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Vol. 11, No. 6 Week of February 05, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Governor defends talks

Close to gas line deal; calls litigation time-consuming fall-back position

Kristen Nelson

Petroleum News

Alaska Gov. Frank Murkowski took on critics of his administration’s plan for equity participation in a North Slope gas pipeline at the Anchorage Chamber of Commerce Jan. 30.

A gas pipeline decision will be based on economics, not emotions, he said, and told the audience he will not support either a gas reserves tax or a lawsuit against the North Slope leaseholders.

“I think it’s clear now that the political season is upon us: We’re seeing the intervention of politics begin to cloud the public discussion with fact free and in some cases fact-less assertions about the gas pipeline and the gas negotiations,” the governor said.

“I want to assure you we will not let those who might want to prevent a contract from reaching the Legislature prevail under any set of circumstances.”

The governor said that because the Stranded Gas Development Act requires confidential negotiations, “we have had to defend our efforts in the public process with — well you might say both hands tied behind our back and a little duct tape around our feet.”

The act requires confidential negotiations, he said: “It’s simply the law. We have no other alternative. It’s amazing to me to have legislators who voted for the confidentiality provision now complaining about it. Well, you can’t have it both ways.”

Gas is stranded

The governor said one issue that has gotten a lot of play in the press is whether or not North Slope gas is stranded.

“There is no pipeline today taking North Slope gas to market because it’s simply stranded.”

The negotiation process between the state and the North Slope producers is designed to un-strand that gas, he said.

The people who drafted and passed the Stranded Gas Development Act had the right idea, he said: “It’s in the best interest of Alaska to negotiate and agree.”

The act set minimum standards for a company to meet before the state could begin negotiations: financial wherewithal and gas and authorized the governor to negotiate a business agreement, “and that’s precisely what I’ve been doing.”

“If we cannot negotiate a good agreement for Alaska ... we can always litigate the issue. We have that ability.”

Murkowski said that if he cannot negotiate a good business agreement, based on the six principles he has outlined, he would throw the “entire weight of my administration into a litigation strategy.” But that time has not come. “I hope it never does,” he said, because litigation would take years and the state could lose the window of opportunity to market its gas.

He said the state is making “substantial progress” toward an agreement.

Why gas has been stranded

Alaska gas has been stranded because economic conditions have not been right for investors to make the financial commitment and because the project is large and has competition from projects around the world with better economics.

The current gas price, Murkowski said, “opened the door finally to get the gas line built.”

Some have argued that the project is economic under current prices and that no fiscal contract is needed, he said. But “experience of the last three decades has shown that prices are subject to constant fluctuation.” High natural gas prices today, he said, do not guarantee high prices in 10 years when the gas begins to flow.

North American gas prices are volatile and the world economy is unpredictable so “investors will use conservative assumptions about future prices for a project of this magnitude.” And under those long-term conservative price assumptions, the Alaska project “does not compare well in terms of the rate of return with other gas projects around the world. Also, the long lead time required by the regulatory process and the construction make this project quite a bit more difficult.”

These are the reasons the negotiations are taking so long, he said.

Opponents of producer plan

“The only way to secure this project is for the state to base it on an economic reality and not wishful thinking.”

The governor said those who claim the project is already economic “do not have a strategy, a strategy to secure the early start of this project,” and lack either a long-term contract for throughput or “the financial capacity to underwrite the project.”

Other opponents of the producer gas project say if the producers don’t develop the gas or refuse to sell it, then the state should tax gas reserves on the North Slope or sue to force an investment or sale of the gas.

The governor said optimistic forecasts put the time for a lawsuit to run its course at eight to 10 years and there is no way to predict who would win the case.

A reserves tax, he said, is “entirely inappropriate at this time because something like that is only applicable at such time as you are unable to reach a contractual conclusion to the negotiations that have been going on for almost two years. And you’re not going to force a situation that is not going to be litigated; it is going to be litigated. ... The time for that kind of consideration is if and when we are unable to get a suitable contract. Then there are alternatives to pursue and I would certainly share in the necessity of moving toward it.”

The state’s equity interest in the gas pipeline will be a good investment, “a continuing source of revenues that will not be subject to changes of gas prices,” he said with pipelines typically returning 12.5 percent.

As for gas revenues, the governor said that in the negotiations the state is “not offering costly incentives to develop our gas” as some have said. He said that once a gas contract is available for public review it will be clear “that this is a bogus claim and it’s not supported by facts.”

The combination of oil and gas revenues, some $4 billion annually now, could be $9 billion a year at current price levels once the gas pipeline is in place and with a production profits tax on oil, he said.

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Second phase: Oil tax change

Asked how close the administration is to having a stranded gas contract, Alaska Gov. Frank Murkowski said there are two phases to the negotiations with the North Slope producers BP, ConocoPhillips and ExxonMobil: “One is the issue on the stranded gas. And we are almost concluded with the stranded gas negotiations.

“The other is, in order to have the project, there has to be certainty on oil,” he told the Anchorage Chamber of Commerce Jan. 30.

The producers, he said, “are not willing to build this project if they feel that they are subject to unlimited taxation by the legislative body in Alaska with no limits. And we’re talking about a 20-year contract in the sense of a permanent consideration on oil only. I want to distinguish that, because we’ve got two contracts.”

The gas contract will probably run about 35 years, he said, “and that would provide certainty on gas,” based on the authority the administration and the Legislature have under the Stranded Gas Development Act “to negotiate certainty on gas.”

The state can negotiate on gas taxation, he said. “We don’t have that authority on oil. ... And we have to get that authority from the Legislature.”

The governor said that there is a constitutional question as to whether the Legislature can bind future Legislatures, but he said the administration has opinions from the attorney general that indicate “that on contracts of this magnitude that there are exceptions that would be granted.”

Producers willing to pay for certainty

The issue, he said, is that the producers won’t sign a contract for 35 years of gas production, “and suddenly find themselves wide open to the whims of the Legislature on oil. So they want to have certainty on oil and they’re willing to pay for it. And they’re willing to pay in the billions of dollars.”

The negotiating point between the administration and the Legislature, he said, will be the price the producers have to pay to get that certainty.

He said the state has “comparisons in other areas of the world where other countries have entered in as partners in a major oil and gas project where there’s been certainty and what the price is for certainty. So we’re not going to give it to them: They’re going to pay to have the certainty that for 20 years the tax load will be X.”

The state is “in a different league than we were before. We’re negotiating now as a country in a sense, because the comparisons that we have are not with other states. They are with other countries, with countries who have taken equity positions with the producers to develop a ... resource.”

Oil tax change

The governor said the change he will be proposing to the state’s oil tax system will result in significantly higher taxes to the state when prices are high. This proposal will eliminate the economic limit factor, or ELF, “and will be based on a profit sharing concept. ... The proposal also includes important tax credits that will create a strong incentive for smaller companies to explore and invest in Alaska.” Murkowski said small producers will be protected: “Producers of only a few thousand barrels per day should not have to pay the tax and we have a tax credit for them.”

The tax will generate billions of additional dollars for the state, and is income “that the state will earn immediately.”

The tax will “probably be retroactive to the first of this year. So it will not be coming in 10 years when the gas starts flowing” but will be a “near-term benefit to the State of Alaska.”

—Kristen Nelson