Sunday, October 18, 2009
Sunday, October 11, 2009
COMPASS: Other points of view
By BRAD KEITHLEY Brad Keithley heads the oil and gas law practice at Perkins Coie, LLC, from its Anchorage offices.
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.
Why has Alaska become an historical footnote? Perhaps unintentionally, the article provides the answer. As explained by an oil company CEO, "That's the wonderful thing about price signals in a free market -- it puts people in a better position to take more exploration risk."
To put it bluntly, for the past several years, Alaska's exploration signals to the industry have said "go elsewhere."
Recent legislative enactments, such as the Alaska Gasline Inducement Act and the ACES oil tax, come to mind as examples. The root cause runs deeper, however.
Alaska has become smug and arrogant about the industry legislatively, administratively and even on the editorial pages of some newspapers. A good example is the attitude expressed earlier this year by one of the governor's "energy" advisers, Joe Balash.
In a recent international survey conducted by a Canadian institute, Alaska ranked 78th out of 143 states and governments in an assessment of policies designed to encourage oil and gas production. When asked to comment on the results, Balash said, "Alaska is right where it ought to be. 'We ... have tough terms; we set the bar high. ... We have world-class resources. Arkansas and Mississippi don't.'"
Unfortunately, that worldview is outdated. Alaska has 35 trillion cubic feet of reserves on the North Slope. To pick an example, recent discoveries of shale gas from Arkansas' Fayetteville shale formation alone are estimated at 20 Tcf, and additional amounts exist in the Woodford shale formation in eastern Arkansas and the potentially gigantic Haynesville shale formation located, in part, in southern Arkansas.
That story repeats across several states and the globe generally. Against these alternatives, Alaska's "tough terms" have shot Alaskans in the foot.
This situation poses a serious threat. Ninety percent of Alaska's general state government revenues and one-third of Alaska jobs derive from the oil industry. Undeniably, Alaska's economy runs on oil.
But, this linchpin is on a very steep decline. At its peak, the North Slope produced in excess of 2 million barrels per day; now, it produces roughly 700,000 barrels per day and is declining rapidly at the rate of 10 percent per year. The two new high-profile projects currently under development will not offset even one year's reduction. At its peak, BP's Liberty project is estimated to produce 40,000 barrels a day; Port Thomson is estimated to produce 10,000 barrels a day of liquids.
To overcome these declines -- and preserve its economy -- Alaska must renew its commitment to encouraging oil development; Alaska's "price signals" must indicate Alaska is open for business.
One question often asked is "who's responsible" for maintaining the "revenue side" of Alaska's economy. Sometimes, Alaskans assume it is the oil industry's responsibility. The correct answer, however, is that we -- Alaskans -- are. Alaska's political leaders set the "price signals" for development in Alaska; industry only responds to them.
The upcoming Legislature session and 2010 elections are critical. Without maintaining oil revenues, state services will decline, income and sales taxes will become a reality, and current residents will leave the state in large numbers, resulting in the collapse of housing prices and the economic well-being of scores of Alaska's businesses.
The revenue side of Alaska is on the line. Alaska's founding generation set the right price signals to sustain Alaska's first 50 years. The current generation must step up to put Alaska on track for the next 50.