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Lessons for Alaska across border? Producers were key to 1990s’ project for moving Western Canada gas Larry Persily Petroleum News Government Affairs Editor
There could be a history lesson across the border for supporters of the proposed Alaska North Slope gas line project.
Almost a decade ago, 22 Western Canada natural gas producers and marketing companies got together to find a competitive alternative for moving their gas to Midwest consumers.
Although producers don’t usually build gas lines, they took on the Alliance Pipeline project.
The partners put up hundreds of millions of dollars in cash, borrowed a couple billion dollars by signing firm ship-or-pay commitments, and put together the deal for the line, stretching almost 1,900 miles from eastern British Columbia to just southwest of Chicago.
When the 22 companies banded together to study the issue in 1995, Western Canada producers were earning much less for their gas than U.S. Gulf Coast producers because of insufficient pipe capacity for moving gas out of Alberta.
It took just a year to decide on a solution, and in 1996 17 of the original 22 set up the Alliance partnership and started the regulatory and financing work. Of those 17, a few were small natural gas marketing companies and the rest were producers, including some of the largest names in Western Canada: Alberta Energy Co. Ltd., Canadian Occidental Petroleum Ltd., Gulf Canada Resources Ltd., Unocal Corp., Petro-Canada and Chevron Canada Resources.
It was their money that built the line. “One hundred percent of the construction budget is financed through bank, bond or equity contributions backed by investment-grade corporate guarantees or cash,” said a 2000 report by the Financial Times Energy Inc., an arm of the Financial Times of London. Producers all drop out before start-up But even before gas started flowing in December 2000, all of the producers had left the partnership, selling out to pipeline companies.
“It wasn’t surprising once they got it built to sell off,” said Ed Small, of CanAm Energy in Calgary.
The producers knew they were going to have to take all of the financial risk of building the line and pledging shipping commitments to cover the borrowing, so they figured they might as well take on the project, said Small, who started work in 1976 for major oil and gas companies in Calgary and switched in 1992 to his own consulting business.
It was a combination of pipeline companies not moving fast enough to add capacity for the producers, in addition to producers wanting an option to the region’s major pipelines operated by TransCanada Corp. and Nova Gas Transmission Ltd., the Financial Times report said.
Early on, it looked like the pipeline companies would oppose the Alliance project. But to help ensure peace, the Alliance partners agreed not to oppose the 1998 merger of TransCanada and Nova in exchange for the companies withdrawing their regulatory opposition to Alliance.
Rather than waiting for the pipeline companies to build more capacity only after pipe constraints drove down the value of Western Canada’s gas, the producers wanted to get ahead of the curve and match supply growth with demand growth, Small said. Producers wanted to know tariff The producers stayed in long enough to not only put together the financing and start construction, but to ensure they could live with the tariff structure, said Jim Pearson, senior coordinator for strategic analysis at Alliance Pipeline L.P. in Calgary.
“The tariff had been pretty well designed” by the time producers started to sell off their interest in the project, Pearson said. “They knew what they were going to be faced with.”
And when the work was done, they were ready to turn it over to pipeline companies. “Producers are interested mostly in looking for gas and producing it. They’d rather put their money into drilling,” Pearson said.
The project went so well that by the time Alliance filed its application with Canada’s National Energy Board in 1997, it had firm shipping commitments for 98 percent of the line’s capacity — even though the tariff required shippers to post a letter of credit or prepay for 12 months of estimated tariffs.
By 1998, with the pipe and compressors ordered and financing locked down, the 17 partners were down to just seven, of which only two were producers. A syndicate of 42 international banks agreed to finance up to $2.6 billion for the project, with a 70/30 debt-to-equity split.
The list of partners dropped to just two in late 2003, with Duke Energy Corp. selling its small share and Fort Chicago Energy Partners L.P. and Enbridge Inc. each holding 50 percent of the venture. Line starts just 2 months behind schedule The final price tag for construction was $3.1 billion (in 2000 U.S. dollars), a cost overrun of about 15 percent, according to a company spokesman. The line opened for service just two months past its scheduled completion date, about four and one-half years after the partners created the venture.
“The Alliance Pipeline project demonstrated that natural gas producers can effectively initiate pipeline projects, but that successful projects will be market driven,” said the Financial Times report.
Although the producers that initiated the project are no longer participating in the partnership directly, “they advanced North America’s transition to a more competitive natural gas market discipline,” the report said.
“There are a lot of comparables” between the Alliance project and efforts to move North Slope gas to market, Small said, including the desire to move stranded gas, producer financing and the large risk. But there also is a difference, he said. In Canada, the producers expected they were going to have to take all of the new line’s financial risk, while in Alaska the producers would like to share some of the risk that tariffs could eat up too much of the gas price at the market end of the line.
And the volume makes the risk much greater for the Alaska pipeline, Small said. The Alliance line was built for 1.325 billion cubic feet per day, while the North Slope producers are looking at building a 4.5 bcf line. The producers worry that so much gas could force a drop in North America gas prices, taking money out of their pockets and any other company with U.S. or Canadian production. Oversupply fear quickly dissipated Competitors of the Alliance pipeline warned of the same fear of oversupplying the market, testifying that netbacks would fall. Alliance management countered the effect would be minimal, maybe 10 cents per thousand cubic feet.
In fact, when the line started moving gas in December 2000, North America was in the middle of a wintertime price spike at about $6 per mcf at the wellhead, pushing prices to almost triple what they were when the Alliance partnership was created in 1996.
High demand and minimal compressor outages have helped keep the line running above its nameplate capacity. Its firm contract capacity is listed at 1.325 bcf per day, though it usually can handle much more gas. The line has carried as much as 1.8 bcf, and averaged 1.6 bcf per day in 2003 with all the compressors online, Pearson said.
The line has not expanded its capacity but has added additional receipt points — it’s up to 42 feeder pipes, ranging from 4 inches to 24 inches. The Alliance starts in British Columbia, near the Alberta border, and then after loading up with British Columbia and Alberta gas moves nonstop toward Chicago, helped along the way by 14 compressor stations spaced 120 miles apart. Tariff about $1 to Chicago The so-called bullet line is a mix of 42-inch and 36-inch pipe, at a maximum pressure of 1,740 pounds per square inch, with several pipeline and customer delivery points in the Chicago area.
North Slope producers are advocating a 52-inch line, operating at 2,500 pounds per square inch.
Alliance’s reserved capacity tariff runs $1.09 per mcf to Chicago, depending on the U.S.-Canadian exchange rate. But when the line is operating at peak efficiency and carrying between 1.5 bcf and 1.6 bcf, the rate drops to 94 cents per mcf, according to the company’s published tariffs.
A single management operation runs the pipeline, though for corporate governance purposes there are separate U.S. and Canadian partnerships for the pipe in each country.
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