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Vol. 13, No. 51 Week of December 21, 2008
Providing coverage of Alaska and northern Canada's oil and gas industry

TC tempers loan talk

TransCanada hasn’t decided to ask for increase, would only be to cover inflation

Eric Lidji

Petroleum News

TransCanada Corp. is trying to temper recent reports that it wants the U.S. government to increase the federal loan guarantee covering financing of a natural gas pipeline in Alaska.

“TransCanada has not approached the government of the United States with regards to a revision of the loan guarantee. At this point, we don’t know if we will do so,” TransCanada Alaska President Tony Palmer told Petroleum News on Dec. 16.

If the Calgary-based company ultimately asks for an increase, Palmer said it would only ask to change an existing inflation clause, not the base amount of the actual guarantee.

As part of the Alaska Natural Gas Pipeline Act of 2004, Congress authorized guarantees to cover 80 percent of the capital costs of a gas pipeline up to $18 billion, but included a clause to adjust the guarantee for inflation by tying it to the Consumer Price Index.

“If the government of the United States intended the $18 billion to be equal to 80 percent, then they may be interested in seeing the inflator being equivalent to oil and gas inflation,” Palmer said.

Since 2004, the Consumer Price Index has risen around 15 percent, bringing the $18 billion guarantee to just less than $21 billion. But Palmer believes costs in the oil and gas industry have risen much faster than consumer prices over the past four years.

Others in the industry seem to agree. Speaking before the Resource Development Council in late November, outgoing BP Exploration (Alaska) President Doug Suttles estimated the cost increases have been between 15 and 20 percent per year for the oil industry.

It remains unclear, though, whether the global economic turmoil currently dampening oil and gas prices will have a similar impact on labor costs or building materials like steel. If those costs drop, it could significantly impact the overall cost of the natural gas pipeline.

Asked if TransCanada could finance the project, estimated to cost between $26 billion and $40 billion, without an increase in the federal loan guarantee, Palmer said, “Yes, of course we can. The loan guarantee does assist in obtaining debt for the project, and it does assist in lowering the interest rate for the project to the benefit of all stakeholders.”

TransCanada completed a cost estimate in 2007. The company will soon begin fieldwork to get new estimates before holding an open season on the pipeline by the spring of 2010.

As proposed, the pipeline would run around 1,700 miles from the gas fields on the North Slope to an existing pipeline hub in Alberta, where gas could be fed across the continent.

Idea concerns senators

In an interview with Reuters published Dec. 9, TransCanada CEO Hal Kvisle said, “The ... question for us is can we get the U.S. government to ideally increase (the guarantees) in step with inflation, recognizing that inflation has taken a big bite out of them.”

Coming just days after the company received an exclusive state license and accompanying $500 million matching grant to move forward on trying to permit an Alaska gas pipeline, Kvisle’s remarks elicited cautious concern from Alaska’s new U.S. Senate team.

“I am troubled by the recent reports of TransCanada floating the idea of even bigger federal loan guarantees,” Senator-elect Mark Begich told reporters in Anchorage on Dec. 11. “That wasn’t necessarily met with great enthusiasm in Washington.”

Asked if he would support such an increase, Begich, a Democrat, said, “I would be very cautious about looking at the future until I see some real project potential.”

Sen. Lisa Murkowski, a Republican set to become Alaska’s senior senator in January and sponsor of the 2004 bill, also remained cautious about increasing the loan guarantees.

“Given the financial meltdown, the marked drop in oil and gas prices and the size of the federal deficit in the wake of the economic rescue efforts, it’s difficult to predict whether Congress would be interested in providing more financial assistance for an Alaska line,” Murkowski spokesman Michael Brumas told Petroleum News on Dec. 15.

TransCanada hasn’t formally pitched the idea of changing the existing terms of the federal loan guarantees. Palmer said the company planned to hold off on deciding whether to raise the issue until after the inauguration of a new Congress and president in January.

Idea floated last January

The issue of increasing the federal loan guarantee is not new.

TransCanada raised the point in its application under the Alaska Gasline Inducement Act, or AGIA, the vehicle Gov. Sarah Palin created to spur progress on a gas pipeline.

The company also floated the idea of using the federal government as a “bridge shipper” if the pipeline failed to secure large enough volumes of gas to support the project.

These ideas prompted controversy when they came to light this past January.

Some believed TransCanada depended on the federal government taking responsibility for the pipeline, which should have disqualified the company under the terms of AGIA.

But the state called the measures “creative ideas … to help facilitate the development of the project,” and said TransCanada planned to proceed without additional guarantees.

In the Reuters article, Kvisle called the project “fundamentally economic” and said TransCanada only needs the guarantee “to deal with some of the uncertainty.”

Kvisle also suggested expanding the scope of the federal loan guarantees to include paying off debt if TransCanada fails on the project, or helping to cover any fiscal gaps if the fees paid by shippers on the pipeline don’t cover the full construction cost.

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