OPEN LETTER TO GOV. MURKOWSKI

Submitted by Scott Heyworth
Anchorage, AK
Nov 2, 2003

Governor Frank Murkowski
VIA FAX: 1-907-465-3532
State of Alaska
P. O. Box 11001
Mail Stop 00001
Juneau, AK 99811-0001

Dear Governor Murkowski,

On behalf of Backbone II, we want to thank you for meeting with us last week. We are writing this letter to memorialize our meeting and to put in writing those things we agreed upon and questions that remain.

1. We agreed with your assertion that we wait another week or two until the Federal Energy Bill passes, fails or is postponed.

   Question: If the bill passes, with the price subsidies included, how long will it take to permit a pipeline across Canada, as the Canadians are hostile to subsidized Alaskan gas competing with their resources?

   Question: Is it wise for Alaska to wait for the settlement of unresolved Canadian Native claims issues and the required amendment of the ANGTA Treaty to increase the flow rate to 4.5 bcf/day from the currently specified 2.5 bcf/day?

   Question: Why shouldn't Alaska develop its own project to tidewater, a project that is already permitted and is within our own country? That is what 138,000 Alaskan voters called for when they overwhelmingly passed Proposition #3 in the last election. This project could happen much sooner than the trans-Canada project.

2. We agreed that we should maintain a positive posture towards both the All-Alaskan and the Canadian highway projects.

   Question: As the markets are indicating a strong interest in receiving LNG from Alaska, do you agree that we should pursue the Alaskan project while we wait for a Canadian project to achieve readiness?

   Question: Can we look forward to your public endorsement and enthusiasm for Alaska's LNG option?

3. We agreed that the strong interest from major companies like Mitsubishi is a positive and perhaps even a breakthrough signal that Alaska's LNG option should be energetically pursued.

   Question: How can we, as citizens who follow these issues, assist in making Mitsubishi know that they are welcome and we are bullish on their participation?

   Question: You expressed skepticism regarding SEMPRA's interest in Alaska gas. Shouldn't we open our doors enthusiastically to all prospective buyers? Are you aware that their expansion phase from 1 to 2 BCF/day should occur at the time when Alaskan LNG could come online? With the international turmoil in Russia, Bolivia and the Middle East, a secure American supply has to remain an attractive option for them and other prospective buyers.

   Question: Wouldn't it be timely for you, as the Governor of our state, to alert the public that ANGDA has received a letter of interest from Oregon and verbal interest from Hawaii? Our people should be told that Kogas of Korea and Tokyo Gas have also expressed interest. This is all good news for Alaska. We assume that you will present the LNG option to the President of Taiwan during his visit next week.

4. We all agreed that you have named an excellent board for the new Alaska Natural Gas Development Authority.

   Question: Will you support adequate funding to ANGDA so that they can perform the work necessary to make a serious offer to purchase and sell Alaska gas? We appreciate the additional funding to the Authority that your administration presented to the Legislative Budget and Audit Committee recently. In the supplemental budget, we hope you will support additional funding in an amount closer to the $1.3 million you originally contemplated.

5. Although we agreed it would be preferable to have a written proposal from Sempra, we wonder if the same standard is being applied elsewhere.

   Question: Do you have a proposal in writing on the trans-Canada pipeline from the producers? If so, we believe it should be made public. Our understanding is that even if the producers obtain price subsidies from Congress, they have not yet committed to build a gas line. Is that correct?

   Question: We understand that when the producers studied the economics of the various pipeline options they promised to share their numbers with the state. Has the state received that information and, if not, why not?

   Question: Are they being motivated by their holdings in LNG reserves elsewhere that may have to compete with Alaska LNG on the West Coast?

   Question: Are you aware that Alaska has a competitive LNG project at flow rates of 2 bcf/day which provides economies of scale over the 1 bcf/day project studied by the oil companies (the ANS Sponsor Group) which they found to be uneconomic? Would you be willing to be briefed on this information? If so, please tell us when you are available. There is also a detailed financing plan in our model that shows how a stand-alone LNG project can be amortized that should be part of the briefing.

6. We agreed that it is everybody's preference for ANGDA to secure a gas supply for the Alaska project through a voluntary contractual arrangement with the producers either to buy the gas or secure a throughput agreement if they prefer to market their own gas.

   Question: The producers have testified before the legislature that they would sell the gas if a suitable offer were made. BP also made this commitment in their Millennium Agreement during the merger negotiations. If Alaska makes an offer and they break their word by rejecting it, will your administration take aggressive action to secure our gas? Is the Attorney General examining the State's options so that we can be prepared to take such action?

7. We all agree that Alaska should negotiate the most favorable rates when we purchase North Slope gas.

   Question: Are your negotiators aware that the highest price we have been able to determine for a wellhead paid by an LNG project is in Trinidad for 85 cents per mmbtu? We don't understand why the producers are demanding $1.35 per mmbtu paid by the US taxpayer, especially for gas from a mature field at the North Slope that has been paid for by production of Alaska's oil over the past 25 years. Can you tell us where that number came from and how it was justified?

8. We cannot agree that a trans-Canada project provides more revenue and benefits to Alaska than an All-Alaskan LNG project.

   Question: Are you aware that the Alaska Department of Revenue cannot substantiate that statement? Members of Backbone have contacted Department staff who initially show a higher wellhead value for the LNG project. The only way a trans-Canada project can show higher revenues is because it has twice the flow rates. However their comparative figures do not include the additional revenues to the State from owning the pipeline that have been estimated to be as high as $1 billion per year. These figures are currently under review by Department staff.

   These figures also do not include lost revenues from oil loss which will be at least twice as high for the Canadian project since it removes twice the gas from Prudhoe Bay. Since the producers have refused to provide the numbers behind their economics, we wonder what is being used to calculate revenues from the Canadian project.

9. We agreed that it is important to get gas to Southcentral Alaska.

   Question: Wouldn't it make sense to use the shortest spur line -- from Glennallen to Palmer -- and tie into Enstar's existing pipeline infrastructure? Pipeline flows have already been reversed and gas is now flowing south to feed Kenai. Enstar has the data on how serious the supply and price issues have become, and they have expressed a keen interest in the Glennallen to Palmer spur line.