The "open season" for the Alaska Pipeline Project of TransCanada and Exxon Mobil is the first major test of market interest in a future Alaska line. It could determine whether investors will sink billions of dollars into a high-pressure pipeline to Canada or Valdez.
"It is a very significant milestone," said Alaska Revenue Commissioner Pat Galvin, one of the leaders in this incarnation of the pipeline dream.
But Galvin and others said the real action comes after 90 days, when TransCanada will know whether it has any offers -- and if it does, whether they're worth pursuing.
The end of open season on July 30 will also be a significant day for Alaska's treasury. That's the when the state reimbursement rate to TransCanada and Exxon Mobil for pre-construction expenses jumps from 50 to 90 percent.
The reimbursements could total a half-billion dollars, one of the biggest state investments in history. The money is one component of the "I" in AGIA -- the 2007 Alaska Gasline Inducement Act, the law under which the TransCanada project has an exclusive state license.
The state has already paid the Alaska Pipeline Project partners about $10 million, with more bills pending, Galvin said. Other inducements are available to gas producers on the North Slope if they or their marketers sign contracts to put gas in the line.
Because the pipeline company isn't a public agency and open season is a commercial transaction loaded with trade secrets and proprietary financial information, Alaskans may not learn the results of the bidding period until the end of the year at the earliest. Even state officials sworn to secrecy will only learn general information about the bids, Galvin said.
BIDS WITH CONDITIONS?
Tony Palmer, TransCanada Corp.'s vice president of Alaska development, said in a phone interview from his office in Calgary that the company will publicly report if it received no bids, a nightmarish conclusion leading to a possible demise of the project. He also said the public will quickly learn if shippers unconditionally propose sending enough gas to completely fill the line -- the maximum design throughput of 5.9 billion cubic feet a day, an almost impossible dream.
The most likely result of open season will be the receipt of bids loaded with conditions, starting a protracted period of private negotiations, Palmer said. For instance, because construction costs are factored into the pipeline's rates, some shippers might want to be protected against cost overruns. Other conditions, like tax abatements or resource access, would bring the state into the negotiations.
"We will work through the fall and through Christmas to try to resolve these differences with customers," Palmer said.
If those negotiations are successful, they will lead to a "precedent agreement" that would be publicly filed with the Federal Energy Regulatory Commission, the nation's main pipeline regulator.
Larry Persily, the newly seated federal gas-line coordinator, said nothing prevents shippers from disclosing that they submitted a bid or even their general terms, so Alaskans may get some early hints about what's going on behind the scenes.
ALBERTA OR VALDEZ?
While only one company can be licensed under AGIA and receive its inducements, the law says nothing prevents other companies from developing a pipeline project. The two main North Slope oil producers, Conoco Phillips and BP, have a project they call Denali. A 90-day open season for Denali starts in July.
Open seasons are common in the pipeline business, but the Alaska seasons are unusually long because of the project scale, said Richard Foley, a program manager at FERC.
TransCanada said it would either build a line to Alberta, where Alaska gas will feed into an existing network connecting to Canada and the United States, or to Valdez, where the gas would be liquefied and transported by ship to the Lower 48 or to other countries. Either line would contain at least five taps for spurs to utilities in Alaska.
OIL MIXED WITH GAS
The North Slope's natural gas was discovered along with the oil over 40 years ago. But gas is a much less lucrative business than oil. Since Prudhoe Bay started production 33 years ago, the gas that rises up through the oil wells mostly gets reinjected back underground to help scrub out more oil and to save for later.
However, natural gas prices are now higher and global demand is expected to grow, which has sparked the idea that the time might be ripe to build the Alaska line.
The pipeline would start with a 58-mile, 32-inch spur from Exxon's largely undeveloped Point Thomson gas field east of Prudhoe Bay, and would include a massive multibillion-dollar gas treatment plant at Prudhoe. From Prudhoe to its destination, the line's diameter would be 48 inches with pipe walls more than an inch thick.
A 1,700-mile pipeline to Alberta would cost between $32 billion and $41 billion, Palmer said. An 803-mile line to Valdez would cost between $20 billion and $26 billion, he said, with some other company responsible for building a plant to superchill the gas into a liquid and for supplying the tankers that would then carry the liquefied gas.
Foley, the FERC program manager, said TransCanada will determine the pipeline destination based on the bids it receives from shippers. TransCanada said it would announce the route by Sept. 1, he said.
The base capacity of a pipeline to Alberta is 4.5 billion cubic feet a day, and Valdez 3 billion cubic feet. TransCanada would recover the cost of construction through its shipping rates, and Galvin said the company would consider the open season a success if it got commitments to cover 80 percent of those costs, with the idea it would sell the remaining 20 percent in the future.
CONTROLLED INDUSTRY
Alaskans who have come to love or hate the oil industry -- sometimes at the same time -- may find the natural gas business more staid and less rough-edged, assuming it achieves a permanent presence here.
"I would prefer 'gentlemanly' to 'staid,' " said Palmer. "But it's very much like a utility business. We're highly regulated by FERC and the counterparts in Canada. That's just the norm in the gas pipeline business."
As a regulated business that operates under a certificate of public convenience and necessity, a natural gas pipeline must treat all customers fairly. Though Exxon is an owner of the Alaska Pipeline Project, it can't get special treatment, Foley said. The same would be true for the producer-owners of Denali.
"The rules establish a firewall situation," Foley said. "Everyone working with Exxon on TransCanada, those officials have to be separate and independent from those who work with Exxon as a producer."
Galvin said it's possible that BP and Conoco Phillips would bid for space in the TransCanada-Exxon line, just as Exxon might submit a bid during Denali's open season.
Find Richard Mauer online at adn.com/contact/rmauer or call 257-4345.
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