Legislators question oil executives about gas line prospects

HEARING: Projects will hold dueling open seasons.

June 23, 2009 

An executive leading TransCanada Corp.'s push for a North Slope gas pipeline on Tuesday spelled out for legislators what would happen if Alaska oil producers refuse to commit their gas to the project next year.

His company, recently joined by Exxon Mobil Corp., is competing with BP and Conoco Phillips' proposed Denali gas line project. Next year the two multibillion-dollar projects plan to hold dueling open seasons -- when both projects lay out their shipping rates and seek gas producers to commit to using their pipe. TransCanada is scheduled for next summer, while the Denali open season will likely be later in the year.

But some pundits, economists and former legislators are predicting that neither open season -- a key milestone in the early stages of developing a major pipeline -- will lock in enough gas to move the project forward.

If TransCanada's open season fails, the company has "an obligation" under a state license awarded last year to keep soliciting gas from the producers every two years, said Tony Palmer, the company's vice president for Alaska development, during a House Resources Committee hearing in Anchorage on Tuesday.

If Denali's open season fails, its next move depends on the reason for failure, said Denali team spokesman David McDowell, speaking in an interview Tuesday afternoon.

McDowell added, "An unsuccessful open season is often followed by more discussions between pipeline company and the potential customers about issues that got in the way of success, hopefully leading to a successful open season the next time."

During Tuesday's hearing, legislators questioned TransCanada and executives from Exxon, BP and Conoco Phillips about the pipeline's prospects now that Exxon has linked up with TransCanada.

Executives from BP and Conoco who are not involved in their companies' Denali project said they thought that Exxon's involvement will probably lead to a better, more competitive proposal from TransCanada. They said their job will be to look at the two proposals objectively to decide which one provides the best return for BP and Conoco.

"It's always nice to have choices," said Claire Fitzpatrick, a BP vice president.

REIMBURSING EXXON

Palmer said that even if TransCanada's open season fails next year, state law requires it to spend hundreds of millions of dollars to seek federal permission for the pipeline project. The company can request up to $500 million in reimbursement from the state for its own and Exxon's costs, Palmer said.

Rep. Bruce Edgmon, R-Dillingham, questioned why Exxon, which he called "the largest corporation on the planet," should get reimbursed by the state for its expenses on the pipeline project.

In response, the House Resources chairman, Craig Johnson, R-Anchorage, pointed out that the state's license requires a risk of millions of dollars to advance the project, even without gas commitments, in return for the $500 million reimbursement. Johnson said he didn't think the state withholding the money was "on the table."

When asked, Palmer said he had "no problems" with Johnson's answer.

ANOTHER SCENARIO

Palmer also described scenarios in which TransCanada's open season wouldn't be 100 percent successful but might not be a total failure either.

"It would not be unusual for potential (TransCanada) customers to condition their bids. That's often the norm that you see in the event that (taxes) remain a major issue," he said.

He said the open season could be termed a success if the North Slope lease holders make their gas commitments conditional on regulators approving the pipeline.

If the producers make their gas commitment conditional on changes to the state's tax rates, it will be harder to call open season an unqualified success, Palmer said.

For example, the three oil companies that control most of the North Slope's known gas reserves have said repeatedly that they need a more predictable, long-term tax rate for the gas line to move forward.

None of the companies have begun haggling with the state over future taxes on the gas, they say, and even though the open season is looming, there's no need for the conversations to happen right now, said Pat Galvin, the state's revenue commissioner.

One of the oil companies agreed with Galvin that it was too early to talk about the tax rates.

Fitzpatrick testified Tuesday that her company probably won't be ready to negotiate with the state until the open season begins, when BP has a chance to review proposals from the competing pipeline projects.

BP is already analyzing the state's tax rate internally, and it might be able to share its views before the open season, but it won't be able to make any commitments until later, she said.

If the producers commit their gas contingent on tax revisions, and the issue is settled with the state shortly after the open season ends, then the open season is successful, said Palmer of TransCanada.

If its open season fails but the tax issues are settled by 2011, TransCanada will immediately begin talking to the producers again about committing their gas, instead of waiting until 2012, he said.

"Clearly, we wouldn't jeopardize (pipeline) schedule," he said. Both the TransCanada and Denali projects envision a pipeline starting up about a decade from now.


Find Elizabeth Bluemink online at adn.com/contact/ebluemink or call 257-4317.

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