Alaska Dispatch

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.

On that trajectory, the Alaska oil industry may reach shutdown as early as 2017. Even if the date for shutdown is extended, by that time the continued decline in revenues nevertheless will result in significant reductions in government services, the beginning of state income and sales taxes, the outmigration of a significant number of people, and the resulting collapse in home and local business values.

The shutdown - and even the decline - is not inevitable. According to testimony submitted before the Alaska Legislature in 2006, there is roughly as much known oil and gas resource remaining on the North Slope as has been produced since the start of Prudhoe.

Decline and shutdown is a likely scenario, however, unless our state government's current oil and gas policy changes. The 2006 legislative testimony additionally demonstrates that developing the remaining known resource will require significant amounts of investment.

Because of the policy decisions made by the state's political bodies since 2006 (with the continued encouragement of the state's largest newspaper), a significant portion of the investment that would otherwise have been made in Alaska over the last few years has gone - and is continuing - to go elsewhere. The result is that Alaska is living on the fumes remaining from prior investments; without making the new investments required to develop additional resources, Alaska's economic gas tank inexorably is moving toward empty.

How have we come to this place? In her book, Sarah Palin recounts that she came into office to "kick industry's ass." The pendulum swung much farther. She, Hollis French and the legislature that followed them, succeeded in kicking oil investment out of Alaska.

Because they have it in their power to do so, how do Alaskans change that future? There are three steps.

First, reform Alaska's oil and gas production taxes to focus on long-term investment. Some who passed ACES argue that it already does that; it does not. Unlike tax regimes that attract investment, ACES taxes away the upside to industry when prices are high, forcing oil and gas companies essentially to accept utility-like returns. The proof is in the pudding; while the New York Times reports "excitement" elsewhere in the world industry, investment in the development of additional Alaska resources has cratered since ACES was passed. In mid-November, ConocoPhillips, "Alaska's Oil and Gas Company," announced for the first time in the last 45 years that it would not drill an exploration well on Alaska state lands this coming year.

Second, terminate AGIA. Whether AGIA was right or wrong when passed in 2007, the world has changed. As the federal Energy Information Agency, the highly respected Potential Gas Committee, and widely respected industry observer Daniel Yergin all have concluded, Lower 48 shale gas is a game changer. As a result, the $500 million in state funds committed by AGIA to a Lower 48 project increasingly looks like a fourth down, one-second-on-the-clock, Hail Mary pass from Alaska's own end zone. Alaskans need to redirect state funds to better targets.

Third, progress all options. A recent Anchorage Daily News editorial suggests at least some in the Parnell Administration favor eliminating efforts on a Bullet Line. Not only is the Bullet Line potentially important to overcoming the decline in Cook Inlet production, it may provide the best way to monetize North Slope gas in the face of the paradigm shift in the Lower 48 gas market. This is not the time to defer potential options; it is the time to maintain full speed on all of them.

Given the lead times required to develop new sources, the critical decisions that will determine the long-term future of the Alaska economy will be made during the term of the Governor we elect in 2010. Perhaps because they were involved in bringing Alaska to this point, many of those who seek to lead Alaska in the upcoming, critical term strive to point the debate in another direction.

Governor Parnell, for example, spends his political capital talking about the need to encourage development on the federal Outer Continental Shelf, over which an Alaska Governor has no control and which will not produce either state royalties or production tax revenues.

Apparently seeking to continue Governor Palin's "kick ass" approach, Senator French touts his extensive involvement in creating ACES, ignoring the fact that it is rapidly depleting Alaska's future.

Alaskans need to demand more from those who would lead them. The candidates need to spell out how Alaska will overcome the current economic trajectory. They need to recognize "it's the oil, stupid." If not, the relevant question quickly will become "who lost Alaska's future."

Brad Keithley co-heads Perkins Coie, LLP's global oil and gas practice from the law firm's Anchorage office.