Alaska Tires of Sitting on Natural Gas Wealth

For nearly 30 years, Alaskans have relied on the 800-mile trans-Alaska oil pipeline to pay for 80 percent of state general fund spending and to provide every man, woman and child a yearly dividend check, simply for living here.

But with oil production gradually waning, Alaskans have been waiting for a booster shot.

The oil pipeline built in the 1970s to move crude from the frozen North Slope to tankers in the port in Valdez was supposed to be followed by a second pipeline to tap into the state’s other energy treasury – a vast natural gas reserve.

Yet again and again, the project to carry natural gas through Canada to markets in the Lower 48 has been delayed. The stalemate leaves at least 35 trillion cubic feet of identified gas reserves trapped beneath the North Slope — about 50 percent more than the United States uses in a year. It also deprives Alaskans of new construction jobs, extra state government revenue and growth in the savings account — known as the Alaska Permanent Fund – that will issue $845 dividend checks to every state resident on Oct. 12.

With the U.S. bracing for a natural gas crunch and double-digit price hikes this winter, Alaska officials now are focused on commercializing their natural gas – even if it means conflict with the international oil companies that hold the leases.

Gov. Frank Murkowski (R) is in closed-door negotiations with the three major oil companies on a contract for fiscal terms for a pipeline . At an estimated $20 billion, it is being called the largest private construction project in North American history.

Murkowski is willing to invest $4 billion of state money to get the project going in return for partial state ownership of the pipeline. If he gets a deal, he says he will call a special session of the Legislature before year’s end to approve a contract.

And if he doesn’t get a deal, there is danger for the oil companies. A signature-gathering effort is now under way to put a measure on next year’s general election ballot that would cost the industry $1 billion a year for refusing to sell their gas or build the pipeline. If the proposal for a gas reserve tax goes on the ballot, even opponents concede it’s likely to pass.

“Teddy Roosevelt, a great Republican, said, ‘Speak softly and carry a big stick.’ All we’ve been doing lately in the gas line negotiations is speaking softly. I say we put a big stick on the table,” said Democratic state Rep. Eric Croft, chief sponsor of the gas reserves tax initiative and a declared candidate for governor in 2006.

But Becky Hultberg, spokesperson for Murkowski, warns that a reserves tax would lead to litigation. “That’s not the best way to get this pipeline built,” she said.

Some impatient Alaskans, including former Republican Gov. Wally Hickel, President Nixon’s first secretary of the Interior Department, say that the state should take back the oil leases if necessary. “We’ve had gas sitting up there for 30 years,” Hickel said. “And so what we have to do is say, ‘Wait a minute, now you just can’t do that forever.'”

The oil companies portray the pipeline as a massive and inherently risky undertaking, although Congress last year passed a loan guarantee of up to $18 billion.

A recent analysis by a research firm under contract to the Legislature concluded that the project would be profitable under any likely scenario for gas prices, even at prices as low as $4 per million Btus – less than a third of the current record prices.

Industry outsiders worry that the North Slope’s natural gas, which now is reinjected into the ground to enhance the flow of oil, is too valuable to the companies in its current use for them to support a pipeline project.

But the oil companies say they are serious in negotiating a pipeline with the Murkowski administration.

“This is a project that our chief executive officer has had discussions with the president and the vice president of the United States about,” said Daren Beaudo of BP Exploration (Alaska).

Jack Griffin of ConocoPhillips said the three major producers have spent more than $100 million just to come up with a cost estimate for the project.

Particularly for Murkowski, the political stakes of the natural gas dispute are high.

Murkowski, who has not said whether he will seek re-election next year, has received record negative poll ratings for an Alaskan governor, with numerous surveys showing that a majority do not like the job he’s doing. Murkowski has made the gas pipeline a legacy project, promising Alaskans a deal this year and working hard for perhaps the only accomplishment that might make a second term viable.

Meanwhile, legislators also are in a potentially tough spot. It would be hard to vote against a gas pipeline contract, given three decades of dashed hopes up to this point. On the other hand, lawmakers are worried about approving a “deal” that does not commit the oil companies to an actual start date for the construction.

The issue is coming to a head now.

Confidential negotiations between the Murkowski administration and the three major oil companies in Alaska – BP, ConocoPhillips and ExxonMobil – intensified recently when the governor publicly demanded that they respond to a proposed offer, the exact terms of which remain secret. Murkowski let the deadline slide when Hurricane Rita forced Exxon officials to flee Houston. But he has left the impression that if he’s going to come to a deal with the North Slope producers, it will have to be soon.

Aides say that Murkowski remains optimistic about a special legislative session, which by law could not take place sooner than in 60 days, placing it between Thanksgiving and Christmas.