Alaska astir over plan to tap its big 'tank' of natural gas

When Gov. Frank Murkowski announced last spring he had struck a deal with three major oil companies on terms for building a huge natural-gas pipeline to the Midwest, he said it would fulfill Alaska's decades-long dream of commercializing the North Slope's vast natural-gas resources.

"This is the greatest opportunity that has ever come by any of us to anchor in the economy of this state for the next 50 years," he said at a news conference, one of many he's held to rally support around the plan.

But now Alaska gas-pipeline politics has exploded.

Governor Murkowski was dumped from his job, finishing with 19 percent and in third place in the Aug. 22 Republican gubernatorial primary. Terms of his gas-pipeline contract led many voters to scorn the deal and the governor who proposed it.

Soon after the primary, FBI agents swarmed the offices of at least six state lawmakers, seizing papers and other evidence in a criminal probe related to oil and gas policy. Among those targeted is state Senate President Ben Stevens, son of Ted Stevens, Alaska's powerful US senator. The criminal investigation, according to search warrants issued for lawmakers' offices, appears to focus on possible oil-industry payouts for passage of the governor's gas deal and an oil-tax overhaul that is connected to it. In addition to the six lawmakers whose offices were searched, several others were interviewed by the FBI.

No charges have been filed.

Adding to the public's sour mood is the partial shutdown in August of the huge Prudhoe Bay oil field – stemming from pipeline leaks that BP Exploration (Alaska) Inc. is supposed to prevent. All together, the events are causing Alaskans to reevaluate their relationship to the oil companies that have long dominated the state's economy and politics.

Alaskans may be pro-development, but they seem fed up with what they perceive to be corporate control of their state, says Jim Sampson, president of the AFL-CIO of Alaska. "There's been a push-back here," he said at an AFL-CIO state convention Aug. 24, where delegates wore buttons demanding: "Show us the JOBS."

Natural-gas potential has long been the subject of high hopes and crushed dreams in Alaska, a state heavily dependent on production from its dwindling oil reserves.

Within the oil fields on state-owned land on the North Slope, there are about 35 trillion cubic feet of proven natural-gas reserves – the nation's largest known but untapped conventional supply – that have been languishing since they were discovered decades ago. Geologists believe two to three times as much could be discovered if companies bothered exploring for natural gas rather than for oil.

Lack of a way to transport the gas has kept it stranded on the North Slope. There, 8 billion cubic feet a day – enough to supply California's or Great Britain's daily needs – is pumped up, in conjunction with the oil production, and then reinjected into the reservoir for storage and to build pressure to assist in future oil recovery.

Detailed plans to build a gas-pipeline system date back to the 1970s. They never moved off the drawing board because of prohibitive costs.

High energy prices and an impending shortage of natural gas have finally made the huge project feasible, according to state officials.

But even as Murkowski touted his gas-pipeline deal as a milestone achievement in state history, critics saw it as a sweetheart deal for the three major oil producers: BP, Exxon Mobil, and ConocoPhillips.

All three major gubernatorial candidates – Tony Knowles (D), Sarah Palin (R), and former state lawmaker Andrew Halcro, an independent – are critics of the Murkowski deal, with Mr. Knowles and Ms. Palin promising to solicit entirely new proposals.

Within Murkowski's draft contract are controversial provisions that would:

•Freeze oil and gas tax rates for decades, forbidding the imposition of any new taxes on the three oil companies' Alaska operations, either by the legislature or by citizen initiative. "That's impossible. It's not constitutional, and it's wrong for Alaska," says Knowles.

•Require the state to take its tax and royalty earnings in the form of natural gas rather than cash, giving the state – which has never before marketed natural gas – the task of finding buyers and ensuring deliveries. "The state doesn't have a very good track record – and neither does any other state – of being in competition with private businesses, including three of the biggest oil companies in the world," says state Sen. Tom Wagoner, a Republican from Kenai.

•Omit any deadlines or performance benchmarks. The deal requires only that the three companies advance the project "as diligently as is prudent under the circumstances." "The contract doesn't do anything. All it does is lock us up for 35 or 40 years," says former Gov. Wally Hickel, a famously pro-development Republican.

•Surrender Alaska's right to take disputes with the companies to court and exempt them from oversight by the Regulatory Commission of Alaska, which regulates utilities (including pipelines). Instead, disputes would be resolved by an arbitration panel, with some members chosen by the oil companies.

Such terms are needed to make the financially risky project feasible, say supporters.

Its backers – including Vice President Dick Cheney and other Bush administration officials – say that unless this deal is approved quickly, the market niche that Alaska gas would fill will be satisfied by imported liquefied natural gas.

The Federal Energy Regulatory Commission report warned that it is a matter of "urgency" that the deal be approved this year. "For Alaska to be a meaningful part of the natural-gas supply mix of the US in the coming years, action needs to be taken now," said a July 10 report from FERC to Congress.

The legislature did approve one Murkowski proposal related to the gas pipeline. After months of debate, in a second special session called by the governor, lawmakers overhauled the state oil-tax system so that taxes will now be paid on companies' reported net Alaska profits – a change sought by the oil producers – instead of on gross production. Backers of the change said it makes Alaska consistent with a worldwide standard and will encourage new investment. Critics say it would allow oil companies opportunities for creative accounting, resulting in endless disputes over how net profits are defined.

Those who voted against the net-profits tax say their suspicion that the vote was tainted heightened after the FBI raids of the six lawmakers' offices, in a probe of VECO Corp., an oil-field service company based in Anchorage.

House minority leader Ethan Berkowitz (D) says he was outraged to find oil lobbyists in the House chambers giving signals to direct some members how to vote. During one heated debate, he made a speech decrying the telephone calls and other messages that were reaching the House floor during the proceedings.

"I saw votes taken, strong-arm tactics used on various legislators, votes reversed. I saw ugly efforts to turn this legislative body into a rubber-stamp for an administration that was in lock step with the oil industry," says Mr. Berkowitz, who is running for lieutenant governor.

VECO, a private company headed by some of Alaska's most politically active businessmen, denies any wrongdoing. "VECO's record as an upstanding corporation that has worked for almost 40 years to improve Alaska, and the lives of Alaskans, speaks for itself," a company statement said.

Murkowski has not abandoned his quest to win legislative approval for the gas-pipeline deal before he leaves office in December. "To ignore this as a consequence of the primary election, we think, is irresponsible," he said at a news conference where he outlined plans for another special session.

But others have a different strategy for getting the gas pipeline under way. Voters in November will consider a citizen initiative that would impose a tax of nearly $1 billion a year for natural-gas reserves that are not commercialized. The tax, on long-known natural-gas reserves, would be refunded once a gas pipeline is built.

None of the top three gubernatorial candidates backs the reserves tax, which critics say is overly punitive, but all acknowledge that it is popular. "If I were a bettin' man, I'd be betting that the thing passes," Palin said at a recent news conference. "I think a lot of Alaskans are feeling like, '... We can take the issue on through the ballot box.' "