TransCanada: Alaska gas key

Pipeline operator sees gas as important new supply; unwilling to bear risk

Larry Persily

Petroleum News Government Affairs Editor

While the state of Alaska wants a North Slope natural gas pipeline for the billions of dollars it would generate in tax and royalty revenues, and the producers want it for the billions they could earn by selling their gas, TransCanada Corp. says feeding the new gas supply into its existing distribution grid is what counts.

“It is key for us,” said Kurt Kadatz, spokesman for the Calgary-based pipeline operator.

TransCanada expects to have a lot of room in its pipeline network to move Alaska gas to Midwest, Pacific Northwest and Northern California markets by the time a North Slope line could start feeding gas into the system sometime in the next decade. (See related story, “TransCanada at bat,” in the March 21 edition of Petroleum News.)

With the withdrawal of MidAmerican Energy Holdings Co. as a potential developer for the Alaska gas line, Gov. Frank Murkowski and legislators are turning to TransCanada as their newest hope for building the project that has failed countless economic feasibility tests for 30 years.

“The message that TransCanada is sending to us is this is very important to them and they’re willing to step in,” said Mike Menge, special assistant to Alaska Gov. Frank Murkowski on oil and gas issues.

TransCanada looking to avoid gas price risk

TransCanada met with Alaska officials the week of March 8 to pitch the suggestion that the state take all of the price risk by buying North Slope gas at the wellhead and pledging to ship the gas through a TransCanada-owned Alaska pipeline for at least 15 years so that the company could secure bond financing for the project.

“That is something that requires a great deal of consideration,” Murkowski said at a March 26 press conference. That was the same press conference where the governor announced he would not accept MidAmerican’s demand that the state grant it exclusive “sole developer status” for the pipeline project.

“Alaska is not a distressed company,” he said, citing MidAmerican’s reputation as a buyer of troubled companies. And it especially would have been wrong to give MidAmerican exclusive rights to the project when TransCanada and the North Slope producers are interested in building the pipeline, Murkowski said.

While administration officials court TransCanada, the state also continues to negotiate with the producers on how the state might be able to help improve the project’s tax economics in the hope the companies will decide to commit to construction.

State offers exclusive processing of pipeline rights of way

That would effectively block the producers from building the line and could force them to accept whatever terms TransCanada might propose for moving gas to market.

The line, stretching from the North Slope to central Alberta, is estimated at $20 billion for a gas treatment facility on the slope, more than 2,000 miles of pipe and compressor stations to handle 4.5 billion cubic feet per day of gas.

TransCanada has long been interested in building the Canadian portion of the line but recently stepped forward and said it also would consider taking on the Alaska mileage for the project, Menge said.

The company issued a press release March 26 to announce it “has been engaged in renewed discussions with the state” for the Alaska portion of the line, and is “prepared to assume a leadership position with respect to the development of an independently owned pipeline project in Alaska.” It was the same day as Murkowski and MidAmerican each held press conferences blaming the other party for the breakdown in talks under Alaska’s Stranded Gas Development Act.

No Stranded Gas Act application from TransCanada

However, most of the benefits under a Stranded Gas Act contract would accrue to the owners of the gas, rather than the operator of the pipeline. Any taxes paid by the pipeline operator would flow through the tariffs to the gas owners or shippers, somewhat reducing a pipeline operator’s incentive to negotiate a fiscal contract with the state in lieu of taxes.

TransCanada declined to provide any details of the state’s offer of exclusive rights of way in exchange for trying to put together the project.

“The details of those meetings are private,” Kadatz said. “The evolving events of last week,” including MidAmerican’s withdrawal of contract talks with the state, “led us to some future discussions,” he said.

Company knows it must deal with producers

Though looking to put together a project with the state and producers, TransCanada is not interested in buying gas at the wellhead and taking any of the price risk in selling the methane. “Right now our business focus is not gas marketing,” Kadatz said.

“The bigger challenge is getting a shipping commitment in place that works for the pipeline owner, that works for the state and that works for the producers who are the key players in all of this,” TransCanada CEO Hal Kvisle told the Calgary Herald.

The company’s assets total more than C$20 billion and its 2002 net income from continuing operations was C$801 million.

In addition to wanting the gas to move through its existing pipeline grid, the company’s other stake in the Alaska line is a 1977 U.S. regulatory certificate, a 1978 Canadian certificate and a U.S.-Canadian treaty that, in total, TransCanada believes give it exclusive rights to build the line.

TransCanada holds those rights as the successor to a string of several companies, including its wholly owned subsidiary Foothills Pipe Lines Ltd., that were involved in the Alaska Northwest Natural Gas Transportation Co. of the 1970s.

Falling production opens up room in lines

Canada’s National Energy Board forecasts Western Canada’s 2005 natural gas production will be about 3 percent lower than in 2002, despite high prices and heavy demand.

TransCanada’s operations include:

•The eastern leg of the Foothills system can carry 2.2 bcf per day from Alberta across Saskatchewan, where it hits the U.S. border in northeast Montana and connects with the Northern Border Pipeline Co., of which TransCanada owns 10 percent. The Northern Border line runs to the Illinois-Indiana state line and carried an average 2.3 bcf per day in 2002.

•TransCanada’s 100-percent-owned mainline system runs from the Alberta-Saskatchewan border to the Quebec-Vermont border, where it feeds pipelines in Canada’s eastern provinces and Atlantic states. The mainline system handled more than 7.2 bcf per day on average in 2002. The mainline also feeds the Iroquois Gas Transmission System in upstate New York. TransCanada owns 41 percent of Iroquois, which carried almost 1 bcf per day in 2002.

•The company’s Alberta gathering system includes more than 14,000 miles of pipe, handling more than 11 bcf per day.

•The British Columbia gathering system carries more than 1 bcf per day.

•TransCanada also owns 50 percent of Great Lakes Gas Transmission, a 2,000-mile system feeding off the mainline pipe in Manitoba and serving Minnesota, Wisconsin and Michigan with an average 2.4 bcf per day in 2002.