Providing coverage of Alaska and northern Canada's oil and gas industry
February 2011

Vol. 16, No. 7 Week of February 13, 2011

AGIA an issue in Juneau

House Bill 142 says line uneconomic without firm commitments by summer

Kristen Nelson

Petroleum News

Is it time to declare AGIA dead? That’s the question some Alaska legislators are asking.

The TransCanada-ExxonMobil Alaska Pipeline Project, one of two projects to move Alaska North Slope gas to market, was licensed by the state under the Alaska Gasline Inducement Act.

Tony Palmer, vice president of Alaska development for TransCanada, said after the close of the July 30 open season last year for the Alaska Pipeline Project that “we have received multiple bids from major industry players and others for significant volumes.”

The next step, he said, is to work with potential customers to resolve conditions on the bids: “That’s what we’ll be doing over the next several months.”

Palmer told Petroleum News just prior to the close of the open season that the goal was to have precedent agreements signed by the end of the year. If conditions are simpler, it may take less time, he said.

On the other hand, “If we get many complex conditions we may not be able to achieve it in 100 business days,” extending beyond the end of the year when precedent agreements could be signed, Palmer said.

Because year-end has come and gone without signed precedent agreements, some members of Alaska’s Legislature are now concerned that the AGIA-licensed project is a failure and they want to legislate a way for the state to get out of its contract.

State required continuation

Under AGIA, the state required that in the event of a failed initial open season — no bidders for pipeline capacity or not enough bidders — the licensee would be committed to continue through certification by the Federal Energy Regulatory Commission.

That was one of the must-haves in AGIA, which in return provided a number of incentives, including $500 million in state matching funds for work on the project through FERC certification.

Palmer told legislators during the 2007 debate over AGIA that TransCanada preferred — in the case of a failed initial open season — to focus on obtaining customers “as opposed to doing the engineering and regulatory and legal work to capture a FERC certificate.”

Palmer said that even though the state offered a higher cost-share match after an open season, that TransCanada would prefer not to pursue the certificate “until we had customers or credit.” Told that fellow Canadian pipeline company Enbridge had told legislators “no producers, no pipeline,” Palmer said in his view it is “no customers, no credit, no pipeline.”

The Legislature passed AGIA in 2007, and despite its concerns over the FERC certification requirement, TransCanada submitted an AGIA application and received the AGIA license in 2008.

Both the Alaska Pipeline Project and the competing BP-ConocoPhillips Denali project held open seasons last year. Both reported receiving bids; neither project has completed negotiating precedent agreements.

HB 142 introduced

Which brings us to the new session of the Alaska Legislature, and concerns by some House Republicans that since precedent agreements have not been signed the AGIA-licensed project may not be economic and may not result in a pipeline, while the state is committed to reimbursing TransCanada up to $500 million.

The sponsors of House Bill 142, introduced Feb. 4, say the bill would provide an exit strategy for the state if there are insufficient firm transportation commitments resulting from the initial open season.

House Speaker Mike Chenault, R-Kenai, speaking at a Feb. 7 press conference, said the Legislature is in the dark.

“We’ve heard from TransCanada after the open season that gas was bid,” but don’t know if there is enough gas for a pipeline, he said.

Chenault also said “our perception of natural gas supplies in the Lower 48 at the time of the AGIA process are considerably different than what they are today,” with shale gas production growing at a rapid rate.

Rep. Mike Hawker, R-Anchorage, said the goal of the legislation is “to create a sense of urgency about moving forward with the AGIA process.” That urgency was “not mandated in the original AGIA legislation and … I think it was an oversight in the original AGIA legislation,” he said.

The bill creates “a rebuttable presumption that the project licensed under the Alaska Gasline Inducement Act is uneconomic because of insufficient firm transportation commitments during the first open season,” gives TransCanada until July 15 to disclose that it received firm transportation commitments sufficient to support construction of the project, and requires the commissioners of Natural Resources and Revenue to notify the Legislature before Aug. 1 whether firm transportation commitments were disclosed to them prior to July 15.

The commissioners would have until Aug. 15 to submit a report to the Legislature that there are sufficient firm transportation commitments for the project to go forward, or that the project has credit support sufficient to finance construction and predicted costs of transportation “would result in a producer rate of return that is not below the rate typically accepted by a prudent oil and gas exploration and production company for incremental upstream investment that is required to produce and deliver gas to the project.”

TransCanada, administration, respond

Palmer told Petroleum News Feb. 8 that TransCanada “is confident that we have done everything we can do to advance the project and meet the obligations we have to the State of Alaska; and to date the State of Alaska has met their obligations to us as the licensee.”

He said he wouldn’t prejudge what might happen with the bill, but will “participate as requested and we’ll see how that plays out.”

The Associated Press is reporting that the administration plans a legal review of the bill.

Deputy Commissioner of DNR Joe Balash told AP there are concerns about “impacts and potential exposure” from the measure.

Larry Persily, federal coordinator for Alaska Natural Gas Transportation Projects, told Petroleum News in a Feb. 8 e-mail: “I understand Alaskans’ frustrations with the pace of the gas pipeline project and I know people want to see some positive news about the open seasons. I only ask that people not confuse the debate over AGIA with the project itself. The pipeline is possible, the project would be good for the state and the nation, and the federal government is ready to work with whichever company or companies are willing to risk the tens of billions of dollars needed to finance the pipeline.”

Legislative reactions

Members of the Senate Bipartisan Working Group had mixed reactions to the bill.

Senate President Gary Stevens, R-Kodiak, said in a Feb. 8 press availability there were some concerns in the Senate about whether the state has given the process enough time, and said he didn’t “anticipate a similar bill on the Senate side, but we’ll see how things progress on the House side.”

Sen. Bert Stedman, R-Sitka, said he thinks discussion is timely, and said he’s “concerned that we could be tied up in the contractual obligations for years into the future.”

Sen. Tom Wagoner, R-Kenai, said he thinks the Legislature needs to wait to see the results from the open season “and then sort it out at that time.”

House Democrats, speaking at House Minority press availability Feb. 8, were opposed.

Minority Leader Beth Kerttula, D-Juneau, said she thinks “the State of Alaska should be taking down barriers to entry instead of putting them up and I think that unfortunately what the new AGIA bill would do is break our deal to get a gas line.” She said she thinks the bill would produce a lawsuit by “breaking our deal and setting an artificial deadline.”

The bill has been referred to only one committee, House Finance, and Kerttula said she intended to talk to Chenault about that.

Rep. Scott Kawasaki, D-Fairbanks, a member of House Resources, said “certainly AGIA and the whole concept of AGIA is a Resources issue” and should be heard by that committee.

The bill had not yet been scheduled for a hearing when Petroleum News went to press.

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