Consultants who support Alaska Gov. Frank Murkowski's draft fiscal contract with a trio of producers that want to develop a pipeline to tap North Slope natural gas reserves held a press briefing Friday following a week when the deal came in for heavy criticism by consultants hired by the state legislature.

In a meeting of Alaska's Legislative Budget and Audit Committee, Daniel Johnston, a consultant hired by the legislature, said the Murkowski administration has used flawed data to support the draft contract. According to the Fairbanks Daily News-Miner, Johnston criticized the administration for comparing profit rates from different large projects from other parts of the world to justify the project. "That thing is terribly wrong," he said of the contract during his presentation last week.

Responding to that, one member of the Murkowski camp Friday called Johnston's comments "rather glib, hyperbole."

Countering Johnston during a press briefing, state Department of Revenue economist Roger Marks defended the contract and asserted that the project will not go forward unless the three producers -- BP, ConocoPhillips and Exxon Mobil -- have fiscal certainty with regard to taxes (see Daily GPI, June 12). He said the state also needed to improve the rate of return in order to make the project attractive.

To improve the pipeline project's economics for the producers, Murkowski's contract would have the state take a 20% ownership interest in the pipeline and take 20% royalty payment from the producers in kind rather than in cash. This would put the state in the gas marketing business.

"We don't believe there are any concessions in [the contract]," Marks said. "There are payments we make; there are payments we get.

"This is a risky project. It could turn out to be very, very good. It could turn out to be very, very bad." Marks said that with the size of the pipeline project -- $20 billion or more, the downside is worse than the upside is good.

"I think there are some groups in Alaska that feel that with the current [natural] gas prices this is such a good project it will go ahead anyway," said Petro van Meurs, economic consultant to the administration on the project.

"The idea that this is not a risky project, that this will go ahead regardless, I think is a very dangerous position to take," van Meurs said.

The economist pointed out that only over the last three years the cost projection for the Mackenzie Valley pipeline project has increased 50%, from $5 billion to $7.5 billion. "There is an enormous inflationary pressure now taking place in Alberta, which is the spot we have to go to as well," van Meurs said. "Under the current circumstances, this is an extremely serious situation."

He said that not everyone is expecting natural gas prices to remain high. "Price predictions are now such that some companies are actually gambling on low gas prices being the case around the world, and they're now commercially investing in GTL [gas to liquids]."

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