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TransCanada to reactivate 23 year old Alaska gas line right-of-way
Larry Persily Petroleum News Government Affairs Editor
In a move to ensure it is part of any venture that builds an Alaska North Slope natural gas pipeline, TransCanada Corp. will reactivate its 23-year-old state right-of-way lease application for the route.
The company also said it will apply for a state fiscal contract setting up a schedule of payments in lieu of taxes, which it would invoke if it ends up owning a stake in the Alaska portion of the project.
And while taking the two steps to show its strong interest in the project, TransCanada also acknowledges any deal will need to include as partners the North Slope producers to provide the financial guarantees necessary for building the line — and to provide the gas itself.
Calgary-based TransCanada joins pipeline operator Enbridge Inc., also of Calgary, in pledging to submit an application under Alaska’s Stranded Gas Development Act. The law allows potential project owners to negotiate the certainty of a long-term contract for payments in lieu of state and municipal taxes on the proposed pipeline.
The three major North Slope producers submitted their own joint Stranded Gas Act application the third week of January, with negotiations continuing.
The state expects to receive Enbridge’s application by the end of April, said Steve Porter, deputy commissioner at the Alaska Department of Revenue. TransCanada anticipates turning in its paperwork within a few weeks, Hejdi Feick, company spokeswoman, said April 19. Partnership could emerge With two pipeline companies and three producers looking at the project, and each willing to spend millions of dollars on fiscal negotiations with the state and their own planning work, it is appearing more likely the project could be a shared venture instead of under a single owner.
“TransCanada is clearly one key part of the equation for the project,” Alaska Gov. Frank Murkowski said in announcing the company’s new role in the state’s efforts to promote construction of a pipeline to move North Slope natural gas to market — and to move new tax and royalty revenues into the state’s declining-oil-production treasury.
“I think he refers to it as a partnership,” Mike Menge, the governor’s special assistant for oil and gas issues, said of the envisioned venture to develop the line. “Clearly, we have no idea what form that partnership will take.”
In addition to the producers and pipeline companies, the partnership will need to include the state, provincial governments, and U.S. and Canadian federal governments, Menge said. The pipeline, as proposed, would run about 2,000 miles from the North Slope, through the Yukon Territory and into Alberta, where it would connect with either or both TransCanada’s and Enbridge’s existing North America distribution systems.
“This is a very large project that will require the cooperation of a number of parties,” TransCanada’s Feick said, adding the company “recognizes the importance of the state resolving the upstream issues.”
She declined to elaborate on what upstream issues need resolving. “That’s a good question for the governor and the state of Alaska,” Feick said. Producers likely to carry the risk “To TransCanada, ‘upstream issues’ is always code for getting the gas,” Menge said.
So while the state waits for TransCanada’s and Enbridge’s applications under the Stranded Gas Act, the administration will continue negotiating with the producers on royalty, production tax and other issues that are key to moving ahead on the project.
And just as the state’s lead Stranded Gas Act negotiator Pedro van Meurs told legislators earlier this month, TransCanada also is aware the North Slope producers most likely will be the deep pockets covering the financial risk of the project by pledging to ship their gas.
Such ship-or-pay contracts — regardless of the spread between the pipeline tariff and destination market price — would provide the financial security needed to borrow money for construction.
“It’s not the technical design that’s the problem but who will hold the shipping commitments for gas for 15, 20 or even 30 years,” said Hal Kvisle, TransCanada’s chief executive officer.
“Everybody, historically, has looked around the table and asked whether the LDCs (local distribution companies), merchants or pipeline companies (would hold the risk) of building the pipeline,” he said at a Washington, D.C., press briefing April 19, sponsored by the Interstate Natural Gas Association of America.
“Eventually, it’s come down to the big producers. ExxonMobil, ConocoPhillips and BP PLC are the ones most likely to hold the shipping commitments, so whatever kind of project is put together has to be one that works for the producers,” Kvisle was quoted by Dow Jones Newswires. He is the first Canadian to hold the post as chairman of the gas association. Costs make people nervous “When you get a project of this complexity, with steel prices and construction costs going through the roof, people get nervous,” Kvisle was quoted by Dow Jones. “Nervousness, more than anything else, is the reason this pipeline has never been built.”
The project, proposed to carry 4.5 billion cubic feet of gas per day, could cost $20 billion, with total tariffs estimated at almost $11 million a day to Midwest markets.
Kvisle held his briefing the same day as Alaska Gov. Frank Murkowski announced TransCanada’s news at an Anchorage Chamber of Commerce luncheon.
“TransCanada holds federal authorizations including the right-of-way lease to construct the line through Alaska, as well as the right to build the line through Canada,” Murkowski said.
The company believes its 1977 U.S. regulatory certificate and 1978 Canadian certificate to build an Alaska gas line give it exclusive rights to the project. The certificates apply to the Alaska Natural Gas Transportation System, designed almost 30 years ago to carry an average 2.4 billion cubic feet per day from the North Slope into Alberta for distribution throughout North America.
Although some industry observers question whether TransCanada’s rights would prevent a developer from building a different project — carrying more gas along a slightly different route — most agree it would create serious political problems to ignore the company’s claims, especially in its home country.
“There are no simple answers to the legal questions posed,” said a 2001 Federal Energy Regulatory Commission staff report on whether the 1977 U.S.-Canada treaty and subsequent operating certificates are the only way to get the line built. TransCanada willing to share rights to project After obtaining the gas line right of way, and putting together shipping contracts sufficient to finance the project, TransCanada said it would be willing to turn over the right of way to another developer for the Alaska portion of the project. The company would retain the Canadian portion of the line for itself.
The company is not looking to build or operate the gas treatment plant that would be needed on the North Slope, just the pipeline, Feick said.
The offer to turn over the right of way is contingent on the developer of the Alaska portion of the line acknowledging TransCanada’s exclusive rights to the project and agreeing to connect with TransCanada’s pipeline system to move the gas to Alberta for distribution to North American markets.
The company and its wholly owned subsidiary Foothills Pipe Lines Ltd. operate more than 24,000 miles of natural gas pipeline across Canada. TransCanada also holds partial interest in half a dozen other companies that own 4,500 miles of gas pipe in the United States.
In reactivating its state right-of-way lease application, TransCanada restarted a process it opened up in 1981. The company, through its Foothills subsidiary, applied that year for state right of way to accompany its federal right of way from the North Slope to the Yukon border. Foothills suspended its state application in 1982, citing low natural gas prices as the reason for shelving the project. Right-of-work stopped again in 2002 Foothills reactivated its state application in July 2001, only to shut it down again in May 2002 to allow time “for other aspects of this project to catch up.” The company said those other issues included federal tax incentives for the pipeline — still stuck in Congress almost two years later — and the need for a gas deal with the North Slope producers.
TransCanada’s right-of-way application covers about 200 miles of state land between Prudhoe Bay and the Canadian border. The rest of the route is mostly federal, with some Native corporation holdings.
The company’s decision to move ahead with its right of way will not change the state’s plans to process its own rights-of-way applications for so-called spur lines to carry smaller quantities of natural gas from the main pipe south to Valdez and also to the Kenai Peninsula, said Menge of the governor’s office. The state also wants to secure a right of way from the proposed Point Thomson oil and gas development west to the main line at Prudhoe Bay, in anticipation that Point Thomson gas will be needed to feed the gas line.
Murkowski is asking lawmakers to appropriate more than $3.5 million for the spur lines and Point Thomson rights-of-way work, with the intent that the state would hold the permits and later transfer them to whatever private or public venture may decide to build the lines.
TransCanada will reimburse the state for the costs of processing its right-of-way permits, and for the state’s negotiating costs under the Stranded Gas Act.
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