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:
- Smaller. The Alaska population in 1974, the year before pipeline construction was 341,000. The entire state was home to fewer people than the 399,000 who occupy the Anchorage/Mat-Su Economic Region today.
- Poorer. Alaska’s gross domestic product was an American, bottom-of-the-barrel $2.9 billion in 1973. GDP doubled with pipeline construction in 1975. It is today about $49 billion, down from a peak of $54 billion, but still good enough for a 47th-place ranking among the states.
- Far less comfortable. The newly completed University Center Mall was the biggest shopping center in the state’s largest city. Anchorage was little developed south of Tudor Road. The George Parks Highway connecting Anchorage and Fairbanks was still gravel in places and rough, very rough. The Seward Highway south of Anchorage was a narrow, winding snake. In downtown Anchorage, the Egan Center, the Performing Arts Center, the Anchorage Museum weren’t even in the dream stage yet.
- Taxed. Yes, back in the day Alaskans (if they coud find work) paid their state income taxes to support a government that provided a fraction of the services it provides today.
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.
“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.
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.
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.