Gas pipeline group lacks agreements TRANSCANADA: Aim was to have shippers signed by now.

Christmas came and went, and then the new year, and Alaska is still waiting for its present from TransCanada -- signed agreements with gas shippers that would show its North Slope pipeline project is moving forward.

"We did set out a target, and sometimes you achieve it and sometimes it takes you a little bit longer," said Tony Palmer, TransCanada Corp.'s vice president of Alaska development. "This is a very large and complex project."

Palmer's company, with partner Exxon Mobil, has a state license and state subsidies to build the multibillion-dollar line as the Alaska Pipeline Project.

He had expressed optimism last year that between Christmas and New Year's he would be able to report that willing shippers had signed transportation agreements to move their gas through the pipeline. The completion of such deals, called precedent agreements, are critical milestones that must be reached for the project to have any hope of succeeding.

"It certainly comes as no surprise to me that we have heard nothing," said Rep. Mike Hawker, R-Anchorage, one of the Legislature's leading skeptics of the law that granted TransCanada its state license. "Our concerns are being validated."

Precedent agreements are the hoped-for outcome of an "open season," another bit of pipeline jargon describing the bidding period when shippers seek guaranteed volume in a pipeline to move their gas. The shippers, through transportation fees, ultimately pay the construction cost and profit of a pipeline, and precedent agreements usually require them to have good credit and sound gas customers. TransCanada's 90-day open season ended in July.

Under state and federal law, the bids remain secret until the precedent agreements are signed and filed with the Federal Energy Regulatory Commission in Washington, D.C. The agreements could be conditional, such as requiring the Alaska Legislature to make changes in state taxes or regulations to reduce the cost of gas, or requiring a guarantee that cost overruns in construction wouldn't increase transportation charges.

Larry Persily, the federal pipeline coordinator, said Palmer may have made a mistake by suggesting the agreements would be reached, even conditionally, by December.

"You create an expectation and when you don't make it for whatever reason, people think, 'Oh my god, something's wrong.' It was an optimistic deadline, given the complexity of the project, the commercial terms, the issues to resolve," Persily said. "So TransCanada didn't make it in December -- big deal. But a year from now, if there's no precedent agreements, well, that's really bad."

2012 DEADLINE

Palmer, in a telephone interview from his office in Calgary, said the project is moving forward in other ways as TransCanada prepares the complex set of studies and documents it needs for its application to FERC for a certificate to build the line. State law requires the filing in October 2012.

"Alaskans should look at that positively, that we are advancing on all fronts, but we haven't been successful as yet in obtaining the customers we want -- we're still working hard to achieve that," Palmer said.

Both Palmer and Persily said they were unconcerned by a recent federal estimate that suggested a gas line from Alaska would be impractical for decades because of a surplus of gas in the Lower 48, leading to low prices.

Persily said the study failed to take into account new rules that will encourage power plants to switch to gas, and didn't consider the likelihood that states or communities would rebel against the environmental costs of new techniques for producing gas from shale, such as groundwater degradation.

Palmer said he is concerned about his customers, not the U.S. Energy Information Administration, which produced the estimate.

"The people that matter are the shippers," he said. "If they believe that gas prices will be sufficient to make the project go, that's a positive for the project and hopefully will mean that they will sign the precedent agreements. If they think that gas prices are going to be low forever, well, that's clearly a negative for the project."

STATE SUBSIDIZES TRANSCANADA

TransCanada won exclusive rights to a state license under the 2007 Alaska Gasline Inducement Act, which provides up to $500 million in state-paid pre-construction subsidies for engineering work, permit applications and other expenses.

The state has already paid TransCanada nearly $37 million and anticipates spending about another $100 million by July. The governor is asking the Legislature to set aside $160 million for 2012.

A competing large-pipeline proposal, the Denali project of Conoco Phillips and BP, is progressing without official state sanction or subsidy and is also in negotiations with shippers for precedent agreements. In a recent report to the Federal Energy Regulatory Commission, Denali said it hoped to have final agreements by the end of March.

Gas pipeline issues threaded throughout the 2010 Legislature as lawmakers looked for ways to push a project along. A gas pipeline that could tap huge, if stranded, gas resources on the North Slope has been a dream in Alaska for decades, even if some critics say the gas is best left in place as a way to stimulate oil production. Though not the only technique for increasing subsurface pressures, forcing excess gas into the ground has long been a method for boosting the production of oil, a more valuable commodity than gas.

But this year, with TransCanada closely holding all its cards, there's not much for the Legislature to do about the big gas line other than receive reports.

Bill Wielechowski, D-Anchorage, one the Senate's leaders on energy issues, said he was hopeful that TransCanada would file its precedent agreements by the end of March, still three weeks before the end of the 90-day legislative session. If that happened, lawmakers would have at least some time to deal with conditions demanded by shippers that involve changing laws, taxes or regulations, he said.

Another Senate energy leader, Lesil McGuire, R-Anchorage, said she expects to use her seat on the Finance Committee to demand answers about the gas line project when the subject of TransCanada subsidies comes up.

Persily, a former state Revenue Department official and legislative aide, has advised the Legislature to wait for the precedent agreements to arrive, setting aside gas issues even if it gets into a big debate over oil taxes, as is likely.

"You don't know who you're negotiating with or the terms of the deal, so just wait like everyone else," he said.

PIPELINE FOR ALASKANS?

Another gas line project is also plugging away -- the so-called "bullet line" proposal for a strictly in-state, smaller-diameter pipeline from the North Slope, passing through gas-hungry Fairbanks and on to Cook Inlet communities by 2016. In one of its 2010 laws, the Legislature directed the financial and planning experts at the Alaska Housing Finance Corp. to study the feasibility of such a line and issue a report by July 1.

A 24-inch-diameter bullet line could be built for $5 billion under some estimates. TransCanada's 48-inch line to the North American pipeline network in Alberta is estimated to cost up to $41 billion. Its alternative line to a possible gas liquification plant that someone else would build in Valdez would cost up to $26 billion.

Dan Fauske, executive director of the housing agency and its newly created Alaska Gasline Development Corp., said he is now preparing studies on the likelihood that other "anchor tenants" could share in the cost of the line, such as a liquid gas exporting plant or a plant that could make jet or diesel fuel. Without such a plant, or a direct state ownership stake in a bullet line, the costs alone to ship gas to Southcentral Alaska would double the price that residents now pay for gas.

McGuire, the Anchorage state senator, said she could support using surplus state funds to build a line, under the theory that states build roads, schools and other essential infrastructure. With Cook Inlet's natural gas fields dwindling, developing more energy sources for the region is essential, she said.

Rep. Hawker said the July 1 date for the report from Fauske also represents the "drop-dead date" for precedent agreements from TransCanada. Though it's not a legal deadline, if TransCanada hasn't made them public by then, it could, in effect, miss the bus, he said.

Fauske's report is likely to spur a special legislative session to decide whether to build an in-state line, Hawker said. If TransCanada doesn't have an alternative by then -- it's required to provide five taps inside Alaska for instate gas consumption -- the Legislature could decide to invest in a bullet line, leaving neither money nor interest for the larger one, he said.

Find Richard Mauer online at adn.com/contact/rmauer or call 257-4345.
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