Loan Guarantees and Pipeline Economics

In a recent letter to Governor Parnell, Alaska Senator Mark Begich stated that it would be difficult for Alaska’s congressional delegation to get an increase in the federal loan guarantees anytime soon; so, Senator Begich proposed that the state should consider loan guarantees for the remainder of the debt that the federal government would not cover – in the realm of $9 billion in loan guarantees. The problem with his proposal is that it requires a substantial amount of legislative energy, time, and effort and does nothing substantial to change the economics of the gas pipeline.


Loan guarantees tend to reduce the cost of debt and consequently reduce the tariff. This is good, but it reduces the cost of debt only by a small margin making only a minor change to the tariff.

The loan guarantees are important to the pipeline builders, but they do little to create incentives for the shippers. The risk to the shippers is substantially unchanged. The State of Alaska needs to look for solutions that reduce the risk to the shippers and solutions that make a substantial reduction to the tariff and thus increase the economics of the pipeline.

I have two recommendations regarding how to change the economics of a large diameter pipeline: one for the Alaska portion of the pipeline and one for the Canada portion of the pipeline.

Alaska Portion of the Pipeline

Regarding the Alaska portion of the pipeline, I recommend the State of Alaska fund the equity portion of the pipeline, take a debt rate of return, and not start receiving payment on its investment until the original debt is paid off. This funding mechanism could take the form of a financial interest or an ownership interest. That could be determined by discussing the proposal with companies that might want to participate in the ownership of the pipeline.

The benefit of this proposal is that it would change the economics of the pipeline and reduce the tariff more than any other single proposal that has been put forth so far. Combined with other risk reduction actions, it may be sufficient to move the gas pipeline forward.

The cost of this proposal would probably be up to $10 billion for a success scenario but less than $2 billion to see if it would be likely to succeed. The risk capital would be invested to develop a proposal and hold an open season. If the open season was successful, then the project could move forward to a FERC certificate. It is possible that up $3 billion would have to be expended to get to a project sanction decision, but this capital would only be expended after a successful open season and signed precedent agreements from the shippers.

One hundred percent of equity contribution should be invested in the Alaska portion of the pipeline only. That way Alaska gets the full benefit of the investment, and the tariff on the Alaska portion of the pipeline sees the greatest impact, thus providing cheaper gas for Alaskans.

If Alaska decides to make such a commitment to the pipeline, Alaska should approach the federal government to see what they can do to support Alaska’s commitment. The two things Alaska should ask for are 1) Alaska’s fair share of the revenue from federal offshore development, and 2) Alaska should ask for the chance to explore in ANWR.

Regarding AGIA and TransCanada, Alaska should get TransCanada to either agree that the current AGIA plan is uneconomic or get TransCanada to waive their rights to damages under AGIA in exchange for the opportunity to participate in the Canadian portion of the pipeline. I am fairly certain that TransCanada would not want to own a piece of the Alaskan portion of the pipeline under to above plan. I am also not worried about TransCanada threatening to sue under AGIA. It is clear that the present plan is uneconomic; so, there will be no liability under AGIA if TransCanada does not agree to waive their rights.

In addition, contrary to AGIA’s capital contribution, Alaska would get a return on its capital investment and future generations would receive the benefit. Consider the investment a savings account for the future when Alaska may need the return.

Canada Portion of the Pipeline

TransCanada has proposed a 70/30 debt equity ratio (with some modifications). They propose to invest 30% of the cost of the pipeline in equity. The equity rate of return on the pipeline will probably be greater than 12%. The cost of the debt, on the other hand is closer to 5% depending on who the borrower is and their credit rating. Clearly it is better to have more of the pipeline funded by debt and less by equity because the return on the equity is more than twice as expensive to the pipeline as the debt.

Alaska should try to get TransCanada to agree to an 80/20 debt equity ratio. This will lower the tariff by a certain amount and save the State of Alaska and the shippers over the life of the pipeline billions of dollars. In the alternative Alaska should argue to the Canadian government for an 80/20 debt equity ratio. Alaska should also argue for a return on equity of 12% or less on the Canadian portion of the pipeline. Once again this would lower the tariff and make the pipeline more economic. These two terms are not unreasonable. Both were given serious consideration during the initial pipeline negotiations with the producer group.

As a reminder, gas pipeline economics is a major element of achieving a successful gas pipeline, but there are many more elements that must be addressed to move the project forward.

The issues that need to be addressed are:

1) Fair oil and gas taxes
2) Long term fiscal plan
3) Short term annual capital and operating budgets
4) The permanent fund, its present and future use
5) Gas pipeline economics (discussed in this article)
6) Exploration and filling TAPS and the Gas Pipeline
7) Fiscal certainty/stable oil and gas tax environment
8) Point Thomson (hopefully this will be resolved soon by the State of Alaska and the Point Thomson owners)

In summary if Alaskans really want an Alaskan Gas Pipeline, they need commit their resources to its success. They need to be disciplined fiscally. They need to lead instead of follow. They need to take charge of their future. The result is they will be better off by pursuing such a direction. If the pipeline is a success because of their efforts, they will reap the benefits. If the pipeline is not a success then they will be prepared for the new world they will find.

A Comprehensive Plan - What is Necessary

In May of this year Bud Fackrell, Denali Pipeline Project President announced that “Denali is ending its efforts (to continue the pipeline project) because of a lack of customer support.” This was not a surprising outcome. The pipeline project, without a more comprehensive strategy, will not proceed ahead. The price of gas in the lower-48, current oil and gas taxes and the uncertainty of those taxes in the future, and the lack of a long term plan to finance state government, all contribute to decisions by the shippers of the gas not to commit their gas to a pipeline.


Some will say that TransCanada’s Alaska Pipeline Project is still moving forward, but the only reason it is still moving forward is because the State of Alaska is financing 90% of the costs from the open season until the filing for the FERC certificate. TransCanada’s project will flounder as well once the FERC does not award a certificate due to the lack of shippers for the gas. Gas pipelines aren’t awarded certificates and pipelines don’t get built if they do not have gas to ship.

What is necessary for any gas pipeline to proceed is a comprehensive plan that changes the playing field, a plan that assures a reasonable tax, a plan that provides a modicum of certainty that the tax will not change every time the state needs additional revenue to balance its budget, a plan that shows the industry the state can manage its short-term capital and operating budgets in a way that shows restraint/discipline/understanding of their impact on the long term, a plan that includes a long-term fiscal plan that is not dependent on the oil and gas industry to balance its budget. What the state needs is a plan that changes the economics of the gas pipeline. It is time for a more comprehensive approach to Alaska’s future.

Some have advocated the state should build a large diameter gas pipeline through Canada. Some believe LNG will save Alaska through a large diameter line to Valdez. Some believe a large gas pipeline project will never get built and that Alaska should focus on a smaller diameter in-state gas pipeline. Some tout “Alaska’s gas for Alaskans” like it is some creed or motto that will automatically make whatever project they are supporting economic. The problem with all of these ideas is that without a more comprehensive picture, none of them will be economic, and none of them will ever get built.

There are at least eight issues that must be addressed in a comprehensive manner in order to move Alaska forward in bringing Alaska’s gas to market. Every proposal to bring Alaska’s gas to market should be required address all eight issues.

1) Fair oil and gas taxes

2) Long term fiscal plan

3) Short term annual capital and operating budgets

4) The permanent fund, its present and future use

5) Gas pipeline economics

6) Exploration and filling TAPS and the Gas Pipeline

7) Fiscal certainty/stable oil and gas tax environment

8) Point Thomson (hopefully this will be resolved soon by the State of Alaska and the Point Thomson owners)

Over the next several weeks I will propose alternatives that will address all eight issues. I have written previously about most of them, but I have a few additional ideas I would like to place on the table in advance of the October 18th Alaska Gas Pipeline Forum.

Equal Time for Parnell

Some have complained that I only write about Ethan Berkowitz, but actually, I write about what I hear or read in the press. Recently, I finally got a chance to listen to a soundbyte from Governor Parnell thanks to a posting from the Fairbanks Daily News-Miner. If your are interested in watching the soundbyte go to:

http://www.youtube.com/watch?v=wLkf1TJxhH4&feature=player_embedded#!

In the video Governor Parnell defends his position on the Alaska Natural Gas Pipeline and the need to continue to support the $500 million reimbursement to TransCanada and ExxonMobil by citing the benefits of AGIA. The problem is that most of his justifications are either wrong or are of little value.

The method I have used in the article is to quote the governor and then provide my analysis and response, and where appropriate I have also provided the subject law or regulation.


It assures that there are 5 offtakes for gas for Alaska communities. – Governor Parnell

This is his first justification for supporting the $500 million.

Offtakes will occur where they are economic, not based on a demand by the state. As I stated in a previous article regarding the benefits of AGIA, or lack thereof, the only reason the Palin administration demanded 5 offtakes was because the Murkowski administration required 4. Offtakes will occur wherever the demand is sufficient to pay for the facilities necessary at the offtake site to provide access to the gas. Offtakes are about economics, not about meaningless demands. The state could have demanded 10 offtakes sites and the pipeline company would have agreed because the basis for the offtake site was that it would be paid for entirely by the entity taking the gas.

The real answer to the offtake issue is that all compressor stations should be designed to allow for offtake of gas.

My evaluation of this justification. – It’s not wrong, it’s just not important and certainly doesn’t justify giving a pipeline project $500 million.

AGIA must have #12 at AS 43.90.130(12) is reprinted here for your convenience.

(12) commit to provide a minimum of five delivery points of natural gas in this state;


It ensures that tariffs, instate tariffs for gas delivered to Alaska communities are measured by distance sensitive rates, meaning we are only going to pay for mileage for that gas from Prudhoe to Fairbanks for Fairbanks gas. We are not going to pay for mileage from Prudhoe to Chicago and back to Fairbanks which is what the producers could do if Alaska didn’t have that kind of protection. – Governor Parnell

Governor Parnell states that without the protection of AGIA the producers could charge Alaskans a tariff that included the cost of transporting the gas from Prudhoe to Chicago and back to Fairbanks. This simply isn’t true. It wasn’t true when AGIA was passed, and it is not true now. Surprisingly, AGIA even cites the federal law that would prohibit what the governor says could happen. So the Governor must know his statement is untrue and that protecting distance based tariffs is not a reasonable justification for providing TransCanada and ExxonMobil $500 reimbursement for moving the project forward.

My evaluation of this justification. – It’s wrong and doesn’t justify giving a pipeline project $500 million.

AGIA must have #13 at AS 43.90.130(13) is reprinted here for your convenience.

(13) commit to
    (A) offer firm transportation service to delivery points in this state as part of the tariff regardless of whether any shippers bid successfully in a binding open season for firm transportation service to delivery points in this state, and commit to offer distance-sensitive rates to delivery points in this state consistent with 18 C.F.R. 157.34(c)(8); and
    (B) offer distance-sensitive rates to delivery points in the state consistent with 18 C.F.R. 157.34(c)(8);

18 C.F.R. 157.34(c)(8) is reprinted here for your convenience

    (8) Based on the In-State Study and the delivery points within the State of Alaska identified in paragraph (c)(1) of this section, there must be an estimated transportation rate for such deliveries, based on the amount of in-state needs shown in the study. Such estimated transportation rate must be based on the costs to make such in-state deliveries and shall not include costs to make deliveries outside the State of Alaska;


It assures access to that pipeline on favorable rates for future explorers so that the producers don’t control the pipeline but there is possibilities for more abundant cheaper gas from other areas. – Governor Parnell

This is the state’s “rolled-in” rates argument which I have written about previously. The governor’s argument here is accurate. AGIA does require that the pipeline company advocate for “rolled-in” rates, but that does not mean that this position is in the best interest of the state.  There is no argument from either pipeline proposal or the shippers that the first expansions by compression will be through “rolled-in” rates. So, as a practical matter, the demand by the state that the pipeline company propose “rolled-in” rates is unnecessary because it is in the pipeline company’s interest and the shippers interest, and the FERC will probably require it. The real debate is over expansions by “looping,” building a second parallel pipe beside the first in order to expand that segment of the pipeline. I have written about this in other articles, but the effect of requiring the pipeline company to propose “rolled-in” rates under these circumstances will probably result in the state arguing for a reduced tariff for the owners of gas found in offshore federal waters where the state receives no royalty or taxes, the reduced tariff to be paid for by existing shippers already shipping gas in the pipeline, including in-state shippers. The result will be an incremental increase in the price of gas in Alaska to be paid for by Alaskans to benefit a gas owner that will pay no royalty or taxes to the state, clearly the wrong position.

My evaluation of this justification. – This argument I would rate as accurate but either not important or slightly detrimental to the state depending on which expansion the governor is referring to. But you certainly wouldn’t pay $500 million for a pipeline company to hold a position that is either not valuable to the state or possibly could hurt the state’s interests in the future.

AGIA must have #7 at AS 43.90.130(7) is reprinted here, in part, for your convenience.

(7) commit that the applicant
    (A) will propose and support the recovery of mainline capacity expansion costs, including fuel costs, from all mainline system users through rolled-in rates as provided in (B) and (C) of this paragraph or through a combination of incremental and rolled-in rates as provided in (D) of this paragraph;


That $500 million dollars is protection for Alaskans in a deal that gets negotiated between multinational corporations. I think that’s a fair price to pay to assure that Alaska interests are protected. – Governor Parnell

I am not sure what the Governor is arguing here, but I think he is arguing that the $500 million is justified to protect Alaska’s AGIA requirements. As I stated above and in a previous article on AGIA, the $500 million was an incentive to encourage a pipeline company to do what no rational pipeline company would do, to move forward to filing for a FERC certificate after a failed open season. The only way to get a pipeline company to do this was to pay for the vast majority of the costs of doing so.

Maintaining the obligation to pay the $500 million may be the right answer, but it is not for the reasons stated by the governor. Justifying the commitment of $500 million to the project should be based on whether it helps move the project forward. Does it encourage the major players BP, ConocoPhillips, TransCanada and ExxonMobil to resolve their differences and move a single project forward or does it continue to provide one of the bases of dissention between the parties? Currently the “20 must-haves” of AGIA are one of the bases of disagreement between the parties. BP and ConocoPhillips do not agree with the requirements of AGIA. TransCanada has agreed by contract to meet the requirements of AGIA, but TransCanada’s partner, ExxonMobil has not agreed to those requirements. Currently AGIA stands in the way of the major parties to the pipeline in resolving their differences. Someday it may be time to abandon the requirements of AGIA, but the state may want to consider maintaining its commitment of $500 million to the project, but only if it can be used as a tool in the negotiations to bring the parties together and move the project forward, not as a burden that stands in their way.

Natural Gas Pipeline Options

The gubernatorial candidates have been debating alternatives for a natural gas pipeline and which alternative makes more sense. Berkowitz is a staunch supporter of the state building a natural gas pipeline, I assume to Valdez, while Parnell is a supporter of staying the course and supporting AGIA. This article will provide some clarification regarding the passage of AGIA and make some recommendations on the proper path forward, or at least which path not to follow.

First, AGIA was not about the administration getting rolled as Berkowitz says in his ad. Governor Palin, Lt. Governor Parnell at the time, and 59 out of 60 legislators did not get rolled by the pipeline companies, especially Exxon. At the time Exxon was arguing against AGIA. AGIA was about rolling Exxon and the other producers. It was about bribery to get a pipeline company to, as Commissioner Galvin put it, do things they would not otherwise do. The state, through AGIA, made a requirement that the pipeline company, regardless of the results of open season, push the project forward through filing a FERC certificate. As an incentive the state would reimburse the project for up to $500 million. The percent of reimbursement after open season would be 90%. The reason for the 90% was because no rational pipeline company would move forward past open season unless the open season was successful. I assume the AGIA proponents expected the open season to fail; so they made sure the pipeline company had the incentive to move the project forward anyway.

So even though Ethan Berkowitz attempted to rewrite history in his ad and failed, we should still ask if he has a valid point regarding the state building a pipeline to Valdez or other port?

Actually, if his proposal was the right answer, and the all-Alaska option is really a viable economic option, the shippers will have bid at the Trans-Canada open season. Trans-Canada provided all shippers with the option to bid their gas to Valdez. The Trans-Canada option would also have the added benefit of a private company or companies funding and taking the risk on the project.

The only way it makes sense for the state to build the pipeline is if Trans-Canada’s open season failed. Denali’s open season would also have to have failed as well. That means that the shippers of the gas believe the project to Valdez and the project through Canada are both uneconomic. Based on this assumption let's look at the state owned and funded all-Alaska project.

Does Ethan Berkowitz propose the state retrace the same ground the pipeline companies have gone over so far? Does he propose the state appropriate the funds to bring the project to open season? Since the economics of the pipeline project haven’t changed, the pipeline costs the same to build, the owners of the gas are the same, the risks of shipping are the same, wouldn’t Ethan Berkowitz expect the same result to occur at the open season? Only two years from now? Perhaps he proposes the state not hold an open season. Who needs shippers to commit to the pipeline anyway? Maybe the state will just build the $20 to $30 billion pipeline to Valdez. Surely the gas owners will ship their gas on an existing pipeline? And if they don’t, we will sue them and take away their gas. Sounds logical enough ---- except that it is short-sighted and extremely shallow thinking.

If the state does not hold an open season and builds the pipeline without contracts, the shippers will have no contractual obligation to ship the gas. They will only have the reasonably prudent operator standard/obligation under their leases.

A reasonably prudent operator will ship gas when it can make money selling the gas and a reasonably prudent operator will leave the gas in the ground when it is not profitable to ship it.

Lets assume it cost $4 to ship the gas to the point of delivery. It may cost much more if the state is the builder of the pipeline, but lets assume the state was an efficient designer and builder of the pipeline, tankers, and all facilities to get the gas to market. Any time the gas owner can ship the gas for more than $4, they may agree to ship their gas on the state’s pipeline. Any time the price of gas is less than $4, the shippers will leave their gas in the ground and no one will ship gas on Alaska’s pipeline. The state will have taken 100% of the risk of building the pipe and 100% of the shipping risk. Eventually this will backfire on the state because sometime in the future the price of gas will go below the cost of shipping the gas and the state will eat the cost of staffing and owning an empty pipe, not to mention the other facilities required to get the gas to market.

The problem with Ethan Berkowitz’s pipeline proposal is that it sounds good and may get the votes of those who haven’t done their research or seriously considered the ramifications of his idea, but the proposal is not well thought out. He has not considered the viability of his proposal or the risk he is forcing on the state. If you don’t agree with me then help me answer just a few of the questions I have proffered above. How does Ethan Berkowitz propose to fill the pipe? Does he plan to hold an open season? Does he plan to commit the state’s gas to the state’s pipeline? How about the other facilities required to get the gas to market? Who will take the risk of building those facilities without shipping contracts?  How does he plan to fund such an expensive pipe? Please don’t tell me through PFD checks. I have already written another article about the viability of that proposal.

To answer the above questions you can’t guess. You must find the answers in the documentation Ethan Berkowitz has created or in a speech he has given. If you cannot find the answers, then Ethan Berkowitz’s proposal is shallow and not well thought out. If you find the answer, please provide them to me. I will be glad to analyze them and let you know if they are viable. Campaign soundbytes can only get you so far. Eventually someone is going to ask for meat on the bones of your proposal. I'll be waiting.

Analysis of the Twenty "Must Haves" of AGIA

Overview

There was a substantial amount of importance placed on the twenty "must haves" during the debate on the Alaska Gasline Inducement Act (AGIA). The twenty “must haves” were the basis and reason for the State of Alaska being willing to provide the applicant with up to $500 million in reimbursement for a commitment to the twenty must haves and to move the project forward to applying for the FERC certificate of convenience and necessity. To quote one administration official, the must haves were required to force the applicant to do what they otherwise would not do.


When looked at individually many of the must haves didn’t seem that important or were completed the moment the RFA application was filed. For example, the very first must have required the applicant to submit their application by the filing deadline established by the commissioners. Not exactly, something to fall on your sword over. All contract RFA’s have a filing deadline, and if the applicant does not file by the deadline, their application will not be considered. It was unnecessary to put this item in statute. It merely beefed up the number or requirements without providing additional value to the state.

Other must haves seemed to have little in the way of substantive analysis as the basis for their inclusion. For example, must have number 12 required the applicant to commit to at least five delivery points. The only justification for five points seemed to be that the previous governor, Governor Murkowski, has proposed at least four.

A couple of commitments seemed to make up the core of why the administration needed the must haves and were willing to pay the applicant to make sure they occurred. Must have number 3 requiring the applicant to file for a certificate of public convenience and necessity by a date certain, and must have number 7 regarding rolled-in rates were at the top of the administration’s list. For the reasons listed below, I did not find either of these must haves compelling.

But even if none of the must haves hold any remaining value there may still be a reason to maintain the State’s financial obligation (the $500 million reimbursement) under AGIA.

TransCanada just completed its open season process and Denali is in the midst of its open season. Normally, at the conclusion of the open season process, if it is unsuccessful, the pipeline company will spend most of its energy attempting to determine what went wrong, then rewriting its plan to meet the needs and concerns of its shippers. It would then hold a new open season process in an attempt to have a successful open season. AGIA circumvents this process and requires the applicant to move forward to filing the FERC application even if it doesn’t have the shipping commitments to justify such action. TransCanada is willing to do so because the State of Alaska has agreed to reimburse the pipeline company for 90% of its costs up to $500 million.

As a practical matter this will allow TransCanada to continue to move the engineering and field work forward for at least a year while TransCanada, ExxonMobil, BP, and ConocoPhillips attempt to settle their differences and merge their efforts into a single pipeline proposal. So long as the State is willing to allow the parties to use the $500 million as a bargaining chip and is willing to waive those must haves that get in the way of the negotiations, then AGIA may still have some value left in it for at least another year.

The remainder of this article is a summary analysis of each of the twenty must haves and their remaining value to the State of Alaska.

For those interested in seeing the twenty must haves in context of the rest of the statute, please refer to the State of Alaska AGIA webpage reference below:
http://gasline.alaska.gov/Findings/Appendix%20B%20-%20AGIA%20Statute.pdf

Short Summary of the twenty "must haves"

1) Done. File the application by specified deadline.

2) Done. Provide a thorough description of proposed project.

3) Only remaining obligation is to file for a FERC certificate of public convenience and necessity by a date certain. TransCanada has proposed October 2012.

4) Done. N/A reference to Regulatory Commission of Alaska.

5) Ongoing obligation to assess market demand every two years.

6) Ongoing obligation to expand pipeline in reasonable engineering increments.

7) Ongoing obligation to commit to propose rolled-in rates.

8) Done. State how applicant plans to deal with gas treatment plant.

9) Done. Propose percentage and total dollar amount of reimbursement.

10) Ongoing commitment to propose capital structure of not less than 70% debt.

11) Done. Describe means of preventing and managing cost overruns.

12) Done. Commit to minimum of five delivery points.

13) Done. Commitment to offer distance sensitive rates and firm transportation service to delivery points in Alaska.

14) Done. Commit to establish local headquarters.

15) Ongoing local hire obligation.

16) Done. Waiver of right to appeal department license decisions.

17) Ongoing commitment to negotiate project labor agreements.

18) Done. Commitment that state reimbursement won’t go into rate base.

19) Done. Provide detailed description of applicant and all participating entities.

20) Done. Demonstrate readiness, financial and technical resources to build pipeline.



Analysis of AS 43.90.130 – the twenty "must haves"

The 20 “must haves” of the Alaska Gasline Inducement Act are found in Alaska Statutes Section 43.90.130. Application Requirements. Section 130 requires the application for a license must meet certain criteria – the twenty must haves. Some are timing obligations, some are information requirements that must be submitted as a part of the Request for Applications (RFA), some are obligations with commitments in the future; others are met at the moment the application is filed.

AS 43.90.130(1) requires that the application must be filed by the deadline established by the commissioners. This obligation was met at the moment the applications were filed, and there are no ongoing or future obligations associated with this “must have.”

AS 43.90.130(2) requires that the application provide a thorough description of the proposed natural gas pipeline project, including the proposed route, the location of receipt and delivery points, an analysis of the project’s economic and technical viability, and a technically viable work plan, timeline, and associated budget. The requirements of this “must have” are common to all pipeline projects moving forward to an open season process. They are not unique to the Alaska Natural Gas Pipeline and are not in the category of those requirements that are needed to force the applicant to do what it would not otherwise do. This obligation was generally met at the moment the application was filed, and there are no ongoing or future obligations associated with this “must have.”

AS 43.130(3) requires that the applicant agree to (A) conclude a binding open season within 3 years of receiving a license, (B) apply to the FERC to use the prefiling process before filing an application for a certificate of public convenience and necessity, and (C) apply for a FERC certificate of public convenience and necessity by a date certain.

Subsections (A) and (B) have been completed, and TransCanada has proposed filing for the FERC certificate by October 2012 in compliance with (C). The date certain can be amended under AS 43.90.210 Amendment or Modification of the Project Plan.

The “date certain” obligation under AS 43.120(3)(C) is a continuing obligation that will not be met until the applicant files for a FERC certificate of convenience and public necessity. This certainly is one of the obligations that are in the category of those requirements that are needed to force the applicant to do what it would not otherwise do. This is one of the provisions that most pipeline companies would not agree to because they know that, statistically, date driven projects have a greater chance of failure and cost overruns than projects that are milestone driven. The saving grace of this provision is that the language of the statute provides for an “out” if the applicant runs into difficulty complying with the date they proposed, i.e., the project can still be milestone driven and if the applicant doesn’t meet the “date certain” they will have justification for an amendment so long as they have diligently pursued the project. The additional “sweetener” for this provision is that the State of Alaska will reimburse the applicant for 90% of its costs after Open Season up to $500 million to pursue the project through filing of the FERC certificate.

AS 43.90.130(4) provides that if the project is subject to the jurisdiction of the Regulatory Commission of Alaska (RCA), the applicant will commit to similar obligations that it was obligated to do in (3) above. Since there has been no allegation that the project is subject to the jurisdiction of the RCA, this “must have” can be deemed complete or not applicable.

AS 43.90.130(5) requires to applicant to assess market demand for expansion every two years. This obligation is specific and will require some form of documentation that the applicant met the obligation. As a practical matter, every pipeline company is continually assessing the market demand for capacity. Pipeline companies are incentivized to provide expansion when it is needed by the market. Although this “must have” is ongoing, the value of it is limited because pipeline companies do not need to be told to be on the lookout for pipeline expansion opportunities. This provision had little value when enacted unless you were a conspiracy theorist and believed that the major oil companies on the north slope would conspire to lock up initial capacity on the pipeline and ship only their gas and not expand the pipeline to allow other gas owners on the slope access to the pipeline. Even conspiracy theorists are no longer concerned with this provision because TransCanada won the license and TransCanada, a pipeline company, is incentivized to expand the pipe at every economic opportunity made available to them.

AS 43.90.130(6) requires the applicant to commit to expand the pipeline in reasonable engineering increments and on commercially reasonable terms. This provision sounds good, but is unnecessary. No rational pipeline company would try to expand a pipeline on non-commercially reasonable terms or in unreasonable engineering increments, and the FERC wouldn’t allow such an irrational act to occur even if you found a pipeline company that would consider such unreasonable behavior. This provision, although still an ongoing requirement, is not important to the overall goal of getting Alaska’s gas to market. It will happen with or without the State of Alaska’s insistence.

AS 43.90.130(7) requires the applicant commit to propose rolled-in rates for all expansions so long as the final rates would not result in rates that are more than 15 percent above the initial maximum recourse rates for capacity. This provision is interesting because of the strong positions taken by the State of Alaska and by the major oil and gas owners on the North Slope. Yet the likelihood of this provision ever becoming a real issue is very small. In order for there to be a conflict over this provision there would have to be three expansions of the pipeline.

Everyone generally agrees, based on the submittals of TransCanada and Denali that the first two expansions would result in a reduced tariff and “rolled-in” rates would be perfectly acceptable to all. Only the third expansion would result in a difference in rates.

The third expansion would be through “looping”, that is, building a parallel pipeline alongside the proposed gas pipeline for certain sections of the route.

The State of Alaska argues that a third expansion might not be economic without rolled-in rates; and therefore the pipeline company should propose them.

The North Slope oil and gas owners argue that they should not be required to subsidize a third party gas owner’s expansion through rolled-in rates.

As a practical matter, the only probable scenario that could result in expansion by looping is if Shell found substantial amounts of gas in the Chukchi Sea. The pipeline would have had two expansions by compression and any gas that Alaskans needed would have been under contract in one of the first two expansions. The likely recipients of gas from the third expansion would be Canada, the lower-48, or Pacific Rim markets.

The State of Alaska would require the pipeline company to propose rolled in rates in the third expansion which would mean higher rates for everyone currently receiving gas from the pipeline, and if the FERC approved the rolled-in rates, rates for Alaskans would increase. The State of Alaska effectively made a requirement that was against its own interests. Rolled-in rates for the first two expansions makes sense for Alaskans. Rolled-in rates for the third expansion through looping will increase rates to Alaskans in order to pay for Shell or another major gas producer to ship their gas from the Chuckchi Sea through Canada and to the lower-48. To add insult to injury, the major gas producers will pay no royalty or taxes to the State of Alaska for this benefit bestowed upon them. Once again there is a saving grace to this provision, the chance of explorers finding sufficient gas reserves to keep the current pipeline full, find enough reserves to expand the pipeline twice through compression, and then find enough gas to make an expansion through looping is slim to none. Neither the State of Alaska or the North Slope oil and gas owners should spend any energy arguing over this provision.

There is an additional problem with requiring an applicant to propose rolled-in rates. The obligation must be considered in the context of how it relates advocacy before a regulatory body. The obligation to propose rolled-in rates results in exactly the opposite impact from what the State was attempting to do. First, recognize that a regulatory agency is going to fulfill its responsibilities regardless of what the State has contractually obligated a party to do. Next, if a party is legally obligated to advocate for a particular position, the regulatory agency will know that. The regulatory will discount that advocacy to the extent they believe the position is based on a legal obligation rather than what the party believes. If two parties come before the regulatory agency with a comment, one has a legal obligation to advocate a particular position, and the other can advocate what it believes, the regulatory agency will accept both comments but will recognize that one party may or may not be advocating what it believes.



AS 43.90.130(8) requires the applicant to state how it proposes to deal with a North Slope gas treatment plant. This provision was complete once the application was filed.

AS 43.90.130(9) requires the applicant to purpose the percentage and total dollar amount for the State’s reimbursement of the applicant. This provision was complete once the application was filed.

AS 43.90.130(10) requires the applicant to commit to propose and support rates that are based on a capital structure for rate-making that consists of not less than 70 percent debt. This provision requires a “commitment to propose” and was completed once the application was filed. The license binds the applicant to the commitment. Although this provision is considered complete so long as the applicant does not violate its obligation under the license agreement, the provision itself is not a strong provision. When the State of Alaska was considering participation as an owner of the pipeline, they were evaluating a provision that required a capital structure for rate-making that consisted of not less than 80 percent debt if the financial market would allow it. This would have been a much greater benefit to the people of the State of Alaska than the 70 percent debt number required as a part of the twenty must haves.

AS 43.90.130(11) requires the applicant to describe the means for preventing and managing cost overruns and for minimizing their effect on the tariff. This provision is an important part of the applicant’s proposal in the open season. All bidders want to know how cost overruns will be handled. This provision was unnecessary because it would have been required as a part of any proposed open season, but it is also complete because the TransCanada open season has been held.

AS 43.90.130(12) requires the applicant to provide a minimum of five delivery points of natural gas in the state. This provision is interesting in that there was no real justification for five delivery points. The only justification was that Governor Murkowski proposed four delivery points. Actually the best way to approach delivery points is to talk to the engineers that are designing the compressor stations. Th compressor stations will probably be used as the delivery points for natural gas because using an existing compressor station will be the least expensive way to access gas for Alaskans. When I asked the engineers (one pipeline company set of engineers) if they could design all the compressor stations so that access to gas would be available at each station, they said they could do so without substantial additional cost. If a compressor station is built along the line, it should be designed in such a way as to easily allow access to gas for local use. The local user would still have to pay for the connection costs, including compression and processing, but the access would be available wherever there was a compression station. In addition the federal government requires the applicant, in their notice of open season to provide for delivery points at the locations identified in the in-state needs study which effectively makes this provision unnecessary.



AS 43.90.130(13) requires to applicant to commit to offer firm transportation service to delivery points in the state and to offer distance sensitive rates to delivery points in the state. Interestingly the provision also cites the federal CFR that requires that same thing effectively making the “must have” unnecessary.

AS 43.90.130(14) requires to commit to establish a local headquarters in Alaska. For TransCanada, at least until it is further along in the project, this means it must open a token office to comply with the provision. It is logical for TransCanada to keep most of its staff in Canada close to its executive management team prior to commencement of construction. For Denali (ConocoPhillips and BP), since they both have offices in Alaska, it is easy for them to open local headquarters and staff them with more individuals since they are close to their management teams here in Alaska. This provision has been met by the applicant and is complete.

AS 43.90.130(15) requires the applicant to hire qualified residents and contract with local businesses. This provision looks good but does little to encourage pipeline companies to pursue Alaska workers. The State of Alaska should encourage the pipeline companies to work with local businesses in advance of contract bids. The pipeline companies should size contracts so that local business can bid on the projects. One of the easiest ways to prevent local participation in the bid process is to create a contract that is so large that the local business cannot compete. The pipeline companies need to size contracts to encourage local participation in the bid process. Then the pipeline companies should create programs that help local businesses write business plans that would allow them to participate in the project and allow them to survive after the project is completed.

AS 43.90.130(16) requires all applicants to waive their rights to appeal rejection of their applications. It only applies to applicants and was complete at the time the application was filed.

AS 43.90.130(17) requires applicants to commit to negotiate project labor agreements. This provision sounds good but requires nothing of substance. The provision does not require the applicants to agree to project labor agreements, merely to negotiate them. In all probability the pipeline companies will come to terms with the unions and will agree to project labor agreements, but it will not be because it was required by the State of Alaska. It will happen because it is economic and expedient.



AS 43.90.130(18) requires the applicant to agree to not include the state reimbursement in the applicant’s rate base. I’m not sure the FERC would allow an applicant to add costs to its rate base if it ultimately could not prove it paid for them; so I assume that the FERC would not allow the applicant to add the state reimbursement to its rate base even if the state did not have this provision. This provision is fine but is probably covered by the FERC.

AS 43.90.130(19) requires the applicant to provide a detailed description of themselves and all entities participating with the applicant including the commitments of the other entities participating with the applicant. This provision can assure the State that if a number of entities got together to propose an application, the State could evaluate the entities as a whole to determine if the applicant was ready and able to complete the project. This provision was complete at the time the application was filed.

AS 43.90.130(20) requires the applicant to demonstrate its readiness, financial resources, and technical ability to perform the activities specified in the application. This provision was compete at the time the application was filed.