TransCanada hopeful on gas line despite lacking customers

OPTIMISTIC: Official says design and permitting going well.

August 16, 2011 

TransCanada's efforts to get customers for its proposed gas pipeline have so far failed to achieve any firm deals, the company's top official for Alaska told a legislative hearing Tuesday.

In acknowledging the lack of visible progress at reaching agreements crucial to building the line from the North Slope, Tony Palmer, a TransCanada Corp. vice president from Calgary, visibly frustrated some legislators who wanted him to provide details on the lagging efforts.

Even if legislators took an oath of silence, Palmer said, he'd be reluctant to share the commercial secrets that are part of negotiations with potential shippers, including their identities.

While the commercial aspects of the state-supported line are behind schedule, Palmer said, design and permitting are proceeding apace. And he urged state officials to remove two additional impediments to building a line: the uncertainty over how the state will charge producers for gas, and litigation over Exxon's Point Thomson lease, with its huge reserves of gas. He said he welcomed an announcement Monday that the state had reached a possible agreement with Exxon.

Palmer spoke in the middle of three days of hearings in Anchorage by the Senate Resources Committee. The committee also heard Tuesday from a member of the Alaska Oil and Gas Conservation Commission, who said that the North Slope's huge gas reserves are better used now to produce valuable oil than sold as gas, though that could change in the future.

The committee is exploring a proposal for the state to build a 24-inch-diameter, $7.5 billion gas pipeline from the North Slope to Southcentral Alaska. In doing so, it is trying to find out how that line meshes with other energy proposals, including TransCanada's massive Alaska Pipeline Project. That 48-inch-diameter pipeline has a price tag of between $20 billion and $41 billion, depending on whether it goes to a liquification plant in Valdez or a pipeline junction in Alberta. TransCanada says the market will determine the destination.

TransCanada, with partner Exxon, is officially licensed by the state under the Alaska Gasline Inducement Act of 2007. As such, it is entitled to $500 million in reimbursements from the state for designing the line and getting regulatory approvals. The Senate Resources Committee was told Monday that it would cost $400 million in state money to get the smaller state line to the same pre-construction stage.

Palmer spoke for two hours before a packed conference room at the legislative office building in Anchorage. But if any were expecting a big announcement, they were disappointed.

It's been more than a year since the end of TransCanada's open season, the period in which potential shippers were invited to bid for space in the line. Since shippers pay for the line through their tolls, TransCanada needed to have firm 20- to 25-year commitments before it could go to the finance market for the billions it needs to build it.

Palmer had told Alaskans he expected to have the deals, called precedent agreements, negotiated by New Year's. But that didn't happen and there was no news Tuesday.

"Our commercial timeline is behind schedule," Palmer said. "We did not expect it would take a year, and here we are a year later and we do not have precedent agreements with customers today."

To make the project more competitive, TransCanada and Exxon lowered their expected charges and agreed to lower profits. But he said factors not in his control -- in particular persistent low prices due to the glut of gas in the Lower 48 from shale -- has blocked progress.

Sen. Bill Wielechowski, D-Anchorage, pressed for details, including whether North Slope oil producers were reluctant to sell gas at reasonable prices. Palmer said that information could not be released because it involved trade secrets of his company, shippers and suppliers. Wielechowski offered to sign a nondisclosure agreement.

"What you're asking for is something completely outside the bounds of pipeline processes across North America," Palmer said. "If we do that, you're asking us to put in the hands of you or other legislators, potentially 60, highly confidential information on this project."

But Wielechowski countered that the Alaska project was different.

"This is highly unusual project because I don't know that in any other state in the country you have the state putting up hundreds of millions of dollars," he said. "We're a partner in this project and we have access to no information." If the TransCanada project is headed for failure, that's a critical fact for the Legislature's consideration of a smaller in-state line.

Asked by Sen. Joe Paskvan, D-Fairbanks, whether the demise of a competing project pursued by BP and Conoco Phillips -- Denali -- portended a similar fate for TransCanada, Palmer said it didn't.

"It was necessary for one of these major projects to end," Palmer said. "There was going to be a winner and a loser, or a combination." He said his project would be helped if BP and Conoco Phillips join it.

While some Alaskans have been frustrated by the seemingly never-ending pipeline saga, the state is likely better off for not having drawn off gas from Prudhoe Bay, said Cathy Foerster, a member of the Alaska Oil and Gas Conservation Commission, testifying after Palmer. One of the commission's prime jobs is to ensure that state oil fields are produced to maximum capacity, and gas is needed for that task -- it's pumped back into the ground to increase reservoir pressure and force oil to the surface.

"If we were to say, 'Oil, shmoil, we've got a lot from Prudhoe bay, let's get the gas out, that will make everyone happy,' we would be putting 2 billion barrels of oil at risk," she told the Senate committee. With oil a far more valuable commodity than gas, it makes sense to use gas to produce oil rather than sell the gas and leave oil in the ground.

That factor begins to change in the future as oil reserves dwindle, she said. The oil fields wouldn't be hurt by the 500 million cubic feet a day that would be drawn by the 24-inch instate line, she said, but the 4.5 billion cubic feet taken daily by the larger line is another matter.

But that's not a reason to shelve the project. The North Slope likely has huge natural gas fields that no one has bothered to explore because there's no market. Put in a pipeline and that would change -- and those "dry" fields wouldn't limit oil production, she said.

Reach Richard Mauer at rmauer@adn.com or 257-4345.

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