Tar Sand Project Cost Increase

It's a preview of things to come - Mega Project, Mega Cost. This problem is exacerbated by the Wall Street meltdown.

Fort Hills Costs Leap to $24 billion (LINK)
Petro-Canada hikes price tag for oilsands project 50 per cent
Shaun Polczer, Calgary Herald
Published: Thursday, September 18, 2008

Petro-Canada on Wednesday set a new benchmark for capital cost overruns in the oilsands after it hiked estimates for the proposed Fort Hills mine by 50 per cent.

The project, originally pegged at $14.1 billion, will now cost about $24 billion.

"We've seen a dramatic rise in capital costs in the past year," said Ron Brenneman, Petro-Canada's president and CEO.

Analysts said UTS will face difficulties coming up with the extra money given the financial turmoil that has rocked Wall Street in recent days, with the collapse of big investment banks like Lehman Brothers and fire sales of Merrill Lynch and AIG.

"Financing was already a concern in the current credit market. With the mounting cost escalation and a sum of $3 billion of additional financing, UTS faces considerable headwinds moving forward," UBS analyst Andrew Potter noted.

TransCanada Plans Open Season

June 2010, According to Tony Palmer, TransCanada's vice president for Alaska gas development.

TransCanada to beat Denali in open season (LINK)

By Tim Bradner
Alaska Journal of Commerce

The great pipeline race is on. TransCanada Corp. will begin an open season for an Alaska natural gas pipeline in early 2010, beating a rival pipeline group led by North Slope producers by several months, a senior TransCanada manager told an oil and gas conference in Anchorage Sept. 23.

Meanwhile, TransCanada's rival, the Denali pipeline group, said it is ramping up its work fast and plans to have 300 to 400 people in the field next summer, up from 80 this year.

Tony Palmer, TransCanada's vice president for Alaska gas development, told the annual Alaska Oil and Gas Symposium, sponsored by the American Conference Institute, that his company will conclude its open season June 30, 2010, and will proceed with work toward certifications of the project by the U.S. Federal Energy Regulatory Commission and Canada's National Energy Board.

TransCanada Financials

TransCanada’s high debt to equity ratio and exposure to Lehman’s meltdown prompted me to examine TransCanada in comparison with industry peer Enbridge, Denali Pipeline partners ConocoPhillips and BP, and North Slope producer ExxonMobil. (click to enlarge)

It looks like TransCanada is highly leveraged and not very profitable. What’s not clear to me is exactly how TransCanada would swing the funding for the $40B Alaska Gas Pipeline. Without a successful open season what would they borrow against? If interest rates go up (and they will) will TransCanada plan still turn a profit?

TransCanada Exposure to Lehman

TransCanada (TRP) moves to keep Lehman deals from Barclays,
PAUL WALDIE (LINK)

TransCanada PipeLines Ltd. has more than $250-million (U.S.) in exposure to Lehman Brothers Holdings Inc. and it's concerned about what might happen to that debt if Lehman is taken over by Barclays PLC, court filings show.

TransCanada revealed the holding in a filing in the New York court that is overseeing Lehman's bankruptcy protection. Lehman filed for protection on Monday, listing $613-billion in debt. Two days later, London-based Barclays announced plans to buy the firm's U.S. operations for $1.7-billion.

In its court filing, TransCanada said it has "significant contractual agreements" with Lehman Brothers Commodity Service Inc. and its subsidiary, Eagle Energy Partners, a Houston-based energy marketing and services specialist. The contracts total "in excess of $250-million," the company added.

TransCanada was selected by the Alaska Gasline Inducement Act (AGIA) to compete with the North Slope producers gas pipeline, the Denali Pipeline.

The Total Debt to Equity ratio of TransCanada is 1.345, compared to Exxon's debt to equity ratio of  0.077. 

Denali Pipeline partners ConocoPhillips (COP) and BP have debt to equity ratios of 0.237 and 0.287 respectively.

Bottom line - This is something to keep an eye on as the banking crisis unfolds.  TransCanada is the most exposed (weakest) firm of the potential Alaska Gas Pipeline players.  ConocoPhillips and BP are in good shape and Exxon is more or less bullet proof.  TransCanada's weakness could tip the game in Denali's and Exxon's favor.

Canadian Tar Sands Utilization

One of the main drivers for the Alaska Gas Pipeline is the development of the Canadian Tar Sands.  This link details the outlook for pipelines and refineries downstream of tar sands (LINK).

By Lindsay Sword, Wood Mackenzie

Supply of Canadian oil sands products will increase by 2 million b/d between 2007 and 2015; half of this growth will be in Canadian heavy crude blends. A recent study shows that the export pipeline infrastructure and US refinery capacity will be able to handle forecast additional supplies of Canadian crude during 2007-15. Planned export pipeline infrastructure should keep pace with forecast additional supply of oil sands products to 2015; export pipeline capacity will increase by 2.1 million b/d. Current capacity tightness should be resolved once expected new pipelines start up in 2008 and 2009. By the end of 2015, spare capacity will reduce, suggesting the need for additional export capacity shortly after 2015. Refinery projects targeting Canadian heavy blends that we expect to proceed are aligned with our forecast of additional supply: Canadian heavy blends supply will increase by 1 million b/d by 2015, and projects that are planning on processing heavy blends will increase by 1.1 million b/d.

A quick math check - It takes 1,200 cubic feet of gas to produce a barrel of tar sand oil -   So to produce 2.1 million barrels of tar sand oil, you would need about 2.5 BCF/day.  That's more than twice the volume of the MacKenzie pipeline and a little more than half the capacity of the proposed Alaska Gas Pipeline.

Mackenzie Pipeline Leaders "Optimistic"

From Bloomberg:

Imperial Oil Ltd. Chief Executive Officer Bruce March, head of Canada's largest oil company, said he's the most optimistic he has been in the past five years about the chances of the Mackenzie gas pipeline proceeding.

``We're very committed to the project and we're probably more optimistic than we've been in the last five or six years,'' said March.

Building the proposed 1,220-kilometer (758-mile) pipeline has been marred by regulatory delays and surging costs. Calgary- based Imperial, head of the conduit's development group, in 2007 doubled its cost estimate for the project and pushed back the target completion date by three years to 2014. (LINK)

The cost are up, the schedule has move to the right, there are regulatory delays.  There are a lot of lessons here for the Alaska Gas Pipeline.

Multiple Pipeline Applications Will Strain FERC's Resources

According to Joseph Kelliher, chairman of the Federal Energy Regulatory Commission:

reviewing multiple projects "would greatly challenge the commission staff, the other agencies on the federal interagency team, and state agencies. Clearly, everyone must work together with the shared goal of getting a project built." (LINK to ADN story)

The "multiple projects" he refers to are the Denali Pipeline, and the AGIA / TransCanada project.

LNG Exports to Japan Challanged

Senator wants to stop Alaskan gas exports to Japan

By Tom Doggett (Reuters): A U.S. senator has asked the Energy Department to revoke a recent order authorizing energy companies to continue exporting liquefied natural gas from Alaska to Japan and other Pacific Rim markets. (LINK)

The Anti Free Market Senator is Ron Wyden of Oregon.   Read his press release HERE.

I guess according to Senator Wyden, Alaska LNG should be sold to the Peoples Republic of Oregon at a loss.

If Wyden and the people of Oregon want Alaska LNG - Step up and make a better offer. It's called the free market systems. 

Blog Stats

Little bit of validation from the fine folks at Google. Their ranking of "Alaska Gas Pipeline" sites goes like this #1. Denali the Alaska Gas Pipeline, #2 This Blog: Alaska-Gas-Pipeline.Blogspot.com. and third - the official State of Alaska Pipeline web site.

Ha! Thanks for visiting and thanks for my helpful friends who follow the blog and help me with my spelling. Thanks for all the site hits, it's like "Infinity" as Napoleon Dynamite would say.

One of these days the politicians will be out of the way and real people will do the real job of building thing.

Pipeline Progress - The Fact Come Out

From Keith Johnson :

Palin’s Pipeline: Pols’ Jabs at Big Oil Could Come Back to Hurt Them
Posted by Keith Johnson

But the state’s agreement with TransCanada doesn’t include any guarantees the pipeline will actually be built. And Alaska hasn’t locked up the gas needed to fill the pipeline. In that sense, Gov. Palin’s barekknuckle approach to the diversified international oil giants–steps like raising the royalty fees oil companies pay the state–may make it tougher for her to fulfill her domestic-energy promises. (LINK)

From the NY Times SERGE F. KOVALESKI and MIKE McINTIRE

Palin’s Pipeline Is Years From Being a Reality

The pipeline exists only on paper. The first section has yet to be laid, federal approvals are years away and the pipeline will not be completed for at least a decade. In fact, although it is the centerpiece of Ms. Palin’s relatively brief record as governor, the pipeline might never be built, and under a worst-case scenario, the state could lose up to $500 million it committed to defray regulatory and other costs. (LINK)

ConocoPhillips Gets Final Permit for New Coke Plant

From the Belleville News Democrat:

ConocoPhillips Gets Final Permit for New Coke Plant

ConocoPhillips Wood River Refinery has been issued an air permit -- originally challenged by the U.S. EPA -- allowing the refinery to move forward with plans for a new $2 billion coke plant.

The second coker at the Roxana refinery "will allow the facility to process Canadian crude oil and produce a wider variety of fuels," according to a news release today from U.S. Rep. Jerry Costello, D-Belleville. (Link)

Tar Sand Oil production and downstream projects like this coker in Illinois are the real driving force behind the Alaska Gas Pipeline. Lower 48 refiners need Canadian crude oil. The Canadian Tar Sand Oil producers need gas to process Tar Sand Oil into a synthetic crude product that can be piped to the lower 48.

Pipeline News

From GARY JACOBSON / The Dallas Morning News: 

        Palin's Alaska pipeline dream Not a Reality Yet:

Alaska Gov. Sarah Palin boasted this week that she stood up to Big Oil in advancing a decades-old ambition to bring natural gas to the Lower 48. But experts say she'll eventually have to sit down with the oil giants if she wants her pipeline dream to become a reality. (LINK)

From Barry K Worthington, Financing The World Energy Industry Requires $22 Trillion

Meeting the world's energy needs over the next several decades represents incredibly complex challenges on many fronts. These include access to the resource base for fossil fuels; availability of an adequate workforce, specifically engineers and skilled tradesmen; siting every variety of energy facility; dealing with climate change challenges; stability and predictability of regulation; and attracting $22 trillion ($22,000,000,000,000) into the sector. Never before, on a global basis, has the energy industry been expected to site, finance and manage the construction of infrastructure on this scale. It is doubtful that any other industry has ever been compelled to deal with this level of capital investment. (LINK)

Pipeline Progress

The latest on FERC, the Denali Pipeline and TransCanada from the Fairbanks News Miner.

Scarborough reacts to Palin news

I like to keep this blog on point and discuss Alaska gas pipeline issues, but 15,000+ hits in two days suggest I should share this item:

For more info on the Alaska Governor I direct lower 48 first time blog visitors to: Andrew Halcro's blog & Mudflats is pretty good too.

Read'em and weep.