North America's Source for Oil and Gas News
November 2003

Vol. 8, No. 45 Week of November 09, 2003

Alaska LNG backers lobby Murkowski

Backbone II asks governor for enthusiastic endorsement of state liquefied natural gas project from North Slope to Valdez

Larry Persily

Petroleum News Juneau Correspondent

Promoters of a state-owned liquefied natural gas project have asked Alaska Gov. Frank Murkowski to answer 21 questions that appear to challenge his administration for not aggressively supporting an LNG project.

“Can we look forward to your public endorsement and enthusiasm for Alaska’s LNG option?” asks the five-page Oct. 31 letter from Backbone II. Instead of waiting for North Slope producers to build a gas line from Alaska through Canada to the Lower 48, Backbone II believes the better project is a pipeline from the North Slope to Valdez, where the gas would be liquefied and loaded aboard tankers for markets in California or the Far East.

“Why shouldn’t Alaska develop its own project to tidewater, a project that is already permitted and is within our own country?” is another of the group’s questions to the governor.

Backbone II in September sponsored a full-page newspaper ad in Anchorage and Fairbanks calling on the Alaska legislature and governor to support a massive reserves tax against North Slope gas producers if they refuse to sell their gas for a state LNG project. Even if the state decided to risk the estimated $12 billion needed to build an LNG project, it would still need to either buy gas from the producers or convince the companies to pay to ship and liquefy their gas through the state project.

Getting gas to fill the pipeline a key issue

Gas supply is a key issue facing supporters of state-owned LNG project. “Will your administration take aggressive action to secure our gas?” the letter asks. “Is the attorney general examining the state’s options so that we can be prepared to take such action?”

The letter also asks Murkowski if North Slope producers are more motivated to develop their gas reserves elsewhere in the world rather than Alaska. The group raised the same accusation in its newspaper ads.

The three major North Slope producers — BP, ConocoPhillips and ExxonMobil — have spent millions of dollars studying the LNG option and have been unanimous in their statements that the project cannot compete with bountiful, cheaper gas available in Russia, Indonesia, Australia and elsewhere around the Pacific Rim. The producers believe a pipeline to the larger mid-America market is the best option. ConocoPhillips and BP, however, say they need federal tax incentives before they could afford to take the risk of the $20 billion pipeline.

In addition to sending the letter to the governor, Backbone II sent copies to Alaska’s congressional delegation, and to Alaska legislative officers — House Speaker Pete Kott, R-Eagle River, and Senate President Gene Therriault, R-North Pole.

Neither the governor’s press secretary, Kott or Therriault returned phone calls to Petroleum News in time for this story.

Bill Walker, the lead organizer of Backbone II, said the group intends to raise money and start a radio, television and newspaper ad campaign in the next few weeks to get its message to the public.

Group reminds governor of election campaign

The letter writers also took the opportunity to remind Murkowski of his victorious election campaign last year. A state-owned LNG project, the letter said, “could be the most promising project to use resource development to close the state’s fiscal gap — a key component in your winning election campaign.”

The letter was signed by eight members of Backbone II who met with Murkowski in Anchorage in late October:

• Walker, an Anchorage attorney who serves as city attorney for Valdez. Walker also was a member of the original Backbone group, which worked in 1999-2000 to oppose BP’s takeover of ARCO’s Alaska assets, arguing that the state’s interests would be better served by more, not fewer, companies competing for development on the North Slope.

• Dave Dengel, city manager of Valdez.

• Paul Fuhs, a lobbyist for Yukon Pacific Corp., which has been working for years to build a gas line across Alaska and an LNG terminal at Valdez. Fuhs also served as Alaska lobbyist for CSX Corp. in 2002. CSX, the Jacksonville, Fla.-based transportation company, owns 88 percent of Yukon Pacific. CSX and Yukon Pacific paid Fuhs a combined $96,000 in fees in 2002.

• Former Alaska Gov. Wally Hickel, one of the founders of Yukon Pacific. Hickel’s remaining interest in the company is held in a charitable trust.

• Former Hickel staff members Malcolm Roberts and Mead Treadwell, who now work for the Institute of the North at Alaska Pacific University in Anchorage. Hickel was a founder of the northern issues institute and is one of its primary financial supporters.

• Mike Gallagher, business manager of the Laborer’s Union International Local 341 in Anchorage and a former Valdez resident.

• Jack Roderick, Anchorage Borough mayor 1972-1975 and deputy commissioner at the Alaska Department of Natural Resources 1976-1978. Roderick, as Walker, was part of the original Backbone group that opposed BP’s takeover of ARCO’s Alaska operations.

Group member says there are more supporters

The letter signers are not an all-inclusive list of Backbone II supporters who want to see a state-owned LNG project, Roderick said. “There are a lot more people than just us who are supporting the idea.”

Dengel said he signed the letter as a private citizen, not as city manager for Valdez, though he said he has discussed the issue with the city council. “They’re supportive of what Backbone II is doing.”

Valdez has long supported an LNG terminal in the community, seeing such a project as a source of property tax revenue and jobs. The city joined with the North Slope Borough and the Fairbanks North Star Borough in 1999 to create the Alaska Gasline Port Authority, looking to help finance, build, own and/or operate a pipeline from the slope and an LNG plant at Valdez. The port authority did not succeed in getting gas to sell or securing financing, and Dengel said Valdez spent about $200,000 as its share of the effort.

Group looks to state gas authority

“It needs to be someone,” he said of the campaign to build a natural gas project in Alaska. If not the port authority, then perhaps the Alaska Natural Gas Development Authority will succeed, he said. Voters created the state authority by a better than 2-to-1 margin in the November 2002 statewide general election.

The citizens’ initiative directs the state authority to prepare a project development plan for the Legislature by next summer for a state-owned-and-operated pipeline and LNG plant at Valdez. The authority has been asking for more money to add to its first-year budget of $150,000. The administration and Legislature gave the authority an additional $200,000 at the end of October, taking the funds from a one-time pot of federal aid to the state.

Even with the additional funding, the authority is far short of the $1.5 million to $3 million it and its backers wanted this year. That subject also is among Backbone II’s questions to the governor: “Will you support adequate funding to (the authority) so that they can perform the work necessary to make a serious offer to purchase and sell Alaska gas?”

Others offer to help state authority

The state authority will get some free help from the Valdez-led port authority. Dengel said the port authority is willing to share all of its information with the state agency.

Yukon Pacific also is looking to share its 20 years of data and permits with the state gas authority, though not necessarily for free. “We have permits,” Ward Whitmore of Yukon Pacific testified at a Sept. 10 legislative hearing in Anchorage. “We would like to monetize our permits.”

The state gas authority, like the port authority and Yukon Pacific, faces the problem of getting the producers to sell gas to the state. Dengel said he fears the authority lacks credibility with the producers or some state officials. However, it is not all discouraging news, he said. “There may be some state folks who think that we’re on to something.”

State to review LNG economics

Larry Persily

Petroleum News Juneau correspondent

One of the more contentious points raised by Backbone II in its letter to Alaska Gov. Frank Murkowski is its claim that an Alaska liquefied natural gas project would be more profitable for the state than a larger gas pipeline to mid-America.

“We cannot agree that a trans-Canada project provides more revenue and benefits to Alaska than an All-Alaska LNG project,” the group said in its Oct. 31 letter to Murkowski. It raised the issue among its list of “those things we agreed upon and questions that remain” after the group had met with the governor a week earlier.

The letter also challenges the North Slope producers’ assertions — and the administration’s acceptance — that an Alaska LNG project would not be competitive with other projects in the world that do not need to build an expensive 800-mile pipeline through the arctic to get gas to tidewater.

Differences include project size and markets

North Slope producers say a $20 billion pipeline carrying 4.5 billion cubic feet per day to U.S. markets, fed through the wide-ranging North America distribution grid that starts in Alberta, has a far better chance at succeeding economically than trying to compete with plentiful LNG around the Pacific Rim. LNG backers say their $12 billion project, at about 2 billion cubic feet per day to the Far East or Southern California, is the way to go to commercialize the state’s vast gas reserves.

Supporters of a state-owned LNG project believe the tax advantages of a publicly owned project — no state or municipal property taxes, no state corporate income tax, possibly no federal corporate income, and possibly lower tax-exempt bond rates for all or some of the project — put them far ahead of a privately owned pipeline.

But with the potential tax savings comes the risk of low gas prices, high construction costs, or anything else that could go wrong and cut into Alaska’s finances if a state-owned LNG project runs into trouble.

LNG proponents also say a state-owned project could pay something similar to dividends to the state and communities in lieu of taxes, and could help attract economic development investment to the state if it could make gas available at affordable rates.

That would need to be weighed against the fact that state production tax and royalty revenues are based on volume and value, and the gas line to mid-America would move twice as much volume as the proposed LNG projects. A question is: Which gas would be worth more at the wellhead, where taxes and royalties are calculated.

State to review everyone’s projections

To help settle the dispute, or at least add more facts to the debate, the Alaska Department of Revenue will review all of the proposed LNG projects’ numbers, said Steve Porter, deputy commissioner at Revenue. The department’s petroleum economists will look at financial projections from Yukon Pacific Corp., which has tried for 20 years to build an Alaska LNG project, and the Alaska Gasline Port Authority, a Valdez-Fairbanks-North Slope Borough municipal consortium that has been working since 1999 to do the same thing.

The economists also will review the producers’ LNG numbers, Porter said.

“Those are the three major parties that have done research on an LNG project,” he said.

The department hopes to have its work finished and on the governor’s desk by the end of the year. The department also will share its work with the Alaska Natural Gas Development Authority, which is working to develop its own financial projections for a state-owned LNG project.

Yukon Pacific wants to move propane

A new angle on Yukon Pacific’s economic model is its revised proposal to take 100,000 barrels a day of propane from North Slope production, move it down its pipeline and sell it as feedstock for petrochemical production. The company believes this “value-added” approach improves its project’s economics.

However, the producers currently re-inject into their drill holes much of the propane that comes up with the crude, using it to boost oil production on the slope.

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