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Alaska Legislators Told North Slope Producers Contractually Obligated to Produce Gas

Oil and natural gas producers that hold leases on the North Slope have a contractual obligation to produce the gas reserves, and if they decline to market the gas for a "reasonable profit," Alaska could take legal action against them, two outside attorneys told Alaska legislators on Wednesday.

To determine whether a North Slope gas project would give a producer a "reasonable profit," the state could review profit results from other North Slope developments as well as other gas projects worldwide, Spencer Hosie, a San Francisco-based attorney who has represented Alaska on oil and gas issues for 20 years, told a joint meeting of Alaska's House and Senate Resources committees and the Legislative Budget and Audit Committee.

"The law is clear on this," said Hosie. "Producers cannot simply warehouse hydrocarbons simply because it may not be in their best interest" to produce them.

A Houston-based attorney representing the Alaska Gasline Port Authority also spoke to legislators about how to encourage producers to develop North Slope gas. The port authority is a consortium of the city of Valdez and Fairbanks North Star Borough that wants to buy gas for a pipeline project.

"Doing nothing in the face of an available market is not an alternative that the law affords to the oil companies," Mark Cotham said. If Alaska chooses to do so, Cotham said, it has the authority to force the companies to develop and sell the gas reserves.

However, both Hosie and Cotham cautioned against filing lawsuits because for one thing, they could take years to resolve. Hosie explained that the North Slope oil royalty litigation between Alaska and some producers took nearly 18 years to resolve.

Cotham also noted that the port authority is not taking a position that the producers "are dragging their feet." He noted that the port authority "has made the producers a very detailed offer and we look forward to their response."

Instead of filing lawsuits, Hosie said the legislature might consider taxing the gas reserves in the ground. The tax could be lifted once a gas pipeline is built. Several lawmakers have advocated the tax, and state Rep. Eric Croft (D-Anchorage) said Thursday he will push for a citizens' ballot initiative on a reserves tax in the 2006 statewide election.

During the hearing, State Sen. Gene Therriault (R-North Pole), said the producer's "duty to produce" is not a new idea, but he said that it had been a long time since the state legislature has dealt with issues involving North Slope leases. However, while he said he was not privy to all of the confidential negotiations, he said he did not think that producers were stalling on developing North Slope gas.

"It's complicated to the point that I don't know if I can level that charge," Therriault said.

Several producers and state officials currently are negotiating a contract that would govern tax and royalty payments for a North Slope gas pipeline, and Alaska Gov. Frank Murkowski said he expects to have a deal in place this year.

The producers have indicated that they want a 35-year contract with the state to guarantee the fiscal viability of a gas pipeline. A pipeline from Alaska to the Lower 48 could cost $20 billion or more to build. Last year, a consortium of producers presented Alaskan officials with a proposal that, if approved, would move the gasline to the permit and engineering stage. The proposal also provides for direct state participation as a partner in the line and in the gas transportation.

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