The first northern pipeline proposal to reach Canadian regulators includes an unintended reminder of who controls the Arctic natural gas agenda — producers rather than transporters.

A reminder is in fine print of supporting documentation presented to the National Energy Board by ArctiGas Resources for its “over-the-top” pipeline route. All three U.S. financial houses that ArtiGas asked to rate the project feasibility require “ironclad” transportation contracts from the major producers before they risk investment. The terms convey a reality that stands out as the prime consideration in the Canadian industry. Exploration and production houses will determine the timing and shape of the Arctic pipeline project based on their readings of gas markets in Canada and the United States.

ArctiGas has proposed a US$7.8 billion, 1,700-mile line to deliver a mixed stream of 5.2 Bcf/d of American and Canadian gas from Prudhoe Bay and the Mackenzie Delta-Beaufort Sea region. It’s a route that has run into opposition from the state of Alaska, which stands to pick up large revenues from a route for Prudhoe Bay gas that goes straight south through the state. At this point Alaska has enacted a ban on the over-the-top route, and Alaska Republican Sen. Frank Murkowski, is attempting get a similar ban inserted into federal energy legislation.

The ArtiGas plan calls for 100% debt financing, with the Canadian leg of the pipe owned by aboriginal communities along the Mackenzie Valley route. A consortium of native and industry sponsors is expected to own the U.S. stretch offshore of Alaska.

In letters included as an appendix to the ArctiGas filings with the National Energy Board, RBC Dain Rauscher, Lehman Brothers and BNP Paribas describe the project as feasible and express interest in helping raise funding with bond sales, but only if strict conditions are met. All three firms estimated the requirements for ArctiGas will add up well beyond the forecast pipeline construction tab of US$7.8 billion to reach US$9.4 billion, counting all costs including financing, engineering, environmental and regulatory expenditures.

At Paribas in New York City, Barton Schouest and Dan Cozine, the managing directors for oil, gas and project finance, did not mince words about the high standard of security that will have to support the bonds in order to sell them. Schouest and Cozine wrote “the integrity of the transportation contracts is of paramount importance.”

The big names in Arctic gas — BP, ExxonMobil and Phillips in Alaska, and Imperial Oil, Shell Canada and Conoco Canada in the Northwest Territories — will help. “Clearly, the credit capacity of the North Slope and Mackenzie Delta producers, which will be the transportation contract counterparties, establishes a very strong foundation upon which a financing structure can be developed,” the Paribas executives wrote. But they also insisted that the big names will have to be attached to ironclad commitments to the project.

“Nevertheless, investors must be assured that the terms of these transportation contracts synthesize the bonds into a credit risk, which is essentially the same as a direct credit risk on the producers themselves. The investor must be effectively insulated from construction and operating risks over the life of the project.”

At the Houston office of Lehman Bros., managing director Stephen Claiborn agreed with ArctiGas that its plan follows a well-travelled route used for public works such as bridges, roads and municipally-owned utilities. But the pipeline proposal stands out as an “extraordinary” use of the method. “Financing is anticipated to be secured based on high ratings — A, AA and AAA quality — of the private shippers providing long-term tariff agreements and/or any insurers… It obviously requires the full co-operation of the shippers,” Claiborn wrote.

At the Houston office of RBC Dain Rauscher, a U.S. arm of the Royal Bank of Canada since a takeover a year ago, managing director John Rauscher made it plain that ArctiGas is assuring the financial community it can deliver the necessary pledges by the producers. “You have indicated that the primary security for the bonds will be provided through long-term toll agreements, generally with investment grade shippers,” Rauscher wrote. “We believe that, based on our understanding of the project and current market conditions, a 100% debt financing for this project is feasible. The credit capacity of the shippers and their related contractual obligations will be a strong foundation on which to begin building this highly leveraged financing.”

While encouraging ArctiGas — also known as Arctic Resources Co. in the U.S. and Northern Route Gas Pipeline Corp. in northern Canada — the financiers hedge their bets by explicitly refraining from making commitments. The investment community’s understanding of the first candidate to step forward into the regulatory arena from the northern gas project lineup remains based entirely on predictions by the sponsors in Houston and Calgary. At RBC Dain Rauscher, “our opinion is based solely on the information and estimates provided to us by ARC and we have not attempted any independent investigation or due diligence at this time,” wrote Rauscher.

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