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Alaskan Ultimatums Continue Over Natural Gas Long Line

In a press conference last Thursday, Governor Frank H. Murkowski announced that he has delivered a proposed contract for construction of a long-disputed pipeline to carry Alaska natural gas to the Lower 48, to the main producers in Alaska, ExxonMobil, BP and ConocoPhillips. "I urge the producers to respond affirmatively and immediately."

"In September, I delivered a contract term sheet to the producers," said the governor. "Since then, we have engaged in active negotiations on that term sheet and have made much progress toward agreement. I am encouraged by that progress. Today, I delivered a comprehensive contract -- the state's position -- to the producers. It is a contract that is good for the producers, good for the nation and most importantly, good for Alaskans."

Last week Murkowski said he had received a fiscal contract proposal from the producers (see NGI, Oct. 3).

A majority of the state's general fund revenue is derived from North Slope oil and gas operations in the form of royalty, net profit shares, production tax, property tax, and corporate income tax, according the state oil and gas division. An oil pipeline from the North Slope to an export shipping terminal at Valdez was completed in 1977 and at its peak produced 2 million bbl/d. That production has been decreasing and currently runs about 900,000 bbl/d.

Pressure has been on the governor to expand revenue by getting construction underway on a pipeline to sell Alaska's natural gas resources to the lower 48 states. The approximately 8 Bcf/d of natural gas currently being produced with oil is recycled and used to boost Alaskan oil production.

The governor noted that while he could not share details of the contract, due to the confidentiality provisions in the Stranded Gas Act, it meets his six principles, including that Alaskans get a "fair share" of revenues, access to the gas, and jobs. Also, the gas pipeline must be expandable and the state should own a share of the pipeline.

The governor "believes he can deliver a contract fairly soon," an aide said. Questioned as to whether the revenue and tax portions of an agreement were the sticking points, the aide agreed in most negotiations "the money is always at the forefront." The two sides reportedly are working around a project schedule with no fixed dates laid out by the producers some time ago.

"We are approaching an historic moment - moving from 30 years of trying, to the reality of a gasline. We are closer now than ever before," said the governor. The project has eluded Alaska thus far because of its high construction costs, currently estimated at $20-$25 billion, associated risks and a formula for sharing them.

A spokesman for BP said the producer group was "looking forward to reviewing the proposal." A pipeline to ship gas to the Lower 48 is a "very large, extremely complex, risky and expensive project. The pace of negotiations is not unlike other large risky projects. It takes time. We want a contract done right to the satisfaction of everyone."

Underlining the governor's urgency, the state oil and gas division the previous week threatened to nullify the lease held by operator ExxonMobil and other producers for the development of additional properties on the North Slope, specifically the Point Thomson Unit, unless the producers started development toward production. Various leases for the unit have been held by producers between 28 and 40 years. They have received extensions over the years.

Currently the producers had asked for an extension while negotiations are ongoing for the Alaska pipeline, saying recycling of the natural gas in order to produce the oil would not be economic. The order from the oil and gas division said producers claim development of the lease "is not possible without modifying the current laws regarding the state's right to taxes and royalties on oil and gas production and on construction of a North Slope gas pipeline."

The state division refused to extend the lease while pipeline negotiations are ongoing. It gave the producer group 90 days to agree to terms. If they do not agree to the terms they may surrender the Thomson Point acreage, pay a $10 million charge for past extensions and be released from the remaining obligations in the decision. If the owners do not exercise that option, they must begin development drilling in the tract by June 15, 2006, or lose the acreage and pay $20 million to the State of Alaska.

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