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Alaska spent $35 million for a road to bankrupt development, but hasn't learned its lesson

  • Author: Charles Wohlforth
    | Opinion
  • Updated: July 14, 2016
  • Published July 4, 2016

The state of Alaska spent $35 million planning a road to Umiat before the company that hoped to develop an oil field there went bankrupt in late May. We're currently spending similar money for a 211-mile road to an uncertain development prospect in the Ambler Mining District.

That project survived Gov. Bill Walker's budget vetoes last week because the money was already allocated and the project had been transferred to the Alaska Industrial Development and Export Authority, which also had oversight of the Umiat road. AIDEA still holds $8 million for the Ambler road.

Walker canceled the Susitna-Watana Dam and Knik Arm Bridge. But he likes economic development projects. He still believes in the natural gas pipeline, the most mega of all the megaprojects, even though oil companies and others who watch commodity prices seem to have given up on it.

There are times when the state should invest in docks, labs and roads to support the economy. The stories of the Umiat and Ambler roads are good examples of when we should not.

I talked to David Clarke, who recently took a buyout from BP when it downsized. He managed big projects and advocated for them within the company. With oil prices down, BP needed fewer people to do that kind of work.

Unlike Alaska, companies trying to make a profit don't keep paying people to work on money-losing projects.

Clarke was stunned that the state spent $35 million, about 10 percent of the project cost, planning a road from the Dalton Highway west 100 miles to Umiat, in the National Petroleum Reserve-Alaska, without ever building anything. In industry, he said, project managers start with a broad, first feasibility study, spending no more than 1 percent or 2 percent of the total project cost before making a decision to build.

Part of that initial review is deciding if you need a road or if an ice road, pipeline, barge or airfield would be more cost-effective. Making such a decision requires knowing exactly what you are trying to accomplish — so the development has to come first, not the infrastructure.

"You don't want to go much beyond that stage before you have some resource development in the pipeline, because otherwise you may build the wrong thing or to the wrong place," Clarke said.

Also, before spending big money on engineering, as was done at Umiat, and as AIDEA is doing now at Ambler, it's important to know you will get your money back from industry partners, Clarke said.

That never happened at Umiat. Linc Energy's oil development there was highly speculative. The field was discovered some 70 years ago, but because the oil is buried very shallowly, in permafrost, getting it out is technically difficult.

Linc, an Australian company, bought the prospect in 2011 for $50 million and invested $120 million on two wells in 2013 and 2014, but couldn't find a partner to take development to the next step — except the state, which forked over an undisclosed amount of money in tax credits, according to Petroleum News.

Linc's initial estimates of recoverable oil had to be greatly reduced after a third-party review and, with the decline in oil prices, the whole project went belly up. All of our money is lost. [2 more bankruptcies hit Alaska energy sector, and more employees may be seeking protection too]

"The engineering companies are making a killing out of doing all these studies, but they're not necessarily moving the projects forward," Clarke said. "The $35 million might be reasonable for the work they have done, but I would question why you would have done so much work before you know if the project is what you really need."

Alaska is approaching the Ambler road the same way. The project would cost about $450 million. The state has studied it for seven years at a cost of $19 million. Last October, Walker gave AIDEA approval to spend another $3.6 million on detailed work for an Environmental Impact Statement.

But NovaCopper, the company for whom the state is building the Ambler road, has not decided whether to build a mine. It signed an agreement with AIDEA specifically withholding any promise to mine or to pay for the road.

AIDEA has made a policy of not talking to me about these issues, but spokesman Karsten Rodvik pointed out in an email last week that these projects didn't come from AIDEA. Gov. Sean Parnell started them with his failed Roads to Resources program and then they were transferred to AIDEA. Linc and AIDEA never signed an agreement.

Rodvik suggested the Ambler road would be funded by tolls, like a road AIDEA built to the Red Dog Mine in Northwest Alaska in the 1980s. But that mine's owner agreed to pay the costs of construction and maintenance and gave AIDEA a letter of credit. In the case of Ambler, NovaCopper's papers say that even if it builds the mine, it would barely be able to pay for maintenance of a road, not construction.

Alaska has a class of people who work for construction and engineering companies, and others who benefit from this kind of spending. Whenever critics like me ask questions, they call us environmentalists or say we're against jobs and economic development. But engineering studies and unneeded projects wasted a significant part of the finite oil wealth we sorely need now.

The chairman of AIDEA, Dana Pruhs, owns a large construction company. (He didn't respond to my request for an interview.)

Most government spending to support businesses either wastes money on losers or gives money to winners who don't need it.

"If you have prospective billion-dollar type developments, then those resource companies should be able to build that type of infrastructure themselves and there should be no need for the state to get involved," Clarke said. "It's a dream come true for a resource owner if someone else comes along and takes all the risk."

The state has proved incapable of effective investment in economic development. We should stop the Ambler road and pull back money from AIDEA for more useful purposes.

Charles Wohlforth's column appears three times weekly.

The views expressed here are the writer's and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary@alaskadispatch.com. Send submissions shorter than 200 words to letters@alaskadispatch.com or click here to submit via any web browser.

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