Proving that it pays to follow instructions, TransCanada Corp. has been chosen by Alaska Gov. Sarah Palin and her administration to build a pipeline from the North Slope to Alberta to commercialize the state’s vast natural gas reserves. The pipeline company’s proposal, called TC Alaska, will be presented to state lawmakers, who will have 60 days to decide whether to move forward with the project.

During a press conference last Thursday Palin praised TransCanada and its $26.6 billion plan for meeting all of the requirements of her Alaska Gasline Inducement Act (AGIA). “Everything we asked for in AGIA to protect Alaska interests is in the TC Alaska proposal,” she said.

The TransCanada proposal gives the state a certain timeline for pipeline development, provides for future expansion to accommodate additional North Slope producers and offers low transportation rates, Palin said.

TransCanada was the only company applying under AGIA to make it to the second round of review. Competing proposals were disqualified for not meeting all of AGIA’s requirements (see NGI, Jan. 7). A competing project, known as Denali, was recently submitted by producers ConocoPhillips Inc. and BP plc outside of the AGIA process (see NGI, April 14).

If anything, the Palin administration’s endorsement of TC Alaska has emboldened the Denali backers. BP spokesman Steve Rinehart told NGI Denali is ahead of the game as it has already begun and is not seeking a state license or incentive funds. The Denali backers said they are committed to spending $600 million to get their project through an open season.

“In a nutshell, the decision doesn’t affect us,” Rinehart said. “We’re not part of that AGIA process. We’re not looking for a state license. Frankly, we’re not looking for the state’s $500 million subsidy. What we are doing is moving ahead, we and Conoco, on the project we’ve already started. Our Denali gasline project is in motion, has been for some time. We’ve got project teams at work here at BP and at Conoco. We’ve got field teams lined up to actually be on the ground as soon as the season allows, which is coming up pretty quick.”

Ultimately, the project that signs on financial backing in the form of committed shippers and production will be the one that moves forward.

North Slope major ExxonMobil Corp., which has held back from committing to the Denali project although it was invited to participate (see NGI, May 5), said Friday it is evaluating the decision on TC Alaska. “We are keen to move forward with an Alaska gas pipeline and continue to evaluate all options, including the state of Alaska’s consideration of a project under the AGIA process,” the company said.

The TC Alaska application proposes a 4.5 Bcf/d, 48-inch diameter, mostly buried pipeline running 1,715 miles from a gas treatment plant at Prudhoe Bay on the North Slope to the Alberta Hub in Canada. The Alaska section would be about 750 miles long with six compressor stations at startup and five gas delivery points in Alaska. The application includes an expansion capability of up to 5.9 Bcf/d. Further expansions would include a combination of additional compression and looping.

According to the state, commitments made by TC Alaska include:

“This plan puts Alaskans first. Everything we asked for in AGIA to protect Alaska’s interests is in the TC Alaska project. In fact, because of the competitive process, TC Alaska’s proposal is a better proposal than we’d even hoped for and everything in its proposal is binding and enforceable,” Palin said.

The governor rejected the Denali proposal for coming up short on a number of fronts when compared to TC Alaska. Palin said TC Alaska would give Alaskans the assurance that a pipeline will be developed, with the promise of greater royalties when one is. “We have our interests as Alaskans, and we’re not going to yield on AGIA’s required elements for a project,” Palin said. “Never has it been more important to keep our bearing than right now.”

While TC Alaska does not include development of liquefied natural gas (LNG) facilities, LNG could be added at a later date, Palin stressed.

To get the TC Alaska project to the open season stage TransCanada will be eligible for up to $500 million in matching funds from the state. This, Palin said, is a small price to pay for all of the assurances that the TC Alaska proposal offers when compared to Denali. Palin said that concessions to the producers under the Denali proposal would have cost the state more than $10 billion. “It means that Alaska receives more value, especially on royalties,” Palin said of TC Alaska.

In exchange for the commitments required in AGIA, the Alaska legislature offered a package of inducements that included reimbursement of up to $500 million of the costs incurred to obtain a Federal Energy Regulatory Commission (FERC) certificate, an AGIA project coordinator to facilitate the process, a stable production tax rate for 10 years; and fixed royalty valuation methods to any party that commits to purchase capacity to ship gas on the AGIA gasline during its first binding open season.

“Alaska’s current fiscal system, including natural gas production taxes, are not an impediment to the profitability of this project,” said Revenue Commissioner Patrick Galvin. “The $500 million matching contribution to TC Alaska is a prudent investment for the state, with a potential return of billions and billions of dollars. Rejecting the TC Alaska project in favor of the producers’ project would provide the state with no certainty on forward movement, nor result in an effective open-access pipeline.”

When it was determined that TransCanada was the only project to qualify under AGIA, some in Alaska and elsewhere were critical of the AGIA process and Palin, alleging that the selection process was noncompetitive, faulting it particularly for failing to attract bids by producers (see NGI, Feb. 25; Jan. 28). Recently Tony Palmer, vice president of Alaska operations for TransCanada, reasserted the company’s belief that AGIA was fair and competitive.

“Only one party made it through the first screen. Only one party, TransCanada, was deemed to have a complete application,” Palmer said. “I would tell you that TransCanada, when we filed, did not know how many competitors would be there and had to do what any party participating in an RFP [request for proposals] process has to do, which is you have to put your best foot forward. We competed. We bid to win. And we did so competitively. That is the norm in an RFP process. Competition does not occur after you bid. It occurs before you bid” (see NGI, May 12).

Palmer, who was at the press conference last week, said producers that commit gas to the TC Alaska project during an open season would be eligible to take an equity stake in the pipeline.

The Denali proposal is to build a 4 Bcf/d, 2,000-mile long buried large-diameter pipeline to the Alberta Hub with extension of the pipeline to the Lower 48 if an extension would improve project success or reduce transportation costs. The proposal includes a natural gas treatment plant on the North Slope near the Prudhoe Bay facilities. The proposal would support in-state gas distribution efforts and would provide at least five Alaskan delivery points, including Fairbanks.

No commercial terms are specified and, unlike TC Alaska, the Denali proposal makes no enforceable commitments, the state said. There is no commitment to move the project past an open season to FERC certification. Proponents of the Denali proposal said they would act now and demand fiscal terms later. Based upon the previous gas pipeline terms negotiated by the Denali proponents, those fiscal terms could cost Alaska more than $10 billion, the state said. Rinehart told NGI he would not address the specific criticisms of Denali as the producers have already made their views known during hearings on the AGIA process.

The commissioners’ determination, with written findings addressing the basis for the determination, and a notice of intent to issue a license, will be forwarded to lawmakers, who then will have 60 days to pass a bill approving the issuance of the license. If licensed, TC Alaska would hold an open season. Producers that commit to ship natural gas get reserved capacity on the pipeline and fixed tariff rates. The pipeline company gets commitments that would help it finance construction.

After an open season TC Alaska would apply for a FERC certificate of public convenience and necessity. After a FERC certificate is obtained construction could begin. Construction of the pipeline and the associated processing plants will take at least three years, the state said.

Forward movement on the Alaska gasline could light a fire under backers of Canada’s Mackenzie Gas Project (MGP). The MGP pipeline would ship as much as 1.9 Bcf/d across 750 miles from the Mackenzie Delta south to the Beaufort Sea Coast. However, the project has suffered delay after delay, with its fate tied to efforts of the producer consortium. Last year Imperial Oil Ltd. said the economics of the pipe were “not robust,” and the group has since been renegotiating MGP’s options with the Canadian government (see NGI, Sept. 3, 2007; April 16, 2007). Late last year the Canadian government opened a new round of financing discussions for the project but stressed that no public money would be available (see NGI, Dec. 24, 2007).

Last week Canadian Industry Minister Jim Prentice said it is vital that work begins on the C$16.2 billion MGP begin before construction begins on the Alaska gasline. Prentice said components of the North American economy, such as the steel industry, would have difficulty supporting the simultaneous construction of the two projects. Also last week, a regulatory report on MGP was delayed for several months, which once again will push back the long-delayed project (see related story).

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