Businesses and investors are often subject to the whim of capricious government regulations. While appropriate oversight can be necessary and proper—beneficial for both the taxpayer and the overall business environment—when those in political office change their mind about pre-existing arrangements, they scare off investors, risk future negotiations, and ultimately hurt the people they’re supposed to represent.
Such is the case currently in Alaska’s ongoing efforts to harvest its oil and natural gas resources, where the actions of Gov. Bill Walker, an Independent, have proven increasingly vexing since he took office in January. In his short time in office, he has introduced a number of changes that have created massive uncertainty for an industry that provides an amazingly large proportion of the state government’s revenue, some years approaching 90 percent.
Among these changes was a proposal to introduce a reserve tax on undeveloped gas resources, which Walker planned to introduce but pulled back from a special legislative session at the last minute. That session began on October on 24th. While the tax is off the agenda for now, what Walker will do next is anybody’s guess.
Alaska’s history with oil
Since achieving statehood, Alaska’s resource-rich environment has been its primary source of revenue, and most of that has come from the oil production on the North Slope.
This dependence has become problematic of late. With the price cost of oil dropping by half in the last year, every oil-producing state has lost money. However, none are feeling the pain quite like Alaska, with its monthly oil income dropping by nearly 75 percent since the start of the fiscal year, leaving a $3.6 billion fiscal deficit.
Thus, Alaska faces a massive deficit, and the forces buffeting its revenue this year show no signs of receding. The state has $9 billion in its rainy day fund, enough to keep government afloat for three more years, Jerry Burnett, deputy commissioner for the state’s Department of Revenue, told Pew. But there’s no reason to believe that prices or North Slope production will rise before then.
In a grim portent of things to come, both Standard & Poor’s and Moody’s Investor Service recently downgraded the state’s outlook from stable to negative. S&P gave elected officials one year to reorganize the state’s fiscal outlook or subsequent downgrades may be on the table. The organization’s report read:
Rather than try to cut and tax its way to short-term stability, Alaska would be better served by growing its economy for the long-term and diversifying its revenue streams. To that end, the best option for growth in Alaska is natural gas development.
The future of natural gas in the Last Frontier
Today, Alaska is is poised to make new gas development a reality. The state is an equity partner in an ambitious $45 billion project to develop and commercialize its substantial known North Slope natural gas reserves. One of the largest infrastructure projects in North American history, Alaska Liquefied Natural Gas (LNG) should eventually provide billions of dollars in fresh revenue annually for generations.
The AlaskaLNG project consists of a North Slope gas treatment plant, an 800-mile natural gas pipeline, a liquefaction plant, and an LNG export terminal. The project is expected to produce and export up to 20 million metric tons of LNG per year. In addition to the terminal’s optimal location for exporting gas to Asia, the pipeline will be able to bring fuel to remote communities in the Alaskan interior that need their oil and gas to be flown in.
The project has aligned the collective interest of North Slope producers—BP, ConocoPhillips, ExxonMobil, and TransCanada—with Alaska, which shares a 25 percent interest in the product sold to market. As a result, all parties are united on keeping the cost of supply low and delivering as much gas as possible to market.
The Alaska Legislature passed legislation ratifying the state’s involvement as a co-investor to monetize the 34 trillion cubic feet of natural gas stranded at fields on Alaska’s North Slope, and Governor Sean Parnell signed it into law in May 2014.
But Parnell lost his job to Walker a few months later.
“I am altering the deal.”
Politically, it is understandable that a new governor would want to assess and perhaps tweak the framework for a project he inherited from his predecessor. But taken together, the actions by this current administration are increasingly troubling.
First, Walker sought to expand the state’s in-state gas back-up project, the Alaska Stand Alone Pipeline, into a large-scale LNG export project. To many eyes, this seemed to put the state’s backup project in direct competition with the producer-backed AlaskaLNG gambit.
More recently, the state sought to increase the size of the pipe in the AlaskaLNG project from 42 to 48 inches. The move, which project-backers say could delay the project by 6 to 8 months, would not change the project’s projected gas volumes. And with two years of study done to date on sourcing, moving, placing, and burying the 42- inch pipe, the change to a 48-inch pipe could mean major restructuring of the project.
Walker also wants lawmakers to appropriate $100 million buy out Canadian pipeline maker TransCanada from the project, insisting that this was the best way to ensure the state has a seat at the negotiations table along with other project partners. This would, however, also put Alaska on the hook for $13.1 billion of construction costs, double its current obligation.
House Resources Committee vice chair Rep. Mike Hawker, told the Alaska Journal of Commerce he was originally skeptical of the role TransCanada could play in the project when lawmakers debated the state’s guideline legislation for the project. But Hawker changed his mind, he said, when he realized that, “TransCanada brought a lot to the table and did not take a very big piece of the revenue pie.”
Walker’s other move is the planned introduction of a tax on unproduced natural gas leased to the producers on the North Slope, in an attempt to gain additional leverage against his producer partners and incentivize them to maintain production even in the face of weak gas prices. Such a tax, provisionpolicy perspective, which was voted down by voters in 2006 by a nearly 2 to 1 margin, introduces another level of revenue uncertainty into an equation predicated on a flow of gas that won’t begin for a decade and will likely continue through the latter part of the century.
Putting the project on ice?
To be clear, there still remains a great potential for the state to develop its North Slope natural gas for in-state communities and export to markets abroad. But many worry that Walker is receiving questionable advice on how to make the project work.
But in this climate of uncertainty, the LNG project remains stuck on the drawing board. And the longer it takes to get the project underway, the more it costs. Estimates in 2005 were in the $25-$30 billion range. Now the expected cost is double that.
There is also concern that the partners in the LNG will get cold feet over resource extraction in Alaska. The currently depressed cost of oil and an unpredictable regulatory environment recently caused Royal Dutch Shell to cancel all its exploration up north, despite the fact that the Arctic is among the biggest resources of petroleum on Earth, hiding an estimated 20 percent of the world’s untapped resources.
The relatively low gas prices of today has only a limited predictive power for what energy markets will be like in a decade, when the AlaskaLNG project would come online. It is easy to see how prices could jump in the future. For starters, the gas we are getting from North Dakota is not something that can be counted on indefinitely; while it may be the case that further technological advances keep the fracking boom going for years, it’s also possible that we see some sort of catastrophe there or elsewhere that galvanizes political opposition to it. Also, as events of the last year have proven, we will apparently always have major geopolitical risk in the Middle East with ISIS (or groups like them) threatening to destabilize the world’s access to oil from the region.
And a global economy that shakes off the current torpor and resumes robust growth is going to need all the energy it can get its hands on, especially if it’s led by the developing world.
Republicans and Democrats may feud on several aspects of energy policy but an “all of the above” approach is a general edict that both parties espouse. Republicans honor that by giving (albeit grudging) support to solar energy, biofuels, and other alternative energy and even ardent Democratic environmentalists have acknowledged that natural gas production is an acceptable “bridge” fuel to a carbon-free world.
To move a project of the scale of AlaskaLNG to success requires diligence, cooperation, and momentum. There remains a great potential for the state, but its leaders must not squander it by reopening negotiations again and changing the structure of an immense and historic deal that’s already been reached.
Ike Brannon is president, and Jared Whitley is research director at Capital Policy Analytics, a consulting firm in Washington, D.C.
This article has been updated.
