Questions flow from gas line proposal

A primer on the pipeline and the issues legislators are now pondering.

By WESLEY LOY
Anchorage Daily News
(06/08/08 00:05:09)

JUNEAU -- OK, listen up. Are you baffled by this whole natural gas pipeline thing? Are you wondering why Alaska legislators and Gov. Sarah Palin are stuck in Juneau in June instead of out fishing for salmon? Don't have any idea who TransCanada is, or how "Denali" could be anything but a mountain?

Let's take a time out for a little pipeline primer.

Q. So why are the lawmakers in Juneau?

A. Because Palin called them there for a special session.

She wants them to award a license and up to $500 million in state money to TransCanada Corp. as an incentive to build a pipeline from the Prudhoe Bay oil field to a gas distribution network in Alberta, Canada.

The pipeline would be 1,715 miles long and would follow the Alaska Highway.

Q. But don't we already have a pipeline? Why do we need another one?

A. We do have the 800-mile trans-Alaska pipeline from Prudhoe to Valdez. It started up in 1977 and is a famous engineering marvel.

But the pipeline is designed to carry crude oil, not natural gas. So we need a separate line to carry the huge gas reserves stuck in the ground in Prudhoe and other North Slope oil fields.

Q. Three oil companies -- BP, Conoco Phillips and Exxon Mobil -- are the main owners of the North Slope oil fields and the trans-Alaska pipeline. Why haven't they built a gas line?

A. That's a question that's vexed Alaska politicians and economic development boosters for decades.

The oil pipeline has been a money hose for the state, pouring out thousands of jobs and billions of dollars in tax revenue. The politicians and boosters can see another boom in a gas line.

Two words sum up why the oil companies seem to be so stubborn: cost and risk.

A gas line would be super expensive, probably more than $30 billion. Its success would depend largely on future gas prices. In recent years, prices have soared. But will they stay high? The oil companies also worry that Alaska politicians might raise taxes after they've invested in a pipeline.

Given those factors, the oil companies have chosen to stake their money on safer projects elsewhere in the world.

Besides, they've had a lucrative use for the gas -- for a couple of decades they have pumped the gas back underground to pressure more oil out of Prudhoe.

Q. So who is TransCanada?

A. It's a Calgary-based energy company that specializes in running gas and oil pipelines. It's also involved with nuclear, gas, coal, wind and hydroelectric power plants.

The company doesn't drill for oil and gas like BP, Conoco and Exxon do.

TransCanada is small compared to the oil companies. According to a study done for legislators, TransCanada has a market value of $23 billion compared to $144 billion for Conoco, the smallest of the three oil companies.

Alaska's gas could fill TransCanada's existing pipeline network for many years -- a wonderful thing for the company, according to financial experts.

TransCanada is the only company eligible for the state license and the $500 million in incentive money. That's because Palin picked it from among five bids received last fall under a new law, the Alaska Gasline Inducement Act or AGIA.

The oil companies chose not to bid.

Q. If legislators grant the license, the welders will finally go to work on the gas line, right?

A. Wrong! The license is not a construction contract. All it does is obligate TransCanada to try to line up customers for its pipeline, and to get permission to build from federal pipeline regulators.

Q. Who would the customers be?

A. BP, Conoco and Exxon, plus any other drillers with gas to move to market.

It's these customers, not TransCanada, who ultimately pay for the pipeline through shipping fees.

Under the rules, they'd have to pay the fees over many years even if for some reason they didn't have gas to ship, or the price of gas crashed. Think of it like your gym membership -- you pay even if you skip your workouts.

This is why a gas pipeline is so risky for the oil companies, even if somebody else builds it.

Q. If TransCanada does sign up customers and wins federal permission, when might it build the gas line?

A. According to the schedule the company gave the state, construction could start in seven years with the first gas flowing in late 2017.

Q. If the legislators give TransCanada the AGIA license, does this mean only TransCanada has the right to build a pipeline? And would the oil companies have to use it?

A. No and no. In fact, two of the oil companies, BP and Conoco, now say they have their own plan to build a pipeline to link into the North American distribution grid in Alberta. The project looks very much like TransCanada's.

The oil companies have coined a name for their pipeline -- Denali, like the mountain.

Federal pipeline regulators conceivably could grant permission to either or both pipelines.

Q. When will the legislators vote on the TransCanada license?

A. Under the law, they have until the end of July. House Speaker John Harris, R-Valdez, says he expects the vote will come by the middle of next month. Before they vote, lawmakers plan to hold hearings around the state, including Anchorage the week of June 16.

Q. What happens if they reject a TransCanada license?

A. That's a gray area. Some lawmakers have serious reservations -- they don't see the need to hand TransCanada a half-billion dollars when BP and Conoco say they'll build a pipeline without the state subsidy.

Other lawmakers, tired of waiting so many years for a gas line, favor the license, saying they just don't trust what the oil companies say.

Awarding TransCanada the license is a top priority for the popular governor. Palin says the pipeline company has the right stuff.

Failing a yes vote on the license, we might see a new round of bidding under AGIA.

Find Wesley Loy online at adn.com/contact/wloy or email him at wloy@adn.com
or call him in Juneau at 1-907-586-1531.