil said.

Including impacts from contingent liabilities and the impact of the state not having ownership in the line, ExxonMobil estimated a 25-year impact to state revenue of $37.2 billion from the TransCanada terms — that’s a reduction in revenues, not an increase.

ExxonMobil said it believes the TransCanada application contains conditions which do not comply with AGIA and the request for applications.

It also believes TransCanada’s proposed pre-open season and pre-certification “expenditures are very low versus other recent regulated gas pipeline projects. This may cause prospective shippers to question the reliability of the TransCanada’s cost estimates and proposed tariffs, which could affect the outcome of an open season.”

ExxonMobil said it believes TransCanada’s open season expenditures appear “to be driven more by the AGIA incentives than by technical and regulatory requirements.” The pre-open season spend of $83 million (half of which would be state matching money) “is too small a sum to establish a sound technical and execution basis, generate a reliable cost and schedule estimate, and narrow the uncertainties surrounding the commercial viability of a project of this magnitude,” ExxonMobil said.

Based on its own processes, ExxonMobil said it would expect pre-open season work for a project of this scale to cost several hundred million dollars.

Five to 10 percent of capital costs need to be spent prior to FERC and NEB certification, ExxonMobil said. Based on TransCanada’s estimated cost of $25.1 billion that would be $1.5 billion to $2.5 billion, compared to the $625 million TransCanada is proposing, which ExxonMobil said “is probably inadequate to achieve a certificate, creating uncertainty on the part of potential shippers.”

—Kristen Nelson






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