Commentary

The broken marriage

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Commentary

At some point someone has to ask what went wrong with what was once a symbiotic relationship between Alaska and Big Oil.

Was it the creation of the oil-fueled Permanent Fund that led to the popular idea that the bounty of the North Slope is “our oil,” and getting it out of the ground isn’t much harder or more costly than dipnetting “our salmon” out of the Kenai River?

Was it the Exxon Valdez oil spill that smeared Prince William Sound and parts of the Gulf of Alaska with 11 million gallons of crude and made Exxon-Mobil forever Alaska public enemy number one?

Was it the VECO-oil-lobby linked “Corrupt Bastards Club” in the Alaska legislature that proved there are certain things one should never, never, never joke about.

Whatever it was, somewhere along the line in Alaska, the 49th state’s relationship with Big Oil went from being a business deal to, on many levels, a personal battle of us against them that has stifled the development of new oil and only helped to compound the state’s multi-billion dollar budgetary nightmare.

Greedy, greedy, greedy

Let’s recognize right here that Big Oil is greedy. Exxon-Mobil, BP, and Conoco-Phillips are the engines of capitalism. They exist purely to make money. One could go so far as to argue that as publicly traded companies they have a fiduciary obligation to their shareholders to do so.

But let’s also accept that Alaskans are greedy. Every damn one of us.

We all want to keep our money. We don’t like taxes. We don’t want to pay for government services. We’d much rather someone else pay, and for a long time in this state now the primary paying entity has been Big Oil to the tune of 90 percent or more of the annual state budget plus a good chunk of the $55 billion we were able to bank in the Permanent Fund.

Most of those living in Alaska today have no clue as to what this state was like before oil. So here’s a quick summary:

And then Alaska formed a partnership with Big Oil with a vision of becoming the Saudi Arabia of the north. There were those who warned against it.

 “Blue-eyed Arabs”

“The only way we’ll be successful is to stop being insular, to drop our parochialism, and team up with others,” former Alaska Rep. Brian Rogers observed in 1982, seven years before the Exxon Valdez hit Bligh Reef and started gushing. “We don’t want to be perceived as the ‘American emirates,’ the blue-eyed Arabs of the North.”

A Democrat, Rogers was at the time part of an Alaska Statehood Commission very worried about what the state’s already high oil taxes did to Alaska’s national image. U.S. fuel prices were at the time skyrocketing, and lawmakers from lower-48 states weren’t happy about the $1.6 billion Alaska was pulling down in severance taxes.

“The state has appropriated $2 million for a nationwide advertising blitz  (‘awareness campaign,’ say politicians) next month,” the Christian Science Monitor reported at the time. “Among other things, the media push involves trying to explain to consumers that because Alaskan oil is tied to the price of world oil, abolishing the severance tax would not cut gasoline prices even a penny.

“The task is not an easy one. For one thing, some outsiders find it hard to feel sympathetic when Alaska pleads that it needs all the money it can get from oil revenues. They point out that the state, in a fit of oil-fueled benevolence not long ago, abolished its income tax. ”

It’s amazing to look back now and think there was a time when people thought $1.6 billion in Alaska oil revenue was too much. State oil revenue peaked at about $12 billion – $5.4 billion in 1982 dollars – in 2008 under the terms of Alaska’s Clear and Equitable Share, the so-called ACES legislation championed by then Alaska Gov. Sarah Palin and Democrats in the state House.

The plan was good for Alaska. It was not good for Big Oil.

The result was predictable. The oil companies went looking for better business climates in which to operate. This is the way business works. They found the better environment in North Dakota where technological breakthroughs in fracking changed the oil industry.

Capitalism at work

The oil industry poured investment into North Dakota. The result was that daily oil production there went from under 250,000 barrels per day in 2008 to more than 1.2 million barrels per day by December 2014.

Alaska production was at the time falling from about 600,000 barrels per day to a 2014 low of 380,000 barrels per day. Concerned state lawmakers, about the only ones other than oil-field workers who seem regularly interested in oil production in the 49th state, responded to the steadily falling production by establishing an incentive program to encourage small oil companies to undertake risky exploration for new oil in the Arctic.

The companies bought in, and they found two huge, new oil reservoirs if you are willing to believe Caelus Energy, which claims to be sitting on 6 to 10 billion barrels of crude about 70 miles  east of the community formerly known as Barrow, and Armstrong Oil & Gas and Repsol E&P, the Spanish national oil company, which could be sitting on just about as much.  The latter company was reported to have popped a lot of champaign corks after it hit a big pool of crude on the North Slope in 2013. It later partnered with Denver-based Armstrong in order to gain access to the capital necessary to build the costly infrastructure needed to bring oil into production in Alaska.

And now

Bill Armstrong, the head of Armstrong oil, put his views to the Alaska Legislature pretty bluntly earlier this year when he testified on House Bill 247, a 5 percent minimum tax aimed at increasing state revenue by taking all the profit on oil sold for less than $50 barrel.

“This bill is called HB 247 because you are hellbent 24/7 to run every last company off the (North Slope),” Armstrong said. He said that if the tax became law it would make no sense for his company to invest in trying to produce oil in Alaska.

He wasn’t the first to voice this concern about the way the state does business.

Before Armstrong, it was Rex Tillerson, the head of Exxon, who famously observed that “Alaska is their own worst enemy.”

The oil industry complaint is a simple one. It’s hard to make multi-million dollar business decisions in an unstable economic environment, and there is no doubt that Alaska’s constantly shifting tax structure – particularly its desire to squeeze another dollar out of the golden goose of oil any time a budget problem arises – makes for an unstable economic environment.

Imagine the reaction of Alaska property owners if local mill rates were yo-yoing all over the place every year or two. That’s largely what has happened with oil taxes.

“…Alaska had changed its oil (tax) laws six times in the past decade, but in 2013, when oil was trading at upwards of $90 a barrel, it looked as if lawmakers had finally agreed on a package of incentives designed to spur much-needed exploration by enabling companies to earn big tax credits,” energy reporter Christopher Helman wrote at Forbes on Wednesday. “(Jim) Musselman particularly liked the fact that small companies with no taxable income could redeem their tax credits to the state for cash. Critics said the incentives were too kind to oil companies, but the law survived a referendum, so Musselman, like most oilmen, figured it was settled.”

Musselman is the head of Caelus Energy, which reported that big discovery at Smith Bay on the North Slope. The billion dollar question now is whether the find can ever be brought into production.

“Musselman is wondering whether he’ll ever be able to get the oil out at all,” Helman writes beneath a headline that reads “Alaska And Oil: Biting The Hand That Feeds You.” “The problem? Alaska’s governor, Bill Walker. In June Walker vetoed a bill that would have paid the $100 million that Alaska currently owes Caelus (which claims the state will owe an additional $100 million in 2017). That’s a lot of loot for any company, especially a privately held startup that has sunk $700 million into Alaska.”

Gas versus oil

The reason Walker vetoed the money was simple. He had to veto something to look like he was leading, and nobody really wanted state government jobs cut as was evidenced by how little cutting the Legislature did.

Not to mention, the credits were an easy veto for the governor from the oil port of Valdez who thinks Alaska’s future is in natural gas, not oil; and who doesn’t much like the oil industry for slighting him in his past role with the  Alaska Gasline Port Authority.

Now politically powerful, he wants to show Big Oil whose boss. He at one point threatened to shutdown the Prudhoe Bay oil field to prove his muscle.

The problem with all of this is that it gets Alaska nowhere. Global economics being what they are, it would appear the 49th state would be better served in the short term by trying to get more oil in the pipeline than trying to build a gas pipeline to sell a commodity for which prices are low and projected to stay low for years and years.

Walker, preoccupied with his gas pipeline, simply doesn’t see it that way.

Trained as a lawyer, he also appears to suffer the worst trait of the breed – the desire to win at everything, said  former Alaska Attorney General Charlie Cole, a one-time member  of the  Gasline Port Authority board. To win-at-all-costs is a lawyerly trait not unique to Walker.

Unfortunately, Cole said, that attitude can get into the way of achieving long-term political and economic success.

Truly successful negotiations, he noted, end with neither side winning, but both sides satisfied they got a reasonable deal. Negotiations which end otherwise simply lead to new conflicts.

The problem in Alaska today is that the trust that once existed between the state and oil companies is so broken that one has to wonder if reasonable negotiations are any longer possible.

“Musselman has seen firsthand that amazing amounts of oil can be coaxed out of politically complicated regimes, although it’s no compliment to Gov. Walker to compare Alaska to Equatorial Guinea and Ghana,” Helman wrote. “He sees the potential for Caelus and its peers to add 400,000 bpd to North Slope output over the next decade.

“His message to Walker: ‘Don’t spook the money. If you spook the money, they stay spooked.’”

It’s quite possible, however, that the money has already been spooked. No matter the business, no matter the project, investors invest their money where they can make money, and Alaska isn’t looking like a very good place to make money these days.

PT Capital, an equity fund started by Alaska Dispatch News owner Alice Rogoff, took its $125 million in capital halfway around the world to buy a telecom company in Iceland.

Iceland’s economy is growing. Alaska’s economy is shrinking. Rogoff’s newspaper is bleeding money. And it looks like all of these things could get worse before they get better.

More jobs on the North Slope geared to putting more oil in the pipeline could help turn it around. As Musselman observed, “we can help the state of Alaska solve its fiscal problem for the next three or four generations, if they’ll let us.”

It sounds so easy until you consider that what we’ve got here is the marriage of two entities who’ve largely grown to loathe each other. Former Gov. Sean Parnell managed to get them to agree to try to work together on a gas pipeline, and we’ve seen how that is working out. 

 

 

 

 

 

 

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11 replies »

  1. I first came to Alaska in 1977 and built my law practice and family by hard work and commitment to the Land of the Last Frontier. Something happened about 10 years ago when the Alaskan House and Senate lost their common sense.

    Alaska is a land of reoccurring natural resources. Everywhere you look is water, wind and sun. Yet our legislators have on blinders that allow them to see only oil and gas. When Gov. Parnell had a chance to open up Alaskas interior by rail, he never supported it. When local utilities wanted a wind farm on the Kenai, he opposed it. We have the second largest tides in the world and yet we do not use tidal energy. The North Sea (England) and the Bay of Fundy (Nova Scotia) are full of Tidal Generators yet we in Alaska continue to keep our blinders on and only look to Big Oil to solve our problems.

    It’s important to keep in mind that as long as Saudi Arabia continues to accumulate market share while keeping the price of oil low, Alaska must look for alternative ways of creating renewable energy. Drilling for oil and worse, coal are dying energy sources that will continue to heat up our climate and endanger coastal communities and the fisheries that feed and employ many Alaskans. The sun, wind and the tidal current offers Alaska unlimited potential but as long as we only see oil and gas, we will be left out of the coming renewal energy revolution.

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    • yup, we should be doing more with renewable energy, Joe. but there are big problems, the biggest being that storage is difficult. you can’t park the electricity until you need it, which is why nuclear is again making a comeback and might become the game changer with floating reactors. but oil is going to be around for a long time, and so, too, gas, and oil remains – by far – our most valuable export. if you look at the state’s economic woes of the moment, the only realistic conclusion is we need to get more oil into production. meanwhile, don’t lump gas with oil. gas is cleaner and a potential bridge fuel. back when the state was flush with cash, we should have been working on creating the first truly gas-fueled economy – cars, trucks, trains, buses, etc. – to pioneer technology we could have later sold to a world looking for cleaner energy than oil. but i think our last visionary died with Wally.

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    • Joe – the state has spent hundreds of millions, if not more, on renewable energy projects across the state. There are tidal projects, biomass, wind (Nike, Kotz, Unalakleet, etc.), solar, hydro. when the state was flush with cash it was pumping a ton into renewables. AEA also drafted some great reports on how the best renewable solutions for every community.

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      • Thank you for your thoughts but what has been spent is a fraction of what could and should be spent. The country of Germany will be full renewable in the coming decade… Now thats a commitment.

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  2. If you graphed the symbiotic relationship between the State of Alaska and oil companies (time on the x axis, symbiosis on the y axis), you would see an oscillating trend over time. But as of recent, the trend would show a sharp downward dive (a strained symbiotic relationship). And this can be directly traced to Governor Walker.

    Walker’s gas line obsession has kept him away from restructuring state government from a $100 per barrel bureaucracy to a $40 paradigm. Yet he still expects the oil companies to pick up the tab for a bloated government, and to keep finding more oil, at low oil prices, to keep filling the pipeline.

    But the biggest cause of strained symbiosis is Walker’s lack of basic finance skills. He thinks that if you don’t pay your bills for a year, you magically are a better fiscal situation. He will soon find out that when your bills, like oil tax credits, are nearly double the next year, and you have even less money … you didn’t help your financial situation at all. Hopefully Alaskans will learn from all this … that you shouldn’t elect a governor that hates oil companies and one who can’t grasp simple financial concepts that most learn in 5th grade.

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  3. Well good sir if you are asserting that the world is even younger than many creationists would have good Christians believe, then there truly is no reason to our continue our conversation. You are quite correct.

    PS

    Science isn’t based on polling and is not a popularity contest.

    If you don’t believe in Ice Ages, then how did the coastal Alaskan Fjords come into existence? Or are you a Creationist who believes is less than 10,000 years old? Or maybe an Anthropogenic Fascist, who believes that climate change originated with the industrial revolution?

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  4. My guess is that back in the 1400’s 97% of scientist believed the world was flat. So much for following the crowd. I prefer to follow the advice of scientist with a proven track record of results, like Richard Feynman. Who famously said,”Science is a method for trying to answer questions which can be put into the form: If I do this, what will happen”? They then go and test that hypothesis. The problem with the 97% of scientist so often cited is that their claims are based on models, not actual data, that; if they are tested, prove inaccurate. Sadly, far too many of our scientist have become politicized to the point they fabricate results. I refer you to the East Anglia and NOAA scandals to name just two. Remember that first we had the fear mongers up in arms over global cooling, then global warming and now it’s just “climate change”. A catch-all phrase if ever there was one.

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  5. 1. Anthropogenic climate change will hit the arctic and subarctic first and hardest. That’s demonstrably already happening.

    2. The primary cause of anthropogenic climate change is the burning of fossil fuels.

    3. Alaska’s dependence on the fossil fuel industry is a long term form of economic suicide. Rising oceans, melting permafrost, changing precipitation patterns, damage to ocean ecologies and consequent damage to fisheries; Alaska can ill-afford, in the middle- and long-term, to contribute to the catastrophe.

    4. In human time scales, those injuries and changes are irreversible and permanent.

    So how, exactly, is it a problem if the petroleum industry leaves Alaska?

    /WC

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    • for Tier 1 government employees collecting retirement, the end of oil would obviously be no problem whatsoever. as to the matter of climate change per se, the problem is complicated as i know you well know despite the simplistic comments here. there are economic and environmental trade offs in all things, and in many of these petroleum comes out ahead at the moment. living downwind from China, i’d almost be willing to give them our natural gas at cost to help cut back on their burning of coal. and as someone living in Fairbanks, you ought to be thanking the increase in home-heating-oil consumption that has led to a cut back on the wood burning that was threatening to make the city unliveable. for environmental, economic and simple transportation reasons, oil is going to be with us for some time still, and there’s no reason Alaska shouldn’t benefit from that while trying to figure out a future economy. i’m sure you know this, too. so i have to believe this was a lawyerly case of playing the devil’s advocate.

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    • Dear Wickersham;

      Natural cycles of global climate change dwarf anthropogenic causes of climate change. In the last 2 million years, Alaska has been covered and uncovered by 20 Glacial Ice sheets up to 1 mile in thickness, with sea level variation up to 1,000 feet (connecting Alaska to Asia through the Bering land bridge), and temperatures variations in the Arctic up to 7 – 10 degrees F. There are 30 plus factors contributing to climate change on the planet – of which concentrations of C02 play a minor role in these larger climate cycles of an Ice Age.

      Do the math on 3 feet versus 1,000 feet in sea level changes: that would be less than 1 percent.

      During the Ice Age interglacial periods, the natural cycles of heat output by the sun are the primary driver of climate variation. Industrialization in the 1800s didn’t pull the Earth out of the Little Ice Age (1400 – 1800), changes in the solar cycle did. These are geological facts that are routinely buried by anthropogenic fans of global warming.

      If you want to remove the Oil and Gas Industry from Alaska, let’s replace it with the most reliable, efficient, long term carbon free energy supply – nuclear energy. The infrastructure and operations of the most popular “Alternative” energy sources – wind and solar – are impossible to construct, deploy and maintain, without hydrocarbons.

      And then cut the state government budget to about $2 billion or less to match up with tax revenues, less than half of what it is today.

      Maybe start by having only home schools in Alaska, shut down the University of Alaska, institute home medicine policies throughout the state, permanently end the PFDs, and default on all past contractual obligations to public employees (pensions and health care for retirees).

      Good luck with all that.

      Cheers,

      Science and Math 101

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      • If you are asserting you are right about CO2 and the 97% or more of climate scientists are wrong, there’s no point in having a discussion with you. Life is to short to have arguments with people who won’t assess evidence.

        If, as I have asserted, those 97% of climate scientists are right and the CO2 from fossil fuels is the primary cause of this unprecedented rate of warming, then your short term solution to Alaska’s fiscal crisis aggravates an existential crisis. Your children and grandchildren won’t thank you.

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