- The Washington Times - Sunday, July 9, 2006

JUNEAU, Alaska — Alaska Gov. Frank H. Murkowski will try again to line up his state Legislature behind a deal with three oil giants to build a natural gas pipeline to Canada.

The Republican governor, with his re-election bid on the line and a $1 billion oil industry tax initiative looming, says his incentive-laden contract proposal with Exxon Mobil Corp., BP PLC and ConocoPhillips is Alaska’s best shot at making the long-coveted North Slope gas pipeline a reality.

But legislators haven’t passed changes to state law that would legitimize the contract he negotiated, and they twice have failed to pass a rewrite of the state’s oil taxes, which is integral to the deal.

So Mr. Murkowski will bring them back to the Capitol this week to try again.

The pipeline would pump more than 4 billion cubic feet a day of gas to North American homes, and proponents have touted the megaproject as a way to lessen the nation’s dependence on foreign sources of energy.

Alaskan politicians see the gas pipeline doing for the state what the trans-Alaskan oil pipeline did after it was built in the 1970s: bringing billions of dollars in royalties and taxes to the state and forming the cornerstone of the economy.

“If we don’t have a gas line, we can expect that the oil will run out in 20 to 30 years. That’s what our models show,” said Jim Clark, Mr. Murkowski’s chief of staff.

Until recent years, the price of natural gas has been too low to make the 2,100-mile pipeline to Alberta worthwhile for the companies that hold the leases to the 35 trillion cubic feet of known reserves in the North Slope.

When prices started rising, the three companies that control nearly all of the North Slope’s dormant gas fields began negotiating with the state to build the pipeline.

Also driving the governor to push through the deal is the threat of voter approval of a $1 billion annual tax on Alaska’s gas reserves until the gas is tapped. The initiative on the Nov. 7 general election ballot is sponsored by Democratic gubernatorial candidate Eric Croft of Anchorage and two other Democratic legislators, and is meant to force construction of the pipeline.

The initiative would tax the industry every year a pipeline is not built, but Mr. Murkowski’s contract would shield Exxon Mobil, BP and ConocoPhillips from paying.

“We are concerned that the reserves tax will kill this project for all time. It has that potential,” Mr. Clark said.

Consequently, the pipeline has become the central issue in this year’s gubernatorial campaign. All the front-runners are pro-pipeline, but opposing candidates from both parties are attacking the governor’s approach and his deal with the oil companies.

The contract proposal calls for a 30-year freeze on the three companies’ oil tax rates, and a freeze of up to 45 years for gas taxes. The state would take its tax and royalty payments in gas instead of cash, which means Alaska will have to sell the gas itself to fill its coffers.

Alaska would be a 20 percent owner in the pipeline, which means fronting at least $4 billion for the construction.

The contract lists no starting date for construction, although the companies must begin working on a project plan within 90 days after the contract is signed.

To be written into the contract is the net-profits tax, which the governor plans to introduce for the third time this year as a 20 percent tax on oil companies’ Alaska revenue after expenses. The Legislature twice has rejected the tax bill after both the House and Senate raised that rate but then failed to agree on what the final rate should be.

With the contract, Mr. Murkowski says, Alaska is making investment in the biggest construction project in North American history more attractive. Without it, the chances of a pipeline being built diminish, the governor said.

A signed contract is only one step toward constructing the pipeline. Securing permits, designing the pipeline and working through Canadian regulatory issues are expected to last about four years. After that, the three oil companies still can choose not to build the pipeline.

Much of the criticism over Mr. Murkowski’s deal has centered on granting the 30-year oil tax freeze to the three companies. The governor’s opponents in the campaign and in the Legislature say that would be an unconstitutional relinquishment of the state’s sovereign right to tax.

Consultants hired by the Legislature also have warned that the contract contains no clear work commitments, that the state may be required to submit to any changes the companies make to the project, that the pipeline ownership structure is unknown and still being negotiated, and that disputes would be resolved by arbitration instead of in court.

Mr. Murkowski appears ready to bend on some provisions, most notably the 30-year tax freeze. The governor will propose freezing the oil companies’ taxes for a shorter period and only after the pipeline is sanctioned. A similar plan passed the state Senate in last month’s special session, but did not go to a vote in the House.

When lawmakers begin work Wednesday, they will be asked to do two things: give Mr. Murkowski the authority to negotiate the deal he already has negotiated — with some modifications — and pass the net-profits tax bill that has failed twice.

What the governor can negotiate is dictated by the Alaska Stranded Gas Development Act. The act does not authorize the governor to negotiate oil taxes as part of a gas pipeline deal, and Mr. Murkowski needs the Legislature to change the act for his contract to be legal.

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