Alaska Oil Policy| Where Alaska is missing a stitch …

Today’s papers are full of articles about the coming vote Monday in the Senate on oil tax reform.  The best of the batch (i.e., most fact rich) to me is Juneau Empire reporter Mark Miller’s “Senators preparing for oil tax bill vote,” but there are additional updates as well in the Anchorage Daily News,  Alaska Dispatch and APRN.

The Senate should pass the bill forwarded Thursday from the Senate Finance Committee.  Looking at the current prospects across the North Slope, the bill likely will result in a badly needed near-term uptick in short-term, productive investment.

But I agree with the testimony the Committee received from one of the state’s largest investors the same day it passed out the bill  that the bill doesn’t go “far enough to attract the type of meaningful investment that’s required to make the future look different.”

In its current form, SB 21 is not the type of paradigm shifting change that is required to put Alaska squarely back into the hunt for major, decline curve shifting long-term investments.  The current version puts a band-aide on the state’s investment problem.  It is not a long-term cure.

There are two reasons why Alaska is missing a stitch in the current process and not identifying a long-term fix.

The first is because the state has not engaged directly with industry to find a solution.  Earlier this year British Columbia Premier Christy Clark announced that her government was considering creating a tax on LNG exports.  But Clark did not immediately announce the terms of the new tax.

The reason, said Clark, is because

“We have to make sure that, first of all, … that we aren’t imperiling their business case … if we want to be competitive, we need to do that through the course of negotiations with (industry), so that’s what we’re working on right now.”

BC isn’t the only government that recognizes the benefits of advance consultation with industry.  The United Kingdom has one of the more complex tax structures going (although still not anywhere near as complex as “ACES,” Alaska’s current system), but it is successful because the government essentially has negotiated with industry (or in Brit-speak, “consulted” with industry) on nearly a field by field basis to set tax rates at the levels necessary to attract investment to the available opportunities.

In all fairness, over the past three years both the Governor and Legislature essentially have played a game of darts with Alaska’s oil tax code.  Throw the dart at the board and hope it hits the bulls-eye.   The current version may finally have hit the board, instead of the wall, but its still in the far outer ring.

Alaska will continue blindly to throw darts until it abandons its “consultant du jour” approach and sits down with producers for meaningful consultations  that are directed, like the BC and UK systems, toward reaching commitments on both sides.

The second reason why Alaska has not yet identified a long-term fix — and is unlikely to on its current course — is because the state is not aligned with industry.  I have written extensively about this issue before.  See “Alaska Oil Policy|  Out of Alignment,” Alaska Business Monthly (Nov. 2012); Alaska Oil Policy|  Achieving Alignment,”  Alaska Business Monthly (Jan. 2012).

Simply put, Alaska does not know what type of economic terms it takes to attract long-term investment because Alaska has not positioned itself to see investment dynamics the same way as its investors.  The state may want to, and through consultants, it may try to see things through an investor’s eyes, but the truth is no one can fully understand the industry’s investment dynamics at any given point in time until they are walking the proverbial “mile in an investor’s shoes.”

There are several, very, very good reasons why Alaska should adopt the global “best practice” for developing state owned oil resources and create its own investment arm to partner with industry in developing the state’s resources.

One of the most important of those reasons is becoming clear in this situation.  Until the state positions itself to see Alaska’s resources the same way as its investors, the state will continue to engage in a “crapshoot,”  to quote Senator Kevin Meyeras it tries to hit the tax scheme “bullseye.”  

For over three decades Alaska has lived on the production of easy oil from Prudhoe and Kuparuk, and frankly, has not had to work very hard to keep production flowing.  Now its time for the state to buckle down to some hard work, recognize that it is in a different, much more competitive environment than it has been before, and up its game to global standards.

In short, its time for the state to stop spinning in circles, unilaterally throwing darts at a board and position itself to start working harder to maintain the state’s most important industry.

The Legislature should pass SB 21 in its current form, breath a sigh of relief for any short-term investment it is able to attract as a result, and start immediately doing the hard work it will take to move Alaska forward into a successful 21st Century oil province.

2 responses to “Alaska Oil Policy| Where Alaska is missing a stitch …

  1. Interesting. Isn’t the State of Alaska already an investor through our Royalty Oil? It seems we have a fair amount of skin in the game…our legislative antics notwithstanding.


    • Scott … The state does not pay the costs of developing and producing the royalty oil, and as a consequence does not see the economics of each development opportunity. As a result, the state doesn’t understand which provide the best returns, have the most volume potential or are affected — and to what degree — by various tax structures. That sort of blindness to the economics has led the state to require investments in Pt. Thomson and to provide significant subsidies to “hail mary” exploration efforts, when the better investment would have been in the existing fields.

      Norway also started out with a royalty regime, but after about 10 years realized that it was resulting in sub-optimum investments. They then started converting their royalty interests to co-investment interests (called there, the State Direct Financial Interest), which they believe significantly improved both the government’s insight into the industry and its returns.

      I agree that Alaska has some skin in the game — in the sense that it leased land and wants to see a return on it — but it doesn’t have an ongoing investment interest that permits it to identify what the best way is to achieve those returns.