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Vol. 14, No. 12 Week of March 22, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

AGIA on the table again?

House Republicans want to revisit license decision; Palin wants to stay course

Kristen Nelson

Petroleum News

Republican legislators in the Alaska House are concerned about current gas supply and price issues as they affect gas pipeline economics and want to be sure the TransCanada Alaska pipeline proposal the state is backing is still economic.

Two House Republicans have introduced a resolution asking for a re-evaluation of whether the award last year of a license to TransCanada Alaska under the Alaska Gasline Inducement Act, or AGIA, is still in the best interests of the state.

House Majority Leader Mike Chenault, R-Nikiski, said March 16 in a House majority press availability that with other gas supplies found in the Lower 48 and “the lower-than-expected gas price” it may be time to revisit the TransCanada license “and determine whether we should continue to put state funds on this project.”

He also said that with open seasons for both the TransCanada Alaska project and Denali, the BP-ConocoPhillips joint venture, planned for next year, “I certainly think that at this time we want to push forward with the AGIA process” and see what comes out of the open seasons.

Rep. John Coghill, R-North Pole, chairman of the House Rules Committee, said the fact that ConocoPhillips and BP are moving ahead with Denali gives him some confidence that the long-term outlook is better than the short-term. And TransCanada continues to move its project forward, he said, but, “If it’s not economic, we need to know as soon as we can.”

Resolution to re-evaluate

House Concurrent Resolution 12 was introduced by Reps. Jay Ramras, R-Fairbanks, and Craig Johnson, R-Anchorage, and calls on the governor and attorney general to review and re-evaluate the license issued to TransCanada Alaska in light of the global economic recession’s potential risks for project financing. A report would be due to the Legislature within 180 days of passage of the resolution.

“In the private sector, you vet an issue and then you re-vet it when there are market changes — when conditions in the marketplace change. Only government is capable of setting a course and never deviating from it,” Ramras said.

Johnson asked: “Is it still the right call today? If we had it to do all over again, would we change anything? And that’s what we want the administration to go look at.”

The resolution is scheduled for a hearing in the House Special Committee on Energy March 19 and in House Resources March 23.

House Democrats disagree

In a House Minority press conference March 17, Democrats supported AGIA and the TransCanada Alaska license.

House Minority Leader Beth Kerttula of Juneau said the state “took the biggest step forward that we possibly could have last session and ... we’ve now committed ourselves to this process.”

“I think it’s important to see how that process matures and to take it forward and I intend to work very hard to do just that,” she said.

Rep. Les Gara of Anchorage said he understands “that there are folks who have opposed this gas pipeline for a long time. They had their opportunity last year and the Legislature decided to move ahead.” He said there is nothing wrong with continuing to push things you believe in. “I respect that,” he said, “but there’s nothing that’s changed that all of a sudden says, ‘hey we can’t do a gas pipeline now; let’s just trash this whole contract.’”

“The oil companies, TransCanada, all of the major financial players knew last year what some of the legislators are just learning now, that there are other competing gas sources out there.” Gara also said he believes that without the state pushing forward on a gas pipeline, “if any legislators succeed in stopping the TransCanada proposal, the Denali proposal disappears too and we don’t get a gas pipeline.”

Rep. David Guttenberg of Fairbanks said this is the closest in 30 years that Alaska has come to a gas line. Legislators have gotten a “phenomenal education” on pipeline economics and construction costs in the last few years, he said. Pipeline economics, he said, are based “not on today’s prices — it’s on some larger calculation on what prices are going to be over a period of time.”

Rep. Berta Gardner of Anchorage said while Alaskans don’t see backhoes moving on the project, Federal Coordinator Drue Pearce told legislators who were in Washington, D.C., for the Energy Council earlier in March that things are moving “fast and furious behind the scenes,” with TransCanada on an aggressive timeline which Denali is matching. Gardner said from her perspective the state is in a battle with the producers, a battle to open the state “for business for new explorers and new development; and that’s where Alaska’s future is and that’s why it’s so important to have this independent pipeline and that is why we want to go to the FERC even if the producers say at the first open season that they’re not going to ship the gas.”

Gara said he had spoken to Joe Balash, the governor’s energy aide, and to Commissioner of Natural Resources Tom Irwin. Both, he said, were concerned about the resolution, fearing it could kill a gas pipeline. Gara said they asked for a response from the administration.

Administration speaks

The administration, in a March 18 press conference headlined by Gov. Sarah Palin and Irwin, characterized issues that have arisen since AGIA was passed in 2007 and the TransCanada Alaska AGIA license issued in 2008 as short-term.

AGIA Coordinator Mark Myers, until recently head of the U.S. Geological Survey in Washington, D.C., said the decline in energy use is only temporary, but exploration is declining because of low prices. As supplies decrease there will be more demand and projects closer to completion will move forward.

“AGIA is a contract,” the governor said. The state expects the oil and gas industry in Alaska to abide by their agreements with Alaskans and the state also needs to abide by its agreements.

The governor said her interpretation of the resolution is that it is a call for double checking and triple checking: The administration is happy to do that, she said, but doesn’t believe the resolution is necessary.

Myers addressed the shale gas issue — large supplies in North America are of concern to some legislators as competition for North Slope gas.

“I’m a big fan of shale gas,” Myers said, but it’s “fairly expensive.” While the in-place numbers for shale gas are very large, you need to look at how much is economically recoverable at what price — and that, he said, is a much smaller number than the total resource.

Myers said shale gas will provide a bridge until Alaska’s gas is flowing in 2018. Shale gas doesn’t supplant Alaska’s gas, it only helps support and build a case for Alaska’s gas in Lower 48 markets, he said.

Not off again, on again

There’s no way in a project this size that you’re on today, off tomorrow, on the next day, Irwin said.

He said the administration is more confident than ever that AGIA is driving an Alaska gas pipeline forward: Two and a half years ago we were wondering what we were going to do, he said, and now we have two projects — and companies exploring for gas.

“We’re encouraged and we need to stay the course,” Irwin said.

Asked what the administration is doing to get gas into a line, Irwin said the state has had conversations with the three gas owners, but before any decisions are made cost numbers — real numbers — are needed. TransCanada is doing a real design, Irwin said, and is excellent at reaching out and talking with the producers.

As for fiscal certainty, Palin said the administration is continuing to meet with the producers, but is not at the point yet where something would be brought to legislators.

“We’re always willing to talk,” Irwin said, and the administration has asked the producers what they need. Once the state has a design and real costs of a pipeline it can understand much better where the project could or should go. And real design work is being done today, he said.

In producers’ hands

On the issue of fiscal certainty, Palin said a lot depends on what the producers of the gas are going to request. She said that discussion hasn’t happened yet, so a lot of it is still in the producers’ hands.

The governor said she was open to changes in the fiscal system to allow the project to happen. “We are open to whatever it takes to make sure it happens,” she said.

But, she said, this time around discussions on tax certainty will take place “in the light of day” and politicians’ votes won’t be purchased this time around. That is the difference between AGIA and the prior process, the governor said.

The Stranded Gas Development Act, the process used by the prior administration, provided for confidential negotiations between the state and those proposing a gas pipeline.

AGIA eliminated those negotiations by establishing a process and inviting companies to bid for the state’s AGIA license.

FERC pre-file

Denali has pre-filed with the Federal Energy Regulatory Commission, and the group was asked why TransCanada hasn’t pre-filed.

TransCanada has said in the past that it is a cost issue, and Joe Balash, the governor’s energy aide, said the same thing, that he understands it is reticence on costs, because once a company pre-files, FERC begins hiring consultants and staff and all of that adds to cost.

Balash said TransCanada’s schedule calls for pre-filing after the open season in 2010, which is the process TransCanada has used in the past.

He noted that pre-filing in a typical case requires reports, but FERC waived those draft resource reports for the Denali pre-filing. Balash called it a little bit of chicken and egg: Draft resource reports normally required don’t exist and won’t exist until later this year for either project, he said.

Commenting on the issue of costs, Irwin said he believes “the most economic pipeline is the one that will get built.” He said it will be interesting to see how the economics turn out, adding that every ad that’s run is in the tariff bill.

Asked about the $500 million the state is contributing — in reimbursement for specified TransCanada activities — Palin asked why legislators don’t remember that 59 of 60 voted in favor of AGIA and the $500 million provision.

The $500 million is in exchange for must haves in AGIA which protect the state’s sovereignty, the governor said.

Irwin said the $500 million represents an investment by a resource owner in development. He also said that the $500 million reduces the tariff, and calculations have shown that the state will get the $500 million back through that reduced tariff.

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