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Announcement renews AGIA gas pipeline debate

Posted: May 18, 2011 - 10:05am

JUNEAU -- Tuesday's announcement that a company is scrapping plans to build a major natural gas pipeline in Alaska has renewed the debate over whether a line is viable or the state is chasing a mere pipe dream.

Denali-The Alaska Gas Pipeline blamed market forces for its inability to secure the shipping agreements necessary to justify moving a project ahead. The company's decision to cut its losses leaves TransCanada Corp. alone in pursuing a line to bring gas from Alaska's North Slope to the North America market or overseas.

While a TransCanada official said Tuesday that its negotiations with prospective shippers are continuing, some lawmakers are growing increasingly antsy. Two House Republicans -- Speaker Mike Chenault and Rep. Mike Hawker -- said TransCanada faces the same market realities as Denali, including the rise of North America shale, and that it's time the state looks at other options.

In particular, Chenault believes the state should focus attention on building a smaller in-state line that meets the energy needs of Alaskans.

"Alaskans can't be at the mercy of a market that shows no sign of becoming economic anytime soon," Chenault, R-Nikiski, said in a statement. "Instead, we need to build an in-state gas line and create our own opportunities."

It is widely believed that an in-state line would require heavy state subsidies to bring energy costs for residents to reasonable levels. A report on the viability of such a line was expected later this spring.

Larry Persily, federal coordinator for Alaska natural gas transportation projects, has suggested lawmakers might be better served if they looked at whether the money they'd put into a smaller line would help get a major line built.

Alaska relies heavily on oil revenues to run. With oil production declining, Persily believes a major gas line is critical to drawing future investment to the state.

"Let's see if the state can negotiate fiscal terms that will help everyone and really think through how much it will mean to Alaska to have the big line and the jobs that come with it," he said.

The problem is that how soon a major line will get built -- if it ever does -- remains unclear.

TransCanada's Tony Palmer has said the company is sticking with its timeline to have a line in service by 2020. But obstacles remain -- from market conditions to having the state come to terms with shippers on issues that TransCanada says are out of its control, like long-term certainty on royalties and taxes.

Late last year, federal analysts said they did not believe it would be economical to build a major line in Alaska for at least the next 20 years.

TransCanada is pursuing a line under terms of the Alaska Gasline Inducement Act, or AGIA, which was championed by then-Gov. Sarah Palin in 2007. As part of its exclusive license, TransCanada received the promise of up to $500 million; it also had to meet certain benchmarks.

Last July, TransCanada reported receiving multiple bids from "major industry players and others" that want to use its proposed pipeline. It's been in negotiations since.

Yet in December, the company missed a self-imposed target to have shipping agreements, stoking the anxiety some lawmakers already felt about the project's prospects.

During the regular legislative session, Chenault, Hawker and other House Republicans signed onto a bill seeking proof by July that TransCanada had an economically viable project. Absent proof, the bill would have presumed the project uneconomic for purposes of triggering an abandonment clause in the law.

That clause allows for the project to be abandoned if both parties agree it is not economical. The Legislature cannot trigger the clause; it would have to come either from the administration or TransCanada. If there's disagreement between the administration and TransCanada on the economic viability, the issue would go to arbitration.

The language in the bill was cast as a way for lawmakers to find out as soon as possible whether the project is a sound investment. Palmer said he believed it would unilaterally change the contract and undercut efforts to build a line.

The bill stalled but did not die; it can be brought back in the next session.

Rep. Bill Wielechowski, D-Anchorage, said the process set forth under the inducement act needs to play out. He said Denali's announcement shouldn't raise alarms; after all, it was virtually understood that only one project would go forward.

He said lawmakers haven't ignored the energy needs of Alaskans, noting the state has made significant investment in projects designed to better meet those needs.

Denali was a joint effort of BP and ConocoPhillips, two of the North Slope players. Both he and Gov. Sean Parnell said they hope Denali's announcement will free BP and ConocoPhillips to join the TransCanada project.

TransCanada has been working to advance its project with Exxon Mobil, the other big player.

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