Gas line ignites debate (Alaska)

Fairbanks Daily News-Miner ^ | October 18, 2004 | SAM BISHOP

[Jet Jaguar]

WASHINGTON--Former Gov. Tony Knowles says new incentives to build a natural gas line aren't what the industry needs. Sen. Lisa Murkowski says they are.

With congressional passage of the gas incentives last week, the opposing opinions have become an important debating point in the race for Alaska's open U.S. Senate seat.

Knowles argues that Murkowski failed to deliver an essential piece of the package. Murkowski says Knowles is wrong and the incentives that did make it through should be more than enough to get the line to the next stage.

The company that in many ways spawned this debate, and thus might best be able to resolve it, has clammed up.

ConocoPhillips, for more than a year, has pushed Congress hard to include a special tax credit as a backstop against extremely low natural gas prices. It is that provision that Knowles says was essential.

But Congress passed gas line incentives without the price-linked tax credit Monday. ConocoPhillips issued a brief statement Tuesday.

"ConocoPhillips is pleased with the success the Alaska delegation had in getting the pipeline provision package passed before Congress adjourned," the statement read. "We think that this strong show of delegation teamwork will play a significant role in advancing this project. We also look forward to successfully completing negotiations with the state of Alaska on the state fiscal terms that will also be needed to advance the project."

A company spokesman in Houston, Texas, said Friday he still couldn't elaborate.

"That's all we have," he said.

ConocoPhillips is one of three major North Slope gas owners, and so its view of the price-linked tax credit may be critical to the project's advancement.

The other two gas owners, BP Amoco and Exxon Mobil, both have said the tax credits that passed will serve adequately as one leg of their "four-legged stool." The other legs include: an acceptable tax agreement with the state of Alaska, a clear regulatory structure in Canada and some technology-led cost reductions.

If those all align properly, the companies could start spending the $1 billion necessary to design and permit the project, BP and Exxon spokesmen have said.

ConocoPhillips has joined with BP and Exxon in negotiations with the state of Alaska over the taxes and royalties that the companies would pay. The three are negotiating together as one "sponsor group."

Asked last week whether the failure of the price-linked tax credit might affect those negotiations, a BP spokesman declined to say yes or no.

"We're all working together in our negotiations with the state," said Dave MacDowell, BP's Alaska gas spokesman.

ConocoPhillips has been quite clear during the past year about its desires.

"Without the low-price tax credit provision, the pipeline will not be built," wrote Archie Dunham, ConocoPhillips' chairman, in a report issued in mid-October 2003.

Dunham was one of 18 members of the National Commission on Energy Policy, a group of energy experts that several major U.S. foundations brought together.

The commission endorsed the tax credit for North Slope gas in its paper and Dunham concurred in a brief accompanying statement.

"My company, ConocoPhillips, would benefit if a low-price tax credit mechanism were incorporated into law," Dunham acknowledged. "However, the public will benefit even more generously as they will have access to an important new natural gas supply."

The last word on the price-linked tax credit from ConocoPhillips appeared in the Anchorage Daily News on Oct. 6. The article quoted Don Duncan, the company's vice president for government relations in Washington, who said the company still believed the price-linked tax credit was necessary.

The article appeared the morning after House-Senate negotiators agreed to include two other tax law changes for the line in a much larger corporate tax bill. Both ConocoPhillips and BP Amoco had sought those two changes. One would allow rapid depreciation of the line for tax purposes and the other would apply an existing tax credit for enhanced gas recovery projects to a North Slope gas conditioning plant.

Sen. Ted Stevens, speaking with reporters the next day, complained that Duncan's comments were taken out of context. An Alaska reporter at the news conference repeated what he had heard from Duncan, starting with the fact that the company was happy with what did pass.

Stevens interrupted, agreeing: "The full context is what you just said. They were pleased, they wished they had that other one but they understand why we made our decision (to not push for it)."

Reporters, however, all insisted that Duncan had told them that the price-linked tax credit was necessary. They pressed Stevens to explain how it was possible, given the ConocoPhillips view, that the federal tax package went far enough.

"It's possible because that credit is not needed until gas flows in the pipeline," Stevens said. "The other two are needed immediately."

The depreciation provision and the North Slope conditioning plant credit both are necessary to promote construction of the line, Stevens said.

In contrast, the price-linked tax credit on sales of gas won't have any financial effect until North Slope gas is sold, he noted. So, in the very unlikely case that gas prices crash before the line is done, Congress still could pass the price-linked credit, he argued.

"But what we need now are incentives to borrow money for the construction period," Stevens said, "and during the construction period, the (price-linked) tax credit would not work, it could not work. It only works when gas flows."

The credit under discussion would have kicked in when gas prices at the wellhead on the North Slope fell to $1.35 per thousand cubic feet. If they fell further, the credit would grow, maxing out when prices hit 83 cents.

Stevens said he visited potential pipeline financiers in New York in early October.

"They say it's not possible that the price of gas will ever get that low," he said.

So he came back and urged Murkowski not to pursue the price-linked tax credit, he said.

"As a practical matter, the best advice I can get is it's immaterial right now," Stevens said. "But if they want us to continue to fight, if they tell us that it's absolutely necessary, we'll continue to fight."

Stevens said pushing the tax credit is difficult politically. The Bush administration has opposed it, saying it interferes in the market too much.

"We can't get it right now because primarily the opposition to it is from the other natural gas producers in the United States," Stevens said. "You have to understand where they're coming from. They've got the bulk of the domestic gas right now and if the price fell down, they can't operate either. So there is a fairness issue here about how to deal with the price of gas if it should fall."

Washington, D.C., reporter Sam Bishop can be reached at sbishop@newsminer.com or (202) 662-8721.