The competitive context in which Alaska operates is critical to understanding investment in Alaska oil and gas. The Alaska oil region does not exist in isolation. As with any investor, oil companies weigh one opportunity against another before committing their capital. As the Fraser Institute reports annually, several factors go into the weighting, but very high on the list is the type and predictability of the the fiscal structure governing the project.
Even though understanding the competitive context is critical to establishing oil policy for a region — and even though Alaska’s economy is hugely dependent on oil — Alaska, particularly the Alaska Legislature, approaches the issue oddly. Rather than developing an ongoing capability in Alaska charged with staying abreast of Alaska’s competitive position and suggesting adjustments as circumstances warrant, the Legislature appears content instead to rely on occasional reports by Outside experts.
Because Alaska’s oil region has a number of unique characteristics — Arctic environment, state ownership of the resource (and thus, limited contractual certainty), splits in ownership between the state and federal lands — this reliance on occasional Outside experts makes Alaska even more vulnerable to changes in the competitive environment. Because Alaska has no dedicated “forward looking radar” focused on its unique situation, Alaska often doesn’t foresee the consequences of change elsewhere — or even the consequences of its own actions — until it already is adversely affecting investment in Alaska.
Maybe that approach was acceptable during times when the North Slope was producing at high volumes and prices were strong. Flying into the storm, however, without “forward look radar” during a time where every dollar of investment is critical is shortsighted.
To her significant credit, one Legislator has proposed a remedy to that situation. Section 4 of the Draft Committee Substitute for S.B. 85 proposes to establish an “Oil and Gas Competitiveness Review Board.” Initially introduced by Senator Lesil McGuire early in the last session as Senate Concurrent Resolution 4, the legislation proposes to create a body serving an analogous function to what the Permanent Fund Board does with respect to Alaska’s other significant asset.
“One of the most important things that the [Permanent Fund] Board does is to review, adopt and monitor an asset allocation that achieves a five percent real (above inflation) rate of return …. The APFC uses both internal staff and external money managers in managing the Fund’s asset classes ….” See “Investment Strategy,” Alaska Permanent Fund Corporation.
The goal of the Oil and Gas Competitiveness Review Board is comparable: “The duties of the board include … review the competitive position of the state to attract and maintain investment … [and] make … recommendations … to the Alaska State Legislature regarding … encouraging increased and ongoing long-term investment in and development of the state’s oil and gas resources.” Draft CS SB 85 at Section 4. Similar to the Permanent Fund Board, the Competitiveness Board also will develop in-state expertise to look out for Alaska’s interests.
In this context, a series of ongoing articles being published as part of Baker Hughes online “Reservoir Blog,” should be of particular interest to those that are concerned about Alaska oil and gas policy. Beginning with an overview in May 2011, the Blog has now posted six excellent articles on International Petroleum Fiscal Regimes. Want to develop a better sense of the competitive context in which Alaska operates — and better understand why Alaska needs “forward looking radar” to position itself to continue competing for investments? This series provides an excellent starting point.
This page daily publishes the a list of the recent articles available at the “Reservoir Blog” and other sources. Look over to the right side of the page, about now, and you will see a segment headed “Baker Hughes Blog Reservoir.” The articles are listed under that heading. You can click on any of them individually, or click on the header to be taken to the overall Blog. If you want to subscribe yourself to the Blog, the RSS feed is available here.
We similarly publish daily on the right hand side of this page a list of other articles important to understanding the oil industry available from other publications. We encourage you to stay current if you have an interest in understanding the evolving environment affecting oil and gas investment in Alaska.