'In-kind' or 'in-value'? State may take gas instead of money.

• Author: Bradner, Mike

When Alaskans finally get a chance to look at the gas pipeline deal Gov. Frank Murkowski has negotiated with the North Slope producers, they will have to weigh some fundamental questions regarding the state's potential involvement in the pipeline.

The basic question is whether the state should become a more involved partner in the project by investing in and owning part of the pipeline and taking its royalty and tax share of revenues "in kind," or in the form of gas.

While there are big profits that can be earned under these arrangements, there are also big risks. The alternative is to continue with the state's passive relationship with the industry, as a landowner receiving royalty payments and a sovereign government levying taxes. There also are risks in continuing with the status quo, however. If there is a downturn in markets, state revenues are directly affected. Owing a part of the project is seen as a way to partly mitigate this risk.

There are two major parts of the state's involvement in the gas project that will be the core of the deal, along with an agreement to keep taxes at current levels.

The first big step will be the state taking of its royalty gas and even its taxes "in-kind," or in the form of gas. This is a cornerstone of the plan for the state's involvement in the project, and one that is even more important than Alaska owning 20 percent of the pipeline.

The idea is for the state to take its one-eighth royalty share of gas and its production tax in-kind, or in the form of gas. Instead of being paid for royalty gas by the producers or taxes being paid, the state would take gas, including Natural Gas Liquids (NGLs)--like propane, butane and ethane--and market the gas and NGLs itself.

This isn't as unusual as it may sound. Alaska's oil and gas leases have always given the state the option of taking its royalty "in-value" (in money) or "in-kind" (in the form of oil or gas). Over the years, the state has always taken some of its royalty oil in value and some in-kind. The royalty in-value payment by the producers is a used as a value benchmark in the in-kind sales the state does because the producers' own sales of royalty oil is a test of what the market price actually is. Most of the state's royalty-in-kind oil has been sold to Alaska refiners. In recent years, the refiners have paid the state a premium on top of the "in-value" price reported by the producers for royalty oil they sold.

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