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Vol. 10, No. 47 Week of November 20, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Negotiate, not litigate

Murkowski says gas contract a business deal, requires partners with gas

Kristen Nelson

Petroleum News Editor-in-Chief

Alaska Gov. Frank Murkowski gave the Resource Development Council an update on Alaska Stranded Gas Development Act negotiations at the council’s annual conference in Anchorage Nov. 16.

The premise of the act is that the state should negotiate a business deal with the North Slope producers who own the leases containing discovered gas, Murkowski said. “A commercial contract with those who own the leases to the gas just simply makes good sense when you consider the practical alternatives,” he said.

The governor said the focus of the state’s negotiations is with BP, ConocoPhillips and ExxonMobil because “the economics now and in the future appear to support, in our opinion, the producers’ proposal. And that proposal is based on an economic realization — basically the ability to amortize the high cost of a 20 or 20-plus billion dollar project.”

Financial capability necessary

The Stranded Gas Development Act, he said, “was basically a structure that indicated the state should negotiate a business deal with the producers who purchased the leases to develop the gas.”

The alternative to such a business deal, he said, would be “litigation to take the gas leases that they purchased, basically, away from them,” he said, providing lawyers the opportunity to send their children or grandchildren to graduate school.

The state also has applications under the act from the Alaska Gasline Port Authority and TransCanada. But those two proposals, the governor said, have no gas.

Murkowski said the act “does not tell the governor to make a business deal with interests who first need to bring about litigation to get a quantity of gas.”

Litigation is costly, it’s uncertain and takes a long time, he said, “and after we prevail we just have to start all over again with a contractual process.” And that delay could allow liquefied natural gas “to get a foothold in the market that Alaska’s pipeline gas is designed to serve, so there is a competitive consideration there as well.”

Financing for pipelines is done on take-or-pay contracts for transporting gas, a firm transportation commitment, he said.

“If you take a firm transportation commitment for say 30 years, a take-or-pay commitment for maybe 5 to 6 billion cubic feet a day starting five years from now, you’re looking at some big money, a real risk… Very few companies in the world have a balance sheet to make this commitment,” estimated at more than $100 billion over 30 years, the governor said.

“The producers have that capability. They’re among the very few that do for a project of this size,” he said.

Options for the state

The governor characterized the state’s options as a gas pipeline built with the producers, with income to the state of $2 billion to $3 billion a year, “or an internal political fight and long-term litigation with producers with no money coming into the state or municipal governments.”

The delay, the governor repeated, could cause LNG to displace Alaska gas in the market.

“The project being negotiated with the producers is the one that moves the most gas to the market at the lowest tariff and the highest value generating the most tax and royalty revenues to the State of Alaska and its residents. The project truly must maximize the return from our natural resources because that is a constitutional mandate, and one I don’t take lightly,” he said.

As to why the state should take an ownership position, the governor said a study the state had done last year found that the Alaska gas pipeline didn’t rank well compared to other projects available to BP, ConocoPhillips and ExxonMobil around the world.

“It was kind of a rude awakening,” Murkowski said, because Alaskans believe that with all the gas on the North Slope and the Lower 48 need for gas, “all you have to do is get it to market. But you’re getting it to market in a timeframe of 10 to 12 years at a cost prevailing at that time — nobody knows.”

The state taking its gas-in-kind increases the internal rate of return on the project by “two full points,” Murkowski said, calling it a “significant” amount for a project of this size.

State ownership

The state has been working to narrow the differences between its initial proposal in October 2004 and the sponsor group’s response in December 2004. “Even though the numbers and the contract terms were somewhat different, the exchange of proposals clearly showed that we had the basis and the preliminary foundation to make a deal,” the governor said.

Because the state is proposing to take gas in-kind it will have an ownership position both in the gas pipeline and in the gas, and while an ownership position in the pipeline is relatively risk-free because of the take-or-pay contract to move gas through the pipeline, gas ownership exposes the state to both capacity and market risk, he said. Capacity risk exists because the state will sign a firm transportation contract and be committed to pay for space on the pipeline whether or not it ships any gas. Market risk exists because the state has no control over the price of gas in the market.

Tariffs based on mileage

In addition to a fair share of revenues from the project the negotiations are also aimed at providing opportunity for Alaskans to have access to gas. “Affordable energy is simply vital to the growing economy throughout Alaska,” he said.

The governor said one point the state has negotiated will have “a tremendous impact initially on those that are close to the pipeline and Fairbanks is probably the one area that will receive significant benefits because the transportation tariffs will be based on mileage from wellhead.”

On the issue of access to the pipeline for future explorers, the governor said he thinks the state has met the expectations of explorers by “providing assurances in the contract that indeed that will become a reality.” The state has also been successful in getting the Federal Energy Regulatory Commission to approve strong open season rules for Alaska: FERC “has been very responsive to the unique needs of the State of Alaska,” he said.

There is also “strong voluntary expansion language” in the contract, the governor said, to allow more gas to be shipped.

The state ownership of 20 percent of the pipeline will provide steady revenue in the range of 12-14 percent, Murkowski said, revenue on which the state will pay no federal tax. Gas ownership will give the state more take when gas prices are high, and pipeline ownership gives the state “a seat at the table to protect the interests of all citizens of our state.”

Alaska jobs and job training are a provision of the contract, Murkowski said, and the state anticipates 6,500 new Alaska jobs.

Oil tax changes

Fiscal certainty on oil has been included in the negotiations because the producers need certainty on oil taxes to protect their gas deal, Murkowski said. For the state it provides “the opportunity to reform the ELF (economic limit factor) concept,” a taxing mechanism which the state plans to replace with a net profits tax concept under which companies would pay more tax when oil revenues are high and less when they are low, he said.

There will be incentives to encourage oil exploration and development “particularly with small companies that we want to encourage coming into Alaska,” he said.

The governor said it isn’t possible to say when work will begin, “but obviously the fundamental economics are there and that’s what it takes to bring a project of this magnitude to reality.”

The most significant impact of a gas pipeline will be to “transform the North Slope to America’s … energy storehouse. My goal is to have North Slope production provide many of the same benefits as the province of Alberta enjoys.” Alberta supplies the majority of Canada’s oil and natural gas, and has “a significant petrochemical industry and we have the same potential benefits here in our State of Alaska,” he said.

Once negotiations are completed the commissioner of the Department of Revenue will do a fiscal interest finding and there will be a public review period, “for as much time as it takes but somewhere in the area of 45 days … we hope is sufficient.”

That and a review of comments, all takes place before the contract goes to the Legislature, which will accept or reject the contract.



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