June 12, 2009 / 12:08 AM / in 8 years

Exxon gives boost to TransCanada's Alaska pipeline

ANCHORAGE/CALGARY (Reuters) - Exxon Mobil Corp said on Thursday it has joined TransCanada Corp's effort to build a $26 billion Alaska natural gas pipeline, giving the long-sought project key support from one of the main Arctic gas players.

Under the deal, TransCanada will retain a majority stake in the massive project to bring North Slope gas to market. But it and Exxon Mobil will share responsibility for all technical, commercial, regulatory and financial aspects, executives said.

Exxon Mobil, one of Alaska's three main producers, and TransCanada, a major North American pipeline operator, will spend $150 million on development through the process of soliciting shippers in 2010, TransCanada vice-president Tony Palmer said. That is up from a previous budget of $83 million.

TransCanada and its predecessors have envisioned the project since the 1970s. Now it and Exxon Mobil are proceeding despite low gas prices, high costs and a competing pipeline proposal from BP Plc and ConocoPhillips.

"It is our belief that working with TransCanada and the state of Alaska ... provides the best opportunity to bring together all the necessary parties to deliver a successful project," Marty Massey, Exxon Mobil's U.S. joint interest manager, told reporters.

"We've made our choice as to which pipeline project we're going to support, and it's the TransCanada project," he added. "I find it hard to believe that we would commit our gas to a project that we're not supporting."

Under the plan, the partners will devise a new cost estimate for the project in the first quarter of 2010. Plans call for start-up of the pipeline in 2018.

Exxon Mobil's involvement would mark progress in its efforts to rehabilitate its reputation in the state, 20 years after the Exxon Valdez oil spill fouled more than 1,200 miles of Alaskan coastline.

"There's a lot of bad blood, there's a lot of resentment over the Exxon Valdez and the handling of the payments," state Sen. Bill Wielechowski, an Anchorage Democrat who co-chairs the state Natural Resource Committee, said. "At the same time, they're valid leaseholders on the North Slope and it's very hard to build the gas line without them."

The project would unlock as much as 35 trillion cubic feet of gas stranded within Arctic oil fields. The line would run about 1,700 miles to TransCanada's pipeline network in Alberta from Prudhoe Bay, delivering 4 billion to 4.5 billion cubic feet a day.

Some analysts have said recent shale-gas discoveries close to major markets in the Lower 48 states threaten development of Arctic gas, which requires the massive transport system.

But Palmer said he believes Alaskan gas can be competitive if the partners can keep development costs within budget.

Last year, TransCanada won a state license for the pipeline under a bidding process championed by Gov. Sarah Palin.

That license remains intact with Exxon Mobil's involvement, Palin said. Exxon Mobil said it aims to become a fully certified as well.

"By recognizing the value of Alaska's relationship with TransCanada, Exxon Mobil has made a strategic decision that I believe makes good sense," she said in a statement.

Under Palin's Alaska Gasline Inducement Act, TransCanada is eligible for a $500 million subsidy and a pledge that the state will not negotiate with any competitors as long as a series of commitments are met.

Palin administration officials said the new pact is evidence that the governor's AGIA strategy is working. But Palin did not bring the parties together or participate in the deal, officials said.

"There were no negotiations," said state Revenue Commissioner Pat Galvin, part of the administration's gas pipeline team.

Palin did want to hear from the companies' chief executives, though, and that is why she traveled to Dallas, Galvin said.

"She was meeting with the CEOs to confirm the Exxon Mobil-TransCanada commitment to this proposal," he said.

The state's only role was to review the arrangement to determine whether it required any changes in the law, said Galvin and Marty Rutherford, deputy state commissioner of natural resources. State officials concluded that no changes were necessary, Rutherford said.

"The issue for us is whether the ownership of the license has changed. In this transaction, it has not," Galvin said.

As a partner with TransCanada, Exxon will be eligible for a state match of money spent to advance the project up to $500 million, under the terms of AGIA, Palmer said.

The $150 million investment through the planned July 2010 open season will be shared by TransCanada and Exxon, and both companies will share in the state reimbursement, he said.

However, Exxon does not assume any part-ownership of the AGIA license unless a new deal is struck, he said.

Massey said the new partners will keep trying to attract support for their project from BP and ConocoPhillips.

It may not be easy.

The BP-ConocoPhillips proposal, called Denali, has been designed outside of the AGIA process. Exxon Mobil declined an invitation to join that project last year.

"Denali is moving forward. This doesn't change that," BP spokesman Steve Rinehart said.

Denali partners also intend to solicit shippers next year.

Exxon Mobil shares rose 21 cents to $74.05 on the New York Stock Exchange, while TransCanada shares rose 68 Canadian cents to C$33.68 in Toronto.

($1=$1.10 Canadian)

Additional reporting by Bill Rigby in Seattle; Editing by David Gregorio

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