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Denali gets bids for gas line

Posted: Monday, October 11, 2010

The BP-ConocoPhillips Denali gas pipeline project reported bids for "significant capacity" from potential shippers as its initial open season closed Oct. 4.

"As we expected, the bids include conditions, some of which are outside Denali's control. We will carefully evaluate these bids and their conditions and continue confidential negotiations with potential in an effort to reach binding agreements," said Denali President Bud Fackrell.

Denali's competitor, a consortium of TransCanada Corp. and ExxonMobil Corp., reported similar bids for significant capacity, also conditioned, when the two companies closed their open season in July. Denali spokesman Dave MacDowell said details of the proposals cannot be released because of confidentiality agreements.

It will most likely be early to mid-spring 2011 before any details of shipper commitments are revealed, sources in both pipeline companies have said, because of the time needed to negotiate final agreements and file required notices with the Federal Energy Regulatory Commission, which will be public.

Some of the bigger conditions, like a fiscal agreement with the state, will take more time, possibly a year, to resolve.

Fackrell said Denali has spent in excess of $150 million and 700,000 man-hours in engineering and other work through the open season. TransCanada and ExxonMobil said they had spent about the same amount.

Fackrell said a number of factors will weigh in as Denali and potential customers continue negotiations.

"Based on what potential shippers have said publicly in the past, we expect their evaluations to focus on the competitiveness of North Slope gas, including factors such as gas markets, growth in North American shale gas supply, the Alaska fiscal framework and the status of Point Thomson leases," where there is a dispute between lease owners and the state of Alaska.

The state is in settlement negotiations with the major Point Thomson owners, which include ExxonMobil, BP, Chevron Corp. and ConocoPhillips. However, because about a fifth of the proven gas reserves on the North Slope are in Point Thomson, until the dispute is resolved there will be a cloud hanging over the legal status of the gas there.

TransCanada has said that it expects its potential shippers to focus on the same uncertainties in resolving conditions on capacity bids, particularly the need for a fiscal framework with the state of Alaska.

Both competing projects propose a 48-inch pipeline from the North Slope to Alberta on similar routes through Interior Alaska and Yukon Territory.

TransCanada would tie into its existing pipelines in Alberta but both TransCanada and Denali would offer shippers the option of using other pipelines to move their gas to the continental U.S., the pipeline companies have said.

TransCanada also offered its potential shippers the option of a stand-alone pipeline to southern Alaska and a gas liquefaction plant in Valdez if there is insufficient interest in a pipeline to Alberta.

Denali has indirectly made the same offer. If there are insufficient bids for capacity to build the pipeline to Canada, but if customers are interested in an LNG project, Denali would consider it, the company said in past briefings.

The state of Alaska is backing TransCanada with a $500 million grant after the pipeline company agreed to a set of conditions, including a commitment to use "rolled-in" tariffs on pipeline expansions and a 70-30 debt/equity ratio in financing the project.

The state issued TransCanada a license under the Alaska Gasline Inducement Act, or AGIA, which entitles TransCanada to the subsidy, but this does not give TransCanada an exclusive right to build a gas pipeline.

The rolled-in rate for expansions, an important AGIA condition, is important as security for exploring companies that are not among the pipeline's owners, the state has argued, because the rate would be lower than the alternative of an "incremental" tariff, where the shipper of any new gas pays the full cost of the pipeline expansion.

North Slope producers BP and ConocoPhillips, as well as ExxonMobil, TransCanada's partners, disagreed with the AGIA requirement of rolled-in rates because it would amount to a subsidy of the new shipper by existing shippers who would have to pay a higher tariff once the cost of the expansion is rolled into the rate.

U.S. Federal Energy Regulatory Commission rules prohibit subsidies in pipeline tariffs, where one shipper must indirectly subsidize another, and the state's AGIA requirement sets up a conflict with FERC rules, the producing companies have argued.

Similarly, the major producers dislike committing to a set debt-equity ratio in financing because the amount of debt and equity investment should be determined by market conditions, not a government requirement, they have argued.

The state has argued it wants a guaranteed debt-equity ratio with a majority or debt because of the way the financing arrangement affects the state's tariff, which affects state revenues.

A lower amount of equity and a larger proportion of debt create a lower tariff, which maximizes state income.

Because Denali's owners BP and ConocoPhillips have not agreed to the state's AGIA conditions, they decided to launch their own pipeline project outside the state's framework, and without a state subsidy.

Although ExxonMobil has signed on with TransCanada it, too, has not agreed to the state's AGIA requirements, and the company will not become a full partner in the project until key issues are resolved with the state including the AGIA requirements and the needed fiscal framework, ExxonMobil has said previously.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.



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