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Vol. 10, No. 1 Week of January 02, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Showdown looms

TransCanada, Enbridge in battle of giants over control of Alaska pipeline through Canada; outcome hinges on future of 1978 legislation and treaties

Gary Park

Petroleum News Calgary Correspondent

The Canadian government has retreated to a neutral corner as the battle lines are being drawn over who should control the flow of Alaska natural gas through Canada to the Lower 48 and whether 26-year-old treaties are still valid.

The stakes were succinctly outlined by John Carruthers, vice president of gas development at Enbridge, who told the Financial Post that the pressure is on Canada to have a “clear and predictable” regulatory process that will allow a US$20 billion investment to be made in the development of North Slope gas.

For Enbridge, the outcome will determine its chances of grabbing a slice of the project.

For TransCanada, Enbridge’s near-neighbor in downtown Calgary, the issue is clear-cut. It has sole rights to move Alaska gas across Canadian territory and no-one else need apply.

Will Canada back Northern Pipeline Act?

What is no longer “clear and predictable” is whether the Canadian government will give unqualified backing to the 1978 Northern Pipeline Act, which was based on 1977 Canada-U.S. treaties that underpin TransCanada’s case.

If the Northern Pipeline Act is repealed it opens the way for the North Slope gas owners, ExxonMobil, ConocoPhillips and BP, to join TransCanada and Enbridge in bidding for fresh rights to the Canadian leg, which stretches across 1,000 miles of the Yukon Territory, northeastern British Columbia and west-central Alberta before feeding into the so-called “pre-build” section, which consists of two legs covering a combined 647 miles — one connecting with the Pacific Northwest and California and the other to the U.S. Midwest.

They were built in the early 1980s by Foothills Pipe Lines (now owned by TransCanada) and now carry about 3.3 billion cubic feet per day or 35 percent of all Western Canadian gas exports to the United States.

Their original purpose to form part of the Alaska transportation network was stalled by the energy price collapse of 1982.

Now that completion of the missing northern link from the North Slope is back on the front burner, the Alaska gas owners, TransCanada, Enbridge and governments on both sides of the Canada-U.S. border, along with their legal advisors, are sharpening their pencils.

Argument clear-cut for TransCanada

For TransCanada, since it took total control of Foothills in 2003 for C$257 million in cash and assumed debt, the argument is clear-cut.

Hal Kvisle, chief executive officer of TransCanada, has told recent conferences that his company is “not very open-minded about any discussion that would take away the rights that we have earned over 25 years.” He said that has included spending hundreds of millions of dollars laying the foundations for an Alaska pipeline, including the pre-build legs.

Kvisle was emphatic in telling analysts in October that TransCanada is the only company that holds certificates to build the pipeline in Alaska and Canada through the international treaties and the Northern Pipeline Act.

“We are not prepared to convey our rights in Canada to anyone else,” he declared, but indicated greater flexibility on the Alaska side, saying the producers “can build on our right of way and we would be pleased to convey our rights to them.”

Chrétien supported TransCanada in 2003

Bolstering Kvisle’s stance is a letter from Canada’s former Prime Minister Jean Chrétien in October 2003.

Chrétien said at the time that he reinforced TransCanada’s assertions in a meeting with then U.S. Energy Secretary Spencer Abraham.

He told Abraham that the Northern Pipeline Act is “in place and that given the benefits that would accrue to Canada, we would prefer to work within that framework.

“The government of Canada will meet its commitments to facilitate planning and construction (of a pipeline) as provided for by the Northern Pipeline Act.”

In its own legal and regulatory summary, Foothills described the 1977 Canada-U.S. agreement as a “binding international agreement” that was implemented by both countries to remain in “full force and effect for a term of at least 35 years.”

It also said Canada had “repeatedly sought and received assurances from both the United States and its regulatory authorities” that they remained committed to completing the full Alaska pipeline.

Foothills said neither the Northern Pipeline Act nor Canada’s National Energy Board Act contained any provisions that would permit the National Energy Board or the cabinet to require the transfer of Foothills certificates to a third party.

Chrétien’s successor Paul Martin has yet to declare his preference and Natural Resources Minister John Efford has been equally quiet.

But, in the words of one industry observer in Canada, a legal case is building that the Northern Pipeline Act framework for the pipeline “will no longer stand the test of time,” because of advances in technology and Canada’s more stringent environmental review procedures.

Enbridge supports new application

BP Alaska spokesman David MacDowell told the Financial Post that the producers have designed and engineered a project that is quite different from what was originally approved.

The implication that such a greenfield pipeline would supplant the Northern Pipeline Act would be welcomed by Enbridge, which insists the act does not provide exclusive rights to build a pipeline across Canada from Alaska.

Carruthers, appearing before the U.S. House of Representatives subcommittee on energy and air quality in May, said a pipeline would now be subject to “modern and efficient environmental assessment and regulatory processes” by the National Energy Board and the Canadian Environmental Assessment Agency, as well as consultation with First Nations and other aboriginal communities and stakeholders.

“Our view is a new application … would be the most efficient regulatory process with the least risk,” he said.

Enbridge already has an application before the Alaska Department of Revenue to take a lead role in establishing a consortium to plan, permit, build and operate the Alaska pipeline.

Carruthers told the U.S. legislators that a consortium would increase competition among pipeline suppliers and reduce the cost of the pipe.

He also said the Enbridge proposal would reduce transportation tolls, lessen project risk and shorten the completion date by up to a year.

Enbridge, although a relative newcomer to the gas transportation field, already owns or has a stake in 12,000 miles of gas gathering and transmission lines.

It is also the only company with experience north of the 60th parallel in Canada as builder and operator of a 20-year-old liquids pipeline from Norman Wells in the Northwest Territories and the completion of the Inuvik Gas Project more than five years ago, plus joining studies and field trials in Alaska related to trenching in permafrost.

TransCanada says focus on ‘commercially viable project’

TransCanada, which is engaged in confidential discussions with the office of Alaska Gov. Frank Murkowski over its application for a right of way across state lands in Alaska, is eager to convey a message that it is not just relying on the Northern Pipeline Act and the Canada-U.S. treaties.

The company says its efforts are concentrated on “creating a commercially viable project by continuing to align all stakeholders and advance project initiatives so we’re ready to move forward.”

To that end TransCanada, while maintaining the right to build the Canadian portion, said it is “willing to take a leadership role in Alaska as required.”

Like Enbridge, TransCanada is also plugging its efforts to be at the leading edge of technology in areas such as high-strength steel, mechanized welding, pipe coating and inspection technologies, all tested in extreme cold weather. That includes a joint demonstration last February with ExxonMobil of the world’s strongest pipe.

This jousting between the two Canadian pipeline giants looks to become a lot more heated, with the Canadian government caught in the middle.



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