Thoughts on Alaska Oil & Gas

As the current legislative session heads into the home stretch and the electoral season approaches, Alaskans increasingly hear the slogan “It’s our oil (and gas)” as justification for various proposals and positions.

While the slogan makes for good rhetoric, it is important Alaskans keep in mind that, although it’s our oil and gas, it’s the oil companies’ money that discovers, develops, produces and markets, and — hopefully — will continue to explore for new resources. Without their investment, our oil would still be in the ground, and according to Scott Goldsmith of UAA’s Institute for Social and Economic Research, Alaska would look a lot like Maine, with high state income and sales taxes, no dividend, and a very small local economy.

Theoretically, the development of Alaska’s resources could have been handled differently. When oil was discovered in the Norwegian sector of the North Sea, for example, the government established and funded a state owned corporation (Statoil) that put the country’s money in the ground alongside private industry. While the effort required significant capital and exposed the government to substantial financial risk, the net result today is that Norway has an entity capable of taking the lead in exploring new areas if private industry is hesitant to do so. Some other countries follow the same model with varying degrees of success. Continue reading →

There is no doubt that the long-desired pipeline to carry gas from Alaska, through Canada, to the Lower 48 — the so-called “Big Line” — is in significant trouble.

To be sure, the Parnell administration has attempted to convince Alaskans otherwise to justify the state government’s continued $500 million subsidy of TransCanada’s project under the Alaska Gasline Inducement Act. However, the observations of as diverse a group as the highly respected Potential Gas Committee, the federal Energy Information Administration and long-time and widely regarded consultant (sometimes to the Alaska government) Daniel Yergin clearly demonstrate the gravity of the situation.

In a November article in The Wall Street Journal that summarized the effects of what Yergin terms the shale gas “revolution,” he concluded, “[a]t current levels of demand, the U.S. has about 90 years of proven and potential supply — a number that is bound to go up as more and more shale gas is found.” Against those numbers, is it realistic to think that producers will risk the $25 billion to $30 billion necessary to build an Arctic pipeline to attempt to penetrate an already oversupplied Lower 48 market? Not really. Continue reading →

The centerpiece of next year’s political debate, beginning with the legislative session in January, needs to be Alaska’s economic future. To those who have studied Alaska’s economic fundamentals, that future is bleak. If the next Governor and legislators do not alter Alaska’s present course, the second fifty years of statehood will be much, much more difficult than the first.

The future currently is bleak because of the trajectory of Alaska’s oil industry. Oil accounts for 90 percent of state general fund revenues and one-third of Alaska jobs. No other industry comes close to having the capability to generate the same level of wealth for Alaskans. As James Carville – who repeatedly reminded the Clinton team during the 1992 election that “it’s the economy, stupid” – would say if he looked at Alaska today, “it’s the oil, stupid.”

The future of Alaska’s oil industry is in significant doubt. From a high of over 2 million barrels per day, North Slope oil production – the lifeblood of the Alaska economy – is down to 700,000 barrels per day. Absent continued investment, the existing sources of production (and oil’s contribution to state government revenue and jobs) will decline at a rate approaching 10 percent per year in the coming years. Because the trans-Alaska oil pipeline is not designed to handle low flow, knowledgeable people talk about the need to shut down the trans-Alaska oil pipeline when production reaches roughly 300,000 barrels per day. Continue reading →

Building a gas pipeline to the Lower 48 has been a dream of Alaskans for over 30 years. I have been involved in or observed the efforts to bring that dream to reality during most of that time. There is a common thread that has run through those efforts that is present again today. We should be concerned.

The common thread is that market conditions in the Lower 48 at first create a great deal of excitement around Alaska gas. In short order, a proposed gasline is scoped to bring Alaska gas to the Lower 48. The project in due course then runs into political problems, which delay progress until, finally, the conditions in the Lower 48 gas market evolve to the point that Alaska gas is no longer needed and deferred to “another time.”

The first time this sequence occurred was in the 1970’s and early 1980’s. In the early 1970’s, the Lower 48 began experiencing severe natural gas shortfalls. During the winter of 1976, industrial plants and even schools closed periodically during the winter months as demand outstripped supply. Moving Alaska gas from the newly discovered Prudhoe Bay field to the Lower 48 became a national priority and Congress ultimately passed a law paving the way. Continue reading →

A recent New York Times article should make Alaskans think. The headline was “The Oil Industry is on a Roll This Year with New Discoveries.”

The first sentence captures the thrust: “The oil industry has been on a hot streak this year, thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy.” The article reports 200 significant discoveries so far this year in dozens of countries, including Australia, Brazil, Norway, Ghana and Russia.

Alaska receives mention only as a historical footnote. Continue reading →