Oil producers sign on for gas pipeline

Groups apply to negotiate on taxes, royalties and other terms

Posted: Sunday, January 25, 2004

ANCHORAGE - A second proposal to build an Alaska natural gas pipeline, which Gov. Frank Murkowski said could lead to the largest construction project ever undertaken in North America, is being reviewed by the state.

On Friday, the three major oil producers - with rights to North Slope natural gas - ConocoPhillips, BP Exploration (Alaska) Inc. and ExxonMobil Corp. publicly submitted their proposal.

A day earlier, accompanied by rounds of applause, Murkowski accepted a separate proposal for building the pipeline from MidAmerican Energy Holdings Co. of Des Moines, Iowa, its subsidiary, Alaska Gas Transmission Co., and a consortium of Alaska Native corporations.

Friday, in a much more sedate event, the governor touted the state's long and productive relationship with North Slope producers.

"It is a great day for Alaska," Murkowski said at an Anchorage news conference. "We recognize this is just one step in the right direction and there remains much work to be done. But it is a step in the right direction."

The two groups have submitted applications to the state to negotiate taxes, royalties and other terms that would apply if they build a pipeline.

They are the first steps toward getting more than 35 trillion cubic feet of natural gas stranded on the North Slope to market, Murkowski said.

The application from the oil producers had been on the governor's desk a week before the application from MidAmerican, but amendments had to be made to accommodate requests from the producers, Murkowski said. ExxonMobil recently decided to be included in the deal. The governor said the two proposals stand independently.

He said he expects one more proposal to be submitted.

The $20 billion pipeline proposed by the big three oil producers would run 3,500 miles from Alaska's North Slope to an undetermined location in the Midwest. Plans for the Canada portion of the project aren't specific yet.

Until now, the oil producers have not wanted to commit to the project, contending it was not economical.

The state has tried for decades to get the project started. Murkowski said three things have changed - gas prices are up, demand is up and domestic supplies are down.

It's too early to say if the two proposals could be merged and the risk spread among multiple partners.

"Certainly BP has said all along that any investor that's ready to shoulder some risk and add value to the project is welcome," BP's Ken Konrad said. "But given they haven't spoken to us and haven't shared any engineering data, etc., etc., it's way premature to speculate. I would hope and expect at some point in time they might want to talk to us."

Ken Thompson, president of the Anchorage-based startup Pacific Star Energy - part of the MidAmerican group - said the proposed projects don't have to compete.

"We can all have a piece of pie," said Thompson, a former Alaska executive for Arco.

"The producers - and I was one of them - are the best in the world at producing oil and gas; let them produce the gas and we build the pipeline."

The governor said there remains a lot of work to be done. The contract the state and producers are working on now will provide a framework for taxes and financial incentives.

"Nobody's going to build this pipeline unless there's a degree of certainty associated with what the revenue demand is going to be from local and state government," Murkowski said.

Joe Marushack, vice president of Alaska gas development for ConocoPhillips, said developing such a fiscal plan with the state is one of the three priorities that ConocoPhillips believes is necessary to get the project going. Marushack said provisions that streamline the process in the federal energy bill are the second.

"Further, we continue to believe that provisions are needed to balance the market risk, preferably through federal fiscal legislation or possibly through our negotiations with the state," Marushack said.

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