U.S. spot market prices for gas reached $6 per thousand cubic feet on Oct. 27. That's less than half what they were in recent weeks.
Gas shippers, either producers or downstream buyers of gas, will be asked to sign take-or-pay shipping commitments worth in excess of $100 billion. If economic conditions are still sour, executives of even these major companies may blink before signing the checks. That could delay the project or kill it - again.
The U.S. gas price volatility reminds many in Alaska of what happened to the last proposed gas pipeline project, called the Alaska Natural Gas Transportation System, which was moving at full steam in the early 1980s until the North American gas market dropped out from under it.
Memories of that are still fresh at TransCanada because Foothills Pipe Lines, now a part of TransCanada, was part of the ANGTS consortium that spent about $1 billion in environmental, engineering and permitting work before the plug was pulled on the project.
Denali and TransCanada will have spent almost $750 million by the time the companies have their open seasons in 2010.
For now, however, it's full steam ahead for both projects. TransCanada Corp. and the competing Denali pipeline group, which is owned by two North Slope producers, are moving ahead with engineering and cost studies, and both still plan open seasons in 2010 to solicit customers for their projects.
TransCanada has yet to formally receive its state license under the Alaska Gasline Inducement Act, but the company is doing work even though it won't be partly reimbursed by the state under the AGIA license, company Vice President Tony Palmer said.
The license is awarded 90 days after its signing by Gov. Sarah Palin, which will put the date at about Nov. 25, Palmer said.
Meanwhile, the Denali pipeline company is analyzing data gathered during field work this summer and is doing a limited field program this winter to gather geotechnical data by drilling, company spokesman Dave MacDowell said. The geotechnical program means Denali will now be keeping its Tok field office open year-round. A major summer program is planned for 2009.
Palmer said TransCanada has completed aerial photography along the pipeline route from the North Slope to the Canada border and from Delta to Valdez. The company is also doing aerial surveys of the pipeline route through Canada, he said.
"We have mobilized our project team and plan to solicit comments on a proposed engineering planning contract for the gas treatment plant soon, which will be followed by a formal request for proposals later this year," Palmer said.
The gas plant, to be in Prudhoe Bay, is a major project on its own, and is expected to cost about $2 billion. The plant will condition the raw gas that is produced for the pipeline, mainly by removing carbon dioxide, water and impurities.
An engineering planning contract for the pipeline itself will be let early next year.
"The pipeline is much more straightforward for us," Palmer said, because of TransCanada's experience in pipeline building.
The pipeline company is also close to making an announcement of where it will locate its Alaska office, Palmer said. It will be either in Anchorage or Fairbanks. Palmer couldn't say how big the office will be or how many people it will support.
MacDowell said Denali's staff is still supported by two temporary offices in Anchorage, but that the company will be announcing the location of a larger, centralized office soon.
Denali is also beginning work on studies of infrastructure needed to support pipeline construction, in-state gas needs and workforce development, MacDowell said.
As for the current clouded economic outlook, Palmer said TransCanada doesn't think a recession would affect his project if the economy downturn is relatively short, say a year or a two.
"There could even be a window of opportunity," he said, if it cools recently overheated oil equipment and materials markets and creates a more level headed environment in which to conduct cost estimates.
Still, any lock-in on prices won't occur for years until after a project has been sanctioned by the company and U.S. and Canadian agencies, Palmer said.
But if the slowdown lasts several years, Palmer acknowledged it could affect TransCanada's hopes to nail down customers for capacity for its project.
Meanwhile, TransCanada's competitor, the Denali gas consortium owned by BP and ConocoPhillips, says it is too busy with preliminary engineering and cost estimates and to worry about a recession.
"We're focusing on the things we can control, like the work necessary to conduct an open season in 2010," MacDowell said. "That remains our objective and we can't be distracted by volatile market conditions playing out at present."
TransCanada hopes to begin its open season in March 2010 and to conclude it by July 2010, Palmer said. Denali will have its open season later that same year, according to its president, Bud Fackrell.
The Denali group is budgeting its preparations for the open season at $600 million, of which $40 million has been already spent on the 2008 summer program.
TransCanada has estimated its work to prepare for the open season at about $184 million. Half of that will be reimbursed by the state under the AGIA license agreement.
There is no question that ultimately only one pipeline will be built, and that a consortium of pipeline companies and producers will build it. The disagreement is over who will control the project, the producers or TransCanada.
Most Alaskans believe Denali has a leg up over TransCanada because BP and ConocoPhillips have gas reserves on the Slope that total about half what is needed for the project, and which the two companies would presumably ship through a pipeline they own.
However, a third major owner of North Slope gas reserves, ExxonMobil Corp., has yet to decide how it will market its gas. Another major gas owner, Chevron Corp., also has made no decision.
TransCanada owns no gas but it has been in the gas pipeline business a long time and hopes to convince the gas owners, or potential downstream purchasers of gas, to purchase capacity in its system. The pipeline company says it can build a pipeline for less than the producers' group would spend.
The state of Alaska is pushing for TransCanada, believing that a pipeline controlled by an independent company would prevent a gas monopoly on the North Slope, since the producers already own most of the producing fields and existing infrastructure.
TransCanada hopes the state's support will ultimately give it an advantage in attracting gas shipping commitments from the producing companies. AGIA carries with it the state's promise to make an agreement on tax terms for any producers that commit gas to TransCanada.
Alaska state officials, such as Revenue Commissioner Pat Galvin, have said that if the producers want a deal with the state on taxes the way to it is through TransCanada.
The producers argue that the deal TransCanada struck, an agreement under the state's Alaska Gasline Inducement Act to abide by special pipeline terms, may ultimately become an albatross for the pipeline company.
BP and ConocoPhillips say they can't accept some of the terms under AGIA, and that this will prevent TransCanada from being brought into the Denali consortium or prevent the producers from joining TransCanada.
To resolve this, the state Legislature may have to soften AGIA's terms and also make a tax deal available for gas to any pipeline, not just TransCanada's.