Time will come for Plan B on gas pipeline

March 13, 2011 

It's time for a talk with TransCanada Corp. about renegotiating at least parts of the state's contract with the pipeline company. What seemed like a good idea three years ago doesn't anymore. TransCanada has been a good partner with the state, however, and there might be a win-win solution.

Here's the problem: The U.S. is awash in cheap gas being produced from shale. The world is also glutted with liquefied natural gas, or LNG, looking for a market. Things don't look good for our $40 billion-plus Alaska gas pipeline.

Our immediate concern is that the state is spending considerable sums to support this project, $160 million next year, in fact. Of more concern, however, is that we're hobbled in pursing alternatives for our gas by our contract with TransCanada. In fact, we're exposed to treble damages if we do.

TransCanada is adversely affected, too, because its contract with us obligates the company to keep spending money on engineering and other work related to an application to be filed with the Federal Energy Regulatory Commission by 2012. Given the glut of gas on the market, it seems unlikely that TransCanada will have firm transportation contracts signed when it has to make that application.

It could be a big waste of money. Even though Alaska pays 90 percent of these costs under our contract, TransCanada pays the remaining 10 percent, so it matters to the pipeline company too.

This is an unusual arrangement. Typically a pipeline company signs up customers to ship certain volumes of gas during an "open season," a period in which shipping contracts are solicited, and then the company designs the pipeline around the contracted amounts. With contracts and engineering in hand, the developer proceeds to FERC licensing, which is quite involved.

Why we obligated TransCanada to proceed to licensing without contracts, if the open season fails, and with only a guess at what the volumes might be, is a story I'll get to. However, this could be a waste because if and when shippers do appear someday, the volumes will likely be different and the engineering may have to be redone. We're talking big money, several hundred millions of dollars.

I recall TransCanada pleading with former Gov. Sarah Palin and the Legislature not to stick this requirement into the state's Alaska Gasline Inducement Act, or AGIA, but to no avail. It was only when Palin offered to have the state pay 90 percent of expenses after a failed open season that TransCanada agreed to this provision. The AGIA contract has the state pay 50 percent of pre-open season costs, by the way. These payments are now being made.

The state's AGIA strategy has some good points, but some of its assumptions were flawed and the chickens are coming home to roost.

The base assumption going in was that the gas pipeline was economic. In hindsight, that seems amazing. There was also a desire for an independent pipeline company like TransCanada to lead the project. However, once the pipeline company developed the project, there was concern that the North Slope producers, who own the gas, would not commit to ship their gas. A key part of the AGIA strategy was for the pipeline company to continue working toward the FERC application and spending money on engineering, without shipping contracts. State officials believed the producers could eventually be pushed into the project.

TransCanada's open season was held late last spring. We're going on nine months, and there is no word yet on results. Denali, the competing BP- and Conoco Phillips-led pipeline project, also held an open season last summer. Denali said recently it hasn't yet secured contracts either.

It is these contracts, and the credit of the companies that sign them, which enable the pipeline company to raise financing for construction.

Palin is now gone, leaving all this in Gov. Sean Parnell's lap. TransCanada and Denali both say they have potential shippers and are negotiating. Parnell is urging patience.

We may yet hear good news, but it's difficult to imagine that, in this market environment, large companies will sign shipping contracts obligating them to pay a hundred billion dollars or more.

What is frustrating for Alaskans, however, is that the arrangement hobbles us in pursuing alternatives. Specifically the contract limits the amount of gas committed to an alternative, such as a pipeline built to Southcentral Alaska, to 500 million cubic feet a day. However, any hope of making such a project feasible lies in shipping the higher volumes necessary to achieve economies of scale, as well as attract industrial customers.

Parnell is sticking with TransCanada because we signed a contract. The state should indeed honor its commitments. There comes a time, though, when we have to think of Plan B. The in-state gas pipeline work now going on, involving a smaller pipeline to Southcentral Alaska, is a good framework for that.

This could involve TransCanada because the company knows how to build pipelines. The state should consider being an equity partner at least in proportion to its one-eighth royalty ownership share of the gas. The pipeline should be built large enough, at least to Interior Alaska, so that the section from the Interior to Alberta can be built when markets allow it.

The pipeline to Southcentral should also be large enough to supply gas to utilities and new industrial customers such as, possibly, Sasol, a South African energy company that has been interested in bringing its proven gas-to-liquids, or GTL, process to Alaska. GTL makes high-value liquid products, like ultra-clean diesel and jet fuel, from natural gas.

Sasol executives visited Alaska several years ago, but state officials gave them the cold shoulder because they were interested only in a pipeline. Rebuffed here, the company will now develop its first North American GTL plant in British Columbia, using gas from shale. But Sasol is still interested in Alaska, I'm told, despite the earlier snub.

This should be our Plan B. Renegotiate with TransCanada and make it our partner in a trans-Alaska pipeline. Recruit Sasol or another company with proven GTL capabilities to be the anchor industrial customer for a pipeline to southern Alaska.

Someday the Lower 48 will need Alaska's gas. Not just yet, though.


Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Anchorage Daily News.

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