Former Alaska Highway gasline partners could be owed $4 billion

Governor’s Alaska Highway Natural Gas Policy Council and subcommittees review progress to date

Kristen Nelson

PNA Editor-in-Chief

The Alaska Highway gasline project has had a number of partners over the years who have invested money in the project and dropped out. And they may be owed as much as $4 billion. The federal/international action subcommittee of the governor’s Alaska Highway Natural Gas Policy Council, chaired by Charlie Cole, questioned attorney Curt Moffatt, who represents Foothills Pipelines in Washington, D.C., about the debt.

The subject had come up at the subcommittee’s August meeting in Juneau. Moffatt spent a lot of time at a Sept. 7 meeting trying to reassure subcommittee members that this was an issue being negotiated and would not hurt the project.

Carl Marrs, president of Cook Inlet Region Inc., wanted to know how money already expended on the project would figure into gas pipeline tariff rates. Moffatt said the market would determine how much of the sunk cost could be recovered, and said there was a lengthy discussion on how much the sunk cost was.

Cole told Moffatt that the subcommittee had heard amounts of investment by withdrawn partners ranging from $500 million to $4 billion. Marrs said they had also heard $2.5 billion.

Moffatt said that the original cash outlay was some $280 million and that the $2.5 billion to $4 billion figures come from interpretations of documents and rate making practices.

The current partners, Moffatt said, are in negotiations with withdrawn partners over the sunk cost. The debt, he said, is in the hands of sophisticated companies who have expressed an interest in participating in the line.

Moffatt said he believes that agreement will be reached on some level of prior spending and good will for keeping the permits alive that is appropriate. “I just do not believe it’s a $4 billion issue,” he said.

Concern about overhang

Marrs concurred, telling Moffatt, the message out of the committee is “we want this settled … quickly… It concerns us a lot to have one-half billion to four billion hanging over our heads as we move forward.”

Cole told the full committee later that day that the present partners have the power to determine whether the withdrawn partners are able in any fashion to get their money back.

“And one thing I guess we did, if we didn’t do anything else this morning, we sent the Foothills people a fairly strong message that the time has come for them to meet with the withdrawn partners and get that issue resolved, because this project cannot withstand an overhang of a billion dollars, let alone $4 billion. It just creates too much uncertainty out there financially and it’s a shackle, if you will, on the ability of people to go forward with this project.”

John Katz, director of state-federal relations and special counsel in Washington, D.C., told the subcommittee by phone that the administration is very concerned about the $4 billion contingent liability, has talked to Foothills and TransCanada about it, and has slowed legislation because of it. And Congress would be unlikely to legislate away the $4 billion, Katz said, because if the claim were ruled valid in court, the federal government would then be liable.

Foothills objects to amendments

Moffatt said that partners Foothills and TransCanada, who hold the permits for the Alaska Highway gasline project authorized in the in the 1970s and 1980s, believe that no changes in federal legislation are required for a gas pipeline following the Alaska Highway. He said Foothills believes the standard should be to “do no harm to the ANGTA regime and all of its components.”

Current legislative proposals, he said, would create a parallel procedure for a new proposal before the Federal Energy Regulatory Commission and would lead to confusion and delay.

Asked if Foothills thinks Mackenzie Delta gas could go to market before Alaska gas, Moffatt said Mackenzie needs infrastructure. But, he said, the sequence of which goes first probably depends on how astute government forces are in the United States. If you start all over with new Alaska gasline legislation, you could slow down the Alaska project, Moffatt said.

Limitations on tapping into gas pipeline, other issues emerge

Kristen Nelson

“We’re finding a complex and expensive economic parameter,” said Ken Thompson, … (because) “the pipeline is very thick — an inch and a half — and very high pressure — 3,000-plus pounds — and will contain a lot of natural gas liquids.”

Thompson, chairman of the access for in-state gas use and future opportunities subcommittee, said “it not a simple matter of plugging in a line and selling it.” Both the pipeline and its contents pose problems, he said:

“Every time there is a tap you have to remove substantial natural gas liquids, meaning a natural gas liquids processing plant.”

It may be more commercial, Thompson said, to have one or two hubs where you take gas and remove natural gas liquids. And instead of running natural gas pipelines to all communities, energy is provided to small communities as gas liquids — butanes and propanes.

Project must be competitive

Potential financiers would want, he said, “to see that there is a market, there is a buyer, there are certain levels of volumes.”

In addition to contracted volumes, he said, there is also frequently some volume in pipelines built by pipeline companies which is speculative — space in the pipeline not yet contracted.

The contracted volume of gas would have to be enough to create a return that exceeds the cost of capital.

But, he said, “producers will want a rate of return that matches or beats their other capital investments in the world. There’s a big difference.” And, he said, “the leases stipulate cost of capital.”

Who sets the price?

“So where,” he asked, “is that point, that if valid, written bids by substantial companies are made, where is it that those commitments must be made?”

Determination of netback

Texas varies its percentage, he said, but over the last few years it has kept about 50 percent of its royalty gas and sold it themselves, because in 50 percent of the cases it was able to negotiate higher prices than the producers. When the producers were able to negotiate a better price, the state of Texas let the producers sell the gas.

“The state of Texas also told us that when they are able themselves to get a higher price, they taxed all the leases and all the producers at the highest prices, which is what the state leases in Alaska allow,” Thompson said.

Thompson also said he believes the state should not negotiate a formula for netback value of gas.

Both Jack Roderick and Charlie Cole said they found this a troubling recommendation after the years the state spent wrestling over oil netback.

Thompson said the state could always negotiate a formula for the netback value of gas in the future. He said he thought that for a few years “the state should be in the market by selling some of its gas to external markets to make sure we’re getting the best, highest wellhead and sales values… It also allows us access to information on transportation costs.”