State sees partnership on natural gas pipeline

Believes project costs remain relatively stable despite falling commodity prices, cites need to increase federal loan guarantee

Eric Lidji

Petroleum News

The State of Alaska believes the various players involved in trying to build a natural gas pipeline will come together on the project, according to a top state oil and gas official.

“We believe it’s only a matter of time until all the parties come together to accomplish our mutual goal,” Deputy Department of Natural Resources Commissioner Marty Rutherford said at the “Energy in Alaska” conference hosted by Law Seminars International in Anchorage Dec. 8 and 9.

Rutherford said the belief comes against a “backdrop” of volatile commodity prices and their impact on the expected profits on the project. She noted that while the price of oil plummeted over the latter half of the year, the price of natural gas did not fall as fast.

The state believes a natural gas pipeline would be “still very profitable” with gas prices between $5 and $6 per million British thermal units of energy. The current Henry Hub price is around $5.75 per million Btu, down from prices around $9 per million Btu at the end of July, a 36 percent decline that came as oil prices fell around 68 percent.

Those relatively more stable gas prices, combined with declining steel and labor costs, means, “there are literally billions and billions of dollars to be made by all the parties” involved with the pipeline, Rutherford said, including the producers and the state.

Collaboration expected

The idea of the projects merging isn’t new, but also isn’t a given.

“The prevailing wisdom is that the two proponents for the mainline will, at some point in time, get together, since only one mainline can actually be built,” Drue Pearce, federal coordinator for Alaska natural gas transportation projects, said during the conference.

Because BP, ConocoPhillips and ExxonMobil hold most of the known reserves of North Slope gas needed to justify the pipeline, they would be the primary customers on any pipeline.

The state recently finalized its support for TransCanada, officially giving the company a state license that comes with a $500 million matching grant and other incentives. Denali just wrapped up a summer fieldwork program along its proposed pipeline route.

Asked how the incoming administration of President-elect Barack Obama could advance the gas pipeline project, Rutherford mentioned “increasing the federal loan guarantee” and making sure the regulations created for accessing the guarantees are “reasonable.”

The remark echoed recent comments from TransCanada CEO Hal Kvisle. In an interview with Reuters published on Dec. 9, Kvisle said, “The ... question for us is can we get the U.S. government to ideally increase (the guarantees) in step with inflation, recognizing that inflation has taken a big bite out of them. We need to encourage the U.S. government to perhaps increase the size of the loan guarantees.”

As part of the Alaska Natural Gas Pipeline Act of 2004, Congress authorized guarantees to cover 80 percent of the capital costs of the project up to $18 billion, but included a clause to adjust the guarantee for inflation by tying it to the Consumer Price Index.

According to the Reuters article, Kvisle suggested expanding use of the guarantees to include paying off debt if TransCanada fails on the project, or helping to cover any fiscal gaps if the fees paid by shippers on the pipeline don’t cover the full construction cost.

“Or the loan guarantee, in the extreme, could be used to guarantee the tolls, to guarantee to the producers that the toll won’t be above a certain level,” Kvisle said.

In the article, Kvisle called the pipeline “fundamentally economic” and said the company only needs the guarantee “to deal with some of the uncertainty around” the project.

Prioritizing the construction of an Alaska natural gas pipeline is specifically mentioned as part of the energy and environmental policy of the incoming Obama administration.