NGI The Weekly Gas Market Report / NGI All News Access

Murkowski Contract Draws Fire; Former Gov. Knowles Mounts Challenge

Alaska Gov. Frank Murkowski last week introduced three bills intended to move forward his plan for a pipeline to tap the state's vast natural gas reserves. Meanwhile, Democratic former governor Tony Knowles launched a bid for a third term and pledged, if elected, to undo Murkowski's draft gas pipeline fiscal terms contract with a trio of producers that will build the pipe if the terms are to their liking.

Murkowski's administration also drew fire from a newspaper columnist who criticized the state's communication on the contract as vague and inaccurate.

The contract between Alaska and three producers for the Alaska Natural Gas Pipeline, currently being reviewed by the state legislature (see NGI, May 29), will likely be getting more scrutiny now that contract opponent Knowles has announced his candidacy for governor.

Knowles, a Democrat who was elected governor twice, in 1994 and 1998, supports building a gas pipeline but opposes the contract struck between Republican Murkowski and ConocoPhillips, BP and ExxonMobil. Knowles and others have criticized the contract for being too soft on the producers, saying it has no actual requirement to build the line and imposes no consequences on the producers if a pipeline is not built.

However, the former governor is very much in favor of a gas pipeline, as he touted during a 2001 speech when he himself was governor.

"I believe Alaskans can be on the working end of a shovel building a natural gas pipeline within two years," Knowles said in January 2001 (see NGI, Jan. 15, 2001). "After decades of broken dreams, the economic and political stars are finally aligned in our favor. Natural gas is the fuel of the 21st century. Most Alaskans and industry experts believe the most viable project is a natural gas pipeline from Prudhoe Bay to Fairbanks, and then along the Alaska Highway to the energy-thirsty American market."

Knowles announced his candidacy last week, and Murkowski said he will seek a second term. Also, House Minority Leader Ethan Berkowitz, D-Anchorage, announced he would abandon his run for governor in order to run for lieutenant governor with Knowles.

Candidates had until Thursday to file if they wished to run in upcoming state elections. Knowles is eligible for a third term as governor since it would not be consecutive with his previous two.

Knowles ran and lost against Lisa Murkowski, daughter of the governor, for the U.S. Senate seat vacated by the elder Murkowski when he became governor. Lisa Murkowski was appointed to the seat by her father in 2002.

Primary elections are Aug. 7, and the general election is Nov. 7. Both Knowles and Murkowski must win their respective primaries if they are to face each other in the general election. Fairbanks businessman and former legislator John Binkley, and Sarah Palin, a former mayor of Wasilla, are running against Murkowski in the Republican primary. State Rep. Eric Croft of Anchorage is seeking the Democratic nomination. Former legislator Andrew Halcro is an independent candidate.

As campaigning gets under way, the legislature will have Murkowski's contract to chew on, as well as the trio of bills he introduced last week.

The bills propose changes to Alaska's Stranded Gas Development Act (SGDA) to align it with the terms of the pipeline contract; clarify that legal challenges to the contract would go directly to the Alaska Supreme Court; and establish a state corporation, the Alaska Natural Gas Pipeline Corp., to finance, own and manage the state's 20% interest in the gas pipeline system.

While Murkowski is anxious to get the contract through the Legislature, not everyone thinks that is going to be a slam-dunk. In a commentary in the May 28th Anchorage Daily News, economist and regular columnist David Reaume found much fault with the amount of information on the contract disseminated to date.

"Special session presentations and online postings of questions and answers are a good start, but they are only a start," Reaume wrote. "It is one thing to have Murkowski administration officials give short answers to complex questions. It is quite another thing to verify the accuracy of those answers to the level of satisfaction needed to comfortably vote for or against the contract."

Specifically, Reaume wrote that the state's website (http://www.gov.state.ak.us/gasline/) provides misleading information about regulatory jurisdiction over the pipeline where it says in a Q&A section that the pipeline will be under state regulatory and legislative oversight.

"In fact," wrote Reaume, "the state will not be regulating the pipeline if the draft contract is approved. Sections 8.1 through 8.3 require that the Federal Energy Regulatory Commission and the Canadian Energy Board have sole regulatory jurisdiction over the project." Reaume asserts that the state's regulatory oversight would be ceded away by the contract. "Point being -- the state's Q&A approach cannot even be depended on for accuracy, let alone completeness."

He said that "there is no way that the Legislature can responsibly act on the contract before next year."

Murkowski is pressing on, though. "The bills I am introducing today will take the gas pipeline contract three steps closer toward construction..."

One of the bills introduced by Murkowski would broaden the scope of subjects that may be negotiated under the SGDA, Murkowski wrote in his letter accompanying the House and Senate bills. "These new subjects include equity ownership, payment of obligations in gas rather than money, and changes in existing leases and other agreements with the state regarding oil and gas properties."

Additionally, Murkowski's bill would expand the types of terms that may be included in a contract under the SGDA. "The authority granted would cover terms in the fiscal contract now under review by the Legislature and the public. These terms include 'netting-out' provisions, payment of interest on obligations, ability to provide fiscal terms to others, confidentiality of payment-in-lieu records, state acquisition of pipeline capacity, indemnity given by the state, exemption from a reserves or resource tax, Regulatory Commission of Alaska jurisdiction, audits, and limits on damages."

Murkowski wrote to House and Senate leaders that provisions in his bill to establish the Alaska Natural Gas Pipeline Corp. are similar those relating to other public corporations, including the Alaska Permanent Fund Corp. and the Alaska Railroad Corp. "However, other provisions are tailored to the unique role Alaska Pipe is expected to play in facilitating this truly historic project."

The governor proposes that Alaska Pipe's board of directors be composed of the commissioners of the state's Department of Revenue and the Department of Transportation and Public Facilities. Five public members would have to have sufficient backgrounds in finance, investments, business management or the oil and gas industries.

Alaska Pipe would be allowed to incorporate subsidiaries, and at least one of these is expected to be a Canadian company to oversee the pipeline's operations in Canada. Murkowski estimated that the state would need to contribute about $1 billion to Alaska Pipe and associated companies. The money would be raised from direct and indirect appropriations to Alaska Pipe and the issuance of revenue bonds by Alaska Pipe. For tax reasons, it is possible that loans to any Alaska Pipe Canadian subsidiary would be made directly by the state rather than by Alaska Pipe.

Alaska Pipe would be subject to the Public Records Act, but it would have broad exemptions from disclosures relating to proprietary and other commercial information. "These broader exemptions from public disclosure are modeled upon similar provisions in the Alaska Stranded Gas Development Act. The open meetings laws of the state do not apply to the corporation. However, the corporation is required to conduct at least one meeting a year in public."

Also last week, Alaska's commissioner for natural resources extended the deadline for Exxon Mobil to submit an acceptable development plan for natural gas fields at Point Thomson, the Associated Press reported. Commissioner Mike Menge granted a 90-day extension to give lawmakers time to speak on Murkowski's proposed gas pipeline contract. Last year Exxon Mobil was found to be in default for omitting specific benchmarks from the development plan it submitted for Point Thomson gas reserves. Over nearly 30 years the company has filed nearly two-dozen development plans for the unit, according to AP.

©Copyright 2006 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.