Gas line doubts raised

June 9, 2006

By JOEL DAVIDSON

Frontiersman

MAT-SU - Hoisting the voluminous and highly controversial Alaska gas pipeline contract above his head, Gov. Frank Murkowski stood before a charged crowd Wednesday at the Best Western Lake Lucille Inn in Wasilla.

For the next few minutes, Murkowski attempted to explain and defend the tentative deal he struck with three oil giants - ExxonMobil, BP and ConocoPhillips - to develop the Alaska gas pipeline project - a project oil companies say will cost between $19 billion and $27 billion.

To take effect, the contract must be ratified by the Legislature.

The contract spells out the terms of the deal, which some critics say are too risky for the state and too favorable for oil companies.

&#8220There are risks associated with this,” Murkowski admitted to the audience. &#8220One of the greatest risks to Alaska is if the producers don't make the investment to build the pipeline.”

But without risks, there will be no rewards, he added.

The Wasilla stop was one of many the governor plans to make across the state as he listens to public testimony regarding the contract. The comments will be compiled and used to decide whether to amend the deal.

One major component of the plan addressed Wednesday regarded the controversial tax-freeze provision, which would forbid the state from changing the production tax and royalty rates on the three oil giants for the next 30 to 45 years. The governor said the tax freeze is necessary to provide oil companies with a stable economic future while they invest in and develop the largest private construction project in American history.

The proposed gas line would run from Prudhoe Bay, south to Tok and into Canada, and possibly to the Midwest.

Palmer resident and former gubernatorial candidate Jim Sykes said he doesn't buy the governor's justification for the tax freeze. He said the freeze threatens Alaskan's constitutional right to create a citizen initiative on taxation, and at the same time it does not require oil companies to actually build the pipeline.

&#8220We can sign a fair and good contract and have an Alaska gas pipeline, but we should never give up our fundamental constitutional rights to any contract,” Sykes told the audience Wednesday.

As written, the contract contains no provisions requiring oil companies to build the pipeline. Rather, the deal relies on a good-faith effort by the developers to use &#8220due diligence” to pursue construction.

Murkowski defended the open-ended nature of the contract as necessary for producers to sign on. He said a citizen initiative that could make it onto the October ballot that would tax oil companies for each year they delay building the pipeline is ill conceived.

&#8220You cannot tax the gas line into existence - it simply won't happen,” he said. &#8220What you can do is work to create favorable economics that drive the project.”

The governor said the reserve tax initiative likely would destroy the economics of the deal by adding a liability of up to $1 billion a year to the oil companies.

&#8220The proponents of this are concerned that the companies are not genuine in their commitment to try and build this line,” he added. &#8220Well, I think to the contrary.”

Big Lake resident Jay Cross, an independent candidate for state Senate, disagreed and argued that the contract needs to require results from the oil developers.

&#8220There is no performance clause, there is no end results,” he told the crowd. &#8220All it does is give up our rights to do anything about it.”

Republican gubernatorial candidate Sarah Palin, of Wasilla, also was present at Wednesday's hearing. She agreed that locking the state into a 30- to 45-year tax freeze is too risky.

&#8220We know there will be volatility in the market, and new technology might lead us to rethink the level of taxation,” she said in a phone interview Thursday. &#8220Tying up the tax rate for all these decades is not in our best interest. We've got to play hardball with these guys. They are looking out for their bottom line, and we need a governor who will do the same thing for Alaska.”

Another key - and controversial - provision of the contract addressed at Wednesday's public hearing dealt with the amount Alaska should tax the oil companies on their revenue. The governor said anything more than a 20 percent tax would jeopardize the tentative agreement he has with oil companies.

As of Thursday night, the Legislature, working during an extended special session, had not come to an agreement on the tax rate. The governor said the tax rate is key to moving forward in finalizing the contract.

The special session ended at midnight Thursday and Murkowski planned to make an announcement today whether to immediately add another special session or send the legislators home for a break.

The House and Senate both want to increase the governor's proposed 20 percent tax rate, but the two chambers disagree on how much to raise it. The House proposed a 23.5 percent rate, while the Senate won't go above 22.5 percent.

In a letter to legislative leadership Wednesday, the governor warned that the House rate could be a deal buster.

While most comments at Wednesday's talk were critical of the current pipeline plan, several speakers spoke in favor of the deal.

Cheryl Metiva, executive director of the Greater Wasilla Chamber of Commerce, offered qualified support for the governor's plan.

&#8220I think it is very important that at least this is being discussed and we have a contract that is out there,” she said. &#8220It is less than perfect - I think it needs to be reconsidered and a number of angles need to be rethought …”

Contact Joel Davidson at

352-2266 or joel.davidson@ frontiersman.com.