Northern Rights
Vol. 9 Issue 5 - June 2005

by Jack Danylchuk

Dragging the Alaska Highway pipeline back in front of Canada’s National Energy Board would be like replaying the Stanley Cup finals – at the insistence of the losing team. Bob Blair chuckles­ at his analogy. And for good reason. After three decades of convoluted corporate mergers and acquisitions, the analogy – like the future of the pipeline project itself – is anything but clear-cut.

Back in the 1970s, when he was a major player in the petroleum industry, Blair’s proposal to move Arctic gas from the Mackenzie Delta and the North Slope down the Alaska Highway won National Energy Board (NEB) approval, beating out a competing bid from TransCanada to build a pipeline through the Mackenzie Valley. Shelved but never forgotten, the project, with its myriad complexities, has been given new life by rising energy prices. If Alaska’s gas producers can cut the deal they want with the state government, Ottawa and the carriers, the system to transport Alaska gas through Alberta to American markets could finally be built within the next decade.

Watching the fray from semiretirement in Vancouver, Blair acts as an unpaid consultant for Foothills Pipe Lines, the company granted the right under 1978’s Northern Pipeline Act (NPA) to build the Canadian leg of the project. At the time Foothills was the property of Blair-led Alberta Gas Trunk Line and partner Westcoast Transmission; today it’s under the TransCanada umbrella. And TransCanada, now in the driver’s seat, argues that the 27-year-old NPA still applies.
“I spent a long time fighting for Foothills,” says Blair, thinking back to the 200 days of NEB hearings that led to the act. “It consumed huge amounts of our lives and corporate resources. To have someone say ‘let’s open this and have another look’ catches you by surprise, to say the least. It sounds a little pushy.”

The company doing the pushing is Enbridge, formerly Interprovincial Pipe Lines. A rivalry between Enbridge and TransCanada has been simmering for a decade, heated by diminishing opportunities for production growth in North America. The companies, headquartered across the street from each other in Calgary, both have unused pipeline capacity, and they’re competing to move oilsands crude out of Fort McMurray. But if the Alaska Highway pipeline proceeds, it will be the biggest prize.

Alaska’s gas producers – BP PLC and its partners Exxon Mobil Corp. and ConocoPhillips Corp. – have proposed a buried, high-pressure line from the state’s North Slope to southern markets. The line would be capable of shipping 4.5 billion cubic feet of natural gas per day (bcfd) and could be expanded to 5.6 bcfd. The estimated cost is $20 billion for a large-diameter pipeline from Prudhoe Bay on the northern coast through Alaska, Yukon and northeastern B.C. to link with waiting lines in Alberta, and then onto the U.S.

Enbridge signaled its intention to enter the competition to build this pipeline early in 2002, a year after Pat Daniel took over as CEO. At the time, Daniel declared that the company must get bigger to compete in an industry in which technology is increasingly expected to provide growth and profits. “There will be industry consolidation,” he predicted. “Electric utilities, gas distribution, gas pipeline companies and independent power producers will start to come together.”
A University of Alberta chemical engineering graduate, Daniel sits on the advisory council to the school’s faculty of business. He came to the post with 30 years of experience, almost all of it with Enbridge and its heritage company, Interprovincial. Once known primarily as an oil shipper, Enbridge boasts 13,500 km of pipeline delivering more than two million barrels a day of crude oil and petroleum liquids. It moved into natural gas in 1994, buying Consumers’ Gas Co. Ltd., the biggest distribution company in Canada, with 1.7 million customers in Ontario, Quebec and New York State. Enbridge has major interests in the Alliance and Vector natural gas transmission systems, which deliver gas from northeastern B.C. and Alberta to Chicago. It has also bought former TransCanada assets, pipelines in Spain and Colombia, and recently acquired a system that delivers half of all Gulf of Mexico gas to the U.S.. In 2004, Enbridge’s earnings were $645.3 million.

The battle for the Alaska pipeline burst into the open in early March 2005. Enbridge took out full-page ads in the Globe and Mail and National Post, calling for the federal government to open the Canadian portion of the project to competition. “Canada was built on the principles of fairness and free enterprise,” the ads asserted. “A project like the Alaska-Canada natural gas pipeline should be too.”

Steve Letwin, group vice-president of gas strategy and corporate development at Enbridge, says the ads were prompted by TransCanada’s continuing lobbying efforts with the federal government. “Enbridge was just catching up,” he says. “What we were surprised at was the level of lobbying. We naively thought this was a project that was going to be open in the market. If we had a sense of that we would have been doing a lot more lobbying ourselves. I guess we learned a little lesson, but I think we made our point.

“Just the fact that the government seemed to be landing in favour of the NPA tells me that over the years they’ve heard nothing but NPA whenever there was talk of Alaska,” Letwin continues. “TransCanada has to do what they have to do. I’m not criticizing. They have a view; we have a view. The government shouldn’t play one side or the other. I know the press is trying to put this as two rivals fighting it out, but at the end of the day, if the government stays out, we will be two companies competing for a project. This isn’t about personalities. This is about rights. We’re a publicly traded company; they’re a public company. This is a multi-billion-dollar project. We have invested a lot of money on infrastructure. We need to protect our shareholders.”

TransCanada replied to the Enbridge publicity campaign this past spring with ads of its own, as well as an early April briefing to “set the record straight.” CEO Hal Kvisle spent nearly two hours lecturing reporters and analysts, going into minute detail and patiently answering questions, all the while maintaining that the contest with Enbridge was merely “a creation of the media.”

Like Pat Daniel, Kvisle is also a U of A  alumni. He graduated in 1975 with a degree in civil engineering and, with thoughts of an Artic pipeline in mind, started working at Dome Petroleum. When it was dismantled and sold, Kvisle moved to Fletcher Challenge, which at the time was a forestry company. He created its energy division through a series of shrewd acquisitions, building his own reputation as a deal maker. Since taking leadership of TransCanada in 2001, Kvisle has shed assets that didn’t meet pragmatic, common-sense tests, including an energy-trading business like the one Enron pioneered, and fragments of pipelines scattered throughout the world.

Under Kvisle, TransCanada has focused on North American pipelines and electrical power generation. It owns co-generation, hydro and a third of the continent’s largest nuclear power station in Ontario. It is the continent’s biggest natural gas distributor with 15% of the continental market and 41,000 kilometres of pipeline. In 2004, TransCanada reported net income of $1.032 billion.

Kvisle began the April media session with an apology for the company’s silence to date, and a shot at Enbridge, explaining that “it has not been helpful for TransCanada to engage in discussion in the media. For people who are not involved in the project, the freedom to discuss it is quite a bit different.”  His message that day was twofold: a defence of TransCanada’s inherited right to build the Alaska Highway pipeline under the NPA, and a public pitch for his company to a large, interested group of producers, consumers, federal and state governments, First Nations groups, and regulators.
TransCanada hadn’t merely sat on rights it acquired through mergers, according to Kvisle. It has built on them. “We’ve invested $2 billion in the pre-build and spent hundreds of millions of dollars on technical studies of the right-of-way in Alaska and Yukon,” said Kvisle. “We’ve put all pieces of the project together.” Moreover, the four billion cubic feet a day coming from Alaska would top up TransCanada’s current system, which is operating below its 14 bcfd capacity. That would offer toll savings estimated at $10 billion over 15 years for western Canada producers, Kvisle said.

“The Alaska line would represent less than 20% of TransCanada’s overall distance and capacity,” said Kvisle. “It is not a piece of pipe that is dramatically going to change TransCanada as a conduit for flowing gas to U.S. markets. But it is a very important asset to us.” In defence of the NPA, and in answer to producer demands for a clearer regulatory process, he said, “Nothing is better than NPA. It’s Canadian law; it has no expiry date. There is not a lot that has changed. The NPA is not an old act. It has been used many times, as recently as 1998.”

Regardless of whether the TransCanada versus Enbridge battle is a media construct, or whether the NPA will stand the test of time, there’s an even bigger question in the air: How exactly do Alaska’s gas producers want to proceed? Although TransCanada wants to work with BP, Exxon Mobil and ConocoPhillips – “we are willing to lend technical expertise and be involved as investors,” says Kvisle – the producers are onside with Enbridge’s call to place the project before the NEB. According to BP, the project hinges on securing a “clear, durable fiscal contract with Alaska, a clear traditional Canadian regulatory process, and U.S. federal legislation that provides an efficient regulatory process and fiscal provisions.” BP has also pointed out, several times, that it has more pipeline expertise than Enbridge and TransCanada combined, that it could get this line built without either company.

That said, BP officials are pleased with the progress so far. U.S. federal legislation containing the necessary Alaska gas provisions passed Congress in October 2004 and has been signed into law. It allows producers to choose between the Alaska Natural Gas Transportation Act, the equivalent of Canada’s NPA, or the traditional U.S. regulatory process. Fiscal contract negotiations with Alaska are underway and a completed contract should be presented to the state legislature for approval sometime later this year.

“Alaska has to happen first,” says Ken MacDonald, a vice-president with BP Canada Energy Company’s Alaska-Canada gas pipeline group. “This project will not go anywhere without fiscal arrangement contracts with the state of Alaska being concluded.” Initially, there was hope that that a deal could be concluded by May, when the Alaska legislature adjourns its annual session, but MacDonald says the producers and state government are now aiming for later this year and a special session to sign it into law.

BP and its partners want the project reviewed by the NEB because they feel that would allow full aboriginal participation, include full environmental reviews, and enable natural gas liquids extraction and transportation in Canada. “A traditional NEB and Canadian Environmental Assessment Act joint panel approach provides the template for a clear, efficient and reliable process,” MacDonald says. “We are very much looking at this stage that we would file to build the pipeline ourselves. It may be other parties that will join with us to build this pipeline. We’re willing to work with anyone who can bring value to the project and share some of the risk.”

The NPA has limitations, MacDonald says. “The project proposed today differs fundamentally from 1978 and it is unlikely that it could proceed under the NPA certificates.” BP estimates that the value to Canada would include $15 billion in capital spending and $16 billion in revenues to federal, provincial and territorial governments along the route. This adds to the pressure on federal Natural Resources Minister John Efford to make a decision. Yet Efford was all but invisible through April’s ongoing debates about the issue, shuttling between Ottawa and Newfoundland for the last half of the month.

At an energy conference in Alaska in January, Enbridge’s Pat Daniel said his com­pany “is firmly of the view that if the Cana­dian government relies solely on the NPA, it would create project uncertainty and delay, if not stall it in its tracks.” Steve Letwin, his colleague, is more explicit: “Let me make it clear. If we see the government making a decision in favour of the NPA exclusively, we would certainly take legal action. We would ­strongly argue that there was a sunset clause.... We would say the project is no longer alive – ­certainly not alive under the terms and conditions being proposed today.”

So far, says Letwin, the discussion in the media has been mostly about TransCanada versus Enbridge, “but at the end of the day, it’s the producers who are going to dictate when and how this is going to happen. They’ve invested the billions of dollars in finding the reserves.” And there are reasons producers might want to delay the Alaska Highway pipeline: a drop in oil prices; a flood of natural gas liquids into eastern North America; a move away from gas in the power generation sector in favour of nuclear energy, cheaper coal or coalbed methane. “If Alaska gas comes into an over-supplied market there could be a rapid correction to the down side,” says Kvisle, “so producers are cautious.”

Bob Blair remembers the Alaska Highway pipeline as the biggest battle he ever undertook, and the most satisfying. It took him before the U.S. Senate, the federal power commission, parliamentary committees and the National Energy Board. “There is no battle like a pipeline battle,” he says. “Sometimes they are unobtrusive when they are built, but there is no business fight more ferocious. The battle is for the largest utility system franchise in the world. Control, ownership and management of pipelines are vital parts of nations’ energy strategies. That’s why we fought so hard, so we would not be overrun.” And that’s why the fight, on many fronts, is continuing.