Gas pact likely to end up in court

Posted: Wednesday, October 26, 2005

Alaska's own gas pipeline negotiators are divided over their contract proposal to the point that they are nearly certain it will land in court.

"There are some folks who think the Alaska Supreme Court is going to look at what we've done and say it won't fly," said Dan Dickinson, a member of the negotiating team and former state tax director. "Everyone's very focused on the fact that there is going to be a judicial challenge."

Last week's memo by Department of Natural Resources Commissioner Tom Irwin gave a glimpse into the divisiveness within the state's gas team. In it, Irwin outlined eight areas of the state's offer to three North Slope oil producers where he questions its legality.

Dickinson acknowledged the internal split, saying there has been "some mind-numbing back and forth" on reconciling the proposal with current laws and contracts.

"I don't want to characterize the difference of opinions other than to say they do exist, they have existed and opposing views are important to the process as long as they are constructive," said Becky Hultberg, spokeswoman for Gov. Frank Murkowski.

ConocoPhillips has already agreed to the state's offer, which has not been publicly released. The other two members of the producer group proposing to build a North Slope gas pipeline, BP PLC and Exxon Mobil, have not yet responded.

Alaska's constitution says the state's power of taxation shall never be surrendered or contracted away. The crux of the internal debate is whether the state's proposal violates that article and the Stranded Gas Act, the laws that set the parameters of a fiscal contract for a gas line.

Irwin's memo says he worries that he and his staff could face personal liability for endorsing the proposed contract. He asks Attorney General David Marquez for "assurance that we are operating within the confines of law or advice on how to bring our actions into conformance with current law."

Since the memo's release, the governor's office has refused to comment on what it is calling Irwin's "employment status." On Tuesday, Hultberg again declined to comment on Irwin's position in the administration and also whether his place on the state's negotiating team has been affected by the memo.

Among Irwin's concerns are that the gas may no longer be considered "stranded" because of the current market value of natural gas, and that the state is giving away its ability to take administrative action or appeal to the courts if the producers breach the contract.

Also, the proposal would alter the tax agreements already made for existing oil and gas production and infrastructure. That, too, goes against state law, Irwin writes.

Dickinson said he could not talk about specifics of the proposal, but because the Prudhoe Bay and Point Thomson gas would go through existing facilities, differentiating between multiple contracts for the same facilities would be difficult.

"How do you draw those lines?" Dickinson said.

As for giving away the state's ability to hold the producers accountable in case of a breach of contract, Dickinson said alternative resolution methods were being considered.

"I think you see that in a lot of contracts around the world," he said.

Irwin writes that the contract could conflict with the obligations oil and gas producers are have to develop the Point Thomson field. Recently, the Division of Oil and Gas rejected Exxon Mobil's development plan for Point Thomson and threatened to pull its leases if a new one with a development timeline isn't submitted.

A stranded gas contract proposal that conflicts with those obligations could be illegal, Irwin writes.

In response, Dickinson said Point Thomson has been under several plans of development for decades with no results, and that people should judge whether a different approach would be better.

"Whatever we've been doing in the past hasn't seemed to be very effective," Dickinson said.

Irwin writes that the administration's plan to deal with the possible legal problems by having the state Legislature amend the Stranded Gas Act after the deal is signed. He compares changing the rules of the game to rewriting a contract request so a favored party can win it.

That "strikes me as potentially improper," Irwin writes.

If a deal is reached, the contract will go out for public comment before the state Legislature votes to approve or reject it.



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