Providing coverage of Alaska and northern Canada's oil and gas industry
August 2006

Vol. 11, No. 33 Week of August 13, 2006

Murkowski names Prudhoe team

Governor asks for lead federal agency; AG to review state’s rights; imposes hiring freeze

By Kristen Nelson

Petroleum News

Alaska Gov. Frank Murkowski briefed the Alaska Legislature Aug. 9 on his administration’s response to the Aug. 6 decision by BP Exploration (Alaska) to shut down the Prudhoe Bay field, and encouraged legislators to pass his production tax.

The bottom line, the governor said, is a careful response, “but with Alaska’s interests fully protected.”

He said he has appointed a special cabinet team “to make certain that the environment is protected and that there is a strong corrective action plan and a safe production resumption plan in place as soon as possible.” Commissioner of Natural Resources Mike Menge will lead the team, which also includes Commissioner of Environmental Conservation Kurt Fredriksson, Commissioner of Revenue Bill Corbus, Attorney General Dave Marquez and John Katz, director of the state’s Washington, D.C., office. Menge, as chair of the cabin team, will “act as a lead in dealing with British Petroleum and the federal government,” the governor said. “What I want this cabinet team to do is to make certain that we retain the ability to exercise all of Alaska’s prerogatives under our Prudhoe Bay lease and unit agreements, state laws and rights-of-way agreement.”

The state intends “to carefully scrutinize all proposed corrective action plans and production resumption plans,” he said.

“I want to assure all of you, and all Alaskans, that we will hold British Petroleum accountable for past and future field management decisions.”

State not consulted

“Now for openers I am concerned that the state was not consulted before the decision was made to shut down production on the entire Prudhoe Bay field,” Murkowski said.

He said he was concerned that BP was not employing pigging on a regular basis: “we expect the best technology to be utilized in monitoring,” and also about the solids that had built up in the transit lines and the corrosion that has occurred “without earlier corrective action.”

The governor said the Department of Environmental Conservation has received “numerous satisfactory maintenance reports” and he asked “what did BP learn last Saturday or Sunday or whatever that it did not know previously that would cause BP to take such a precipitous action?”

He said he thought BP’s plan to replace all of the transit lines was “a very strong step” and urged the company to “get on with that process.”

“But I do want BP to take all other steps appropriate to meet its obligations to the state by bringing the pipeline system into compliance with good engineering and environmental standards.”

Coordination with federal agencies

Murkowski said he has discussed with the secretaries of the federal departments Energy and Transportation the need for the state to coordinate with federal agencies, and the need for a lead federal agency.

He said he has asked the attorney general to review the state’s legal rights, “and determine an appropriate course of action to protect our state’s interests including the state’s right to hold BP fully accountable for losses to the state.”

The Department of Natural Resources will be working “aggressively with in-state refiners and North Slope producers to meet in-state needs” for both heating oil and jet fuel, the governor said. The commissioner of Revenue and the director of the Office of Management and Budget will “prepare a management plan to protect vital public services while we determine how long the field will be shut down.” On Aug. 9 the governor imposed a hiring freeze on state hiring until the length of the shutdown is known. He said the Office of Management and Budget will review the fiscal year 2007 capital budget and identify projects that can be phased until the Prudhoe Bay problem is better identified. The cabinet team will also consult with Alyeska Pipeline Service Co. “to determine what problems it may have in operating at lower production levels.”

The governor told legislators this was a wakeup call: “We are vulnerable to any decline in production,” he said, and urged legislators to pass his oil tax and move ahead in approving the gas pipeline contract.

Production revenues from Prudhoe Bay will fall as production is shut in, Murkowski said, and under the present production severance tax, with the economic limit factor, or ELF, the second largest field on the North Slope, Kuparuk, pays no production tax. “Under my PPT, the one I proposed, we would receive $1.6 million per day in taxes at current oil prices; currently we receive zero. We simply have to correct that.”

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