Exxon joins TransCanada in push to build gas pipeline

TRANSCANADA: Partnership plans to pursue 1,700-mile line to Canada.

June 11, 2009 

Exxon Mobil Corp., the largest natural gas holder on the North Slope, said Thursday it will work on the long-awaited natural gas pipeline project with TransCanada Corp.

The two companies said Exxon will participate in all aspects of TransCanada's project: technical, commercial, regulatory and financial. TransCanada will retain the lead in its project and be majority owner.

The alliance of Exxon and TransCanada was hailed by Gov. Sarah Palin, whose administration is backing the TransCanada project under legislation -- the Alaska Gasline Inducement Act -- she pushed through in 2007, her first year in office.

She described the agreement as "very encouraging and exciting, but certainly no surprise, because AGIA was crafted to allow just this type of commercial alignment to take place."

But some others said Thursday's announcement was so lacking in specifics that it was difficult to know its significance.

It's "much ado about not much," said Ken Boyd, a former state oil and gas director who is now a consultant.

"It's some kind of agreement to do something, I guess we're better off than we were yesterday," he added. "Anything that moves the gas line forward is a good thing."

The TransCanada-Exxon project is one of two being explored to bring the North Slope's huge gas reserves to Lower 48 customers. Conoco Phillips and BP, the second- and third-largest holders of North Slope gas reserves, are pursuing a separate pipeline project called Denali.

Thursday's announcement falls well short of a commitment to build a pipeline. A decision on construction could be a couple of years away.

Rather, the companies said they are boosting their budget for preliminary work from about $83 million to about $150 million. Tony Palmer, TransCanada vice president of Alaska development, said it was confidential how much of the $150 million Exxon will pay.

Marty Massey, U.S. joint interest manager for Exxon Mobil Production Co., said the goal is for the agreement to go beyond the preliminary work and be a long-term partnership, but neither he nor Palmer would discuss any financial commitment Exxon is making beyond its portion of the $150 million.

The state was let in on the TransCanada-Exxon agreement in early May and reviewed it in detail over the past six weeks, said Marty Rutherford, the head of Palin's gas pipeline team.

Rutherford send Palmer a letter Thursday blessing the arrangements in the TransCanada-Exxon deal and assuring that TransCanada is still eligible to receive up to $500 million from the state to reimburse it for half of the project's up-front costs. TransCanada then will reimburse Exxon for its share of their costs.

HOW COMMITTED IS EXXON?

Several Alaska state legislators said it's hard to tell how big a deal the announcement is without more details, and at least one found it to be more noise than substance.

House Speaker Mike Chenault, a Republican from Nikiski, said he won't know how significant it is without having more conversations with Exxon. "For all purposes it seems to be a step in the right direction; naturally the devil is in the details," he said.

Anchorage Republican Rep. Mike Hawker, co-chairman of the committee that writes the budget, said TransCanada seems to be merely subcontracting some work to Exxon. "My take is what's going on here is a completely overblown media circus," said Hawker, whose wife works for Conoco in its Cook Inlet operations.

That the state will reimburse Exxon for its gas pipeline costs is raising eyebrows. But that repayment can't be avoided under the gas line inducement law.

"Yeah, nobody likes Exxon, and how they treated the Exxon Valdez plaintiffs even recently bothers me terribly, and maybe this means we will give them a little bit more scrutiny," said Beth Kerttula, House minority leader.

Yet Exxon is a dominant player on the North Slope, she said. "This was something that was inevitably going to happen for the pipeline to be successful; Exxon was going to have to be involved. Now it's up to us to be sure it works for Alaskans."

The state House energy and resources committees have scheduled a hearing for Monday to discuss the announcement. They've invited Exxon, TransCanada, Conoco, BP and Palin officials to attend.

Palmer and Massey stressed that their agreement is substantive.

BILLIONS OF DOLLARS

A pipeline, if it is built, would likely cost more than $30 billion, making it one of the largest private construction projects in U.S. history. The current estimate is that if construction occurs, the pipeline would be finished in about a decade.

A project would fulfill a dream of three generations of Alaska leaders to tap the vast storehouse of natural gas at the Prudhoe Bay oil field and elsewhere on the North Slope. A pipeline promises to pour billions of dollars into the state treasury in coming decades, create jobs for Alaskans, provide gas for heating homes and creating electricity in the most populated part of Alaska, and fatten the state's Permanent Fund savings account plus the dividends the fund pays to Alaskans each year.

Exxon is the world's largest publicly traded oil company. Although its profile in Alaska is lower than that of BP or Conoco because it doesn't run any oil fields, the company is a major player. It owns the largest share of oil and gas at the giant Prudhoe Bay field. It also has a significant interest in the Point Thomson field, the North Slope's second-largest known gas field, and it began development there this year.

In all, Exxon controls more than one-third of the North Slope's known natural gas reserves.

TransCanada owns more than 36,000 miles of gas pipelines in North America, with a significant presence in its home of Alberta, Canada.

Alberta would be the destination of the 1,700-mile pipeline from the North Slope that TransCanada is exploring. The company is doing preliminary work -- pinpointing the route, pre-construction engineering, refining cost estimates -- in hopes of holding an "open season" next year. An open season is when gas owners can commit to using the pipeline. Without such commitments, a pipeline project cannot get go-aheads from regulators or the money needed for construction.

The $150 million is the cost estimate for getting through the open season, currently scheduled for July 2010.

THE RIVAL PIPELINE

Both Palmer of TransCanada and Massey of Exxon said they hope BP and Conoco Phillips eventually will "align their interests" with the TransCanada project.

"We continue to seek alignment with other producers as well as the state to make this project a success," Palmer said.

He called the agreement with Exxon "an important step, with many more to go before we have a project in the ground in nine years."

Massey said Exxon has thrown in with TransCanada rather than the Conoco/BP pipeline project because it "has the best chance of success and is the best way to get all parties together" -- the North Slope producers, TransCanada and government officials.

Massey also said the agreement with TransCanada does not mean that Exxon will place its North Slope gas into that pipeline.

"We will face that decision next year," he said.

"If Denali does go forward and they have an open season, we will determine what we should do with the gas during that open season; it will be a separate independent decision based on the commercial realities of that project versus the project that we are supporting, but I think you have to draw the conclusion: Why would we put our gas in a project we are not supporting?" he said.

Scott Jepsen, vice president of external affairs for the Denali project, said the Conoco-BP joint venture is spending roughly $135 million through this year to get ready for its open season, slated for late next year, likely after TransCanada's.

When asked if the Exxon-TransCanada announcement was a setback for Denali, he said that no gas production has been committed to any pipeline yet, and that Denali continues to believe the pipeline proposal it will develop will be more attractive to gas producers when it is unveiled for the open season next year.

TALKING TAXES

Massey said his company's agreement with TransCanada does not mean Exxon no longer wants to talk with the state about gas-tax terms or changes to the gas line inducement act, a law Exxon has criticized in legislative hearings.

Exxon still wants the state to set some "predictable and durable fiscal (tax and royalty) terms" for a pipeline and gas production that could last for 50 years.

Rutherford, Palin's gas pipeline chief, said the state has not begun negotiating with Exxon or the other producers. But, "we're in the process now of developing our proposed package that will provide some certainty associated with royalty values."

State Revenue Commissioner Pat Galvin said the Palin administration still believes a gas pipeline would be profitable under current laws, but it "is open to new information from anyone."


Daily News reporters Bill White can be reached at bwhite@adn.com, Sean Cockerham at scockerham@adn.com, and Elizabeth Bluemink at ebluemink@adn.com.

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