FERC Report to Congress on Alaska Natural Gas Pipeline Expresses Concern About Further Potential Delays

The Federal Energy Regulatory Commission (“FERC”) has issued its eighth report to Congress on the progress being made by competing Alaska Natural Gas Pipeline applicants, who seek to build a pipeline from Alaska’s North Slope across Canada, to supply markets in the Lower 48.[1] Despite millions of dollars being spent by two competing teams to design the pipeline project, FERC concludes in its report that improvements to infrastructure – roads, bridges, ports, and airstrips – that are needed to support pipeline construction are not getting the same attention, and that long lead times for infrastructure work could delay the pipeline project.

Not addressed by the FERC report are other obstacles the Alaska gas line must overcome, like competition from less expensive unconventional gas basins in the Lower 48 or from LNG imports, and volatility in the price of natural gas, which recently hit eight-year lows.[2] The project teams have been focused on pipeline design and planning work that can help firm up their cost estimates. Confidence in those estimates will need to be quite high to draw the commitment of the more than $20 billion likely to be needed to complete the project. FERC’s report points to another set of costs that will have to be fed into the mix, as the two teams make the most serious attempt yet to bring Alaska’s North Slope natural gas to market, almost 40 years after it was discovered.

Background

A natural gas pipeline from the North Slope, across Canada, to serve markets in the Lower 48 was originally authorized in the Alaska Natural Gas Transportation Act (ANGPA) of 1977. [3] The southern portions of the anticipated line, the “Canadian prebuild,” were completed from Alberta into northern California and into the Chicago area, but the U.S. portion of the pipeline from Prudhoe Bay south through Alaska has been delayed for more than three decades. During the 1980s, a competing proposal to export the gas as LNG, via a pipeline to Valdez, gained currency, but proved uneconomic. That option still has supporters, but the pipeline and other infrastructure that would be needed still would make Alaska gas too expensive to compete in the world market against LNG from gas fields located at tidewater in Indonesia and the Middle East.

Interest in delivering Alaska’s natural gas to the Lower 48 states via a pipeline across Canada picked up at the beginning of this decade, as natural gas became the fuel of choice for new power generation facilities, and projections shows that existing gas fields in Canada and the Gulf of Mexico were beginning to decline. The price of gas was quite volatile in the early part of this decade, as markets were disrupted by the 2001 California energy crisis, the collapse of ENRON, and other shifts. But despite sometimes dramatic movement in gas prices, both up and down, the long term market trends still indicated that the U.S. market would need new gas supplies in the foreseeable future. Those projections have fostered the development of unconventional gas in the Lower 48 – such as coalbed methane, shale gas, and deepwater Gulf exploration – and inspired the first sustained effort in two decades to bring Alaska’s gas to market.

Former Alaska Governor Frank Murkowski, elected in 2002, made the gas line project a centerpiece of his administration. He negotiated an agreement with BP, Exxon, and ConocoPhillips, which hold rights to most of the known North Slope gas reserves. That deal would have fixed tax and royalty rates on natural gas and oil for an extended period, providing fiscal certainty the companies said they needed before they could advance the project. The Alaska Legislature rejected this agreement, in large part because of the commitment to lock in for an extended period the amount of revenue the State of Alaska would receive from the project. There also was concern that the companies did not actually commit to build the gas line. The Murkowski Administration also was faulted for not giving serious consideration to the competing pipeline proposal from TransCanada, owner of the “Canadian prebuild” line and of rights to a route from the Alaska border across Canada to the prebuild line, created back in the 1970s under ANGPA. This failed effort probably was the most important factor in Sarah Palin’s defeat of Governor Murkowski in the Republican primary in 2006.

Governor Palin campaigned on a promise to take a different approach to the gas line project. Shortly after she took office, her administration outlined a legislative proposal, the Alaska Gasline Inducement Act (“AGIA”). AGIA was enacted by the Alaska Legislature in the spring of 2007. It called for competitive proposals to build the gas line, and promised funding from the State for the successful bidder, to support development costs. TransCanada was the successful bidder in the AGIA process. Governor Palin rejected a proposal submitted by ConocoPhillips and BP outside of the AGIA process. Nevertheless, those companies have gone forward with their own alternative to the AGIA-licensed TransCanada project.

The FERC Process

During Alaska’s Murkowski Administration, there also were efforts at the federal level to foster development of the Alaska project. These included passage of the Alaska Natural Gas Pipeline Act (“ANGPA”) in 2004,[4] which directs FERC to adopt expedited procedures for licensing an Alaska gas line project, as well as provisions incorporated into the Energy Policy Act of 2005 (“EPAct 2005”) that offer federal loan guarantees and other support for the project. Fifteen federal agencies have entered into a Memorandum of Understanding to coordinate their responsibilities in overseeing and approving the project.[5] Among other provisions, EPAct 2005 requires FERC to make semi-annual reports to Congress on progress of the Alaska pipeline.[6]

Two applicants have initiated the FERC application process under EPAct 2005: 1) TransCanada Alaska Company, LLC (TC Alaska)[7], a joint venture effort by a subsidiary of TransCanada Corporation and ExxonMobil Corporation subsidiaries and 2) Denali – The Alaska Gas Pipeline LLC (Denali), [8]a partnership of BP and ConocoPhillips.[9] The Denali pipeline submitted its first monthly status report to FERC in May, 2009. In the last six months, Denali contracted with Bechtel to do the engineering work for the mainline portion of the pipeline. The Denali project would run 2,000 miles from the North Slope to Alberta, Canada, with the potential for an additional 1,500-mile-long pipeline from Alberta to Chicago.

The next step in FERC process will be for the applicants to hold “open seasons” under which potential shippers of natural gas from the North Slope will “subscribe” to capacity in the pipeline. FERC’s rules establish standards for Open Seasons for initial and voluntary expansion pipeline capacity and for allocating capacity to ensure nondiscriminatory access to any Alaska transportation project.[10] Open Seasons permit potential shippers to compete for and acquire capacity on a proposed or existing pipeline. Open Seasons inform project sponsors of shippers’ needs so that they may adjust project design accordingly. Both projects plan open seasons in 2010.

Tony Palmer, TransCanada's vice president for Alaska development, said he expects unclear results from the company's scheduled 2010 open season, the 90-day period from May to July.[11] As with most large project open seasons, the shippers are likely to insert a number of pre-conditions into their open season applications.

The Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects (OFC)[12], coordinates the federal agencies whose permits and approvals would be required for Alaska natural gas transportation projects. On June 9, 2009, the OFC completed the first phase of the Implementation Plan specific to the Denali project. The first phase includes the period of time from beginning the FERC Pre-filing process until the FERC deems Denali’s application complete. The second phase of the plan will cover the Environmental Impact Statement development period. The OFC expects to complete the Implementation Plan for the TC Alaska project by the end of 2009.

The U.S. Congress has taken steps to support the long-delayed pipeline. A bill reported out of the Senate Energy and Natural Resources Committee would increase the U.S. Department of Energy’s authority to provide loan guarantees from $18 billion (contained in 2004 legislation) to $30 billion to the successful applicant.[13] The FERC report states that “[w]hen a more complete commercial project emerges from TC Alaska, Denali, or another sponsor(s), DOE will proceed with structuring the loan guarantee program.”[14]

The FERC progress report raises a concern that greater progress needs to be made on pipeline support infrastructure or the pipeline construction may well be further delayed regardless of which of two project alternatives moves forward:

“Recent infrastructure needs assessments by Denali, TC Alaska, and the Alaska Department of Transportation and Public Facilities indicate that a large number of projects to improve or repair highways, bridges, ports, and airstrips must be completed prior to initiating construction of an Alaska natural gas pipeline by either Denali or TC Alaska. Because these infrastructure improvements are long-term efforts that require permitting and funding, greater progress in this area must be made to avoid conflicting with the projected timeline for pipeline construction.”[15]

The FERC report says both teams have assessed infrastructure needs. However, a substantial amount of additional coordination will be needed with the State of Alaska, Canada’s provincial governments, and federal authorities before these infrastructure needs can be addressed.

Oversight of the Canadian Portion of the Line

The Canadian portion of the pipeline will be overseen by three Canadian government entities: the Major Projects Management Office (MPMO), Northern Pipeline Agency (NPA), and the Canadian Environmental Assessment Agency (CEAA). Both the MPMO and NPA are located within the Natural Resources Canada (NRCan). NR Can has authority similar to that of the U.S. Department of Energy. The MPMO is responsible for coordinating the Denali project. NPA is responsible for managing TransCanada’s proposed Canadian portion of the pipeline (“the Foothills Project”). The National Energy Board of Canada will regulate both projects’ tariffs and tolls and evaluate the merits of Denali’s Canadian portion of the pipeline. Canadian agencies are developing schedules for both projects so that permitting and regulatory work in Canada can to coincide with permitting and regulatory activity in the United States.[16]

Other Alternatives for Alaska’s Natural Gas

In addition to the two competing projects that have filed FERC applications, there are three other efforts to construct facilities to get Prudhoe Bay gas to various markets: an LNG project, an “all Alaska” project and a State of Alaska investigation.

The Alaska Gasline Port Authority has proposed an LNG proposal designed to deliver Prudhoe Bay gas to Valdez by pipeline. The gas would be liquefied at facilities in Valdez and shipped on tankers to Asian, U.S. West Coast, Mexican, and/or Hawaiian natural gas markets. TC Alaska has committed to include the option of transporting natural gas for this proposed LNG project within its Open Season for a mainline pipeline from the Alaska North Slope to Alberta, Canada. The FERC report asserts regulatory jurisdiction over any Alaska LNG project and any pipeline dedicated to transporting gas to the LNG facility[17].

The Alaska Natural Gas Development Authority (ANGDA) is continuing to develop an “all Alaskan” plan to build certain intrastate natural gas pipelines to move Alaska gas to Alaskans. The ANGDA proposal involves constructing a 460-mile-long natural gas pipeline of various diameters from Beluga to Fairbanks. This pipeline would initially be used to transport Cook Inlet natural gas from southern Alaska to Fairbanks,[18] and then later connect to either Denali or TC Alaska to bring North Slope natural gas to southern Alaska.

The State of Alaska is using available data to consider four alternatives for delivering in-state gas to Alaskans. The four alternatives are: 1) A pipeline from the Alaska North Slope (both the foothills of the Brooks Range and the Prudhoe Bay area) to the tidewater in Cook Inlet, along the Parks Highway;
2) A pipeline from the Alaska North Slope to tidewater in Cook Inlet, along the Richardson & Glenn Highways; 3) A spur-line off a main-line to Alberta, down the Parks Highway to Cook Inlet; and 4) A spur-line off a main-line to Alberta, down the Glenn & Richardson Highways to Cook Inlet.[19]

Conclusion

FERC’s recent status report is another reminder of the difficulties any project faces in bringing Alaska’s North Slope natural gas to market. Long-term supply and demand projections still appear to favor the type of project being pursued by Denali and TC Alaska – a line across Canada to Lower 48 markets. The work those companies are doing now, to refine their designs and cost estimates, may reveal by early 2010 whether the time for this project has finally come. But FERC’s comments about infrastructure improvements needed to actually build the line also is a reminder that it may be difficult to project the project’s full costs, and that construction may ultimately take longer than any of the proponents have hoped.

For more information regarding efforts to market Alaska’s natural gas, or other energy projects, please contact Michael Dotten or Svend Brandt-Erichsen, or any member of Marten Law Group’s energy and infrastructure practice.