HOME PAGE SUBSCRIPTIONS, Print Editions, Newsletter PRODUCTS READ THE PETROLEUM NEWS ARCHIVE! ADVERTISING INFORMATION EVENTS PETROLEUM NEWS BAKKEN MINING NEWS

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

Vol. 13, No. 9 Week of March 02, 2008

Withdraws AK right of way

TransCanada tried to reconstitute ANNGTC several years ago, Palmer says

Kristen Nelson

Petroleum News

As part of TransCanada’s separation of the old 1970s Alaska gas pipeline project and its application under AGIA, the company has withdrawn a state right of way application it filed in 2004, Tony Palmer, vice president Alaska business development for TransCanada, told the Senate Judiciary Committee Feb. 25.

Palmer said the company considered — when looking at putting in an application under the Alaska Gasline Inducement Act — whether it should do so under Alaska Northwest Natural Gas Transportation Co., the partnership formed some 30 years ago to construct the Alaska segment of the gas pipeline. That project was being done under legislation passed in 1976 in the United States, the Alaska Natural Gas Transportation Act or ANGTA.

Palmer said the conclusion was that the AGIA application wouldn’t be done under ANNGTC because of “uncertainties from some historical contingent liabilities” arising out of the ANNGTC partnership agreement.

ANNGTC had 11 original partners, “really the bulk of the U.S. pipeline industry at the time,” Palmer said. Beginning in the early 1980s, all of the partners withdrew except two, both TransCanada subsidiaries, United Alaska Fuels and TransCanada Pipelines USA.

“TransCanada did try, very hard, several years ago to reconstitute the (ANNGTC) partnership on very generous terms with the former withdrawn partners. That was unsuccessful,” Palmer said.

That was in the early part of this decade and “as a result of those initiatives we have decided that that is an impossible task,” then and now.

The power of compound interest

Palmer said the $9 billion potential liability to withdrawn partners is not an issue unless ANNGTC builds the pipeline.

The ANNGTC partnership agreement includes a provision giving withdrawn partners “specific contractual rights for repayment under certain circumstances,” he said, and was part of the original partnership agreement. Withdrawn partners forfeited all rights to be treated as partners but because it was anticipated that the project would move ahead quickly there was an opportunity for repayment of a withdrawn partner’s original contribution plus return. That original contribution was about $24 million per partner, and the cost of capital rate approved by the Federal Energy Regulatory Commission was 14 percent.

Palmer said that had the project proceeded in the early 1980s, “the assets that had been developed for the capital expenditures, would have been good and valuable assets, because the assets that were developed were all of the engineering, environmental and legal and other work to get permits, to get a certificate from the FERC, to get rights of way — all of that good and valuable work was available and would have been used to develop a project.”

The project was not build, but the “contractual right to payment was specific and in the original partnership agreement.”

However, he said, it has conditions: ANNGTC must build the pipeline and the payment must not cause undue hardship to the partnership.

The $9 billion is the $24 million for each withdrawn partner compounded at 14 percent for some 30 years.

ANNGTC not building the project

While ANNGTC is not dormant, the last partnership meeting was several years ago, Palmer said, and ANNGTC does not propose to build the project.

The remaining TransCanada partners in ANNGTC “are not the AGIA applicants,” he said.

And those remaining ANNGTC partners “have no obligation to continue pursuing a project that was formulated some 30 years ago,” he said. The ANNGTC agreement does not contain a non-compete clause: “… It was never contemplated that there couldn’t be another alternative. And no TransCanada entity is prohibited from pursuing a different project,” Palmer said.

TransCanada is using the enabling legislation passed in the United States in 2004, the Alaska Natural Gas Pipeline Act, not the 1976 legislation.

TransCanada Alaska Company LLC, which is pursuing the Alaska portion of the project, and Foothills Pipelines in Canada which is pursuing the Canadian portion, “are not now, nor have they ever been, partners in ANNGTC: They are completely separate legal entities.”

And, he said, the AGIA application “does not contemplate the use of any assets owned by ANNGTC.”

Those assets include the original FERC certificate, a federal right of way, some coastal zone management permits and “a great deal of” engineering and geotechnical work.

The Canadian rights of way do not belong to ANNGTC, Palmer said.

Foothills Pipelines Ltd. received a certificate under Canada’s Northern Pipeline Act for the Canadian section of the pipeline. “That’s an entirely separate legal entity from ANNGTC,” he said. TransCanada today owns 100 percent of Foothills and there are no withdrawn partner issues in Canada.

No ANNGTC assets used for AGIA application

Palmer said TransCanada is not using any ANNGTC assets in its AGIA application.

“We are going for a complete new start in Alaska. Just like any other party would have had to, this entity is starting from scratch,” he said.

There was a filing for a state right of way in Alaska under ANNGTC in 2004, Palmer said: “We have withdrawn that application; that application was withdrawn last week (week of Feb. 17), so we no longer have that.”

ANNGTC holds an existing federal right of way and has made payments on it for 20-some years. Palmer said it expires in 2010. “We have not made a decision at this point what to do, but it expires in its terms by 2010. We have no rights, the TransCanada AGIA applicants, have no rights to that federal right of way, nor was it used in our application.”

TransCanada Alaska Company LLC, the AGIA applicant, intends to submit new applications for the state and federal rights of way in 2011, according to the schedule included in the AGIA application, he said.

In summary, Palmer said, “our AGIA application has nothing to do with ANNGTC, its long history or its contingent obligations to withdrawn partners. No claim has ever been made or threatened by withdrawn partners. As an additional safeguard, TransCanada has indicated clearly and unequivocally that we commit to never including any potential ANNGTC liability in project tolls,” he said.

Concurrence on tariff issue

William Mogel, an attorney with Saul Ewing retained by the Legislative Budget and Audit Committee, reprised for the committee a memo he wrote in January on whether FERC would permit inclusion of obligations to withdrawn partners in a tariff.

Mogel said he concluded “that FERC would not permit it, primarily for two reasons.”

First because the TransCanada AGIA applicant for the Alaska portion of the project is a different legal entity from ANNGTC and second because the original amount of the costs expended by ANNGTC, some $250 million plus interest, “were not costs that would be used and useful in a new pipeline company.”

He said the requirement that an asset be “used and useful” if a utility is to recover a return on that asset has “long been a hallmark of public utility regulation.”

It’s not the same project

While the AGIA project and the ANNGTC project both run from Prudhoe Bay to the Canadian border, Palmer said the original project was expected to have a smaller volume, some 2.3 billion cubic feet a day, compared to 4.5 bcf a day contemplated in the AGIA application.

Palmer said there were a number of variables discussed for pipeline diameter for the earlier project, from smaller to larger, but the pressure would clearly be higher in a line today than what was contemplated 30 years ago.

“The actual routing we have not completely defined,” he said, because some of that work remains to be done, “… but I will tell you it is expected to be a very similar route.”





Gas business very different 3 decades ago

The natural gas business was very different in the 1970s at the time of the original proposal to bring North Slope gas to market in the Lower 48.

The original partners in Alaska Northwest Natural Gas Transportation Co., the partnership formed to build the Alaska segment of the project, were “merchant pipelines,” said Tony Palmer, vice president Alaska business development for TransCanada. Today, pipelines move gas for third parties, Palmer told the Senate Judiciary Committee Feb. 25.

When ANNGTC was formed, however, pipelines “bought gas and sold it onward to local distribution companies” and the original partners intended to become shippers, he said.

Today pipelines hold open seasons so that shippers can commit gas to a proposed pipeline, but “the original partners were merchant pipes seeking gas in an era of shortage. So they were hoping that they would get Alaskan gas to serve their customers in the Lower 48.”

1970s a time of gas shortage

The original project was formulated in the mid-1970s and got most of its approvals in the mid- to late-1970s. The partners expected the project to be completed by 1983, Palmer said.

But the North American gas situation was changing in the late 1970s and 1980s, he said. Both the supply-demand balance and the price of gas changed, as the United States and Canada “went from a period of deficits, where there was a shortage of natural gas, to a period of surplus.” The gas market was changing while ANNGTC was working on the project, doing engineering and environmental and legal work and acquiring permits, he said.

Palmer said “you came out of a period in the mid-1970s where a number of factories were closed … because there was insufficient natural gas, to a period where there was appearing to be a surplus of natural gas.”

The project kept being deferred, despite the best efforts of its sponsor and of governments in both Canada and the U.S.

By “1981 it was clear that the project was not going to proceed on schedule,” he said.

In fact, it became clear that Canadian gas would be delivered to the U.S. before Alaska gas, and the pre-build, lines into the U.S. from Canada, were constructed in 1981 and 1982 under the existing legislation in Canada for the project.

As more and more gas was found — in the United States as well as in Canada — “it became clear that prices were not sufficient and this gas was not needed in the short term,” he said.

Parties started to withdraw from the ANNGTC partnership in 1981 and 1982, Palmer said, and continued to withdraw through 1994.

—Kristen Nelson


Petroleum News - Phone: 1-907 522-9469 - Fax: 1-907 522-9583
[email protected] --- http://www.petroleumnews.com ---
S U B S C R I B E

Copyright Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA)©2013 All rights reserved. The content of this article and web site may not be copied, replaced, distributed, published, displayed or transferred in any form or by any means except with the prior written permission of Petroleum Newspapers of Alaska, LLC (Petroleum News)(PNA). Copyright infringement is a violation of federal law subject to criminal and civil penalties.