Gasline open season unlikely to be success

Sep 25, 2009 (Alaska Journal of Commerce - McClatchy-Tribune Information Services via COMTEX) -- TRP | Quote | Chart | News | PowerRating -- State officials and companies planning a $30-billion plus North Slope gas pipeline say they expect "conditional" proposals to ship gas through the pipeline during a solicitation for customers next year.

Tony Palmer, a TransCanada Corp. vice president, and Mark Myers, a Department of Natural Resources official, said it's unlikely enough customers will sign up with firm commitments so that the big project will be cleared to go.

Both said work on the pipeline will continue, however, and that valuable information will be learned from the bids that are made.

"We expect that there will be conditional bids, and we shouldn't be afraid of this," Myers said Sept. 15 at an oil and gas conference in Anchorage.

The open season and the work that will continue will help the different parties negotiate commercial terms and come together, Myers said.

The state will pick up 90 percent of TransCanada's costs as the work continues under terms of the state's agreement with the pipeline company. This will help the parties come together, he said.

State officials said previously they will obtain important information from the bids by companies, for example, whether there is any serious interest in a pipeline to Valdez to a liquefied natural gas project. TransCanada is obligated under an agreement with the state to include a Valdez option.

Department of Revenue officials also have said that the cost estimates made in preparation for the open season will help them judge what kind of long-term fiscal agreement may be needed for gas producers.

"I would love to be an optimist that we will have enough commitments to advance the project with no conditions but I expect that this is highly unlikely," TransCanada's Palmer said.

On the other hand, TransCanada has a solid reputation as a competent pipeline builder and operator, Palmer said.

"We ship 20 percent of North America's gas, none of which we own, through our system," he said.

Palmer and Myers spoke at the Alaska Oil and Gas Congress, an annual meeting sponsored by the American Conference Institute.

Their comments that bids for capacity in a pipeline are likely to be conditional are the first statements made by senior officials that the open season planned by TransCanada in 2010 may not be as successful as hoped.

An open season is a period where a pipeline developer, in this case TransCanada, solicits contracts from customers to buy capacity in the pipeline. It is on the basis of firm transportation contracts for gas that a pipeline developer arranges financing for construction.

The process is similar to a commercial real estate developer going to a bank for a construction loan with firm lease agreements from creditworthy tenants in hand.

Palmer said TransCanada would hold its open season May 1 through July 30, assuming the U.S. Federal Energy Regulatory Commission gives a procedural approval for TransCanada's open season terms.

Palmer said it's not unusual for pipeline customers, or shippers of gas, to condition their bids for space in the pipeline. This may be particularly true for very large projects like the Alaska gas pipeline, he said.

Normally concerns can be resolved in a matter of weeks. It's possible on this pipeline that one or more potential shippers may condition their bids on resolution of fiscal issues with the state, Palmer said.

ExxonMobil, one North Slope gas owner now working with TransCanada on engineering and cost studies, has already initiated that it needs clarity in fiscal terms as well as changes to the state's terms imposed on TransCanada through the Alaska Gasline Inducement Act before it can fully participate in the pipeline project.

The two major North Slope gas owners, BP and ConocoPhillips, have voiced similar concerns about the state's terms. The two have launched their own pipeline initiative, the Denali project, which also plans and open season in 2010.

Spokesmen for Denali at the Sept. 15 conference did not comment on their expectations for the open season.

Palmer said that despite the lack of firm contracts, TransCanada would be able to stick to its schedule because the company's agreement with the state provides for work to continue even if the open season fails.

Marty Massey, ExxonMobil's manager for U.S. joint-interest holdings, said in earlier interviews that his company is prepared to work with the state over several years to secure the changes in AGIA and the stable fiscal terms, and that it will stick with TransCanada as the pipeline company continues work in planning and engineering.

The pipeline company proposes to finance 75 percent of the pipeline cost with debt, an amount that could be $20 billion or more, and Palmer acknowledged at the conference that raising the money may be difficult given the turmoil in financial markets in 2009.

"Our preliminary discussions with bankers indicate that this may be much more challenging than it has traditionally been in pipeline financing," he said.

On the other hand, major financial commitments to steel and other materials, as well as to contractors, would not be made until 2014 or 2015, he said. This leaves time for financial markets to sort themselves out.

This indicates the importance of Trans-Canada securing long-term commitments to ship gas from credit-worthy customers, companies with substantial financial reserves.

"We cannot finance this project without long-term contracts," Palmer said.

TransCanada also hopes to bring a "broader alignment" with other stakeholders in North Slope gas, such as BP and ConocoPhillips, who are now leading the separate Denali project.

"Competition is good, but at the end of the day there has to be a winner and a loser, or a coming together. We hope the coming together may be sooner than later," Palmer said.

Tim Bradner can be reached at

tim.bradner@alaskajournal.com.

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