To fuel our future, we need to go further, fast

ECONOMYDecember 17, 2011 

Gov. Sean Parnell's state budget, released Thursday along with state revenue and oil production forecasts, reflect some disturbing trends: less revenue, higher costs and trouble ahead. The budget proposal shows the kinds of forces driving the state operating budget ever upward, like increases in Medicaid, state employee contracts and a new prison. Parnell is trying to hold the line on spending with a lower state capital budget to offset operating budget increases, but we all know what happens when the Legislature gets through with the capital budget.

On the revenue side, we see continued declines in oil production in a state where oil revenues pay for 90 percent of the budget. There is a good reason to believe the state's production forecast is actually a tad optimistic: It includes new oil projects still being evaluated. If some of the new oil doesn't show up, as has often happened, the decline steepens.

What the governor didn't say Thursday, and what he needs to say, is that production will soon be at the point where we won't have the revenue to sustain the budget without drawing down reserves. Is it next year? Two years out? We need to know.

Parnell has hopes of reversing the slide in production. The results of the Dec. 7 state oil lease sale weren't particularly encouraging. The sale wasn't a bust but it wasn't wildly successful, either. Basically, companies already on the Slope bid to add acreage, although there were two new companies, both small firms.

More exploratory drilling is planned this winter and that's encouraging, but with one exception the companies say their expectations are modest. No major discoveries, in other words. The exception is Great Bear Petroleum, a small company that will test a new idea that oil can be produced from shale rocks on the North Slope similar to the way it's being done in North Dakota and Texas. If this works, it could be a game-changer for the Slope. But it will take Great Bear at least two years to find out if the idea is workable.

Shell may be close to finally getting permission to explore offshore in the Arctic and that's encouraging. Shell could put new oil in the pipeline but because the company is exploring federally owned offshore prospects, that won't help the state treasury directly. Unlike onshore fields, we receive no royalty or tax revenue from the federal acreage.

The governor says the state's tax on oil production is too high and discourages investment precisely in the places where new oil can be developed quickly -- in existing oil fields. Parnell's proposal to reduce the tax as an incentive for additional production was a hot potato in the last legislative session. Lately there have been signs that more legislators feel something needs to be done. We could see progress on this in 2012.

The governor and legislators are to be credited with having the courage to think about fresh approaches on taxes and projects like the gas pipeline but I think we need to go further, and fast.

The swerve to LNG is a good idea but how about other ideas? There are companies interested in gas-to-liquids. Should the state be courting them as well as potential LNG buyers in Asia? They should at least be acknowledged. How about propane, at least for use in state? There is interest and the governor should talk it up.

Some say that if a new idea isn't being pursued by a large company, it isn't worth doing. However, it's the small, innovative companies -- the Great Bear Petroleums -- who are quicker in developing new ideas than the majors. It wasn't a major company that figured out how to drill horizontal wells and fracturing to free shale gas, and now shale oil, for example. And it is small companies, not large ones, bringing jack-up rigs to explore Cook Inlet, with some strategic help from the state, I would add.

There are other Alaska innovators. Cook Inlet Region Inc., an Alaska Native corporation, is pursuing a really innovative idea for producing gas from deep coal seams through an underground gasification process, commercializing coal without a coal mine. Linc Energy, a small Australian company, is close on CIRI's heels with similar underground coal gasification plans.

Enhanced oil recovery -- squeezing more oil, perhaps a lot more, out of existing fields -- is traditionally an area where large companies hold sway because of the heavy and expensive research commitment needed. But even here there are small companies with new ideas for Alaska and the state should encourage them. This gets deeply into science, so participation by the University of Alaska, which has a pretty good petroleum engineering group, seems logical.

We're at a critical juncture and we need some new and visionary thinking, whether it's remaking the state oil tax or encouraging new technology or new forms of energy.

LNG? Good idea. Roads to resources? Good idea, but I remember talk about a road to the Ambler mining district when I arrived in Alaska in the early 1960s.

Let's think bigger and not be cautious.

Our late Sen. Ted Stevens was quick to grasp a new idea and use his office to showcase it. It might have been impractical -- harnessing methane from tundra lakes was one idea I remember -- but Stevens was willing to talk it up and make sure people at least looked it. The senator was a big supporter of gas-to-liquids, for example, and got language in several bills to support it.

I miss Stevens and his willingness to champion new ideas. We need more of his kind of leadership.


Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Daily News.

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