Governor says North Slope producers will consider letting Alaska be part owner

Posted: Thursday, October 21, 2004

Gov. Frank Murkowski said Wednesday that three North Slope producers are willing to consider the idea of the state being a part owner in a proposed natural gas pipeline to bring North Slope gas to market.

In a press release, Murkowski said substantial progress in advancing the gas line project had been made during meetings with three North Slope producers in Pasadena, Calif., on Tuesday. Those producers were ConocoPhillips, BP Exploration and ExxonMobil. The governor said the producers had embraced the state's equity concept that he first announced to the Legislative Budget and Audit Committee on Oct. 13.

The governor also praised the work of the state's congressional delegation in securing the federal incentives needed to advance the project to the next phase developing a contract that would provide the huge project a measure of fiscal certainty.

Last week, Murkowski told the audit committee he supported the state assuming an equity position in the construction of the gas pipeline and also a shipper's risk, and called on the Legislature to work with the administration to complete the Stranded Gas Act process.

Assuming an equity position means owning a percentage of the pipeline infrastructure itself the pipe, the valves, the compressor station, the trench, etc. That means investing money to build the line, explained Larry Persily, an oil and gas expert who worked in the Alaska Department of Revenue during the Knowles and Murkowski administrations. He left his state job in early October.

"The risk is construction cost overruns and delays," Persily said.

Owners recoup their investments and reap any profits through contracts with gas shippers. However, the Federal Energy Regulatory Commission, or FERC, regulates what gas pipeline owners may charge. Essentially, they set the utility price.

There are other risks, such as those associated with the volatility of gas market prices. Should shippers default on their pipe-use contracts, the owners could be left holding a pipeline with a high mortgage and less revenue than expected, Persily said.

If Alaska chooses instead to become a shipper, that is, a seller of gas for instance, if it sells the royalty gas it might take in-kind it would face other risks.

Shippers sign contracts with pipe owners. Those contracts remain in effect even when the market price of gas drops. Couple that utility cost with the cost they pay to producers for the gas itself, and shippers could lose if the price slips too low.

In the United States, shippers typically don't sign long-term contracts, Persily said. But they may have to if they hope to see a new gas line built in Alaska. The Alliance Pipeline linking Alberta to Chicago that began operations in December 2000 is a good example. It cost $3 billion to build, a sizeable capital investment. Shippers were required to sign 15-year contracts with the owners. Such lengthy contracts likely would be needed to make the Alaska gas pipeline a reality, he said.

Like the private companies currently discussing the pipe-line project, Alaska could become both an owner and a shipper of gas. The FERC, however, has clear laws restricting how the two functions deal with each other, Persily said.

Currently, the administration is negotiating with the three major oil producers and the TransCanada Corp. over separate proposals to build a pipeline from the North Slope to the Lower 48. According to the governor, state officials also have begun talks with Enbridge Inc., which has filed a Stranded Gas Act application.

The state also is assisting the Alaska Natural Gas Development Authority and the Alaska Gasline Port Authority in efforts to develop a gas line project.

The proposed project has been estimated to cost between $14 billion and $20 billion. Recent federal legislation provides loan guarantees of up to $1 billion and expedited permitting and judicial review processes.

BP spokesperson Dave MacDowell said Wednesday the company was supportive of the concept of the state taking control of its own natural gas and was "actively and positively" discussing state equity in the line.

"Fiscal contract negotiations are continuing, and we plan to have a comprehensive proposal available for the Legislature to review early in the coming session," he said.

Murkowski said the state had set its own target date of Oct. 28 for submitting a proposal to producers regarding an equity share in the pipeline. The producers have indicated they would respond within a week.

The governor's press release said negotiations would continue as the state's Stranded Gas team worked with producers to develop a final proposal for the Legislature. Should the Legislature adopt the plan, it would set the stage for spending around $1 billion for engineering, planning and permitting, the press release said.

Last Thursday during a GOP rally in Las Vegas with 20 other governors, Murkowski met with President George W. Bush. According to the press release, the president was enthusiastic regarding the recent federal legislation and said he looked forward to signing bills to advance the project.

The governor met with the president as he traveled back to Alaska from Oklahoma City, where he had been elected chair of the Interstate Oil and Gas Compact Commission for the coming year. The IOGCC will hold its spring meeting in Anchorage in May.

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