Murkowski writes letter to legislators urging them to scrutinize TransCanada’s role in pipeline

On Tuesday, former Gov. Frank Murkowski wrote a letter to legislators, urging them to dig more deeply into TransCanada’s role in the contracts that are being negotiated to build the large diameter natural gas pipeline, which is estimated to cost as much as $65 billion.

“I am prompted to write each of you to express my growing concern over a major uncertainty associated with Senate Bill 138 – that is, how much revenue will the State lose by turning over to TransCanada what would otherwise be the State’s interest in the gasline?” Murkowski wrote. (See the full letter below.)

The state is partnering with TransCanada to own an equity stake in the pipeline and, among other things, is guaranteeing the company a 12 percent return on equity, which as Murkowski points out, is more than “twice what the State could borrow by issuing revenue bonds or tax-exempt bonds.”

In turn, TransCanada is financing much of the state’s investment. The question remains, however, if that arrangement is in the best interest of the state.

“This is a major policy call that has taken place without Legislative scrutiny,” Murkowski wrote.

Murkowski is urging legislators to pass one part of the agreement which would align the state with the producers who have lease rights to the gas, but to wait to pass the other part which establishes the state’s relationship with TransCanada.

When Murkowski was governor, he was also in the process of negotiating a large diameter natural gas pipeline, which at the time received much criticism. Gov. Sarah Palin, however, won the race before the contract could be finished. During her administration, legislation was passed and another contract was negotiated with TransCanada. That contract is still legally binding, and explains why the state has not looked for partners outside of the company.

Read the full letter below:

I am prompted to write each of you to express my growing concern over a major uncertainty associated with Senate Bill 138 – that is, how much revenue will the State lose by turning over to TransCanada what would otherwise be the State’s interest in the gasline?

SB 138 contains two parts: the Heads of Agreement which I urge that you pass this session. This brings gas owners and the State in alignment as each party owns North Slope gas.

The second part is the MOU between the State and Trans Canada. Unlike the 2007 AGIA agreement, the new MOU would pay for TransCanada’s services with what otherwise would be the State’s equity interest in the gas line. The tariff to the State is fixed at 12%, which is inflation proofed. This tariff is more than twice what the State could borrow by issuing revenue bonds or tax-exempt bonds.

Reports have noted that the MOU is a very complex document. Some of the lawyers who have appeared at the committee hearings of jurisdiction acknowledge parts are difficult to comprehend, let alone explain. Any legislator who takes the time to try to digest the document would agree.

Some take comfort in their belief that the MOU is non-binding and the state can “take the off ramp at any time”. This can be unrealistic. Take a quick look back at 2007 when TC entered in to the first AGIA agreement with the state. So far the state has expended more than $300 million with more to come, and we have yet to get a full explanation of what the State received for its money. Commissioner of Revenue Rodell stated that with TC’s participation the cost to the state would be $300 million annually in lost revenue once the gas begins to flow. The argument favoring this approach is that the capital costs of the project would be in the billions and would come at a time (2015-2021) of declining State revenues. TC would get the State’s share of the gasline by fronting these costs.

Commissioner Rodell said that the cost of lost revenue was worth the financing that TC would provide.

Really? Why have we not seen a side by side comparison of the costs and rewards to the State of TC holding the State’s share of the pipeline with the costs and rewards to the State of  the State holding the State’s share of the pipeline.

This is a major policy call that has taken place without Legislative scrutiny.

There are major costs to the State of doing this. The “loan” is risk free to TC because the State pays all of its costs, including depreciation for TC’s up front capital costs (Exhibit C Item 6) and an inflation proofed cost of money at a base rate of 5%. Moreover, TransCanada will simply use the State’s Take or Pay agreement to transport our gas as security for the obligation it undertakes to pay for the State’s share.

What is the State’s alternative? There has been no discussion in the Legislature about going to the investment market to determine whether revenue bonds or other financing is available that would not require the state to pay down its savings during the 8 to 10 years before revenue starts to flow and would not require the state to give up its equity interest in the gas line.

Other questions remain yet to be answered:

Why share pipeline ownership with a non-gas owning company when the producers have the capacity to, and very well may, construct the LNG line themselves?

Having repaid 90% of TC’s expense for its work in the pipeline, what is the justification for TC to obtain any portion of the state’s equity share?

Why the special treatment for this particular company? Why not simply pay TransCanada for its services like any other company that provides services to the state?

When I was in the banking business, one of the rules of the road for a lending officer, was if you were lending your own personal funds, would you risk making the loan? Knowing what you know, but more importantly, being concerned about what you don’t know, are key factors in making this call?

A prudent approach would be for the Legislature to advance passage of the HOA this session. Then between sessions develop alternate means of financing Alaska’s equity portion of the gas line, so that Alaska does not “expend-down” its savings in the 8 to 10 years before first gas flows and the state can retain its equity.

Best wishes for a successful session.


Frank H. Murkowski

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13 thoughts on “Murkowski writes letter to legislators urging them to scrutinize TransCanada’s role in pipeline

  1. Lynn Willis

    Oil is worth much more to the state than gas. These same producers (at least two of them Conoco and BP) were “serious” about the Denali project right up until they were not. The Denali project helped derail AGIA. The AGIA/Denali projects were planned in the time frame when AOGCC stated to the legislature that while the 500 million cubic feet per day for the then ‘bullet line” was probably acceptable the volumes for the AGIA or Denali project would not be supported. As of December AOGCC is being even more conservative. That is an important issue which only requires the AOGCC to testify to what will be acceptable to them before this bill becomes law. Why not hear from them?

  2. E. Anc Dude

    I didn’t much like Frank Murkowski as Governor but had more respect for him as putting Alaska’s interest before Big Oil. Wish I had as good feelings towards Parnell but I don’t. What’s wrong with answering Frank’s questions? They are good questions. I want to know the answers too. Maybe Parnell will be more responsive if we get someone from the lower 48 to ask. This whole canadian thing smells. Why can’t we use an American company ?

  3. Jon


    Why is this issue such a a big deal to you? Do you think the producers aren’t serious unless they go to the AoGCC? Do you think that the AoGCc is not going to allow them to offtake the gas thereby effectively kiliing a project that will produce an enormous amount of revenue and get gas to Alaskans? play it out – what do you think the legislature will do if the Aogcc says you can’t take gas?

    There is no point going to the AOGCC until a determination has been made on how much gas is needed.

  4. Lynn Willis

    I share Governor Murkowski’s concerns and I assume he certainly didn’t hear testimony that might have stopped him from writing that letter. He addresses the concerns of many of us. As he suggests why not revenue bonds at a much lower cost to Alaskans? I don’t see how TC could have any more influence than another non majority partner/pipeline operator on allowing more gas from other sources into the line. I think our infatuation with Transcanada has to do with the idea that it is better to pay off Transcanada than admit we blew AGIA.
    While TC has done some additional work beyond that we already purchased for 350 million we are obligated to purchase that additional information for 130 million dollars and be bound by the AGIA agreement well into the future including the 500 million cubic foot restriction on the AGDA/ LINE. The AGDC/ASAP project has been effectively terminated. Also, how much of that additional 130 million of work we must now purchase (unless we partner with them for AKLNG) is even relevant to the new AKLNG project?
    As to the cost to Alaskans before any gas is produced, please read Commissioner Rodell’s presented to Senate Finance on Monday evening including the slide titled: “AKLNG Obligations vs. GFUR Forecast. On that slide, all the options are clearly presented including; 20% equity, no TC; 20% equity TC, no buyback; and 20% equity, TC, with buyback. I assume you favor the TC with no buyback option but even that option will obligate 30% of unrestricted revenues in 2021. The other options are even more expensive
    I will stop being concerned about AOGCC when I hear AOGCC testify to support your assumptions. I suppose Parnell could simply fire the current AOGCC staff and bring in some more out of state people more aligned with the Governor’s idea of the purpose of a sovereign. What harm to ask AOGCC now and require incremental reports .
    I agree with Governor Murkowski – they are moving too fast for comfort on this and important questions remain unresolved.

  5. Jon K

    The irony of course is that Parnell’s approach, while it entails risk because we will have an equity stake in the project, gives us the best chance of maximizing the state’s return. According to yesterday’s testimony from the legislative consultants, if LNG sells for $13, which is a conservative estimate, the state gets about 40% of the value of the project.

  6. Jon K

    Curtis, you really need to familiarize yourself with the legislation. All of Murkowskis’ questions have been addressed during legislative testimony.

  7. Jon K

    Lynn, the legislative testimony to date has addressed all of your concerns and complaints. To recap , TC’s involvement brings several major benefits to the state: (i) TC will carry a large share of the state’s pre-construction and construction costs. This means when budgets are tight, as you correctly point out, the state is NOT going to spend as much on the project – given your concern about the budget, why wouldn’t you want TC involved to absorb the costs?; (ii) the state reserves the right to buy down TC’s equity, this means that while TC is entitled to 40% of our share of the project and therefore 40% of the costs, we can at a later date buy back our share as we learn more about the project; (iii) momentum: TC has already done a considerable amount of work on the pipeline and gas treatment plant – we can use this work to move the project along; and (iv) TC’s presence means that we have an entity that is incentivized to expand the pipeline to accomondate third parties – the more gas in the pipeline, the more revenue for state. Without TC, we run the risk that the producers will bar new entrants from accessing the gas treatment plant and pipeline. In short, TC helps ensure expansions, which is in the state’s interest.

    And will you please stop with the AOGCC gas offtake issue. This really isn’t a problem. Once the producers have a better idea about the project they will go to the AOGCC to allow them to take gas from Prudhoe Bay. They are not spending hundreds of millions of dollars on permitting and billions at Point Thomson, not to mention buying hundreds of acres of land in Kenai, with the expectation that they cannot take the gas from Prudhoe or Point Thomson. The offtake issue will be addressed in due time.

  8. Lynn Willis

    This pipeline is political cover for Governor Parnell and the Republican majority. I expect the whole thing to fall apart sometime after the next election when Parnell is termed out and the legislators are safely ensconced for another term after promising this pig in a poke.
    Transcanada has already received over 300 million dollars from the state under AGIA and is owed another 130 million if we don’t partner with them and possible additional payment for breach of the AGIA contract. Why should we trust the same process and many of the same individuals who created AGIA to create another contract with Transcanada?
    The AKLNG project has been described as the largest pipeline project in history. Transcanada is in line to build the XL pipeline yet nobody is asking how they could do that and construct the AKLNG project at the same time.
    And where exactly is all this gas available for export? We still haven’t seen any applications from the producers to the AOGCC to export gas that might better be used to extract oil.
    According to the State Department of Revenue this project, during actual construction would consume between 30% and 60% of the state’s unrestricted revenues. This amazing fact comes from the same folks who complain that in a few years education, medicaid and PERS/TERS will consume the entire state budget. Now these legislators are talking about collateralizing future gas contracts from AKLNG to obtain revenues. so already they are spending the projected revenue leaving future generations very little. .

  9. Curtis

    Stop the Canadian giveaway. Stop Parnell from giving away Akaska’s future. Stop Parnell from using the pipeline to further his own political future. The proposal is a fraud that will lock Alaskans in paying TC even more than they have to date. If Parnell wanyed to do something for Alaskans, he’d build the small diameter line. Now that makes sense. Murkowski’s letter is worth reviewiing. More thouight has gone into that letter than has come from all the hearings the legislature has done so far. Joe Balash and Angela Rodell should both be fired for incompetence. This project iis way too important to proceed as we’ve been doing. I for one want answers to the questions raised by the former governor. Also, appreciate the role Murkowski is playing to stop giving away our financial future.

  10. Pete

    Former Governor Murkowski raises some good questions that deserves the legislature’s attention and hopefully will spend the time necessary to get the answers to the questions raised. As a life long republican, I am frustrated and angry with Parnell’s willingness to give our future away to TransCanada for such little consideration. I hate to say this but I believe that Parnell is playing politics to insure his reelection at the long term expense of Alaskans. Its time to slow down, brinh some sanity into the debate and get real answers to real questions. I believe that Murkowski’s questions and approach to handling the bill is wise. Let’s hope our legislature is mature enough to see the wisdam of Murkowski’s letter.

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