TransCanada Vice President Tony Palmer told the Alaska Senate Resources Committee Aug. 16 that the Alaska Pipeline Project is on schedule with technical and regulatory matters, but not on the commercial side.
TransCanada and its partner ExxonMobil completed an open season for the project July 30, 2010. At that time Palmer said that if things went well, precedent agreements — the commercial side of the project — could be signed by the end of the year.
He told legislators at the mid-August hearing held by the Senate Resources Committee that negotiations are still going on for commercial agreements.
The State of Alaska needs to resolve Point Thomson and gas fiscals issues, Palmer said, and told legislators he was encouraged by remarks Department of Natural Resources Commission Dan Sullivan made Aug. 15 that the state and ExxonMobil had reached agreement in principle on Point Thomson (see story on page 1.)
External factors, such as changes in gas supply and demand in North America and globally over the last three years, are outside of TransCanada’s control, he said, as are gas-price forecasts, liquefied natural gas exports and the condition of financial and debt markets.
The shale gas impact
Asked by Sen. Bill Wielechowski if the development of shale gas in the Lower 48 has made the Alaska Pipeline Project uneconomic, Palmer said the North American gas supply is higher today and public gas price forecasts are lower than they were three years ago. It is one of the external factors where potential customers of the pipeline will have to decide their own view, he said.
But to date, “we haven’t seen customers walking away from the table,” because of shale production, Palmer said.
Resources co-chair Joe Paskvan asked what the impact would be on the Alaska project if shale gas were developed in China.
Palmer said the topic is highly speculative, but that in his view those looking at whether China will have a shale gas revolution, with timing and cost uncertain right now, will know more in two to five years.
Asian LNG is still tied to a crude oil price, but some Asian buyers coming to North America have indicated they are seeking North American prices, Palmer said, noting that if they are successful, that could break the linkage of LNG prices to oil.
China has a shortage of natural gas and is importing both via pipeline and LNG and a low-price domestic source would impact both where that country gets its gas and the price.
On commercial side
Palmer said the project has advanced significantly on the commercial side over the last three years.
TransCanada and ExxonMobil have gone beyond the commercial terms included in the license TransCanada obtained under the Alaska Gasline Inducement Act, AGIA.
And TransCanada aligned with ExxonMobil on the project — and has a standing offer to align with BP and ConocoPhillips, he said. That gets the project part way toward having the five partners TransCanada has said would be needed: the State of Alaska, TransCanada, ExxonMobil, BP and ConocoPhillips.
Global gas markets have become more competitive, Palmer said, and in the open season documents for the project the offer in the AGIA documents was enhanced by $500 million a year to customers, over the life of the project a $12.5 billion total reduction in tolls.
He said he couldn’t identify further concessions made in the negotiations, but said the companies will make more concessions in trying to get over the finish line.
While customers would say you could go lower, Palmer said, from the perspective of a pipeline company there is a very competitive offer on the table.
Monies spent
Wielechowski asked how much money would be spent until issuance of the license. TransCanada is committed under AGIA to advance the project through receipt of a Federal Energy Regulatory Commission certificate of convenience and necessity, even in the absence of customers, one of the conditions the state extracted in exchange for its $500 million participation.
Palmer said if the project is unsuccessful at getting customers it will spend on the order of $700 million by 2014, $500 million of which would be reimbursed by the state.
If we have customers, we’d accelerate spending because we would be moving to put the line into service, he said.
Denali, the BP-ConocoPhillips sponsored proposal, folded in May, citing lack of customer support.
Palmer said he always thought TransCanada had the advantage in Canada, and also had the skill set to advance the project, a skill set which improved with the ExxonMobil alignment in June 2009.
No one ever thought two lines would be built, Palmer said: One had to go away or they had to combine.
Asked by Sen. Hollis French how three impediments to the project — Point Thomson, gas fiscals and long-term prices — should be ranked, Palmer said until the state and the producers have resolved their issues, it’s hard to get people to focus on the third issue, whether the project is economic.
At low gas prices, the first two conditions, while necessary, may not be sufficient, Palmer said, but the producers are used to taking price risk, and they are not making the call today.
Asked by Rep. Kurt Olson when TransCanada would make the hard decision to continue or not, Palmer said that while TransCanada had assumed Point Thomson and gas fiscals would be resolved by the end of the open season, as long as there continues to be optimism that they will be resolved, “we’ll let the game play out.”
Sunk cost
Wielechowski was concerned that legislators had to make decisions about funding the AGIA project and the in-state line, ASAP, and pressed Palmer for more information.
Palmer said that under AGIA TransCanada has been able to share additional information with the administration, but said Wielechowski was asking for something that goes beyond what’s in statute.
Sen. Bert Stedman, who co-chairs the Senate Finance Committee, said the state needs to come up with additional money in the next two fiscal years to meet its AGIA obligations.
He described the $500 million as a sunk cost, if TransCanada has customers and is moving ahead with the line or if it has no customers.
The only way we could not spend the funds is if the state and TransCanada come to a mutual agreement that the project isn’t economic, which is not likely, Stedman said.
Building permit
Larry Persily, federal coordinator for Alaska Natural Gas Transportation Projects, told Senate Resources Aug. 17 that AGIA had been oversold and misunderstood. It was never going to get you a pipeline, he said: It’s a path toward getting a building permit for a line — the engineering, design and permits.
The Stranded Gas Act, under which talks took place with North Slope producers under the Murkowski administration, scared Alaskans away from negotiations, Persily said. But the producers have to take risks including cost overruns and the price in the market and state fiscal terms must recognize the risks, he said.
He encouraged Alaskans to look at the gas line as a 50-year project which provides gas for Alaskans, state revenues and more exploration on the North Slope, which will find oil as well as gas.
Having a gas line makes Alaska more attractive, he said.
Persily also suggested that when the state does sit down with producers, some provisions of AGIA such as rolled-in tariffs would probably be back on the table.
—Kristen Nelson
