A key factor contributing to greater revenues to the state of Alaska under TransCanada Corp.'s TC Alaska mega-pipeline proposal rather than a competing proposal advanced by major producers is that the producer plan financing is expected to be based on a higher level of equity requiring higher transportation rates and lower netback and royalty payments, according to the analysis and determination issued last Tuesday by state Commissioners of Natural Resources and Revenue.
Details underlying Alaska Gov. Sarah Palin's May 22 decision favoring the TC Alaska proposal for a pipeline to the Lower 48 showed the state might be out $10 billion or more in revenue if it endorsed the rival plan, the Denali Pipeline, recently submitted by producers ConocoPhillips Inc. and BP plc (see NGI, May 26). Even though the producer proposal was submitted outside of the state-prescribed Alaska Gasline Inducement Act (AGIA) process, the analysis evaluated the producer plan and made comparisons.
"The reason a capital structure with less equity is critically important to the state -- and why a low ratio of equity to debt is required by AGIA -- is that it helps to ensure lower transportation rates on the pipeline...lower transportation rates help to maximize the state's revenues and encourage full exploration and development of the North Slope, thereby increasing the number of long-term job opportunities for Alaskans," the state analysis said. Conversely, a higher level of equity "is a much more expensive means of financing a pipeline than debt. The return on equity for a new gas pipeline allowed by [the Federal Energy Regulatory Commission] is approximately 13% to 14%. By contrast debt can be financed at current interest rates of approximately 7% to 8%."
TC Alaska has committed to use 70% debt and 30% equity through the initial construction phase of the project and a 75/25 debt/equity ratio for negotiated rates, while producer-sponsored pipelines such as the TransAlaska oil line in which BP and ConocoPhillips are part owners "have recently advocated at FERC a capital structure of 70% equity and 30% debt." The Alaska report notes that although the Denali gas line plan does not state a debt/equity ratio, the Rockies Express pipeline project in which ConocoPhillips has a minority interest is 55% equity and 45% debt.
"Essentially, by moving money from their producer pocket into their pipeline pocket, BP and ConocoPhillips would increase their profits significantly at the state's expense by avoiding state royalty and production tax obligations," the report said. Also, the higher transport rates would discourage other producers from exploration and development in the state leading to "basin control" by the North Slope producers.
The tariff rate under a 75/25 debt/equity ratio would be $4.71/MMBtu, the study estimates, compared to a $5.90/MMBtu rate at a 50/50 debt/equity ratio.
"Everything we asked for in AGIA to protect Alaska interests is in the TC Alaska proposal," the governor said in announcing the state's backing of TC Alaska. The project will be presented to state lawmakers, who will have 60 days to decide whether to move forward. The commission's report suggests that producers will be forced to fall in line with the proposal if they want to get their gas to market. Producers, however, have noted that the critical test, the open season where producer shippers would have to sign up for capacity, putting their resources and credit behind the project, is yet to come.
The TC Alaska proposal calls for submitting the plan for the 48-inch, 4.5 Bcf/d, 1,715-mile line to the Federal Energy Regulatory Commission (FERC) for approval by Sept. 9, 2009, regardless of the success of the open season at that point.
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