Governor Frank H. Murkowski -
Speech to the Resource Development Council
November 16, 2005

Note: This is a copy of his speech from bullet-point format

INTRODUCTION
I turned down the suggestion to use this opportunity to review my administration’s accomplishments that are bolstering resource development today. I’m sure everyone here knows that mining, fishing, tourism, oil, international trade are doing much better today – and if we can win a court battle or two, timber will be right there with the others.

In just three short years, this administration has helped make the state more attractive for increased investments from both local and outside businesses. A few examples of late include: Alaska Peninsula lease sale last month, new mines going into production, like Pogo south of Fairbanks and Rock Creek near Nome.

Recognizing that RDC attracts an informed audience, I’m not going to talk about subjects like these, that most of you already know about. I’ll focus instead on the one subject that is the most important resource development issue facing Alaska today: Getting North Slope gas to market.

GAS PIPELINE
Let me start with the reason for focusing attention on the Producers and the basis for our negotiations with them. Over the years, there has been a lot of excitement in Alaska over the prospects of marketing Alaska gas. During the 1990’s the U.S. built countless natural gas fired power plants.

Today 24% of our energy needs come from gas compared with 23% from coal and 40% from oil. And Lower 48 gas reserves are in decline. The economics now and in the future support the Producers’ project’s ability to amortize its projected high cost of $20 billion-plus. However, whether this project will be financed is measured by laying it alongside other developments worldwide and comparing the internal rate of return and the risk of overruns.

Last year, Congress passed gas pipeline legislation intended to facilitate an agreement with the Producers – who hold the contracts to lease the gas. Likewise, the premise of Alaska’s Stranded Gas Development Act (SGDA) was that the state should negotiate a business deal with the Producers who purchased the leases to develop the gas. The alternative to a business deal with the Producers would be litigation to take the gas leases they purchased away from them. I was amused by a media inquiry allegedly from a group of Democratic legislators asking me to submit all three applications for the public hearing and legislative process. It is fair to say that at least two of the proposals would not have an identifiable gas supply—so goes the politics of our gas pipeline.

The Stranded Gas Act does not tell the governor to make a business deal with interests who first need to sue in order to get the gas. And there’s good reason:
• Litigation is risky for the state
• Outcome is uncertain.
• It will take too long, and after we win we’d just have to start all over putting together a contract.
• The delay would allow LNG to get ahead of Alaska’s North Slope delivering gas to market.

A commercial contract with those who own the leases to the gas makes good sense.

Financing
Working with the Producers also makes sense from a financing point of view. Financing the line is done based on take or pay contracts for transporting gas – (known as Firm Transportation—FT—commitments). Very few companies in the world have the balance sheet to make this commitment – cost estimate $100 billion over 30 years. The Producers are among the few. They have financial ability to sign up for FT commitments to transport their gas to market. My job is to make the decisions that direct the state team in negotiating.

Some folks appear to have forgotten that Congress and the state Legislature did not provide the tools for a regulatory dictate but a negotiated business deal. Some lost sight of the objective which is to obtain a sound commercial contract, yet not at any price.

I’m pleased to say we have done that with ConocoPhillips and hope to soon reach a resolve with BP and ExxonMobil.

Our Options
These are the options:
• A line with the Producers involved with $2 billion to $3 billion a year for the state to spend as the Legislature sees fit, or
• An internal political fight and long-term litigation with Producers and no money coming into the state or municipal governments.
• Such a delay causes Alaska to risk LNG coming into Lower 48 markets and displacing gas from the North Slope pipeline. Delay could cause us to lose our market.

The project being negotiated with the Producers is the one that moves the most gas to market at the lowest tariff for the highest value generating the most tax and royalty revenues for the state and residents. The project maximizes the return from our natural resources.

State’s ownership participation
Based on the advice of the state’s chief consultant Pedro van Meurs, the state must take gas in kind (GIK) to get a business deal:

PFC Energy conducted a study for the state last year based on the net present value (NPV)/barrels of oil equivalent(BOE) and the per dollar investment for the gas pipeline -- It does not rank well compared to competing projects:
• For ExxonMobil – the gas pipeline is 74th out of 82 projects
• For BP – 68th out of 81
• And for ConocoPhillips – 49th out of 61

By the state taking gas in kind, it increased the internal rate of return on the gas pipeline project by two points. We have been negotiating to narrow the gap between initial proposal of the state and the one from the Producers, referred to in the Stranded Gas Act as a qualified Sponsor Group:
• SOA proposal 10-29-04
• Sponsor Group response 12-15-04
Even though numbers and contract terms were different, the exchange of proposals showed we had the basis for a deal. The state taking gas in kind results in two different ownerships for the state:

First is an equity in the gas pipeline (no risk: steady source of income and probably more than the Permanent Fund makes)
• However, for the state to negotiate an equity position in the gas pipeline it has to take ownership of its gas.
• Which we’ll do by taking our tax and royalty revenue as gas in kind.

This means we pay for our own Firm Transportation
• Capacity risk.
• Marketing risk.

Since July we have negotiated like labor negotiations.
Great state team – long hours. Negotiated hard, but in good faith. I have sat in and led many of the negotiating sessions. Met with and called producer CEOs in Texas and London to move deal along.

How to measure success of gas contract compliance? Start with my six principles:

1) Alaskans deserve a fair share of revenues from a gas pipeline project.
Government takes: how does it compare?
RIV SQ for Gas?
Many models
RIK needed to make IRR increase
Compare to similarly situated oil and gas jurisdictions?

Our consultants, including Pedro Van Meurs, have indicated that in their opinion, it is necessary to take our gas in kind to make the project economics favorable with other worldwide gas developments.

Gas pipeline dollars will support quality education, healthy and safe communities, and protect our most vulnerable seniors and children – as well as high paying jobs here in Alaska.
Twenty-five percent of gas pipeline royalties will grow the Permanent Fund.

2) Alaskans need the opportunity to access the gas.
Instate Use.
Opportunity for lateral to Kenai through Fairbanks and Anchorage.
Four off-take points.
New abundant energy is critical to the Railbelt and Southcentral.
Affordable energy is vital to growing a healthy economy throughout Alaska.

3) Future explorers must have access to the gas pipeline.
Exploration and development opportunities for new market entrants are critical for Alaska's future.
Excellent state success in getting FERC to approve strong open season rules for Alaska.

4) The gas pipeline must be expandable.
New discoveries must get to market so Alaska realizes maximum benefit from the gas pipeline.
Strong Voluntary Expansion language in contract.

5) The state should share in the wealth by owning a share of the gas pipeline.
We will own 20% - just as Bill Egan wanted to do with TAPS.
Gas pipeline ownership will provide a stable, steady revenue stream of 12% to 14% on which we will pay no tax.
Ownership in gas gives state more take when gas prices are high.
Ownership will give the state a "seat at the table" to protect Alaska's interests.

6) Alaskans deserve Alaska gas pipeline jobs.
Provisions better than any previous.
At least 6,500 new jobs will be created in Alaska.
We've already begun training Alaskans for these jobs and $7 million in federal job training funds is just the beginning.

The contract has additional provisions important to Alaska: Strong “Alaska Buy” provisions
Alaska contractors and businesses given priority

Fiscal Certainty on oil:
For Producers – needed to protect gas deal.
For SOA - Opportunity to reform ELF concept.

Net Profits Tax concept – like stranded gas has seen elsewhere in world.
Incentives to encourage oil exploration and development.
Increased severance tax return to state when oil prices are high.

ELF tax applies to only 50% of barrels now – will drop to 19% in 15 years. Speaking of ELF reform: Another hard choice was to aggregate Prudhoe Bay oilfields under one ELF, which I did last year increasing the state’s revenue by roughly $250 million a year.

From the state’s point of view, the ELF is outdated and unresponsive to market price increases. It will be replaced by the net profits concept.

Work Commitments
Like other large projects around the world and in Alaska . Incentives like Fiscal Certainty will keep Producers diligent. What will the gas pipeline do for us? A gas pipeline will transform the North Slope.

My goal to have North Slope production provides the same benefits as Alberta gas does for Canada.

Alberta supplies:
66% Canada’s oil.
81% Canada’s gas.
significant petrochemical industry.

Up to now, looking for oil on North Slope has found gas
Looking for gas will help find more oil.

We have 35 TCF proven – need 70 TCF for project.

Next Steps – when negotiations completed:
Fiscal Interest Finding (Commissioner of Revenue).
Public review – more than 30 days.
Assemble comments.
Legislative session.

Role of RDC
Help public evaluate contract in comparison to other alternatives. Keep your powder dry – look at all alternatives and determine which ones could realistically happen and be best for Alaska.

Optionality Contract with Stranded Gas does not preclude opportunity to work with:
ANGDA.
Port Authority.
Four off-take points.

Just a question of which project is supported by realistic economics. Conclusion

In short, a gas pipeline will make life better for Alaskans.
Jobs.
Funds for public services.
And modernizing our tax and incentive laws will transform the North Slope.

###