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Alaska May Take a Stake in Pipeline

October 18, 2004; Page A6

Alaska is hammering out a deal with oil companies that could require the state to invest billions for a stake in a $20 billion pipeline to carry natural gas from Alaska's remote North Slope to the U.S. Midwest.

It would be a leap into unknown territory for Alaska. States historically have relied on a risk-free model of collecting royalties and taxes on oil and natural-gas production from state-held resources. Depending on how the deal is structured, Alaska could end up swapping at least part of its dependable royalties and taxes in exchange for a much-riskier share of the profits -- or losses -- generated by the natural-gas project.

"It's a scary place to be," says Michael Menge, Alaska Gov. Frank Murkowski's assistant on natural resources. "In the U.S., states are not particularly eager to enter into the complexities of the commerciality of an energy project. There is a reason the taxes and royalties are so appealing: They're relatively easy to deal with."

But without Alaska's investment, there is a good chance the oil companies that own the natural gas -- Exxon Mobil Corp., BP PLC and ConocoPhillips -- wouldn't build the pipeline, observers say. Alaska badly wants the pipeline, which would provide a significant lift to the state's economy.

For decades, Alaska has tried to persuade oil companies to develop its vast stores of natural gas. But companies haven't had any way to move the gas from the frigid North Slope to markets in the lower 48 states of the U.S. The distance, hostile weather and frozen landscape made building a pipeline too difficult and expensive, especially with no guarantees that market prices for natural gas would be high enough to generate profits on such a costly project.

Rising demand for natural gas has put the pipeline on the front burner again. The 4.5 billion cubic feet a day of natural gas that could flow through the pipeline as early as 2014 represents about half of current U.S. imports of natural gas, 9% of domestic production, and 7% of U.S. consumption.

This month, Congress approved a package including billions in tax benefits and loan guarantees for the pipeline -- one of the conditions companies had demanded to ease costs and reduce red tape for the project. The incentives, originally included in a 1,000-page energy bill, had been stalled by partisan wrangling.

But Alaska's congressional delegation, led by Republican Sen. Ted Stevens, chairman of the Senate Appropriations Committee, mounted a weeklong lobbying campaign to put the measures in two other bills. The result was that, in a matter of a few hours on Oct. 9, Washington's contributions to the pipeline project were headed to President Bush's desk. As Sen. Stevens said that afternoon: "This is something we've been working on for 20 years."

Attention focuses on the deal Alaska can cut with Exxon, BP and ConocoPhillips. How the deal is structured remains to be determined, though observers say Alaska could take as much as a 25% stake in the venture. "It really comes down to how much risk the state is willing to take," says Pete Kott, speaker of Alaska's House of Representatives.

Alaska is entitled to royalties of 12.5% of any natural gas produced. The state also would collect a substantial amount of taxes from the project.

The companies expect several benefits from partnering with the state. Not only would the oil companies lower their share of the risk, but Alaska's involvement also would bring better terms all around for the companies, from taxes to environmental issues.

"If all the parties are in similar positions, they will tend to be aligned in their decision making. What hurts me, hurts you," says Dave MacDowell, BP's spokesman in Alaska.

While the partnership would be novel for the U.S., it would be routine for oil companies accustomed to striking similar deals with foreign governments. "Around the world, we do it all the time with national oil companies and governments," says an Exxon spokesman, Bob Davis.

Alaska's Gov. Murkowski presented the idea last week to the Alaska Legislature, which must give final approval to any deal. Gov. Murkowski expects a potential windfall for the state if the pipeline proves as profitable as its trans-Alaska oil pipeline built in 1973. "We have stood on the sidelines for nearly 30 years watching a lot of revenue flow to those who were willing to take the risk," he told a legislative committee.

A substantial stake in the pipeline also would give Alaska more control over the project, officials say. Still, Ethan Berkowitz, House minority leader in the Alaska Legislature, worries Alaska could turn out the loser by partnering with the powerful oil companies. "We're a small dog in the arena with a big dog, and there's only so much the small dog can do," he says.

Even if the oil companies come to terms with Alaska, they still have to contend with a range of issues in Canada, from right-of-ways to the rights of indigenous Indian tribes. But Greg Stringham, vice president of the Canadian Association of Petroleum Producers, based in Calgary, Alberta, said approval of the U.S. incentives package has encouraged Canadian producers about the pipeline's prospects.

"I think what you're seeing now is a willingness on both sides of the border to see that the gas finds its way to the market," he says.

Write to Susan Warren at 1 and John Fialka at 2
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