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August 1, 2008 Dear Friends, Today the Senate voted to approve granting the AGIA license to TransCanada. My vote was “yes”. Having listened to hours of testimony from state officials, TransCanada representatives, Wall Street economists, petroleum economists, attorneys, mediators and of course the North Slope producers – my decision came down to one fundamental question: which way is forward? Moving Forward Here is what TransCanada proposes to do under this license: - Construct and operate a 1,700 mile pipeline. - Construct and operate a gas treatment plant on the North Slope. - Provide pipeline access for shipments to a LNG plant if demand warrants. In addition, the proposal will offer rolled-in rates – meaning that shippers new to the line will not have to bear the full pipeline expansion costs. This point is essential in promoting new gas exploration in our state. The TransCanada project will bring jobs to Alaska, and not just well paid construction jobs. We have learned that while construction jobs provide a two to three year boom in our state – the long term economic job engine is found in the exploration and development of new gas wells. The area available for exploration on the North Slope is geographically the size of Montana. You build the right kind of pipeline and our state gets thousands of long term jobs. Additionally, the proposal provides a minimum of five in-state gas delivery points using distance sensitive rates. This means affordable energy for in state use – at points on the rail belt and beyond. Most importantly, the TransCanada proposal has a set timeline: an initial open season will be concluded by July 2010, FERC certification by October 2012, and initial gas will flow through the line by August 2018. What Will it Cost the State? We will pay $500 million to help in the development phase. That $500 million would be used as follows: through the initial open season, the state shares TransCanada’s costs evenly, 50/50. After that open season, and up through FERC certification, the state picks up the lion’s share of costs – paying 90% of TransCanada’s expenditures. While this means that the state could wind up paying 82% of the expected costs of getting through FERC certification; our $500 million is but 2% of the cost of building the gas pipeline. In addition, our $500 million will help to reduce the tariff, or the cost of shipping our royalty gas through the line. That tariff reduction will pays us back $1.2 billion over the life of the pipeline. For those of you concerned with the amount of money $500 million is, keep in mind that the state is in line to receive a $600 million award for overcharges on the TAPS tariff – per a recent court decision. I think we should pay for our obligations under the gas line license from money that the producers overcharged us on the oil line tariffs. What Else Does the State Put Up? Under AGIA, Alaska offers TC treble damages (three times the amount expended by TransCanada) if we, in essence, decide to change horses somewhere down the road and put state support behind a competing project. But keep in mind, a competing project is defined as a line with a throughput of more than 500 million cubic feet of gas a day. 500 million cubic feet of gas per day is more than you need to heat every home in the state. Alaska could appropriate $3 billion next year and begin building a bullet pipeline from the North Slope to wherever, and that would be absolutely allowable under the bill. What Opponents Are Saying I have listened to the debate, and heard opponents of this license say that you can’t tamper with the free market, that every time government tries to pick a winner that it fails. I see several holes in that argument. Government picks winners all the time. Let’s start with highways. You don’t sit back and wait for the free market to build a highway. You need to jump start the process, appropriate some money, and select a contractor. Schools, ports and harbors, airports all work this way. I also hear that Canada is a foreign country. That may be true, so is the fact that the Canada/US border is the longest undefended border in the world. Consider also the fact that our country and Canada share the largest trading relationship in the world – no other two nations on earth do as much business with one another as our two nations do. Additionally, a treaty, not an act, but an actual treaty, the 1977 Transit Treaty, executed between the two nations does two things: 1. Prevents either country from doing anything to impede or interfere in any way with the transmission of hydrocarbons. 2. Prevents either country from imposing any special taxes on one another’s projects. Further, the North Slope Producers do business with TransCanada every day. Indeed, they are partners in the McKenzie project, which is owned by Shell, Imperial (Exxon) ConocoPhillips and TransCanada. Finally, I’ve also heard opponents of this license say that TransCanada doesn’t have any gas. True, but irrelevant. Only one group does have gas right now – the producers. If we believed that having gas is a necessary condition for any pipeline builder, why didn’t we say so in AGIA? We had lots of contacts with potential bidders. We heard from BG Gas, and Sempra and MidAmerican. Indeed, we heard from TC itself. We did not tell them “you can’t build a pipeline if you don’t have any gas”. We didn’t tell them that for obvious reasons. Competing Projects It cannot be the case that only the producers can build this pipeline. That can’t be right. Indeed, we know that the producers have to sell gas into an economic project. And this project is economic. Very economic. When you do the math, everyone involved makes money. The producers can’t warehouse, or keep underground, their gas. This point has been much argued, but the producers are required, under their leases with the state, to produce their gas in an economic project. It’s called the “Duty to Produce” and it is a well established principle of law. All of the Denali advertising aside – BP, ConocoPhillips, and, indeed, Exxon, were all welcome to bid under AGIA. They didn’t like the rules we set. I’ll point out that while TransCanada has already built 36,500 miles of pipeline, Denali has built zero. An all-Alaskan line remains a very popular option. TransCanada has pledged over and over to build a line to Valdez provided that there are shippers and customers to support that proposal. But we have learned that because of the need for gas liquefaction and shipping, the costs for such a project are much higher than an overland route. Higher costs mean higher tariffs. Additionally, because the market for LNG is overseas, there is a risk of export issues on a federal level and a loss of federal loan guarantees. The Best for Alaska My yes vote for granting TransCanada the AGIA license comes after much deliberation. I firmly feel that this is the best way to “get the ball rolling” on pipeline construction. Under any scenario, Alaska is at least 10 years from shipping our gas. Much of that time is not construction of the line, which is only estimated to take about two years, but permitting processes and preliminary work. Finally, let me say this. What the critics of this deal say is true. It may not result in a pipeline. But the producers have never built a gas line, either. Even under the worst case scenario that the TransCanada proposal does not result in a pipeline, AGIA requires that we as a state get to keep all data that is generated as we move forward. I appreciate hearing from the many of you who have contacted me during the AGIA hearings. As always, you can reach me via email at senator_hollis_french@legislstate.ak.us, or in my Anchorage office at 269-0234. Yours truly,
Hollis
French |
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![[signed] Hollis French](http://www.aksenate.org/images/signatures/16.jpg)