Company courts Alaska for pipeline license

Seve Quinn, Associated Press, June 18, 2008, JUNEAU, Alaska -- TransCanada Corp. has 36,000 miles of pipeline moving natural gas throughout North America, enough pipe to circle the earth along the equator with about 11,000 miles to spare.

Now the Calgary-based company says it wants to build a 1,715-mile line that will be rooted in the Arctic oil fields on Alaska's North Slope and ship natural gas to markets in the Lower 48, where it will power homes and business for decades.

Their plan is to move 4.5 billion cubic feet of natural gas daily -- or about 7 percent of the nation's daily demand -- with the prospects of expanding to 6.5 billion cubic feet.

So far, TransCanada Chief Executive Hal Kvisle has Gov. Sarah Palin's support and is vying for the Legislature's blessing on a license to build the line.

"I would argue TransCanada is the right company to make this happen because we are the largest pipeline company in North America by any measure," Kvisle said. "We are the only company who has built gas transmission projects of this scale, this length, this magnitude before."

But TransCanada is not the only player in this game. Global oil giants ConocoPhillips and BP PLC recently joined forces on a competing pipeline, and those companies already hold leases to North Slope natural gas.

Additionally, some Alaska lawmakers and industry analysts question whether TransCanada has the financial wherewithal to handle a project that could reach $30 billion -- or $10 billion more than TransCanada's market capitalization, a figure used to determine a company's size.

Most people are familiar with BP and ConocoPhillips -- especially every time they drive past the pumps -- but they haven't heard of TransCanada.

But an analyst says a lack of name recognition doesn't mean TransCanada can't be trusted with getting domestic supplies to the Midwest markets.

"They are better qualified for building this type of pipe than the two producers," said Edward Kallio, analyst for Ziff Energy Group, a consulting group with offices in Calgary and Houston.

"They understand this business," he said. "They can build and operate a pipeline that goes through inhospitable terrain. They can engineer, they can build, they can operate pipelines of this size. That's what most important."

Last November, TransCanada applied within the bid requirements of the state's Alaska Gasline Inducement Act, which called for bidders to guarantee progress toward construction of a pipeline and be friendly toward new energy exploration.

BP and ConocoPhillips found the law, passed by the Legislature last year, too restrictive. Two months ago, they joined forces to proceed with their own project, but have released little details about it.

The Alaska Legislature has until Aug. 2 to either support or reject TransCanada's bid for a state license. For the last two weeks, lawmakers have been engaged in a spirited debate over the prospects of TransCanada getting a license.

The license is not a contract for construction. However, the license does come with $500 million in seed money from the state of Alaska as seed money, and presumably, puts the company on the hook to pursue federal permits to build the pipeline.

Supporters say that's just as good as a commitment to build because why would a company spend hundreds of millions toward permits, then not build?

Rejecting the license could leave the state back at the bargaining table with producers like BP and ConocoPhillips. That effort failed two years ago when former Gov. Frank Murkowski agreed in principle with oil companies on a long-term contract on fiscal terms, such as taxes. But the Legislature never voted on it, saying it was too generous for the companies.

State Rep. Mike Kelly, a Fairbanks Republican and former chief executive for a utility company, said keeping TransCanada in the game means maintaining a competitive field.

"I want to keep both of the girls at the dance until we get this thing done," Kelly said. "And I'm convinced TransCanada can do it. When it comes to scope, scheduling and budget, they are notoriously good at keeping those things under control."

But critics say the $500 million backing is too high, even for a state awash in cash from soaring oil prices, and especially when BP and ConocoPhillips aren't asking for any upfront money.

Further, they question why a company like TransCanada with its $1.22 billion net income last year -- a 13 percent boost from 2006 -- needs any state help.

State Rep. Jay Ramras, also a Republican from Fairbanks, has also challenged TransCanada's financial stability and ability to sustain the project over 10 years, the projected timeline to get natural gas flowing in the pipeline.

He cited his own business experience as a hotel and restaurant owner when going toe-to-toe with TransCanada Vice President Tony Palmer on the company's decision-making process.

"In the private sector, if this were a board room instead of two legislative bodies trying to consummate a business transaction, this notion would be dismissed," Ramras said during a hearing. "This is a fool's errand that we are on."

Palmer didn't flinch.

"TransCanada does operate in the private sector," Palmer said. "This decision went to our board. And they made a commercial a decision to participate in the process established by this Legislature one year ago."

If TransCanada does get the license -- and that appears likely -- the next step is securing long-term financial commitments from producers to ship gas. These underpin the project's financing.

Producers argue these commitments -- ones that can last 25 to 30 years -- represent the largest risk of the project. Failure to reach an agreement could kill the project.

Kvisle, the company's CEO, cites a recent agreement between ConocoPhillips and TransCanada to build an oil line as an example of the company's ability to reach a deal.

The Keystone pipeline will ship oil in a 2,148-mile pipeline ultimately capable of delivering 590,000 barrels of crude daily from Hardisty, Alberta, to Midwestern markets.

"ConocoPhillips would have to have a very high opinion of them or they wouldn't have done that," said Steven Paget, FirstEnergy financial analyst who tracks TransCanada performance.

TransCanada must also convince lawmakers it will be diligent in controlling construction costs. The company estimated the project at $26 billion, but the state's own consultants put the project closer to $30 billion.

Lower costs translate into lower transportation fees -- tariffs -- and that means more royalties and production taxes for the state.

Producers have repeatedly told lawmakers that pipeline companies have no motivation to watch construction costs because they will simply recover those expenses in the tariffs.

Ken Medlock, energy fellow at Rice University who once worked in the pipeline industry, said that's a weak argument.

"A company like TransCanada would have every incentive to keep the costs down because producers are going to look at this project the same way as if they were building it," he said.

"Pipeline companies can't charge more than what the producers are willing to give up. If that happened, producers would move to the next best option."

A North Slope gas line has been discussed since oil first moved down the 800-mile trans-Alaska pipeline in 1977. Now, suddenly there's two projects being discussed.

The prospects gained momentum these last several years with natural gas futures currently trading in the mid-$11 range per 1,000 cubic feet.

Analysts said any project of this size is too big for one, even two companies, and two pipelines aren't likely to get built.

"Chances are TransCanada would end up have some sort of partnership in this pipeline," said FirstEnergy's Paget. "The question is what shape will it take?"