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Alaska House Weighs Gasline Economics

A bill being considered by the Alaska House of Representatives, which would create a rebuttable presumption that TransCanada's natural gas pipeline project is uneconomic because it failed to garner sufficient firm transportation commitments during its first open season, amounts to a unilateral changing of the rules by the state and jeopardizes the project -- and possibly future gasline projects -- according to TransCanada Corp. Vice President Tony Palmer.

"Any corporation believes that it looks to the counterparty -- in this case, the state of Alaska -- as to whether or not they honor agreements," Palmer told members of the Alaska House of Representatives Finance Committee in Juneau Monday. "If they do, that's a positive signal for a long-term relationship, both on current projects and future projects...I can assure you that in the event that the state did change the rules and it's determined that you changed the rules, that will affect any future gasline project that the state of Alaska seeks to do with a third party."

The bill (HB 142), introduced two months ago by Republican lawmakers, is intended to light a fire under efforts by TransCanada to construct a natural gas pipeline from the North Slope to serve Lower 48 markets. While the legislation's backers are growing impatient, pipeline faithfuls claim that the measure could derail the project and signal that Alaska is closed for business (see Daily GPI, Feb. 10). The bill would give the state an out from its contract with TransCanada by triggering an abandonment clause in the Alaska Gasline Inducement Act (AGIA). Under the agreement the state is on the hook for up to $500 million in cost reimbursements for the first phases of the project (see Daily GPI, Feb. 25, 2008; Jan. 28, 2008).

HB 142 would require Gov. Sean Parnell's administration to show that the project remains economically viable, according to House Speaker Mike Chenault (R-Nikiski), the bill's chief sponsor. The bill requires the administration to demonstrate that the project garnered sufficient firm transportation commitments during its first open season, which ran from April 30 to July 30, 2010 (see Daily GPI, Aug. 3, 2010).

That requirement flies in the face of the agreement that TransCanada has with Alaska, according to Palmer.

"To have the state of Alaska make a representation to the public of Alaska as well as to the licensee that there's a rebuttable presumption that the project is uneconomic because we didn't have firm transportation commitments three years in advance of the [schedule] ratified...by this legislature is, in my view, absolutely in contravention with the statute."

Some members of the committee said they thought the bill would breach the original contract and leave Alaska open to a lawsuit representing possibly billions of dollars in damages.

But the bill's sponsors, including Chenault (R-Nikiski), would not breach the contract and would help the state avoid pouring money into the project only if it is destined to become a losing proposition.

"While the potential project languishes, it is becoming increasingly apparent that world economic conditions are changing dramatically," Chenault said. "Since the state signed off on AGIA, shale gas is flooding the market in the Lower 48, gas prices have been at extremely low levels, and major gas discoveries around the world are coming into production rapidly and serving potential markets for Alaska gas. The global economic framework AGIA was built on may no longer exist. That may make AGIA an uneconomic project, and if it is, Alaska needs to know."

Alaska and the TransCanada project have arrived at a crossroads, Chenault said.

"Alaskans are clamoring...'What are we doing with our resources and when are we going to take our resources to market?'...is this project uneconomical, or is it economical and should we go forward with it?"

Donald Bullock, an attorney for the legislature who participated in the drafting of the AGIA, said the bill doesn't breach the contract but it does raise "questions of legitimate legislative concern."

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