It's our oil... but it's their investment

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.

Since statehood, however, Alaska consistently has chosen a different path. For a number of reasons -- not the least of which are lack of capital and a limited appetite for undertaking financial risk with state funds -- Alaska has chosen to follow the same approach used by the federal government and most private U.S. landowners by contracting with the private sector for the development of state-owned lands.

As the landowner, Alaska leases its oil and gas resources to private oil companies for a contractually agreed term. In turn, the companies agree to shoulder all of the investments necessary to explore for, develop and produce the resources under contractually agreed provisions.

Most importantly, as compensation for Alaska's interests, Alaska and the oil companies have agreed that Alaska will receive a lease bonus and the revenues realized from the sale of a contractually established percent of the production.

Historically, this arrangement has proven to be extremely beneficial to Alaskans. The $900 million in lease bonuses paid by the oil companies in 1969 for the core Prudhoe Bay tracts is largely credited with finally putting Alaska's government -- which had been on shaky ground since statehood -- on a firm footing. Revenues received from subsequent production have enabled Alaskans to finance extensive state and local government projects and operations without any significant individual or corporate tax burden.

There is an even greater degree, though, to which Alaskans have benefitted from creating a stable economic climate supportive of private oil and gas investments: Alaska has oil and gas development, while others in the Arctic do not.

According to a recent U.S. Department of Energy study on "Arctic Oil & Natural Gas Potential," there are 17 identified large oil and gas fields located in the North American portion of the Arctic. Despite the fact that most were discovered in the 1970s and 1980s, to date only three of the 17 have been developed -- all in Alaska.

Why such limited development? Why Alaska?

According to the DOE, in North America "oil and natural gas field development is governed by market-based economics, with fields only being developed if and when they are expected to generate sufficient profits." The costs and risks of developing Arctic projects are significant: Onshore Alaska North Slope projects cost from one and a half to two times more than similar oil and natural gas projects undertaken in Texas. Other factors, such as long lead times, limited logistics support, severe weather and other harsh environmental conditions create even greater economic risk and burden.

"The bottom line for Arctic oil and natural gas potential is that high costs, high risks, and lengthy lead-times can all serve to deter their development in preference to the development of less challenging oil and natural gas resources elsewhere in the world," the DOE study concludes.