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Murkowski Lays Out Terms for Alaska Pipeline, Wants Producer Response This Week

Alaska Gov. Frank Murkowski has told the North Slope producers -- BP, ExxonMobil and ConocoPhillips -- that he wants a response this week to his contract terms for an agreement on the proposed construction of a gas pipeline from the North Slope to the Lower 48 states.

"I am firm in my belief that we must develop a gasline, but not at any price," Murkowski said in a statement last week to the Alaska Chamber of Commerce. "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."

The governor said he has followed six guiding principles in the negotiations, insisting that any contract must guarantee the following: a fair share of revenues for Alaska; in-state use of the gas; access to others who explore for gas; a design that allows for expansion; state equity ownership in the pipeline; and jobs for Alaskans and job training.

He said the state's equity position probably would be about one-fifth of the project, or about $4 billion, possibly including $1 billion in cash and $3 billion in debt. The state also would be receiving about $2-3 billion/year into the state treasury from royalties paid by producers, given current gas prices.

"Each side has made its position on the issues clear during the months of negotiations -- particularly during the last two months of intense negotiations," Murkowski added. "I have delivered a fair contract proposal to the producers -- a proposal that meets these principles and provides significant benefits to Alaska, the nation and the producers. Now is the time for decision. I look forward to a response next week."

Rumors have circulated that the producers, particularly ExxonMobil, are not committed to building the pipeline because bringing in liquefied natural gas (LNG) to the Lower 48 from overseas would be cheaper and the producers already have substantial financial commitments in LNG trade, liquefaction projects and LNG regasification in the U.S. The producers have denied these rumors but have shown little confidence in completing negotiations with the state on the pipeline.

Meanwhile, there is pressure from the state legislature to move quickly. Consulting firm EconOne made a presentation to the legislature two weeks ago that concluded that the pipeline project would provide the producers with an attractive rate of return without any subsidization or royalty breaks, under any ownership scenario and at gas prices two-thirds lower than where they are currently.

Alaska Lieutenant Governor Loren Leman earlier this month gave the go-ahead to a proposed ballot measure that would tax leases on undeveloped natural gas resources. The measure is designed to spur construction of the $20 billion pipeline project, which would lead to the development of more than 35 Tcf of conventional natural gas resources in the state. It is sponsored by state Reps. Eric Croft, Harry Crawford and Dave Guttenberg as well as former Governors Walter Hickel and Jay Hammond.

The measure, if approved by voters, would apply a 3 cents/Mcf tax on producer's leases, or about $1 billion a year. If it goes into effect in 2006, the taxes could be levied for nearly 10 years until the gas pipeline enters service based on current construction estimates. The measure calls for an escrow account to hold the proceeds of the taxes in case producers file a lawsuit to challenge them. The funds collected would be returned to the producers in the form of a credit against future severance taxes as soon as the pipeline is built. The proposed ballot measure is based on a tactic the state used in 1975 to get an oil pipeline built.

At the same time, the Alaska Gas Line Port Authority (AGPA), a quasi governmental body that proposed an alternative in April to the Alaska Gas Pipeline planned by the big three gas producers, filed a new project offer this month that includes plans to strike a supply agreement only with the state for its royalty gas, leaving the major producers out of the process.

The AGPA project would include construction of an 800-mile 48-inch diameter gas pipeline parallel to the existing crude oil TransAlaska Pipeline System (TAPS), a 125-mile spur to a distribution system on the Kenai Peninsula, a gas fractionation plant (220,000 bbl/d) and a gas liquefaction plant with three processing trains (each with 7.5 million tons per year of production) in Valdez.

The new AGPA offer cites a number of new memorandums of understanding (MOU) with developers of several LNG import terminals along the West Coast, including the Kitimat LNG Inc. terminal in British Columbia, the Northern Star Natural Gas terminal proposed in Oregon, Crystal Energy's Clearwater Port offshore Oxnard, CA, Port Penguin LNG and Sempra Energy's Energy Costa Azul terminal and Baja California Norte, Mexico.

Officials at AGPA say the major producers negotiating with Murkowski are stalling the process because they really have no intention of building a pipeline. Instead, AGPA says, the producers would rather import LNG from other countries and avoid the cost and trouble of building an Alaska pipeline over the next decade. As a result, the citizens of Alaska stand to lose a lot by continuing a negotiation process with the majors.

AGPA officials also believe there is enough royalty gas currently being produced along the North Slope to provide the initial volumes to support a pipeline across the state to an LNG terminal near Valdez on the southern coast. In effect, AGPA believes it can move forward right away with a project based upon the state's royalty share of existing production volumes, which it estimates is 8 Bcf/d (1 Bcf/d of royalty gas) along with production commitments from other smaller producers.

The governor may finally be willing to consider such alternatives. Alaskans apparently will find out in a few days.

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