There is significant debate as to why the North Slope gas has remained undeveloped all these years. However, in recent years, as our oil production has declined and gas prices have steadily increased, there is more and more pressure to build the gasline. The Alaska Gasline Inducement Act (AGIA) is based on the idea that open competition will lead to the best project for Alaska.

AGIA sets out a process by which the state can issue a license to build a natural gas pipeline. The licensee is entitled to certain benefits in exchange for a commitment to work towards a certificate from the Federal Energy Regulatory Commission. To get this certificate, the licensee has to design and engineer the pipeline, acquire all necessary permits and rights of way and prove, as well as can be proven, that the project is economic. The hope is that, once all this is done, the North Slope oil producers will no longer have any plausible reason to hold their gas back from the line.

If the licensee can convince the producers to ship the gas they control, it will be able to secure financing and begin construction. If it can’t, the license will revert to the state, which will then be in the position to award the completed certificate to someone else, or to pursue other means of getting access to the gas.

To the winning applicant, the state is offering a series of inducements. These are:

• Up to $500 million as a state subsidy for “front end” work directly and reasonably related to obtaining FERC or RCA certification. The State will pay a match of up to 50% prior to the first open season, and up to 90% after the open season and before certification.

• An AGIA coordinator and expedited permit review. No conditions may be placed on any state permits that are not specifically required by law.

• A state training program for both construction and operations workers.

The bill also offers inducements to any producer who agrees to ship gas through the pipeline during the first open season:

• A ten-year tax freeze on their gas production (PPT) taxes. If the state raises taxes during the ten years after gas starts to flow, the company would not have to pay the amount of the increase.
• Modification of how royalties are calculated, to minimize after-the-fact royalty adjustments.
• Limitation of the state’s ability to switch between “royalty-in-kind” and “royalty-in-value,” which means it will be easier to schedule gas flow through the pipe.

In return for the above inducements that state gets the following benefits:

• Tariff controlling measures including specific timelines for open season and FERC applications; a 70/30 debt equity structure and management of cost overruns.
• Expansion requirements in which the winning bidder regularly assesses new demand and expands when demand is there and committing to rate-sharing between old and new shippers.
• Other state benefits such as in-state delivery points and distance-sensitive rates; local hire, contracting, and headquarters and a project labor agreement.

Over the past few months, aided by about $13 million worth of consultants, the Administration has reviewed the TransCanada application. They have also analyzed the Denali project and a theoretical LNG project. The TransCanada application is now before the legislature for approval. We have 60 days (until August 2^nd) to vote yes or no.

If approved, the license is issued and the licensee can begin field work.  According to AGIA, the first binding open season must be within 36 months of receiving the license. TransCanada indicated plans for completing an open season in July 2010, with a FERC application pre-filed by April 2011. FERC certification is estimated by June 2014 and the final go / no go decision that year.

The next step after certification is called project sanction, defined as the first procurement commitment in excess of $1 billion. It is, in essence, the beginning of construction. First gas is expected to flow by 2018.

A Classic Review of the AGIA Decision

By Senator Kim Elton

There are two main types of cross-country skiers: classic (cut through the snow, slow and steady, take what the terrain allows, stick to the basics); and skate (skim over the top of the snow, speed around circular groomed trails, try not to stab your dog companion, and have a physique that looks good in Lycra).

There are two main types of media folks: classic reporters (cut through the snow, slow and steady, take what the facts allow, and stick to the basics of who, what, when, where, and why); and pundit/analyst skaters (the talking heads who skim over the snow instead of through it, stick to trails groomed by others, risk stabbing a few dogs for drama, and, if on TV, have a physique that looks good in Lycra).

Only partly because I don’t look good in Lycra, I’ve always felt more comfortable in the classic mode and in the past worked as a classic newspaper person at three of the state’s four largest newspapers. So, in this newsletter, I’ll stick to a more classic who/what/when/where/why report on this special session’s big decision on a state license that, hopefully, leads to a natural gas pipeline that gets Alaska’s gas to markets.

WHO—Two pipeline entities have proposed building a natural gas pipeline from the North Slope to the Alberta Hub where the gas can be sent to various North American markets. One, TransCanada, is an independent pipeline company. The other is a newly created pipeline company (Denali) owned by two of the multi-national oil and gas producers operating on the North Slope—ConocoPhillips and BP.

TransCanada is the successful applicant for a state-licensed (AGIA) natural gas pipeline. They submitted a qualifying application that entitles them to $500 million in assistance and other state inducements in return for commitments that help ensure construction, help ensure Alaskans are employed, and add to the state’s “take” if North Slope gas is delivered to market.

TransCanada is a 50-year-old company that builds and owns hydrocarbon transmission lines in Canada and the U.S.  They have been studying and working on a pipeline from the North Slope for about three decades and already have many of the permits necessary for construction. They have a pipeline plan with analyses thicker than a ream of paper and a cost estimate for construction. TransCanada officials say the 36,000 miles of transmission pipe they manage average 25-30 percent less in operating costs than pipes managed by others in North America. They claim capital costs are 19 percent less in Canada and 30 percent less in the U.S. for pipes the size proposed in their Alaska project. These numbers are unchallenged by others.

Denali is a pipeline company that is only a few months old but is owned by two multi-national oil and gas companies operating around the world and in Alaska. Denali did not apply for the state AGIA license.

Denali is an entity of two owners of the Trans Alaska Pipeline System (TAPS) that moves oil from the North Slope. The two Denali owners also are two of the three multi-nationals that negotiated a gas pipeline deal with Gov. Frank Murkowski (that deal foundered in the legislature two years ago because the companies wanted unchanged gas and oil taxes for decades as well as other conditions that limited state sovereignty with no commitment to actually construct a gas pipeline). As an important aside, courts and the Federal Energy Regulatory Commission recently determined the TAPS owners, including ConocoPhillips and BP, overcharged the state and independent oil shippers hundreds of millions of dollars over two years for shipping oil from the North Slope.  

The Denali plan has no cost estimate and they’ve provided the legislature only a 16-page PowerPoint presentation including front and back cover and 26 photos and logos. They say they plan on spending $600 million to get to an open season where shippers hopefully will bid to commit gas to their pipeline.

Another option is a pipeline to Valdez to a liquefied natural gas plant for shipping by tanker. The port authority, an entity of three Alaska communities that supports this LNG option, has told the legislature they accept the premise of the AGIA license and will work with TransCanada on a potential LNG option.

WHAT—A natural gas pipeline that gets Alaska’s gas to markets. Lease terms for the right to drill for oil and gas specify that producers have a duty to produce if there are economic markets for the product. It is hard to find any gas expert who suggests Alaska’s gas can’t find a market—even given the huge costs of constructing a gas pipeline.

The decision confronting the legislature in this special session is ‘yea’ or ‘nay’ on whether to issue the license to TransCanada under terms adopted by the legislature last year with only one dissenting vote.

WHEN—A pipeline as soon as possible. Given: the field work necessary to design and engineer the line; permitting challenges; the time necessary to arrange financing; the regulatory process; and a construction timeline; a realistic but still optimistic definition of ASAP is about 10 years before first flow.

WHERE—Down the Alaska Highway to the Alberta Hub where gas can be shipped in different directions to North American markets. The only caveat on the ‘where’ issue is that TransCanada has committed to building either a gas line or gas line spur to an LNG plant on Alaska’s coast if enough gas is committed to LNG by North Slope shipper/producers.

WHY—About $66 billion in net present value receipts to the state. That’s the estimate of state earnings by state consultants and TransCanada and also by Exxon, as confirmed in that company’s testimony to the legislature Thursday. A pipeline also will stimulate additional Alaska jobs and exploration on the North Slope in the same way the first Alberta gasline (a pipeline longer than the planned Alaska line and built by TransCanada) stimulated exploration and jobs in that province.

That’s the who/what/when/where/why of the gas pipeline story. Now, forgive me, I’ll play the pundit/analyst in summary.

My analysis is informed by my experience as the oil and gas reporter at the Fairbanks paper in the mid-1970s as TAPS was built, my work on accessing Alaska’s natural gas as policy director in Lt. Gov. Terry Miller’s office in the late 70s and early 80s, and the opinions I’ve formed living through our state’s epic battles with multi-nationals over oil royalty receipts, the Exxon Valdez spill, and TAPS tariffs.

There may not be a perfect answer on how to best get Alaska’s gas to markets but TransCanada is an independent pipeline company with the experience to build and run the pipeline. They have a detailed and heavily vetted proposal and have committed through the AGIA process to conditions that add value to the state and help ensure Alaskans will get work. Denali has no detailed proposal and has not committed to conditions that add value to the state. Denali has said, though, they will continue to flesh out their proposal regardless of whether or not TransCanada gets a state license.

Given the complexity and uncertainties with any huge pipeline project, it makes sense to give a license to TransCanada that gets us up to the construction phase. TransCanada gives real, additional value if their plan is adopted and their line is built.

Another benefit is that competition with a state-licensed builder may make the Denali project better for the state. My suspicious nature leads me to believe the gas producers don’t want to take the $500 million inducement because they believe complying with the ‘must haves’ in the AGIA approach cuts into their pipeline profits take and they’ll make more by not complying with AGIA license terms. I also believe Denali sees an opportunity to leverage Alaska back into some of the onerous concessions ceded to the companies by the prior administration if TransCanada does not get the state license and they become by default the only pipeline possibility.

Finally, nothing in AGIA prohibits the multi-national gas producers, including the Denali owners, from negotiating an equity stake in the TransCanada pipeline. In fact, that may be optimal for the state, the producers and TransCanada but that convergence of interest evaporates if an AGIA license is not given to TransCanada.

So, the summary is more punditry than classic. Even so, my physique is fundamentally unfit for Lycra.

Getting Alaska’s Gas to Market

By Representatives Beth Kerttula & Andrea Doll

In 2007, the legislature passed a structure to get Alaska’s gas to market – the Alaska Gasline Inducement Act (AGIA). AGIA required companies wishing to build a pipeline for Alaska’s gas to submit bids to the administration. If the bids met AGIA’s requirements, they would be sent on to the legislature for final approval of a license to start the process toward building a gasline.

By bid deadline, there were five bids, but the administration concluded only TransCanada met all the requirements. Since May 28 we have listened to the administration, TransCanada, consultants, and the public speak about the proposal and what it means for our future. During this same time, the companies that produce oil on the North Slope and hold leases on our gas have argued against TransCanada’s proposal, and have floated an idea of their own, "Denali – The Alaska Gas Pipeline."

We are inclined to support an independent pipeline built by an independent company. We are highly skeptical of Denali, which we view as little more than a publicity stunt. After seeing the results of the state's Trans Alaska Pipeline System (TAPS) cases, many have realized that when oil companies control both production and the transportation corridor it creates a monopoly, allowing companies to move costs around and creating an unfair playing field that hurts the state and the independent producers out looking for new gas.  The Special Joint Committee on Mergers reviewing the BP-ARCO merger recommended against the merger. After an independent investigation, the U.S. Federal Trade Commission also denied the proposed merger in Alaska.

Independence from the oil producers is not the only criterion we have for an Alaskan gasline. Jobs and energy should go to Alaskans. The gasline must have expansion capability so we can attract new explorers with reasonable tariffs. Finally, Alaskans must have a fair share of our resource wealth. We recently achieved that with our oil and gas tax reform, and we must protect that victory.

We are honored to be serving in the Legislature at this historic juncture.  We have reviewed volumes of reports, data and arguments, and we have listened to untold hours of testimony. It has run from the weird (one consultant drank a vial of diesel fuel to prove how clean it was) to the sublime (one presentation on Alaska’s ownership rights to our gas had the room cheering).

If we make the right decision and stand up for our constitutional right to our resource wealth we believe we will have done something that will live on to benefit Alaskans for generations to come.  Below you will find a short AGIA 101 that further details the process that will lead to construction.