Alaska Gov Says Gas Pipeline Competitors Should Work Together

By Cassandra Sweet and Siobhan Hughes
Wall Street Journal
September 18, 2009

WASHINGTON (Dow Jones)--Alaska Gov. Sean Parnell said Thursday that he expects developers of two competing natural gas pipelines, from Alaska's North Slope to Canada and the contiguous U.S., to find a way to work together before he will consider agreements on production tax incentives for the projects.

Even before Parnell replaced former governor and vice presidential nominee Sarah Palin in July, he was under pressure to show that a $30 billion gas pipeline being developed by TransCanada Corp. (TRP) and backed by the state would succeed, despite competition from another project, economic challenges and headwinds from some state lawmakers who question the project's viability.

BP Plc (BP) and ConocoPhillips (COP), which control major chunks of Alaska's North Slope oil and gas production, are developing a competing gas pipeline called Denali, without state backing.

Both pipelines would ship at least 4 billion cubic feet a day of gas from Alaska's Prudhoe Bay to Alberta, Canada, and start deliveries as early as 2018.

Parnell said he would wait for TransCanada to reach some kind of deal with BP and ConocoPhillips before he would agree to any tax incentives for producers.

"Until there is more commercial alignment between the parties, those talks and those negotiations would be premature," Parnell said. He added that "alignment" doesn't necessarily mean merging the two projects, as some federal officials and analysts have suggested.

Alaska's government has pledged more than $500 million and granted an exclusive license to TransCanada to build the 1,700-mile pipeline in hopes that it will create a new source of revenue for the state to offset declining oil production. The project has been criticized by a small but vocal group of lawmakers who are concerned that low natural gas prices and healthy gas supplies in the lower 48 states make the pipeline a risky financial bet.

Exxon Mobil Corp. (XOM), another major North Slope oil and gas producer, is partnering with TransCanada on the engineering component of the state-backed pipeline. But the Canadian firm has yet to line up commitments from Exxon or other producers to ship gas on the pipeline. TransCanada plans to hold an open season from May through July to solicit gas producers' interest in the line. But a TransCanada executive said earlier this week it could take several months, and an agreement with the state, to nail down commitments.

TransCanada's vice president for Alaska development, Tony Palmer, said Tuesday that he expects potential gas shippers will seek fiscal pre-conditions, including a long-term agreement by the state to lock in production taxes, before they agree to any pipeline commitments.

But Gov. Parnell said companies should use the open season as a forum to negotiate with each other, rather than press the state for production tax incentives.

Denali executives have said they plan to hold an open season in 2010, but haven't publicly set a date.

Meanwhile, some state lawmakers question whether the state should continue backing the TransCanada pipeline. State Rep. Jay Ramras, a Republican, said Alaska could end up paying TransCanada $850 million even if the pipeline is never built, due to agreements made during Palin's administration.

"We're inside an impossible transaction that has punitive clauses," Ramras said in an interview. Ramras said he plans to introduce legislation in January that would require the state to pay TransCanada from its general budget, so that the payments would have to compete for funding with road construction, schools and emergency services, adding more scrutiny to the project.

The North Slope holds some 35 trillion cubic feet of known gas reserves and the state estimates there could be 215 trillion cubic feet of undiscovered reserves. By comparison, U.S. consumption in 2007 was just over 23 trillion cubic feet.

By Cassandra Sweet and Siobhan Hughes, Dow Jones Newswires; 415-439-6468; cassandra.sweet@dowjones.com