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 strandedThe 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 strandedAlaska 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.