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State delivers contract terms to producers Governor says state would invest $4 billion in gas pipeline, get revenues of $2-$3 billion a year; calls for response within a week By Kristen Nelson Petroleum News Editor-in-Chief
Alaska Gov. Frank Murkowski had good news for the Alaska State Chamber of Commerce Sept. 14.
“Yesterday we transmitted a comprehensive draft proposal” for a gas line contract to the producers, the governor said, and the state expects a response next week.
The state has been negotiating fiscal terms for a gas pipeline project which would take North Slope natural gas into Canada and then on into the Lower 48 with the North Slope producers (BP, ConocoPhillips and ExxonMobil), with Canadian pipeline company TransCanada and with the Alaska Gasline Port Authority, which is proposing a liquefied natural gas project out of Valdez. Any contract would require approval by the Alaska Legislature and the governor wants a contract to take to a special session this year.
Murkowski said the proposal given to the producers Sept. 13 includes the six principles he has set out for a gas pipeline contract: a fair share of revenue from the project to Alaska; opportunity for Alaskans to access the gas; access to the gas pipeline for future explorers; an expandable gas pipeline; state equity ownership in the line; and jobs and job training for Alaskans.
He said the state’s equity participation would be about $4 billion, with an estimated billion of that in cash and the rest from a debt issue. The benefits to the state, the governor told the chamber, include $2 billion to $3 billion a year over the life of a 30-year contract, “depending on the price of gas.” While the state and the Legislature would need to determine the appropriate way “to handle that revenue stream, if it does become a reality,” the governor said the documentation includes a proposal “to restore some form of municipal revenue sharing using those gas line monies.”
Including shipping commitments, “estimated contractual commitments are in the area of about $100 billion or more over the life of the contract,” the governor said. “… As a consequence, the fiscal soundness of this project has to be recognized in lieu of other alternatives that certainly have merits but either don’t have a supply of gas or lack a strong financial commitment of delivery.” Written statement stronger A news release issued after the speech had a slightly different twist.
“I am firm in my belief that we must develop a gas line, but not at any price,” the governor said in the release. “I believe this contract proposal is good for Alaska, good for the nation and good for the producers. If they do not agree with my assessment, then I have an obligation to pursue other opportunities for marketing our gas.”
“Each side has made its position on the issues clear during the months of negotiations — particularly during the last two months of intense negotiations,” the governor said in the statement. “… Now is the time for decision. I look forward to a response next week.”
In the release the proposal delivered to the producers was described as “a contract term sheet for a natural gas pipeline agreement.” Governor wants most gas at lowest tariff “Basically my mission as governor is to ensure that our gas line project is the one that moves the most gas to market at the lowest tariff, for the highest wellhead value generating the most tax and royalty revenue to the state and its residents,” the governor told the state chamber.
The governor noted there have been “innuendoes” made about the role of the administration and the applicants who “represent three of the largest energy companies in the world and some of the best management.”
He reminded the chamber audience that he made a decision to aggregate Prudhoe Bay satellite fields for ELF (economic limit factor) tax purposes, generating some $200 million additional in taxes. “That wasn’t very popular, obviously, with the industry groups. And it was a decision made because it was in the interests of the state to do it.”
The governor said he mentioned the ELF aggregation decision “simply to indicate that the decision that I’m making here and forwarding … on to the producers is an objective decision made on the basis of what I consider to be in the best interests of Alaska and that’s developing our resources to the maximum extent in the shortest period of time that will benefit the most people in Alaska…”
“We often look at projects in Alaska and get carried away with emotion: it would be a good thing if this or that happened,” Murkowski observed, but “… decisions are made on hard economics” and that, he said, is why Alaska’s gas has been stranded for so long. Enabling legislation, price of gas Two things changed the Alaska North Slope gas situation, the governor said: federal enabling legislation including an 80 percent loan guarantee and tax benefits “that changed the economics of the project and reduced the risk.”
But the main thing, the governor said, was that the price of gas went up. Gas had been $2-$3 a thousand cubic feet.
“And I can tell you at $3.50 or less (per mcf) this project is in big trouble — it’s underwater.” There is a lot of gravy at the current price, he said, and “at an average of six (dollars) it is very, very attractive.”
Participation in the line, the governor told the chamber, would provide a share of the wealth produced by the project to the state.
And the state wouldn’t face the years of litigation it has had over tariffs on the oil pipeline. “We as a partner would not have that particular exposure,” Murkowski said, although, he noted, the state would share in the risk associated with project cost overruns and changing prices for gas. Gas for Alaska The governor told the chamber that any contractual commitment the state made would ensure “at least four takeoff points” for gas in Alaska.
Those would likely be the Yukon River, Fairbanks, Delta and Glennallen. The Yukon River takeoff would allow river system energy distribution to rural Alaska villages by using the Yukon (see story on propane in Sept. 11 issue of Petroleum News).
“The second (takeoff point) would be probably Fairbanks to provide the gas for that second-largest city.”
Delta and Glennallen takeoff points would allow spur lines into Southcentral Alaska to bring gas to Anchorage and Kenai, and the potential of a line from Delta or Glennallen to allow a spur down to Valdez for an LNG project, “an alternative that would be available in any contract commitment that is negotiated with the state.”
Other projects, the governor said, could go ahead based on their “individual economics … so we are not precluding basically any of the other alternatives.”
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