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Alaska's Gas Contract Out From Wraps, Under Scrutiny

Alaska could collect between $1 billion and $2.7 billion per year from a pipeline project to move North Slope gas to Alberta and ultimately the Lower 48, according to terms of a draft contract between Alaska and a trio of major producers, the state said.

The contract for the $19 billion pipeline and related facilities would need to be approved by the Alaska legislature -- currently in special session to consider the matter -- and that is far from certain as it contains items sure to stir up their fair share of controversy.

For instance, the contract does not require a commitment on the part of producers ConocoPhillips, BP plc and ExxonMobil Corp. to actually build the pipeline and would not penalize the companies from withdrawing from the deal. There is no start date specified for the project, and the companies would only be required to push the project forward "as diligently as is prudent under the circumstances," according to the draft.

"I think that's a big issue to say the state has now effectively granted tax concessions to these three producers to encourage them to build the pipeline," Scott Smith, vice president, Lukens Energy Group, a Black & Veatch company, told NGI. "The problem is it's not guaranteeing the pipeline will be built. That to me is a big question mark in terms of how long this process will take. You're talking about three major producers, $10- to $20 billion of commitment of capital. It's a huge project and they may have different opinions as to the appropriate timing for this."

Released to the public last Wednesday by Alaska Gov. Frank Murkowski, the contract spells out terms that would put Alaska in the natural gas business, making it a 20% owner of the massive pipeline and a marketer of its own gas, which it would receive from the producers as royalty-in-kind. The contract also would lock in oil tax rates for 30 years and natural gas rates for 45 years, something Murkowski has conceded is sure to be challenged in court on constitutional grounds because it relinquishes state taxing authority.

Murkowski told Alaska lawmakers that the state needs to step up, take some ownership in the pipeline project and share the risk with producers if it wants the project to move forward. Otherwise, he warned, there is a risk that the federal government could step in to build the pipeline and squeeze the state out.

"I don't think any of us, including the Bush administration, wants to see federal ownership of the pipeline," Murkowski said. "However, this is a possibility that we may all need to contend with if a contract is not consummated soon..."

Murkowski and governors before him have spent years toiling to build a natural gas industry in Alaska. While the draft contract with producers would move the project forward, if approved, there still is a long way to go with plenty of uncertainty.

"The fact of the matter is we're sitting here in a market that is at least $6.50 to something much more than that, and we've been at that price level for well over a year," said Smith. "And the fact that we're still not at a point where the pipeline is officially moving forward leads me to believe that there's some question as to the timing of this project."

But looking out longer term and perhaps a little optimistically, Murkowski said that gas development as envisioned under the draft contract could mean $12.5 billion to the state at $2.50/Mcf gas and as much as $78 billion at $8.50/Mcf gas over the 35-year operating life of the gas contract. Alaska's risk-sharing and participation in gas development "results in the essential improvements in the economics of this project and results in significant new revenues," Murkowski told lawmakers last week. "You're going to have the opportunity to delve into that when you go into the contract."

Among the provisions of the contract:

The contract is available at http://www.revenue.state.ak.us/gasline/ContractDocuments/

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