While pundits, lawmakers and anonymous blog opiners are building a cottage industry out of criticizing Alaska's oil and gas industry, they should take a glance at history and then take a long look in the mirror.
As long as oil has been flowing through the trans-Alaska pipeline, there has been a growing list of perceived injustices against an industry that built this state. Before oil, our great state was flat broke, and Alaskans like my parents who owned small family businesses wondered if the state would survive after the 1964 earthquake.
But then came oil which helped fulfill the promise given in exchange for statehood that Alaska could stand on its own two feet by developing its resources. However, we still needed partners to transform our black gold into cold cash.
Forty years ago we loved to see smartly dressed English men walking the streets of downtown Anchorage. Their presence meant British Petroleum, which meant investment in a state that desperately needed investment.
We loved the oil and gas companies. We loved their cash, we loved their employees and we loved the promise of our financial independence. In fact, we loved them so much we spent every dime of the almost $1 billion they gave us as a down payment in 1968.
I remember it well growing up on a small cul-de-sac off Tudor Road in the late 60's when Tudor was a two lane dirt road. Within a few years of discovering oil, the road was widened, paved and a bike trail was added. I remember being one of the first kids in the neighborhood to ride a bike up that smooth stretch of gleaming asphalt to the Qwik Stop at Tudor and Lake Otis.
All thanks to oil money.
Alaska's new found wealth benefited us all.
Unfortunately by today's commentary, you'd think that's when the devil entered the room.
Over forty years later, we've built statewide infrastructure, amassed a forty billion dollar permanent fund, and currently have over ten billion dollars in the bank. The average Alaskan has saved untold amounts of personal wealth by not having to pay a state income tax since 1980, meanwhile over that same period of time we've sent out almost thirty million dollars in dividends to Alaskans.
Before oil, Alaska had the second highest tax burden in the country. Today we're dead last.
All thanks to oil.
Today a vocal minority wants you to believe differently. Many lawmakers and industry critics who either weren't around when Tudor Road was a dirt path or don't have the slightest clue about the legal and fiscal realities of the private sector, are trying to tell Alaskans that everything is fine. It's not.
They're wrong and Alaska's economy will pay the price if we listen to their half truths. These folks have created a menu of false claims and false hopes based on ignorance.
We are being colonized by the oil industry:
False. We willingly signed the leases with these companies on the North Slope. We willingly repealed the state income tax so as to become solely reliant on oil production to pay for state government. We willingly established the permanent dividend fund from oil revenues, propagating the free lunch theory via no state taxes and a healthy check every October.
The oil industry owes us a natural gas pipeline:
False. The leases we signed over four decades ago are hydrocarbon leases. Since oil is a hydrocarbon, they are more than meeting their lease requirements until oil runs out. Nowhere in their leases does it say they must commit gas to underwrite the cost of a gas pipeline.
Ironically, those who are now touting the fact that the pipeline could operate another fifty years, have inadvertently made a legal argument that lease holders can wait until 2065 to commercialize gas while still satisfying their lease obligations.
The producers can be forced to sell gas:
False. The process for moving natural gas off of the North Slop is very clear. Once the oil and gas companies determine how much gas they can afford to take off without harming future oil production, they must apply to the Alaska Oil and Gas Conservation Commission (AOGCC) for permission.
The most recent report from the AOGCC states they would not allow more than 2.7 bcf per day to be extracted. Since the producers already use .5 bcf per day to fuel the operations on the North Slope, that would leave roughly 2 bcf a day for any pipeline. No reasonable company would build a 4 bcf per day pipeline with only 2 bcf per day worth of gas available.
In addition, if the industry or the state were to build or finance a 2-bcf-per-day bullet line, there would be enough gas to last seventy years. This means no additional capacity would be available, thus no incentive to explore for additional gas resources.
But the main point remains; nothing can happen until the oil and gas producers decide to apply for gas take-off.
We don't have to give the producers fiscal certainty:
False. Over the last five years, oil taxes have been raised twice. In doing so, lawmakers have not only shown a propensity to raise taxes ... but do it retroactively.
Any reasonable business would never commit to the most expensive oil and gas project in the world without having a clear understanding of their tax liability. The industry already must manage both capital and commodity price risks. Having to worry about state lawmakers who have no problem changing the tax regime is a non-starter when considering the long term commitments needed in order to make the pipeline profitable.
People make the mistake of pricing this pipeline at its retail price of $30 to $40 billion. What we're talking about here is twenty to twenty five year commitments to pay the massive project debt service whether companies have gas to ship or not.
If that doesn't scream out for some certainty, I don't know what does.
Look at Repsol and Great Bear ... no tax relief is needed:
False. Both Repsol and Great Bear have said very publicly that while the state's exploration credits are very generous, they would need tax reform in order to produce any oil they discover.
At what point in time does Rep. Les Gara (D-Anchorage) -- a vocal opponent of tax reform -- stop touting the fact that "this year is shaping up to one of the busiest exploration years on the North Slope," without explaining how those same explorers have said current production taxes are too high?
We should begin a state owned oil and gas company like Norway:
False: Forty years ago maybe, today it would be pointless. All of the lucrative fields have already been leased and offshore potential is federal property.
If the argument is to build our own gas pipeline, we'd still need customers. Ergo the producers. Ergo you want gas, then lets talk fiscal certainty for both oil and gas taxes.
Don't look now but it's 2006 all over again ... ohhhhhhh, hello former Governor Frank Murkowski's original proposal.
The oil and gas industry is profitable ... that's bad:
False: A majority of the profits generated by major oil companies go right into the accounts of average Americans. 97 percent of these companies are owned by 401k, pensions and institutional investors.
Alaska's Permanent Fund Corporation has been wildly successful and some of their biggest stock holdings are the same oil and gas companies that operate in Alaska.
Furthermore, the oil and gas industry is Alaska's bedrock economic driver. Thousands of Alaskans are either employed directly by the industry or make a paycheck providing goods and services.
Governor Sean Parnell is a former oil and gas lawyer, so he is in the pocket of big oil. Oh yeah, so is anybody who defends the industry:
False. No more than Bill Wielechowski is a shill for big labor and likes sticking it to the private sector because of his current job as a union lawyer or Bill Walker is a shill for the gas line to Valdez because he's raked in tons of cash representing the City of Valdez.
Oh wait, bad examples.
Honestly, the numbers speak for themselves regardless of what Governor Parnell did in a past life.
As someone who has criticized Parnell in the past about his unwavering support of ACES when it was first adopted, he has changed his position because of the negative impact the policy has had on investment and real oil development.
Different view ... different vewpoint.
In 2007 when ACES was adopted, supporters were convinced that oil industry investment would remain robust. In fact, State Sen. Hollis French even argued that taxes had little to do with the investment decisions that were made by producers.
Since then, oil production has dropped by 140,000 barrels per day, and by 2020 almost fifty percent of our projected production will depend on investments that have yet to be made.
Oh yeah, what about the oil production decline curve they forecasted immediately after doubling oil taxes?
Turns out it was ten years off ... to the bad.
Oil and gas companies haven't been specific about what they'd do if we reformed taxes:
False. In April, ConocoPhillips CEO Jim Mulva committed to the gas partial processing plant at Prudhoe Bay in exchange for ACES reform. That's 50 new wells and 80 million barrels of new oil. It's an investment of about $2 billion. He committed to more satellite wells at Alpine.
Last month at RDC, ConocoPhillips Alaska President CEO Trond-Eric Johansen reaffirmed that commitment, and promised increased drilling activity and more satellite development at Alpine and Kuparuk, if production taxes were made more competitive.
At the same presentation Claire Fitzpatrick, Chief Financial Officer, BP Exploration (Alaska) also committed to joining ConocoPhillips with development of I-Pad, along with expanding development at acreage representing more than 5 billion barrels of un-recovered oil.
She said BP was "poised to invest billions of dollars in new projects that will result on billions of barrels of new oil from known sources." As for the impact of ACES, she said; "If BP had been investing in these projects over the past four years, the rate of decline over the next decade would be flat."
Specific enough?
One of the arguments I do agree with tax reform critics on -- is that Alaska is an owner state.
However, the thing about being an owner state is you have to actually manage the state you own.
Given the fact that we've allowed ourselves to become dependent on oil production, and in only seven fiscal years we'll be in dire straights due to the growing cost of state government and a decline in oil development, you'd think a lot more in the State Senate would be managing the state's assets to protect the private sector economy.
But then again, how many private sector jobs have these tax reform critics ever personally been responsible for?
Before he passed, few knew that former Governor Jay Hammond was in the process of writing his third book. In a draft manuscript that was shared with me, Hammond's work was titled "Diapering the Devil." The early draft was a critique of Alaska's relationship with the oil and gas industry and the challenges that would lay ahead because of our dependence on said same.
In his own way, Hammond so much as admitted we have no one to blame but ourselves for our reliance on oil investments.
Looking to the future we'll have to either fix the investment climate or suffer the consequences. Despite the gnashing of teeth by tax reform critics, these are the economic dynamics we agreed to forty years ago.
As they say; don't hate the players, hate the game.
That's the ugly reality.
Andrew Halcro is the publisher of AndrewHalcro.com, a blog devoted to Alaska issues and politics, where this commentary first appeared. He is president of Halcro Strategies and Avis/Alaska Rent-A-Car, his family business. Halcro served in the Alaska House of Representatives from 1999 to 2003, and he ran for governor in 2006 as an Independent.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.