Act like an owner-state
| Oct 13, 2009I am running for governor because, as an Alaskan, it is time we, as Alaskans, take control of our future.
We, the people of Alaska, own the resources of the state. For far too long we have relied on others to develop our resources and move them to market. Over the years we have witnessed other countries move their valuable resources to market while Alaska's resources remain in the ground. That must change! Now is the time for us to take charge of our resources; now is the time to seize control of our future for the lasting benefit of all Alaskans.
Eighty percent of Alaska's state budget is from North Slope oil. But TAPS (Trans Alaska Pipeline System) throughput has fallen over five percent annually. Without revenues from a gas pipeline to offset declining oil production, the state's economic future is bleak. Therefore, the greatest risk is presently being borne by Alaskans by not having access to our gas as economical energy and lost revenues from our gas not going to market.
And when rising energy prices are accounted for, the future for individual Alaskans is even worse. Alaskans need access to North Slope gas now. But in order for gas to Alaskans to be economic via pipeline from the North Slope, it must be anchored by out-of-state sales.
With the Lower 48 awash in shale gas it does not need ours. According to recent reports by the U.S. Department of Energy, shale gas plays in the Lower 48 can fulfill North American gas demand for 100-plus years. The only viable option for Alaska is for a gas pipeline to Valdez, and LNG sold on the world markets. This ensures that the jobs resulting from the pipeline construction, operation and value-added industries from the valuable gas liquids remain in Alaska.
I have been actively involved with the All-Alaska gas line efforts for the past 30 years. Over and over the state has urged outside interests to compete for the right to develop a gas pipeline, to the same ineffectual result.
Meanwhile, dozens of LNG projects around the world have been constructed. Here's why. Host governments that shoulder some risk and control the gas handling infrastructure market their gas on their schedule. They act as the sovereigns they are. We must do the same.
Now is the time for Alaska to move forward with our own gas pipeline, one that is fully within our state boundaries. We will finance it, own it and determine when it gets built. It will be built and operated with Alaskan workers. Alaskans will take the risk and Alaskans will enjoy the rewards. No longer will we place our future in the hands of others. This is the only way we can control our future. Now is the time to act like the owner state that we are.
The North Slope producers have stated and put in writing that if someone will bear the risks associated with the building of a pipeline, they will ship or sell their gas on commercially reasonable terms. While we as a state can manage the risk associated with building a state owned pipeline, we as a state cannot manage or survive the risk to the future of our state if a gas pipeline is never built.
Publicly owned transportation and energy infrastructure is commonplace in Alaska. It is nothing new. It just takes a decision to make it happen. Here are examples: our highways; our airports; hydroelectric facilities; the Alaska Marine Highway System; and the Alaska Railroad.
It's time to act as the sovereigns we are. We can get our energy to the Alaska people who desperately need it and ship the excess gas to world markets to replace our declining revenues from oil.
Getting our valuable, proven gas resources to Alaskans and to market is the single most important issue for Alaska and our future. As your governor, I will ensure that we will no longer yield control of our future to others. We will get our gas to market through an All-Alaskan-owned pipeline.
As Alaskans we have the most to gain from a gas pipeline project. But Alaska will only realize benefits from a pipeline -- royalties, taxes, a construction boom, value-added industries, jobs and affordable energy to Alaskans -- if one is actually constructed. Only we can control our own destiny, and that destiny is a state-owned, state-controlled, All-Alaska pipeline to Valdez.
Bill Walker is general counsel for the Alaska Gasline Port Authority. He is running for governor.
That said, the approach Mr. Walker is advocating is wrong for Alaska. It is important to understand why. I will do it in two posts; this is the first.
ACES and AGIA. Mr. Walker’s response concedes AGIA is flawed. Alaskans should support his suggestion that the legislation be revisited.
Mr. Walker claims that ACES is a success. His measure of success, however, largely is whether ACES has increased revenues to state government. The legislation has done that in the short term. In an effort to increase state revenues today, however, ACES is mortgaging away the state’s future.
ACES mortgages away Alaska’s future by imposing a tax burden that scares away long term investment. Mr. Walker may or may not be correctly interpreting ConocoPhillips recent statements. That misses the central question, however. The central question is whether the producers are making the investments today necessary to develop the additional supplies needed the day after tomorrow, as current fields decline.
The producers are not. Why not? As discussed earlier in this string of comments and in a recent Compass piece in the Anchorage Daily News (http://bit.ly/oGFGO), the burdens and price signals created by ACES and AGIA essentially are telling producers to take their money elsewhere.
Oil and opportunity remain in Alaska. As the Legislature learned in 2006, there is as much known oil and gas remaining on the North Slope as has been produced in all the time since the discovery of Prudhoe Bay (see http://bit.ly/2O7LMW at 10). And, if the terms of the investment are acceptable, the producers have made clear they are prepared to make it. A 2006 article in a respected industry publication ran the headline, “Alaska Special Report: Investment Poised to Pour into the Upstream” (http://bit.ly/2COXh).
What, then, is driving investment away? Simple, ACES and AGIA. Dark clouds surround Alaska’s future because in 2007 and 2008, state government became too greedy and decided to take too much revenue and impose too many conditions. Those who fish Alaska’s waters know what happens when “take” is too high – there are no fish for the future. Alaska government is doing the same thing to Alaska’s oil industry; through excessive burden and tax – excessive take – Alaska government is undermining Alaska’s future.
Mr. Walker proposals harm Alaskans’ future by supporting the continuation of those efforts.
Bearing the Risk of the Gasline. Mr. Walker argues that producers are in the business of taking risk and should be prepared to accept the risk of underwriting a gasline. The producers do understand risk. That is precisely why they have not committed to the All Alaska, or any other gasline to date – the projects are too risky without reaching agreement on key costs, including the tax and royalty costs the state may seek to impose on the industry once the project is underway.
In his article that started this discussion and in his own recent Compass piece (http://bit.ly/9IniO), Mr. Walker then goes on to say, if that is the case, “We [Alaskans] will finance it, own it and determine when it gets built.” Really? Do Alaskans want government to invest state funds in a project that the world’s largest oil companies think is too risky? Probably not and Mr. Walker does not repeat that claim in his latest response.
Rather, in his latest response, Mr. Walker changes course again and says, “Third party gas marketing companies would love the opportunity to purchase on the slope on a fixed cost basis and take on the commodity price and project cost overrun risk. … If Exxon, BP or ConocoPhillips are truly unwilling to take on the risk of a gas pipeline on terms acceptable to Alaska … I will find … buyers that will buy at the wellhead and bear that risk.”
In his original article, Mr. Walker says he has been at this project for 30 years; presumably, he has been looking for such buyers the entire time. None have surfaced yet; frankly, that is because no such “third party gas marketing companies” realistically are willing to take on the risk.
The only way actually to build a project is for Alaska and the producers to partner in the effort. As a partner, state government needs to do its share of controlling costs by providing predictability on the tax, royalty and other burdens it intends to impose down the road. Until state government controls itself, the risks it creates for the project remain too great and no entity – not the producers, nor the Port Authority, nor a “third party gas marketing company” – will underwrite the line financially.
To preserve our future, Alaska – and Alaskans – must step up to the plate. By avoiding that reality, Mr. Walker’s varying proposals will only delay the project further – and in doing so, harm Alaska.
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First, if the Port Authority’s proposal (which Mr. Walker is running on) was to build the pipeline and related processing and liquefaction facilities on its own nickel, without any financial backing by the producers, then the situation would be similar to the State’s road system and the Alaska Railroad and might further the debate. That is not the Authority’s proposal, however; in every incarnation, the Authority expects the producers to underwrite the project, by either making firm financial commitments to ship on the pipeline, or agreeing to sell gas to the Authority at a netback price, regardless of market conditions.
Second, while Mr. Walker and others like to talk about the gas being the State’s gas, neither he nor others who make such assertions have ever proposed to contribute to the vast costs of exploring for, developing and preparing the gas for sale. Instead, they expect the producers to make those investments regardless of market conditions. (Sometimes, they say that those investments have already been made and the gas can be produced by the producers for near “free.” That really isn’t true at all, but at most, that argument only extends to portions of the Prudhoe Bay supply, which is less than half of the supplies required to make the project economic.) Their only offer is to purchase or transport the gas at a netback price; in other words, they shift all of the considerable market risk to the producers.
Certainly, we all want others to do things for us at their risk. But it is wholly unrealistic to believe that will occur. By attempting to obligate the producers to make commitments and investments regardless of market conditions, the Authority’s proposal simply is way of imposing yet another tax on the industry. Mr. Walker and the Authority argue the State is an owner, but they don't want to pay for the obligations of ownership -- they want others to do that part.
History has proven that government can tax an industry out of existence. That is where the Authority’s proposal heads Alaska. And that is why its proposal – as repeatedly articulated by the Authority – does not further Alaska.
As are other regions, Alaska needs to build partnerships with industry. A recent New York Times article (http://bit.ly/2ZGMPK) says it best. The article reports that “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.”
Alaska is not part of the hot streak; instead, it is mentioned only as a historical footnote. Why? As the article quotes an industry executive as saying, “That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk.” With all due respect, the burdens created by ACES and AGIA already are sending producers the signal to “stay away” from Alaska.
The Port Authority’s proposal simply says, “stay away longer.” Unlike the old days when the North Slope was producing over 2 million barrels per day, Alaska – and Alaskans – can’t afford to do that any longer (see http://bit.ly/oGFGO).
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Your essay stimulated me to send some questions to the Port Authority that I have copied below. If Alaska developed a processing and liquification facility on the North Slope, and a port for ice-breaking LNG tankers at that location, we wouldn't need to build a 800 mile pipeline. We could also ship LNG from the North Slope to Cook Inlet.
For question 4 below, "what else did I miss?" I realize I missed one big thing- Fairbanks! Shame on me- I was raised there. My dad, when he was pipeline coordinator, had his office there. The Port Authority's office is in Fairbanks too. I'm hopeful Doyon's prospects near Nenana will lead to a more cost effective natural gas solution for Fairbanks, but we'll have to wait and see.
I figure customers would provide their own LNG tankers (as they would if they took delivery from Valdez) and the State wouldn't need to gamble much or all of our Permanent Fund as collateral on an 800 mile pipeline. We'd probably need natural gas sales commitments before constructing North Slope facilities, and also environmental approval.
So if you read this, please summarize why LNG export from the North Slope (not Valdez) has apparently been ruled out as an option.
Thank you very much. Good luck on your candidacy. Here is what I wrote to the Port Authority:
I'm wondering why ice-breaking LNG tankers from the North Slope have been ruled out as a possible option to deliver natural gas to worldwide market. I'd speculate the reasons may be:
1. Cost of designing and building ice-breaking tankers, (and Jones Act if delivering LNG to United States).
2. Shallow water in Beaufort Sea near shore/ cost of developing deep water terminal and port/ additional cost of building anything on North Slope.
3. Environmental impact/ permits/ possibility of accidents or pollution, grounding, leakage, or explosion.
4. What else did I miss?
Just seems with massive costs of an 800-mile pipeline, it is hard to believe ice-breaking tankers, and consolidated local processing facilities at the point of extraction on the North Slope, wouldn't be a viable option.
My dad took the converted oil tanker Manhattan through the Northwest Passage in the 1960s, so I know it is possible to transport not only through the Bearing Strait but perhaps even through the Northwest Passage, or even across the North Pole-- unfortunately arctic sea ice seems to be getting thinner all the time.
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The Upstream Obligations. Mr. Walker asserts that Alaska state government contributes to the costs of exploration and production. He is not alone in this assertion. In other forums, Governor Parnell claims that state government is “subsidizing” new oil and gas investment on Alaska lands.
Both are wrong; Alaska’s contribution, in Mr. Walker’s words – or Alaska’s “subsidy,” in Governor Parnell’s words – are actually being paid by existing oil and gas producers.
How is that? As others have explained, Alaska currently has one of – if not the – highest marginal tax rates on existing oil and gas production anywhere in the world. Why is it so high? In part, existing production is overtaxed to create the funds that the state then uses to “contribute” to or “subsidize” new investment.
Mr. Walker argues that is a good system, because it encourages new investment. But he is wrong. In fact, it discourages investment because producers realize that once their investment results in production, they too will become among the overtaxed. Because the impact of overtaxing existing production during the long-term production cycle far outweighs any temporary “benefits” of being taxed less during the investment cycle, producers have chosen to take their investment capital to other locations that don’t impose such a circular system.
Finally, Mr. Walker argues that the state isn’t obligated to contribute to upstream costs. On that point, he is correct. But then, he turns around in his original article (and his recent Compass piece) and argues, “[w]e, the people of Alaska, own the resources of the state. … Now is the time for us to take charge of our resources; now is the time to seize control of our future for the lasting benefit of all Alaskans.”
Mr. Walker wants to direct the producers to take certain actions, regardless of the limitations to which the state agreed in its leases and other agreements. He wants state government to “seize control,” but wants the producers to pay for it.
As a recent article in the New York Times (http://bit.ly/2ZGMPK) reports, “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.” In that article, Alaska is relegated to an historical footnote.
With all this talk by Mr. Walker and others of “seizing control,” but at the producers’ expense, is it any wonder?
I greatly respect Mr. Walker, value his contributions to Alaska and am convinced that he truly believes he is pursuing Alaskans' best interests. But he is not. Alaska government – and the Alaskans who run it – need to understand the consequences of their actions. They do not, and if that does not change, the Alaska economy will suffer greatly.