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Majors Deliver Fiscal Terms for Alaska Pipeline

BP, ExxonMobil and ConocoPhillips have delivered a fiscal contract proposal to the Alaska governor on development and market delivery of Alaska natural gas production, agreeing to the basic terms Alaska Gov. Frank Murkowski laid out last month for construction of the $20 billion pipeline project from the North Slope of Alaska to the Lower 48 states, a spokesman for the governor told NGI.

"The producers responded to the governor's most recent [terms] early this week and we are evaluating that right now," said Chuck Logsdon, a gas line adviser to the governor. "At this point in time there has been no decision made as to how we are going to proceed, but there is some evaluation going on and I think that there will be some kind of announcement relatively soon; whether that's by the end of the week or the beginning of next week I don't know at this point. But I would have to say that the two sides have gotten much closer."

A spokesman for BP Alaska said he could not comment on the proposal because of a confidentiality agreement with the other producers.

Last month, the governor delivered a proposal to the producers that laid out six principles that would guide the terms of any pipeline deal. "I am firm in my belief that we must develop a gas line, but not at any price," Murkowski said in a statement. "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 would be about one-fifth of the project, or about $4 billion.

Logsdon said producers have agreed to the governor's terms and are willing to allow the state to have an equity stake in the pipeline project. "That isn't a problem. That's something both sides have agreed can work."

He admitted that the governor has basically negotiated with the producers on the terms of a pipeline project to the exclusion of all the other parties that have expressed interest in building a pipeline. "The other proposals have not been rejected per se," he said. "I think the focus of the governor is to try to get an agreement with the producers because after all, all of the proposals require that you get some kind of agreement with the producers. You are going to have to either negotiate with them or fight with them in a legal arena, so the governor proposes to try to negotiate a business-type deal at this point."

Logsdon said the Alaska Gasline Port Authority's most recent proposal to use the state's share of existing royalty production to jump start a pipeline project, bypassing the major producers, was an "interesting plan." However, he said it raised a lot of legal questions dealing with lease language and the state's royalty program. "Does it mean we can take one-eighth of the reserves and require the producers to produce those reserves on our schedule?

"Those are untested waters, and there are production regulations with respect to the Oil and Gas Conservation Commission which would probably dictate the terms for level of production and those sorts of things. There are a lot of questions as to whether the Port Authority could build something without the producers [on board]. There also would be some question on whether [building a smaller pipeline, as the Port Authority has proposed] would be maximizing the value of the resource for the state if the alternative is moving 4.1 Bcf/d.

"I'm not trying to say that the Port Authority's project doesn't have some merit and shouldn't be looked at; I'm just saying that, like it or not, all the proposals are going to require gas from the [major] producers at some point in the life cycle."

Logsdon also noted that there are other strategies to prod the major producers into action, including threatening to take their leases away or imposing a tax on their reserves unless and until they begin production and build a pipeline to the Lower 48 states. Some stakeholders charge that the producers don't want to build an expensive pipeline but would rather import liquefied natural gas.

"The alternative the governor has been pursuing is one of mutual self-interest," said Logsdon. "Given the state of demand for gas in North America, given the price of gas, given the federal loan guarantees [for an Alaska pipeline], given the tax credits, the accelerated depreciation and other benefits, the administration is convinced this is a 'win-win' for the state and the leasers, who have the Prudhoe Bay and Point Thompson reserves, which are in excess of 35 Tcf -- which would go a long way toward amortizing a pipeline with a life span of 30-plus years."

Logsdon said the producers see it as a "win-win" as well. "We are very close to agreeing on a contract. We have a proposal now from the producers, and we are evaluating that."

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