By Tim Bradner
Alaska Journal of Commerce

Three key issues have emerged in a proposed state license for TransCanada Corp. to develop an Alaska gas pipeline.

These include how much gas would really be available for the pipeline company, whether the license would trigger financial penalties against the state that could impede the rival the Denali pipeline being pursued by BP and ConocoPhillips, and whether the penalties would be triggered if the Legislature wants to assist an industrial operator in southern Alaska that requires more than 500 million cubic feet per day of gas moved through a spur pipeline.

The 500 million cubic feet per day is the threshold for a spur pipeline. More than that and a treble-damages provision in the TransCanada agreement comes into play. TransCanada hopes to move 4 billion to 4.5 billion cubic feet a day through a 48-inch pipeline from the North Slope to Canada.

Legislators returned to Juneau July 9 to finish work on the license proposal after a holiday break and a two-week road show in which lawmakers aired TransCanada's plan in communities around the state.

House Speaker John Harris said he hopes to get a vote on the license by July 16.

While legislators are concerned with a proposed $500 million state subsidy to TransCanada the license would confer, they are also worried about gas throughput issues and whether the license would impede the producers' project.

The concern over throughput has emerged in two ways. In hearings in Anchorage, state Revenue Commissioner Pat Galvin said a treble-damages penalty provision against the state in the TransCanada agreement would limit gas offtake for utility or industrial uses in Alaska to 500 million cubic feet a day.

Legislators are unhappy with this because they hope to use state incentives to lure new gas-based industry to Southcentral Alaska with North Slope gas delivered through a spur line.

This includes a possible restart of Agrium Corp.'s shut-down fertilizer plant in Nikiski. Also, Mitsubishi Corp. recently announced it is considering a liquefied natural gas project in Valdez that would be supplied by gas through the spur line. Industrial use or an LNG project would require more than 500 million cubic feet a day.

Southcentral utilities require about 250 million cubic feet per day on an average year-round basis, but there are big swings in utility demand from lower volumes in the summer to high volumes needed in the winter.

A second supply concern is whether enough gas will be available from North Slope producing fields if gas from the Point Thomson field, where leaseholders are engaged in a dispute with the state, is not available for the pipeline, at least in its initial years.

State administration officials have told the Legislature that Point Thomson gas is not needed for the pipeline and that a minimum of 3.5 billion cubic feet a day TransCanada needs to start the project can come from the Prudhoe Bay field. Producing companies dispute this.

House Majority Leader Ralph Samuels of Anchorage said in a June 2 interview that he believes the Point Thomson gas dispute might be one of the most critical issues facing the pipeline.

Prudhoe Bay gas is used to maintain reservoir pressure the field to produce oil. An allowable gas offtake rate will be set by the Alaska Oil and Gas Conservation Commission.

Producing companies said it is unlikely Prudhoe will be capable, without unacceptable loss of oil recovery, of supplying TransCanada's minimum requirements on its own. Even if the Oil and Gas Commission approves a 3.5 billion cubic feet a day offtake rate, about 1 billion cubic feet a day would be needed to fuel oil and gas processing and production facilities and for use in enhanced oil recovery. That will leave only 2.5 billion cubic feet a day, which is below TransCanada's minimum.

AOGCC is an independent state regulatory agency that must rule on how much gas can be produced without unacceptable loss of oil recovery.

Meanwhile, there are few sign that the Point Thomson dispute will be settled any time soon. The state is attempting to cancel Point Thomson leases held by ExxonMobil, BP, Chevron and ConocoPhillips in a disagreement over past work obligations. A proposal put forth by the companies to resolve the dispute, a $1.3 billion gas cycling and condensate production project, has been rejected by the Department of Natural Resources. The dispute is in court, where litigation could drag on for years. Point Thomson holds 8 trillion cubic feet of gas reserves, just under a quarter of the 35 tcf of proven gas reserves on the Slope.

While the dispute will eventually be settled, there are doubts now as to whether it can happen in time for Point Thomson gas to be available for a pipeline open season in 2010, to be held by either TransCanada or Denali.

Legislator are also worried about how the TransCanada license, if it is approved, would affect efforts by BP and ConocoPhillips in pursuing their Denali project, a rival to TransCanada's plan. In hearings in Kenai, Revenue Commissioner Galvin acknowledged that any modifications of state tax laws that could be seen as benefiting producers supporting the Denali project would also trigger penalties to TransCanada.