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Witness Testimony
Mr. Dennis McConaghy
Alaska Natural Gas Pipeline Status Report
TransCanada Corporation (TransCanada) owns one of the largest natural gas transmission systems in the world and has pipeline and electric generation operations and facilities extending across Canada and into the northern United States. TransCanada is an international leader in the construction of natural gas pipelines under harsh frontier conditions. Foothills Pipe Lines Ltd. ("Foothills"), now wholly-owned by TransCanada, holds the certificates to construct both the Alaskan and Canadian portions of the Alaska Natural Gas Transportation System. The Alaska Highway route, designated under the Alaska Natural Gas Transportation Act (ANGTA), was recently reaffirmed in legislation prohibiting alternative routes passed by the State of Alaska and both the U.S. House and U.S. Senate. The first phase of the Alaskan gas pipeline in Canada, known as the "prebuild," was constructed by Foothills in the late 1970's, and has been expanded five times since to meet the needs of U.S. markets. Although changes in the North American natural gas supply and demand balance postponed the completion of the pipeline through Alaska and Canada, Foothills has steadfastly maintained the certificates issued to it by the Government of Canada to construct the remaining Canadian portions of the pipeline. Moreover, the Canadian government has recently reaffirmed the benefits of proceeding under the framework contemplated under the bilateral treaty between Canada and the U.S. and Canada's intention to meet its commitments to facilitate the planning and construction of the Canadian portions of the project as required under ANGTA and Canadian law. Using the Foothills system under the Northern Pipeline Act in Canada will expedite the Alaska project, avoid a new round of negotiations between the U.S. and Canada, and provide maximum benefits to both countries. TransCanada has undertaken several important steps to advance the project in light of the urgent need for additional gas supplies in the Lower 48 states, including signing a Memorandum of Understanding (MOU) with the State of Alaska under which TransCanada will file an application under Alaska's Stranded Gas Development Act and complete its acquisition of necessary rights-of-way from the State. TransCanada intends to build the Canadian facilities that connect the Alaska pipeline to U.S. markets, but also has agreed to convey the State right-of-way to any holder of a final FERC certificate to construct an Alaskan pipeline that interconnects with its existing facilities in accordance with the rights TransCanada has to construct the Canadian segment. Because the Alaska pipeline will require the investment of billions of dollars, determining the appropriate allocation among key stakeholders of the inherent risks in this massive project still must be addressed. Ultimately, four critical groups - the North Slope Producers, TransCanada, the State of Alaska and the U.S Government - must come together and develop an optimal mix of commercial and fiscal terms that adequately address the significant frontier construction and financial risks, under the framework of the existing U.S/Canada pipeline treaty and the Canadian Northern Pipeline Act. The U.S. Government remains a key player despite the current status of national energy legislation. TransCanada is absolutely committed to moving the project forward to complete the Canadian segment and constructively participate in the Alaska segment. TransCanada's ability to expedite regulatory processes in Canada under the NPA and its expertise as one of the world's leading pipeline companies provide a valuable component to the overall project. INTRODUCTION Good morning, Chairman Hall and Members of the Subcommittee. My name is Dennis McConaghy. I am the Executive Vice President for Gas Development of TransCanada Corporation (TransCanada), the parent company of TransCanada PipeLines Limited. TransCanada appreciates the opportunity to participate in this proceeding on the status of the Alaska natural gas pipeline, to brief you on TransCanada's longstanding efforts to bring this project to fruition, and to discuss the current initiatives underway to ensure that Alaska's enormous supplies of natural gas are delivered on a timely basis to U.S. markets that urgently need this critical supply. TransCanada is a leading North American energy company. It owns one of the largest natural gas transmission systems in the world - over 24,200 miles - and has operations and facilities extending across Canada and into the northern United States. TransCanada transports approximately two thirds (11 Bcf/d) of western Canada's natural gas production, representing 16% of North American production, to markets across North America. TransCanada also owns, controls or is constructing more than 4,700 MW of electric generation in Canada and the United States. Headquartered in Calgary, Alberta, Canada, TransCanada's American holdings include interests in five American pipelines and numerous electric operations in the United States. TransCanada recently has agreed to purchase a major natural gas pipeline in the Pacific northwest. TransCanada is an international leader in the construction of natural gas pipelines under harsh frontier conditions. INTEREST IN THE ALASKA GAS PROJECT TransCanada subsidiaries now hold the certificates to construct both the Alaskan and Canadian portions of the Alaska Natural Gas Transportation System. TransCanada has maintained and advanced the project in the last two decades and recently has undertaken several important steps to move the project forward in light of the urgent need for additional gas supplies in the Lower 48 states. The Alaska Natural Gas Transportation Act (ANGTA), enacted in 1976, established mechanisms to select a transportation system to deliver Alaskan natural gas and to designate an entity to receive a certificate to construct and initially operate that system. In addition, ANGTA included provisions to expedite the construction process, including limited judicial and regulatory review processes. The route for the pipeline along the Alaska Highway was designated under ANGTA and both Chambers of the U.S. Congress and the State of Alaska have reaffirmed this selection by including prohibitions against alternative routes in recently passed energy legislation. In the late 1970's, Canada and the United States signed an Agreement on Principles, entering into a bilateral treaty to govern relations between the two countries for the transportation of Alaskan gas to market via the system selected under ANGTA. The Canadian government enacted the Northern Pipeline Act (NPA) to implement the Canada-U.S. agreements. An entity which is now wholly-owned by TransCanada was issued, pursuant to ANGTA, a certificate of public convenience and necessity to construct and operate the Alaska portion of the pipeline. TransCanada has maintained this certificate and, as discussed below, is prepared to work with the critical players - the North Slope Producers, the U.S. Government, the State of Alaska, Alaskan interests and consumers - to assure that the benefits of this certificate and associated rights can be harnessed to ensure the timely construction of the pipeline project. TransCanada intends to build the Canadian facilities that connect the Alaska pipeline to U.S. markets, combining new facilities with existing facilities to create an economically attractive delivery system for Alaskan gas. Following a competitive hearing process that was held in the 1970's, the NPA issued the certificates of public convenience and necessity to construct and operate the Canadian portions of the pipeline to Foothills Pipe Lines Ltd. ("Foothills"), now wholly-owned by TransCanada. The first phase of the Alaskan gas pipeline in Canada, known as the "prebuild," was constructed by Foothills in the late '70's at a cost of over one billion dollars, and has been expanded five times since to meet the needs of U.S. markets. The prebuild facilities now transport approximately 30% of Canadian exports to American markets. Although changes in the North American natural gas supply and demand balance postponed the completion of the pipeline through Alaska and Canada, over the past 25 years the governments of Canada and the United States have preserved the pipeline treaty so that it remains in force today. Additionally, Foothills has steadfastly maintained the certificates issued to it by the Government of Canada to construct the remaining Canadian portions of the pipeline. Most recently, in November 2003, Canadian Prime Minister Chretien reaffirmed the benefits of proceeding under the framework contemplated under the bilateral treaty between Canada and the U.S. and Canada's intention to meet its commitments to facilitate the planning and construction of the Canadian portions of the project under the NPA. Most recently, TransCanada has continued its efforts to move the project to fruition by signing a Memorandum of Understanding (MOU) with the State of Alaska designed to advance the development of the project. Under the MOU, TransCanada will file an application under Alaska's Stranded Gas Development Act and complete its acquisition of necessary rights-of-way from the State. TransCanada also has agreed that, in order to encourage parties to reach the necessary commercial and regulatory agreements, it will convey the State right-of-way to any holder of a final FERC certificate to construct an Alaskan pipeline that interconnects with facilities that TransCanada has the right to, and will, build in Canada. TransCanada already holds the Federal right-of- way within the State of Alaska. DEMAND FOR ALASKA GAS TransCanada is wholeheartedly committed to this project. Canadian and U.S. experts have concluded that the total natural gas supply from traditional sources in Canada and the U.S. will be insufficient to meet projected growth in North American gas demand, particularly that of the Lower 48. Consequently, natural gas from frontier basins in Alaska and Canada's north are required within a decade, along with new liquefied natural gas (LNG) supplies, to ensure North America has adequate supplies of competitively priced natural gas. Although there are several critical uncertainties that would affect the forecast of North American natural gas demand, including long-term growth rates of the U.S. and Canadian economies, the level of oil prices, the relative price of natural gas to other fuels, the effect of environmental policies such as the Kyoto Protocol, and the conventional natural gas supply response, inadequate natural gas supply could cause sustained high gas prices and negatively impact the North American economy over the long term. TransCanada expects that gas supply from traditional U.S. and Canadian natural gas sources will decline by approximately 1 Bcf/d from 2002 through 2012, leaving a gap of approximately 13 Bcf/day to be filled by new sources of supply. Without new gas resources, natural gas prices could be expected to rise high enough to restrict gas demand and economic development. We believe that natural gas from the Mackenzie Delta in Canada's north, Prudhoe Bay gas from Alaska and new sources of LNG are all required early in the next decade if North America is to have acceptable gas prices. RISKS OF THE PROJECT TransCanada strongly believes that the Alaska pipeline project is both necessary and economic. However, the project has unique risks that must be addressed through the appropriate allocation of risks among the interested parties - the producers, the owners of the pipeline, the State of Alaska, the Federal Government and consumers. The Alaska pipeline will require the investment of billions of dollars in new facilities and the expansion of existing facilities. However, given the risks of construction and the risks of projecting commodity prices ten years into the future and beyond, significant challenges remain before the necessary commercial underpinnings for the project can be put into place. Important questions, such as the willingness of players to accept a portion of the completion and overrun risk and the burdens of long-term shipping and gas purchase contracts, remain unresolved today. Important progress has been made in recent years in moving the project forward. The producers have engaged in an extensive and expensive study process to review the options and finances of a pipeline project. The producers also have sought Federal legislation that they state would enhance their willingness to proceed with the project. TransCanada has resolved issues related to historic costs in the Canadian portion of the project and has obtained a reaffirmation by the Canadian Government of its commitment to the U.S-Canada treaty and the Northern Pipeline Act. As well, TransCanada has played an important role in facilitating the progress of the Mackenzie Valley pipeline project. Equally important, in discussions with the State of Alaska and others, most recently in the MOU executed with the State of Alaska, TransCanada has indicated its willingness to facilitate the construction of the Alaskan segment of the project, in addition to TransCanada's facilities in Canada. THE PATH FORWARD Based on TransCanada's own in-depth engineering studies, the Alaska Highway route designated under ANGTA continues to be the most economic and least risky route through Alaska to transport Alaskan gas to market. It avoids additional costs and delays by minimizing potential technology, environmental, and regulatory problems that could seriously delay the construction of the project in both Alaska and Canada. TransCanada's Alberta gas pipeline infrastructure currently has approximately 2 Bcf/d of spare capacity, and we forecast there could be an additional 2 Bcf/d of spare pipeline capacity at the time Alaskan gas is delivered to market. The utilization of this spare capacity could eliminate the need for any additional new pipeline infrastructure from Alberta to markets in the Lower 48 states. It would also allow for the serving of diverse markets in the U.S. The Alaska project is expected to initially transport 4.5 Bcf/d. Integration of the project into TransCanada's existing pipeline infrastructure in Alberta, which has a capacity of approximately 13 Bcf/d, will reduce the capital costs and cost overrun risks to complete the project from the Alaskan North Slope, reduce regulatory risks and minimize environmental and other societal impacts. However, the owners of Alaska gas and the developers of the pipeline that will deliver that gas to U.S. consumers will not invest the hundreds of millions of dollars needed for the initial phases of the project, which will not produce cash flow for nearly a decade, unless they have an opportunity to earn a reasonable level of return on their investments. Shippers and investors need to be able to manage the risks inherent in constructing a project of this magnitude in frontier areas, but the private financial markets are unable to provide the tools necessary to adequately manage the unique risks of this project. What is needed to solve this impasse, in the face of North America's critical demand for additional natural gas? Ultimately, four critical groups - the North Slope Producers, TransCanada, the State of Alaska and the U.S Government, must come together and develop an optimal mix of commercial and fiscal terms, under the framework of the existing U.S/Canada pipeline treaty and the Northern Pipeline Act. The final structure must result in the long-term commitment of North Slope gas supplies to commercially viable shippers, reasonable certainty with respect to both tariffs for shippers and returns to investors in the pipeline, acceptable conditions for the sale of gas by the producers, opportunities for in-state deliveries of natural gas, and conditions for the expansion of the pipeline under terms that encourage the development of new natural gas supplies in Alaska. A key part of this process will be negotiations with the State of Alaska under the Stranded Gas Development Act. This process will help define the long-term fiscal and tax regime required to attract the producers to long-term commitments, whether for the sale of natural gas or as shippers, as well as some of the terms and conditions for the pipeline itself. The Federal Government will have a critical role to play in assuring that no single group is required to bear, in full, risks that are necessary to benefit the entire Nation. Of course, TransCanada will continue to work with the Producers and others on the necessary commercial terms and structures for the project. CONCLUSION Conventional sources of natural gas are projected to be insufficient to meet expected growth in natural gas demand in North America over the next decade. However, frontier gas sources already discovered in northern Canada and Alaska can be delivered to markets in the Lower 48 on competitive terms in this timeframe to meet forecasted demand. Specifically, Alaskan gas can be in-service by 2012 by moving along the Alaska Highway and across Canada under the existing Canada/U.S. treaty and the Northern Pipeline Act, then integrating with the existing North American pipeline grid in Alberta. Using the Foothills system under the Northern Pipeline Act in Canada will expedite the Alaska project, avoid a new round of negotiations between the U.S. and Canada, and provide maximum benefits to both countries. TransCanada remains as committed to the project today as it has been over the past 20 years. Furthermore, TransCanada has taken the unprecedented step of indicating its willingness to transfer critical rights to the successful developer of the Alaska segment of the project as part of a project that is true to, and consistent with, the U.S./Canada pipeline treaty and TransCanada's rights within Canada. TransCanada hopes that its willingness to take this important step will encourage others to complete the process of developing the commercial, regulatory and statutory structure necessary to ensure the timely delivery of critical Alaskan gas supplies to North American markets. TransCanada believes that an appropriate allocation of risks can be developed that will ensure that no industry segment is asked to shoulder an unbearable economic burden and that consumers will, because of the price benefits of the introduction of new suppliers, pay lower rates than they otherwise would face. TransCanada looks forward to continuing to work with the Producers, the State of Alaska, and the U.S. and Canadian governments to enable a viable project that adequately addresses the significant frontier construction and financial risks in Alaska in a manner that capitalizes on the efficiencies of utilizing current Canadian infrastructure. TransCanada's ability to expedite regulatory processes in Canada under the NPA and its expertise as one of the world's leading pipeline companies provide a valuable component to the overall project. Thank you for this opportunity to testify on the status of the Alaska natural gas pipeline. I would be happy to respond to your questions.
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