The Alaska Dispatch Asks the Wrong Questions

In the last two legislative sessions preceding this one, the Alaska Dispatch offered some of the best political reporting available in this state on oil issues. Rena Delbridge during the 2010 session, and then Patti Epler during the 2011 session, were insightful, accurate and balanced. Both also were largely resident in Juneau during the sessions and thus, were able to keep their finger on the pulse of the developments as they occurred.

This year, the Dispatch has not stationed any reporters in Juneau, and more importantly, apparently has given up on reporting the news in favor of providing opinionated, and not altogether well informed, commentary. For those who had come to rely on the Dispatch as an excellent source of news mixed with insightful commentary, the result is disappointing. In many respects on this issue, the Dispatch is turning itself into a mirror version of the old Alaska Standard or the current Anchorage Daily Plant, a trite, predictable outlet for a single minded point of view. The result is that in reporting hard news on oil issues, this year the Dispatch has easily been passed by the “old guard” media, like the Anchorage Daily News, Fairbanks News-Miner and Juneau Empire.

An article published by the Dispatch yesterday is the latest example. In a piece titled “Alaska oil tax debate: Are industry threats any different this time?,” the Dispatch goes on now what is an increasingly familiar harangue from its pages about whether the oil industry can be trusted, with various references to times past that largely are taken, without attribution, from Crude Awakening: Money, Mavericks, and Mayhem in Alaska, a recent book written by the author of much of the commentary and her husband. The book was enjoyable as one perspective on history. Using excerpts from the book as a substitute for thoughtful analysis of today’s issues, however, is unfortunate and is leading the Dispatch to ask the wrong questions – as well as give the wrong answers – to today’s issues.

The real question facing the state at this point in its history is how to restart and build significant investment in oil development. As DNR Commissioner Dan Sullivan said last fall when talking about the Administration’s efforts to stabilize and rebuild production rates, “[w]e need $4 billion minimum [per year in investment], and we’re not even close to that now.”

Indeed, if anything the industry is going backwards. ConocoPhillips recent announcement that it only has budgeted $900 million this year for Alaska capital expenditures – against an industry backdrop of substantially increased investment levels elsewhere and overall inflation rates that diminish the value of invested capital even further – is disappointing.

If spent on the right things, the potential effects of increased investment in Alaska’s oil patch can be staggering. In testimony before the Legislature in 2006, BP presented a chart that did a great job of capturing the potential.  (For a larger version, click on the chart below.)

Remaining Life at Various Investment Levels

What that chart shows is the effect of investment on production levels. The single, black line coming down the left side of the chart is the actual level of North Slope production up to 2006, when the chart was prepared. The three lines from that point forward represent potential futures at different levels of investment.

The bottom, red line is the potential future resulting from a zero investment case. It shows a decline curve of 15% and oil production reaching roughly the 300,000 barrel/day level early in the current decade. The middle, green line is the potential future resulting from what the testimony described as maintaining the then status quo in terms of investment levels (in the neighborhood of $1 – 1.5 billion/year). It shows the continuation of a roughly 6% decline curve, with the same level of production being reached sometime in the next decade.

The real significance of the chart, however, is the upper, blue line. It shows the potential future resulting from doubling those then-current investment levels. The result is a roughly 3% decline curve, with the 300,000 barrel/day mark being put off to nearly 2050.

As important is what the pie charts in the upper right hand corner depict about the same scenario. The pie charts in general show the additional oil that potentially would be produced under the various scenarios. The pie chart reflecting the 3% decline alternative shows that, with the added investment an additional 4 billion barrels (over the status quo case) potentially could be recovered from existing North Slope resources. Using today’s price of oil as a proxy that amounts to an additional $400 billion in gross value. Even assuming the state only recovers its royalty share, that represents an additional $50 billion in the state’s coffers over the same period.

The burning question that the state should be asking itself today is “what does it take to move investment levels – and thus, production levels – to the blue line?” Not only has the Dispatch not asked that question, if confronted by this same chart, my belief is that in its current mood the Dispatch instead would argue about why the decline curves on the chart stop at 300,000 barrels, and miss the larger point entirely.

Frankly, I think there are potential answers to the burning question that Alaska should be exploring. And they do not lie in tinkering with the tax code. Even if passed without amendment, my sense is that the Governor’s favored H.B. 110 would only move the decline curve marginally from the green line.

Instead, Alaska needs to think more globally. One answer is to look closely at the co-investment model that Norway uses. Under that model, the state invests alongside industry in the development of the state’s resources. Not only does that increase overall investment levels, at least in Norway the resulting alignment between industry and the state also has resulted in sustained levels of industry investment that have helped significantly to flatten Norway’s decline curve.

I will write more about that in the near future. If the Dispatch keeps going in its current direction, however, don’t expect to see that discussion on its pages. There won’t be enough room to fit it in amongst the latest excerpts from Crude Awakening, speculations about the motivations behind those who disagree with its stories and other harangues about perceived industry failings.