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Gasline's failure disappointing, but no surprise

Patti Epler
Aaron Jansen illustration

Backers of the Denali natural gas pipeline project had barely thrown in the economic towel, when some lawmakers began calling for TransCanada and the Parnell administration to prove the controversial state-sanctioned gas line project is economically viable.

At stake with the Alaska Gasline Inducement Act is is several hundred million dollars in public money the Legislature agreed to give the project as well as the state's ability to move forward with a larger-sized, in-state gas pipeline.

And the announcement Tuesday morning by the Denali project's backers that they were giving up on building a $35 billion, 1,700-mile pipeline from the North Slope to Alberta, Canada, was also immediately viewed as yet another sign that a decades-long major economic dream for Alaska is once again slipping away.

Disappointment, but not surprise was the phrase most used by people who have been following the gas line debate on all sides.

RELATED: A timeline of Alaska's gasline pipe dreams

"It's not unexpected news," said Larry Persily, the federal coordinator for Alaska gas line projects. "Clearly given today's market it's going to be hard. If you were Denali how many more millions are you going to spend when you're not seeing success close at hand. It's all their money. Maybe when you're spending someone else's money you can keep going a little longer."

In an indictment on the economics of the natural gas business here, Denali President Bud Fackrell said in a press release that the company was unable to secure customers and wasn't going to spend billions more dollars on a futile effort. This after BP and ConocoPhilips, the companies behind Denali, had spent about $165 million on the project.

Natural gas prices have fallen considerably since 2007 when the Legislature led by former Gov. Sarah Palin passed AGIA and agreed to support it with as much as $500 million of state money. The state signed an exclusive license agreement with TransCanada which then brought Exxon Mobil on as a partner.

The Denali project was started as a parallel effort and has not had the benefit of state subsidies, a fact some AGIA supporters point to as one big difference between the two proposals and perhaps the reason TransCanada can succeed where Denali failed.

But House GOP leaders who have long been critical of AGIA are seizing the demise of Denali as an I-told-you-so moment. In the just-ended legislative session, they pushed for--but then dropped--an effort to force TransCanada and Gov. Sean Parnell to prove whether the project is economically viable before giving it even more state cash.

"Why is TransCanada afraid to answer the same question that Denali just answered openly and honestly and in the public eye?" Rep. Mike Hawker, an Anchorage Republican and one of AGIA's biggest critics, said Tuesday. "What do they have that makes theirs different? They're looking at exactly the same marketplace and the same customer base."

House Speaker Mike Chenault, another AGIA opponent, has begun moving toward an in-state gas line that would run from the North Slope through Fairbanks and down to Anchorage. The House, over the Senate's objections, included $200 million in the capital budget in a dedicated fund that would kickstart an in-state gas line if approved. The budget also reduced by $100 million the amount of money Parnell had requested for AGIA.

But the bullet line has come under fire, too, for its huge cost -- as much as $12 billion -- and high tariffs that would mean a dramatic rise in the cost of gas to Southcentral consumers. The only way around that would be if the state subsidized the project with billions of dollars.

Chenault says the bullet line could be much more economically palatable if it could be designed to handle a much larger capacity. But AGIA prohibits the state from supporting any project that carries more than 500,000 cubic feet of gas a day. The TransCanada proposal is for a pipeline that carries 4.5 billion cubic feet a day.

State regulators have said there's as much as 2.5 billion cubic feet a day on the North Slope that could be transported south without damaging oil production operations, which need much of the gas to be reinjected back into the ground to keep the pressure up in the reservoir.

"Unfortunately our hands are tied when we talk about an in-state line because of the AGIA process," Chenault said.

Getting out from under the agreement through a provision that allows the state to abandon it if its economically unfeasible would open up more options for an in-state line or another project, he said.

In July, the state is expected to release a new report on the economics of the bullet line. Chenault and Hawker say there's been talk of a fall special session to move forward with the in-state gas line. And now, they say, it makes sense to deal with the economics of the TransCanada project at the same time.

"Denali has had more than enough time to make this determination," Hawker said. "The public has the right to know from TransCanada if there's a big project or just another government boondoggle."

Tony Palmer, TransCanada's Alaska vice president, wouldn’t comment on or speculate about why Denali made the decision to cut short its pipeline effort. He insists that his company is continuing to "make good progress" including filing a couple of reports with the Federal Energy Regulator Commission, which must approve any license for the pipeline. TransCanada is on target to file a license application in October 2012.

Palmer said Tuesday TransCanada has resolved most of the issues raised by potential shippers who bid on gas during the open season last summer. What's left, he said are things his company can't resolve -- a lawsuit between the state and Exxon over the Point Thomson gas field on the North Slope and how much the state might chare in taxes on natural gas production.

Palmer dismisses the political hubbub over proving economic feasibility as overblown. He notes that the bill did not move out of the House and was never considered by the Senate.

Sen. Tom Wagoner, a Kenai Republican who co-chairs the Senate Resources Committee, doesn't see any bill backing away from AGIA making it through the Legislature, despite House GOP leaders' insistence. It's too early to declare a big gas line dead, he says, and a small gas line has not been proven to be cost effective.

Wagoner prefers to take the longer view and see how gas prices settle out in a few years once the glut of shale gas moves off the market. He says most of the shale gas being produced now in the Lower 48 is from leases that were about to expire and that forced producers to all jump in at once.

He says other alternatives for North Slope gas also need to be explored. A Houston company recently pitched the Legislature on converting gas to ethanol and shipping it through the trans-Alaska pipeline to Valdez. That was just one idea that seems promising, he said.

Parnell and his staff also say the AGIA process is alive and well and that its playing out as it should. In a press release, Parnell said Denali's announcement has a "silver lining" because it frees both BP and ConocoPhillips from that project and would allow them to partner with TransCanada now or engage in other gas projects.

Joe Balash, deputy commissioner of the Department of Natural Resources and a longtime energy adviser to Parnell, said Tuesday that no one ever expected there would be two big gas lines built so the withdrawal of one is not a bad thing.

"Hopefully, this is a little bit of a corner-turning event," he said.

Balash said the administration is trying to resolve the Point Thomson lawsuit and the governor is interested in discussing fiscal issues with the producers.

Persily, the federal coordinator, said now is not too soon to start talking about taxes on gas production. "You're never going to get binding shipping contracts until producers get fiscal terms from state," he said. "I think sooner rather than later, the state needs to get in there."

BP spokesman Steve Rinehart won't say too much about what BP's plans are for marketing the natural gas it owns on the North Slope. And he certainly won't comment on Parnell's implication that BP might throw in with TransCanada and Exxon on the big gas line, or whether BP even bid to ship gas through the line.

"There's still a lot of gas on the North Slope," he said. "We'll continue to look at ways to get that gas to market."

Contact Patti Epler at patti(at)alaskadispatch.com