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Thumbs up for LNG Big players say TransCanada bid problematic; Valdez line gets popular vote Kristen Nelson Petroleum News
Big players have commercial issues with TransCanada’s Alaska Gasline Inducement Act application while the state’s residents favor a pipeline to Valdez — and a focus on gas for in-state use.
That was the general picture from more than 300 comments the state received on TransCanada’s AGIA application.
Among the comments from commercial players (in addition to those from Anadarko Petroleum, BP, ConocoPhillips and ExxonMobil noted in the March 16 issue), the state heard from BG Group, the Alliance Pipeline, a Harvard economist hired by ExxonMobil to review the TransCanada application and Steve Porter, a consultant working for Legislative Budget and Audit.
Many Alaska residents also commented, from multiple-pages to one-line e-mails wishing Gov. Sarah Palin well on the AGIA process — or telling her AGIA is a failure and it’s time to sit down with the North Slope producers.
A number of Alaskans told the governor they voted for her in the expectation she would support an all-Alaska gas pipeline.
Of 226 people with specific comments, the most frequently expressed were: Those in favor of an all-Alaska line (liquefied natural gas out of Valdez), 97; those in favor of negotiating with the North Slope producers, 50; those specifying that in-state needs for gas and cheaper energy should be a priority, 35; those saying yes to AGIA and the TransCanada application, 26; and those saying no to AGIA and to the TransCanada application, but not specifying an alternative, 18.
If the administration determines that the application meets AGIA requirements for a license, it would be recommended to the Legislature which would have 60 days to approve it.
BG: Single Alaska custody transfer meter David Keane, vice president of policy and corporate affairs for BG North America, which considered and then decided against submitting an AGIA application, said the company was commenting on the TransCanada application “to continue demonstrating our willingness to participate” in the AGIA process. Keane said TransCanada “is a well respected pipeline organization with tremendous credentials to meet the complex and challenging environment to build a pipeline for North Slope natural gas.”
He reiterated BG’s belief “that LNG should be a part of the solution for the future development of Alaska’s natural gas resources.”
BG included questions about a range of issues in its comments, beginning with the mention in TransCanada’s application that there will be one custody transfer gas metering station in Alaska at the outlet of the gas treatment plant. How, BG asked, will TransCanada ensure that gas added along the pipeline route, for instance in the Foothills, will be properly processed and metered?
BG: Stakeholder management issues BG raised a number of stakeholder issues, telling the state: “BG Group considers the issues associated with a project of this scale, set in the environmental, social, political, economic and cultural context of Alaska, to be significant, diverse and, in some cases, controversial.” The company believes a “proactive, ‘best-in-class’ stakeholder engagement” will be required.
While TransCanada’s application sets out a communication program, it is not “the kind of integrated stakeholder issues management plan envisioned by BG Group as necessary to secure broad support amongst Alaskans for the project.” BG said TransCanada’s proposal for communication has been effective “for less high-profile oil and gas developments in the region,” but “believes it will be necessary to engage with stakeholders in a more thorough manner from the outset of this project to develop a robust understanding of the issues involved and put in place policies and management plans to address these issues.”
BG said it believes this because when it considered an application under AGIA, it “conducted face-to-face meetings with various key stakeholders, including state and local government officials, labor union representatives, environmental activists and Alaska Native leaders, to identify the groups that could be counted as Alaska stakeholders and identify the issues related to the proposed gas pipeline that were of most interest to them.”
BG mapped out strategies for engagement at every level, and said it is concerned that TransCanada’s stakeholder identification “is narrow in scope and should be broadened to be more inclusive.” Issues of concern to the stakeholder groups BG spoke with fell broadly into categories of environmental, economic, social and safety and security issues, the company said. It said those issues should be addressed broadly, not in isolation and “should be underpinned by effective stakeholder engagement.”
And that takes resources. BG said adequate resources to address stakeholder issues would include a manager to lead each component, which it identified as: environmental and social impact management; biodiversity and conservation; Alaska hire; directly affected communities; and economic diversification. An overall manager would coordinate. “The investment costs should be at least comparable to existing socio-economic and environmental management initiatives of oil and gas companies in Alaska,” BG said. It offered to share the initial stakeholder issues management planning it did in the fourth quarter of 2007 with TransCanada and the state.
BG: Commercial concerns On the commercial side of TransCanada’s plan BG asked why prospective shippers should have to demonstrate that they have access to gas if they meet credit tests. “If a shipper can pay for capacity, it should be of no concern to TCPL that the shipper is taking utilization risk,” BG said.
There are a number of commercial issues where BG said TransCanada’s proposal is not consistent with Federal Energy Regulatory Commission policy or with typical pipeline experience.
BG said TransCanada’s re-computation of rates following termination of a shipper, when TransCanada made the original creditworthiness decision and the decision to terminate, “shifts credit risk to shippers” and said TransCanada “should bear the risks associated with its own business judgments.” BP also said that since TransCanada “claims the right to seek damages equal to all remaining payments,” the re-computation of rates “is potentially a double recovery” for TransCanada.
On TransCanada’s proposal to reset its rate of return every year, BG called the proposal “inconsistent with FERC ratemaking policy” and said TransCanada “has not explained why, with the benefits of a state subsidy and federal loan guarantees, it also needs a preferential approach to ROE (return on equity).”
On cost estimates, BG noted the 2007 cost estimates are based on a class 5 estimate (zero to 2 percent of definition understood for the project) and asked, with all of the work TransCanada and Foothills have done over the past 25 years, why that class estimate was used.
It also questioned the class 4 estimate for the binding open season. “Is this typical for pipeline projects completed in challenging and complex geology?” BG asked.
Exxon funds economic analysis Exxon Mobil Corp. paid for an economic analysis of the TransCanada AGIA application by Joseph Kalt, Ph.D., senior economist with Compass Lexecon; Kalt is Ford Foundation Professor of International Political Economy at the John F. Kennedy School of Government at Harvard University.
Whether the state takes its royalty natural gas in-kind or in-value, the value to the State of Alaska from gas sales is from “higher netbacks produced sooner and subject to fewer disputes,” which means its interests are aligned with those of other shippers on a gas pipeline, Kalt said.
Minimizing delays is also of value to the state, and delays can result from the inability of stakeholders to reach binding commitments. Delays can be minimized by addressing stakeholders’ interests up front, lowering uncertainty “and avoiding a deal that unduly protects one party by shedding its unwanted risks to others,” he said.
A gas pipeline from the North Slope will be a project costing a significant amount of money, and “has a unique set of characteristics that portend particularly high risks,” Kalt said, including construction in the harsh Arctic environment; size and complexity; a gas treatment plant likely to be the largest of its kind in the world; and dedication of the system to serving one upstream producing area.
“In its application, TransCanada seeks to shield itself from these risks in a number of ways,” Kalt said.
Among these are: the requirement to pay for firm transportation services for at least 25 years; negotiated rates offered only as 25-, 30- or 35-year commitments; and a provision that shippers taking shipping “must support all of TransCanada’s future rate filings and cannot object to the economic factors underlying the pipeline’s rates.”
The rates specified and a guaranteed rate of return that would float at 965 basis points above the 10-year U.S. Treasury bill would guarantee a rate of return of some 14 percent at the time of the application, Kalt said.
In addition, TransCanada would recover “most cost overruns from shippers, retaining the right to unilaterally terminate the project while receiving reimbursement of its investments, requiring rolled-in rate treatment from future expansions, and selling additional services to shippers with no credit back to the FT contract holders for those revenues.” Kalt said TransCanada has clearly thought carefully about the risks in the project and how to insulate itself and “has designed a proposal that would shift risks overwhelmingly onto those with a shipper’s interest in the pipeline — i.e., the North Slope gas producers and the State of Alaska.”
While this is what is expected of a pipeline pursuing its own interests, Kalt said it isn’t in the State of Alaska’s interests to leave the proposal “unquestioned, unchallenged or accepted without countervailing assertion of the State’s interest.”
Cost to shedding risk Kalt said TransCanada’s risk shedding is not costless to the state: “It is a maxim of economics that one cannot get rid of risk; risk can only be shifted among parties.” TransCanada shifts its risks not only to shippers, but also to the state, he said, raising costs for the other parties.
“This reduces effective upstream netback values and/or cuts into the benefits derived from gas development.”
Kalt called TransCanada’s risk shedding extreme, and said it “has the effect of raising concerns about the very viability of the pipeline” to the extent that the risk shedding produces concerns “of diminished netback valuation the possibility for failures in the open season process, and the potential that future relationships will be fraught with disputes and disagreements between TransCanada and other stakeholders (including the State).”
Alliance calls for competition The Alliance Pipeline told the state TransCanada’s proposal would connect a newly built pipeline from Alaska’s North Slope into both new-build and existing Alberta pipeline infrastructure from Boundary Lake “to the so-called Alberta Hub” and provide connections to the existing Foothills Pre-Build, with any new Canadian facilities to be built and owned by Foothills under the Northern Pipeline Act of 1978.
Foothills is TransCanada’s partner in the AGIA application and would be responsible for the Canadian section of the project.
Alliance said TransCanada proposes to integrate the Alaska project with its Alberta system which is connected at Alberta border points to other pipelines serving North American markets. “TransCanada controls the vast majority of take-away capacity at those specific ex-Alberta receipt points through its Canadian Mainline System and its various affiliates,” Alliance said.
According to TransCanada’s proposal, Alaska gas would flow through an expanded Alberta system at the British Columbia-Alberta border. “In so doing, TransCanada implies that it has a monopoly over the flow of Alaska natural gas within Alberta because it would have the gas directed to those specific ex-Alberta pipeline systems that it also owns,” Alliance said.
“In Alliance’s view, the Alaskan gas stream should not be held captive to TransCanada’s pipeline network within Alberta. Rather, the most efficient and cost-effective take-away arrangement would logically include an expanded Alliance system,” the company said.
Alliance: Canadian regulatory context not settled Alliance said regulatory context for the Canadian portion of an Alaska gas pipeline “is far from settled,” with TransCanada claiming “valid and primary rights to build the Canadian portion of the project by virtue of historical certificates held through its Foothills subsidiary under the Northern Pipeline Act of 1978.”
Alliance said “any residual certificate rights that may be held by Foothills under the Northern Pipeline Act are antiquated and limited by the outdated circumstances of the 1970s,” which were based on Foothills’ participation in the Alaska Natural Gas Transportation System proposal.
Alliance said “any modern-day project proposal should more appropriately be addressed under the National Energy Board Act and the Canadian Environmental Assessment Act using a current information base and public consultation process,” and reminded the state that the government of Canada has not yet made a final determination on the appropriate regulatory context for the Canadian portion of the project.
The company also pointed out that TransCanada has said it will go for a new FERC certificate, “distancing itself from any certificate rights that might still exist in the U.S. under the Alaska Natural Gas Transportation Act of 1976. On the other hand, TransCanada is holding up the Northern Pipeline Act of 1978 as a franchise mechanism for the Canadian side of an Alaska pipeline project.”
“TransCanada cannot have it both ways,” Alliance said.
It said downstream arrangements described by TransCanada “are unduly restricted,” and argued that non-affiliated pipelines like Alliance “can bring considerable added value to an Alaska pipeline project,” thus maximizing value to the State of Alaska.
Porter revisits debt-equity ration Steve Porter, a consultant for Legislature Budget and Audit on AGIA, a deputy commissioner of Revenue under the Murkowski administration and before that a longtime ARCO employee, expressed in his comments the same concerns he has shared with legislators over the debt-ratio equity of 60-40 that TransCanada has proposed for expansions and the return on equity TransCanada could earn under its application.
TransCanada said it would finance the project with a debt-equity ratio of 70-30, would refinance to 75-25 during operations, but would finance expansions with a 60-40 debt-equity ratio.
Porter said in his comments that the 60-40 debt-equity ratio “is in violation of AGIA.” AGIA sets a minimum 70 percent debt ratio for the project, he said, and defines the project as “a natural gas pipeline project authorized under a license issued under this chapter,” he said, citing the statute. Porter said the project “certainly includes the initial project and all expansions.”
He argued that when the Legislature passed AGIA, legislators meant the 70-30 ratio for “each part of the project,” including the gas treatment plant, the Alaska portion of the line, the Canadian portion of the line, a potential liquefied natural gas line to Valdez and expansions.
Porter: Return on equity a concern Porter said he is also concerned that TransCanada has proposed a return on equity set annually at 965 basis points above the rate for 10-year U.S. treasury notes. He said TransCanada has referenced a rate based on these factors as a 14 percent return on equity. “This is near the high end of what has been approved in Canada, and I would oppose the state agreeing to it on those grounds alone. But this rate of return has a high likelihood of being much greater,” Porter said.
U.S. 10-year treasury notes have historically ranged from 3 percent to more than 15 percent, producing a return of equity for TransCanada ranging from 13 percent to more than 25 percent, he said. And since 10-year treasury notes are near an all-time low — they have only been this low for 3 percent of the last 20 years — that means that statistically the rates have a 97 percent chance of going up over the next 30 years, he said.
Porter also said that since the 10-year notes move up or down with inflation, “what TransCanada has effectively done is transfer inflation risk to the shippers and the State of Alaska. While that may be a good idea for them, it is not a good decision for the State.”
He said it would be better for the State of Alaska to represent itself before FERC and the National Energy Board when those agencies make the decision on TransCanada’s return on equity. “Whatever the state feels is fair at the time is what it should be able to argue before the FERC and NEB,” Porter said, rather than binding itself in advance “to what I believe to be a very generous rate of return, possibly the largest ever granted in Canada.”
Porter: Spending plan a concern Porter also said he was concerned with the fact that TransCanada plans to spend around $83 million on the project prior to open season, and an additional $542 million to get project sanction.
To minimize risk a good project will include thorough front-end loading of permitting and engineering, he said, noting that under the Stranded Gas Development Act the previous administration estimated the project to cost $20 billion and estimated costs prior to open season to be more than twice what TransCanada estimates. The earlier state estimates were close to $1 billion to get a project to sanction, he said.
Porter said TransCanada’s numbers prior to open season, when the state match is 50 percent, seem low. The numbers after open season, when the state matches 90 percent (up to $500 million for total state contribution) “are suspiciously close to a budget number that matches the amount when the State of Alaska’s” maximum of $500 million runs out. He recommended the state conduct an independent analysis or update the analysis done under the previous administration on the costs prior to project sanction. “If TransCanada’s budget projections are substantially lower than the state’s projections, then the state should discount the likelihood of success of this project,” Porter said.
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