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Experts give Alaska gas line good odds


June 15, 2006

ANCHORAGE, Alaska -- Independent consultants hired by the Legislature to scrutinize Gov. Frank Murkowski's proposed natural gas pipeline contract say the state has greatly overstated the risk of cost overruns and low prices sidelining the massive project.

Los Angeles-based Econ One Research also told lawmakers the Alaska gas project is potentially among the most profitable oil and gas projects anywhere in the world.




Their testimony came Wednesday on the first of three days of hearings before the Legislative Budget and Audit Committee, which is meeting this week in Anchorage to continue work on the governor's complex, 460-page proposal.

It would set tax and other state terms that would apply if BP, Conoco Phillips and Exxon Mobil decided to build a pipeline, estimated to cost $19 billion to $27 billion, from the North Slope to Chicago or Alberta, Canada.

A majority of the Legislature must approve the pact before it can be enacted.

During a 30-day special legislative session that ended last week, lawmakers sat through hours of presentations from Murkowski's top aides and his top international petroleum consultant, Pedro van Meurs.

Van Meurs has told lawmakers that there is a 20 percent to 30 percent chance the pipeline won't be built even with a contract, saying that cost overruns and low natural gas prices could halt the project.

Econ One consultant Anthony Finizzia told lawmakers Wednesday that the chances the project won't be built are more likely 1 percent to 5 percent.

The chances of significant cost overruns or low gas prices are low. It's even less likely that both would happen at the same time, Finizzia said.

Alaska would share in the project risk. Under the proposed contract, the state would own 20 percent of the pipeline, and instead of cash for taxes and royalties it would receive a percentage of the natural gas produced as its ownership and tax share.

Rep. Norm Rokeberg, R-Anchorage, said he was heartened by Finizzia's testimony.

"That's been a key concern," Rokeberg said. "This indicates that the probability of a combination of low prices and cost overruns together is not as troublesome as many people believe."

Econ One's analysis also showed that the Alaska gas pipeline project ranks among the top investment opportunities for oil producers anywhere in the world.

In fact, when evaluated by its net present value, a measure of how many dollars in profit an investment is likely to produce, a North Slope gas pipeline to Alberta ranks first out of 56 planned $1 billion-plus oil and gas projects across the globe, Finizzia said.

For their part, Murkowski's staff has been comparing the proposed project with others not using total profits but on their potential percentage of investment returns to the oil companies. Using that measure, the Alaska project appears to be a less attractive investment.

"Their analysis of this project in the context of what's happening in the rest of the world is dramatically different," said Sen. Kim Elton, D-Juneau, who was in Anchorage for the legislative hearing.

"Now the big question is, is the gas stranded or not?" Elton said.

The Murkowski administration negotiated the terms of the contract under the Stranded Gas Development Act, a state law aimed at spurring development of gas that is not being marketed due to high costs or low prices.

Dan Dickinson, a former state tax director now working as a Murkowski gas pipeline consultant, responded that if the gas weren't stranded, the producers would have started building a pipeline by now.

"They're not getting any value from holding onto it," he said of the North Slope's huge natural gas reserves.

The administration plans to bring its own economists to the hearing table later this week to explain the differences between their analyses and Econ One's, Dickinson said.


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Ketchikan, Alaska