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Providing coverage of Alaska and northern Canada's oil and gas industry
March 2009

Vol. 14, No. 13 Week of March 29, 2009

Administration provides update on AGIA

Galvin says Alaska gas viewed as game changer for shale gas, not vice versa; TransCanada holding off FERC because of cost concerns

Kristen Nelson

Petroleum News

Have economic and market conditions changed since the Alaska Gasline Inducement Act was passed in 2007 and the Legislature approved granting an AGIA license to TransCanada in 2008?

That was the concern Reps. Jay Ramras, R-Fairbanks, and Craig Johnson, R-Anchorage, had in introducing House Concurrent Resolution 12.

Johnson told the House Special Committee on Energy March 19 that the resolution does not ask for a rewrite of AGIA, but asks that the administration show the Legislature that conditions haven’t changed.

Ramras said any Fortune 500 company would require regular benchmarks and after attending the Energy Council at the beginning of March he came away “frightened for the prospects for Alaska” and wanted to “shake the trees” and get a lot of information disseminated regularly.

Commissioner of Revenue Pat Galvin said he believes the TransCanada AGIA project remains economic; Commissioner of Natural Resources Tom Irwin concurred. The commissioners shared the responsibility for the decision recommending TransCanada for the AGIA license.

Galvin said the administration is evaluating information as TransCanada proceeds with its AGIA license.

“You don’t need to present a resolution,” he said. “Just ask us to present information.”

There is information available from the AGIA analysis, he said, and some questions can be answered by “plumbing the depths of work” already done in that $13 million analysis.

If more information is required, Galvin said the administration needs clarity so it can write a cost estimate if significant work is required.

The cost of the analysis suggested by the resolution would be substantial, he said, and would divert resources. Some analysis has been budgeted and is under way and the administration would be happy to share the results of that work, Galvin said.

Should decision be revisited?

Addressing issues raised in the resolution, Galvin said one factor would receive more weight if the evaluation were done now — the likelihood of carbon regulation has increased since last spring, he said, making the relative economics of natural gas much more favorable than alternatives, particularly coal.

That, he said would require project economics from last spring to be “significantly adjusted” and price expectations “adjusted upward.”

The global downturn would impact project costs, causing costs such as steel to go down as opposed to last spring when those costs were going up.

Natural gas prices have dropped, but this project doesn’t look at current prices or prices six months from now, but at where the price is expected to be 10 years from now, Galvin said.

The global market downturn and reduced energy demand is expected to last from six to 24 months and while financial markets are tight Galvin said that isn’t expected to extend out five years, and five years out is when the gas pipeline project would be looking for financing.

Increased shale gas and liquefied natural gas supplies were considered in the AGIA analysis, he said.

The overall impact of changes since AGIA was passed is as likely to be positive as negative, Galvin said.

Long term, Alaska gas will most likely come in at a lower cost than shale gas or LNG, he said.

Shale gas is not a threat to Alaska gas, it’s the reverse, Galvin said, relating a conversation with a shale gas investor who told him their analysis was that Alaska gas would be the big game changer for shale gas, and the question was would they be able to survive Alaska gas coming into the market, because Alaska gas was expected to set the market price.

Low tariff and an open-access pipeline are still critical for the state’s long-term future, Galvin said, reminding committee members that one of the key purposes of AGIA was to provide leverage for the state in on-going discussions with producers.

Galvin said reports the state is receiving from TransCanada indicates the project is on schedule. He said the state has no current information leading it to believe the project is in any kind of trouble.

Palmer: cost and schedule

Tony Palmer, vice president Alaska development for TransCanada and president of TransCanada Alaska, told the committee that while TransCanada has no control over natural gas prices and what competitors in the marketplace will do, the company does have some measure of control over “cost and schedule. That’s what we are focused on and that’s what we will continue to focus on,” he said.

While natural gas prices have fallen, Palmer noted that so have costs.

“There is a strong correlation in the oil and gas business between oil and gas prices and the cost of projects,” he said, and both have fallen.

He addressed concerns about access to capital markets and told legislators that TransCanada has raised C$5.5 billion in the past four and a half months in the capital markets.

And that, he noted, was without an $18 billion loan guarantee from the U.S. government.

Project financing won’t begin until after a decision is made to proceed, about five years out, and what will matter for the project is not the state of the capital markets today, but the state of the capital markets in five years, Palmer said.

While natural gas prices are low today, forecasts for 2018 put them “north of $8 per million Btu,” he said.

TransCanada is “aggressively advancing the project,” and just awarded a contract to URS for the gas treatment plant pre-FEED (front-end engineering design) work, Palmer said.

Legislative concerns

Legislators had concerns about the number of employees TransCanada has in Alaska, why the company hasn’t pre-filed with FERC, whether TransCanada can get gas committed to the project and whether the company has the experience to build a “$40 billion” project.

Ramras said he was told while legislators were in Washington, D.C., for the Energy Council in early March that TransCanada had an Alaska office with one person in it.

Palmer said the company has two Alaska employees, plus contractors, and said there were eight people in the office that day.

“This is not a make-work project for TransCanada,” he said. “We don’t think it’s a make-work project for Alaska. We think you’re focused on a ... successful project and that will come from low costs. That’s our business; that’s the way we think we succeed in the pipeline business.

“But we don’t think the measure is how many people we have in our office and how big that office is.”

The pre-file issue

The BP-ConocoPhillips joint venture, Denali—The Alaska Gas Pipeline, has pre-filed with the Federal Energy Regulatory Commission. Committee co-Chair Charisse Millett, R-Anchorage, said FERC told legislators who were in Washington, D.C., for the Energy Council that Denali has pre-filed, that “FERC is ramping up” on that project and that Denali has spent a lot of money to get field studies done.

She asked where TransCanada was in comparison with Denali.

Palmer said TransCanada is on schedule to complete an open season by July of 2010, earlier than Denali. He said his understanding of the Denali project is that it plans to begin an open season by the end of 2010.

On the pre-file issue, Palmer said the norm in the industry is to pre-file after an open season, not in advance.

He said FERC has made it clear it wants TransCanada to pre-file, and said the company’s caution is based on its focus on cost and schedule. When you pre-file, he said, FERC retains a contractor and the contractor begins work.

If you start the process earlier, he said, “the total expenditure will be more because that’s the nature of regulation.”

“ ... The clock runs longer and the total costs are higher,” Palmer said, which is why TransCanada has “been leaning toward a more traditional model, which was post open season.”

He said TransCanada is in discussions with FERC and if it can meet FERC’s requirements and its own, “we may pre-file earlier than we have it in our schedule.”

Palmer said the fact that TransCanada has not prefiled has not affected its schedule. “It has not affected our ability to advance the project or to hold that open season on the schedule we have indicated.”

He said he hopes that “over the course of the next quarter” TransCanada can be responsive to FERC’s desire to have the company pre-file.

The $40 billion issue

Millett asked if TransCanada had ever done a $40 billion project and Palmer said the company has built pipelines that are longer and more technically challenging than the Alaska gas pipeline.

“We currently have a $12 billion oil pipeline under construction, about half the cost of this project — because our estimate is $26 billion.”

Co-chair Bryce Edgmon, D-Dillingham, asked about skepticism he hears on the issue of TransCanada being able to get gas committed to a line.

Palmer said TransCanada has built some 36,000 miles of pipeline without owning any of the gas, and is building a $12 billion oil pipeline which will carry “more than a million barrels of oil from some of these same (North Slope) producers. We attracted them as our customers on the same basis we propose to do here,” he said.

Palmer said he has always seen skepticism from some parties until open seasons are concluded.

Edgmon also mentioned the $40 billion figure and Palmer reiterated that TransCanada’s estimate is $26 billion.

“And we do think it’s critical to keep that cost estimate as low as possible. That is the way you make this project go, by keeping the costs down,” he said. That $26 billion translates into a tariff rate of $2.76, but “if you run it up to $40 billion you get a much higher toll.”

Resolution held

Palmer said he disagrees with the premise of the resolution, “that there’s somehow been a change in the gas markets to the detriment of this project; that there’s somehow been a change in the financial markets to the detriment of this project: I do not agree with that premise. TransCanada does not agree with that premise.

“In fact, what I’ve shown you today would indicate that the economics are actually superior to what we provided in our AGIA application.”

The resolution was not moved from committee. Ramras asked if the commissioners would recommend changes in the resolution that would produce quarterly reports on progress; Galvin said he would work with the resolution sponsors on changes.






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