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Next Month Could See Resolution of Some AK Gas Issues

October 25, 2006
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Outgoing Alaska Gov. Frank Murkowski's legacy will not include final plans for a natural gas pipeline, and his potential successors would like it if he would just step aside to let the next governor take up the charge.

ExxonMobil last week offered to pay Alaska $20 million and surrender 20,000 acres of leasehold to settle a years-long dispute with the state over development of the Point Thomson field on the gas-rich North Slope. The issue is set for hearing Nov. 13.

Democratic gubernatorial candidate Tony Knowles has criticized the offer, saying ExxonMobil owes the $20 million anyway under a previous commitment. Knowles and Republican gubernatorial contender Sarah Palin both say a settlement with ExxonMobil over Point Thomson would diminish the state's leverage in negotiating the gasline fiscal contract with ExxonMobil and other producers, BP and ConocoPhillips, according to press reports. Better to wait on the settlement and let the next administration sort it out after the new governor is sworn in Dec. 4, they say.

For years Alaskans, most notably Murkowski, have pined for a pipeline that would tap the North Slope and move gas production to the Lower 48, either through Canada or to the U.S. West Coast via liquefied natural gas (LNG) tanker. Commercializing its gas reserves becomes increasingly critical to Alaska as oil reserves, and the revenue they generate, decline. The fragility of Alaska's oil-based revenue stream was brought to the fore earlier this year when BP was forced to shut in production at Prudhoe Bay due to pipeline corrosion (see Daily GPI, Aug. 8).

The office of Michael Menge, commissioner of Alaska's Department of Natural Resources, told NGI that it will not comment on ExxonMobil's proposed settlement. Exxon owns 53% of Point Thomson, which it discovered in 1977. BP owns 29%; Chevron, 14%; and ConocoPhillips 3%. ExxonMobil's plan to develop Point Thomson was previously rejected by the state in October 2005 (see Daily GPI, Oct. 10, 2005).

"ExxonMobil, on behalf of the PTU [Point Thomson Unit] owners, proposes to resolve all outstanding obligations under the expansion decision by paying the Department of Natural Resources $20,000,000 and surrendering 20,000 acres from the PTU...," Richard Owen, ExxonMobil Alaska production manager, wrote Menge Oct. 18. "All acreage remaining within the unit will be subject to the significant commitments made by the PTU owners as part of the plan of development submitted Oct. 18, 2006."

Provisions of the plan of development (POD) are related to gas sales development, reevaluation of alternate development scenarios and technical/operational work in support of Point Thomson development. The plan specifies drilling operations would start in the first quarter of 2009 with a well that would further assess the gas field. The owners would be required to pay the state $40 million if they fail to sink a well as planned.

ExxonMobil and BP were sued last year under the Sherman Act and Section Seven of the Clayton Act by the Alaska Gasline Port Authority (AGPA) for failure to develop their North Slope gas reserves (see Daily GPI, Dec. 21, 2005). The suit was rejected in June (see Daily GPI, June 21). The AGPA is proposing a pipeline that would move North Slope gas to Valdez, where it would be converted to LNG and shipped to the U.S. West Coast. The producers have favored a line to move gas to the Lower 48 through Canada.

Meanwhile, when voters choose the next governor Nov. 7 they also will decide whether to approve the "Alaska Gas Line Now Initiative," which is intended to accelerate pipeline development by taxing producers on gas reserves for as long as they lie fallow. Proponents say the tax will create a sense of urgency that will keep ExxonMobil, BP and ConocoPhillips from dallying on pipeline work. Opponents -- among them a University of Alaska economics professor who released a paper on the initiative Monday -- claim the tax will create little real incentive, could turn the producers away and lead to unintended consequences not yet foreseen.

"Our analysis suggests the initiative would create only a small incentive for speeding up a pipeline project -- and at the same time increase pipeline costs and discourage new investment on the North Slope," wrote University of Alaska Anchorage economist Scott Goldsmith in a recent fiscal policy note. "Rebidding the leases wouldn't guarantee the state new leaseholders eager to move ahead. All [of] that would be bad for Alaska, which depends heavily on income from petroleum development. But continuing development requires new investment." The note and Goldsmith's full paper are available at http://www.iser.uaa.alaska.edu/.

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