Alaska natural gas producers are being offered a chance to win shares in a $3 billion bonus if they sign up for delivery capacity on TransCanada Corp.'s entry in the contest to build a pipeline to the Lower 48.
The sweetener is made possible by TransCanada's newly acquired right to extend its Nova transportation network beyond its native Alberta under a decision by the National Energy Board (NEB) to take jurisdiction over the formerly one-province grid (see NGI, March 2a).
The potential $3 billion gain takes the form of toll savings that can be generated in the first 15 years of the proposed Alaska route's operations under the Canadian system of rolled-in financing for projects that qualify as additions to existing pipelines, TransCanada Vice President Tony Palmer said.
Palmer pledged that the NEB will be asked to let TransCanada locate the connection between the Alaska line and its established grid midway across northern British Columbia (BC) at Fort Nelson. A favorable ruling would enable TransCanada to roll into Nova's rate base the costs of a forthcoming 100-mile addition of jumbo pipe to its mainlines in Alberta, effectively reducing the Alaska system's tolls by 13-18 cents/MMBtu, he predicted.
The BC leg would be built by the time the Alaska project arrives, as a Nova extension called Horn River Pipeline (see NGI, March 2b). On the heels of obtaining the jurisdictional transfer, TransCanada will shortly apply for construction of the new Nova leg as a service initially dedicated to northern BC's Horn River Basin shale gas area.
There is no guarantee that the $3 billion will materialize for Alaska gas shippers, Palmer added. There could be a fight with Alberta and BC producers. The extra bonus will have to come out of a forecast total of $10 billion in toll savings that TransCanada expects to achieve for all its shippers with its version of the Alaska project. The plan calls for spreading costs of TransCanada's entire system thinner over increased traffic that would result from delivering Alaskan gas to the United States from Alberta through its existing network. Enough capacity is expected to open up on TransCanada's long-distance mainline for all of the Alaska project's deliveries of 4 Bcf/d due to natural depletion of Alberta production combined with increased consumption by the province's oilsands and power industries.
Palmer described the Nova jurisdictional transfer as a key factor in keeping TransCanada's entry in the Alaska pipeline race economic by holding down costs for prospective shippers. The Canadian pipeline giant's current forecasts call for tolls to be $2.76/MMBtu for the 1,700-mile journey from Alaska to the Nova transportation and trading hub in Alberta.
"It is critical that we maintain those costs under $3," Palmer said. "There must be a profit margin for producers and governments even in periods of low prices."
He pointed to current consensus forecasts that gas will hover near $6/MMBtu for the next five years then rise to $8/MMBtu or more by the 2018 target date for putting the Alaska line into service. "An $8 price would see a netback (wellhead price after delivery costs) of $5 -- clearly a sufficient netback for producers as well as governments."
Palmer described the bonus and repeated TransCanada's historic claims to build the Alaska line, dating back to a 1970s treaty, at a Calgary industry conference where the rival Denali Project made its Canadian debut. "This is a competition -- right now," said Bud Fackrell, president of Denali The Alaska Pipeline LLC.
There are about 100 Denali employees, including a new Calgary office led by veteran marketer Daniel Ouimet. The operation has also started the Canadian regulatory process rolling by filing initial, informal project descriptions with the NEB and holding preliminary discussions with a range of authorities that will be involved in approving construction and environmental applications.
Fackrell said strict separation will be maintained between Denali as a pipeline and its owners, Alaska producers BP and ConocoPhillips. In rival open season auctions of delivery service contracts scheduled for 2010, the producers will make independent decisions about whether to support Denali or TransCanada based on their economic merits, he said.
After spending $55 million on initial planning, environmental and community relations work involving more than 30 contractors in 2008, Fackrell said the effort will accelerate this year. The program will include redoing cost estimates because current forecasts in the $26 billion range are just projections of calculations done in 2002, he reported.
"The project must be economic," Fackrell emphasized. Costs have to be pared because the gas market has changed over the past seven years, he indicated. Alaska supplies must compete with liquefied natural gas imports and shale production in the U.S. and Canada, which have grown and show signs of continuing to multiply, he said.
"This project is not a slam-dunk. It's far from that," Fackrell said. On top of keeping Alaskan gas competitive against other supplies, the mammoth pipeline construction project will have to be financed on changed and wary money markets, he predicted. The companies involved will need strong balance sheets to hold down borrowing costs and the BP-ConocoPhillips combination fits the bill with combined "market caps" or total value of their outstanding shares still at about $200 billion even on currently depressed stock markets, Fackrell said. "It's going to take this kind of financial strength," he predicted, pointing out that the Alaska gas pipeline will be the world's biggest investor-owned project ever if it is built.
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