Essay: Maintaining Optimism In A Challenging Environment

An essay to assist both Alaska citizens and our thousands of readers abroad in understanding the critical circumstances now confronting the 49th state.

By

Dave Harbour

(Send us your comments, and scroll up for tomorrow's related commentary!)

America invented the term, “Keep a stiff upper lip”, exactly two hundred years ago in a book entitled, "Massachusetts Spy".  The Brits adopted the term and now oil producers throughout the world are repeating it to stay calm in the face of what may be a prolonged period of low oil prices.

Alberta Premier Jim Prentice, Minister, Pipeline, Oil Sands, Pipeline, Photo by Dave HarbourWe will first sympathize with Alberta’s new Premier, one of the best and brightest elected officials in North America.  Jim Prentice (NGP Photo) inherited a southern neighbor whose president is guided more by political debts to environmental extremists than the public interest.  

Prentice also entered office just as oil prices began to plummet, putting his Province in a similar but much less severe fiscal crisis than Alaska faces (See box, lower left).

Alaska's situation is more critical than Alberta's,  because its budget is over 90% dependent on its declining oil production vs. Alberta's 10% dependency on oil sands royalties.  Note in the link above the decisive steps Premier Prentice is considering.  With a much more dire fiscal challenge, will Alaska undertake decisive measures this legislative session, as Alberta seems to be doing, or will Alaska fund deficits with the remaining state savings?

Note to: Elected Officials

Subject: Responsibility

We hope there is not one elected official in Alaska (i.e. Governor, Mayor, Assembly or Council or School Board member) who has had a conversation at home with a significant other, like this:

"Honey, you know the situation is dire.  We have had deficit budgets for some time now.  But with 50% lower oil prices, we'll burn through the savings in a couple years.  And still, we have almost a $10 billion unfunded PERS/TERS liability. (Though if worst comes to worst a bankruptcy court would order the permanent fund to keep our state pensions whole, I think).  Hopefully, we'll see another boom in discoveries or in prices…but if not, we have to make plans.  So I'm thinking we just stay in office through 2017, keep a low profile, then make our move.  Are you O.K. with that?"

Surely no elected official would swear an oath of office and decide to do nothing requiring courage or sacrifice to confront the fiscal shortfalls — like cut capital projects, operational spending, even matching government programs and even entitlement programs.  

We realize that these challenges are not fun for politicians.  

But we hope we elected statesmen and not politicians, for the latter care too much about pleasing constituencies and guaranteeing reelection.

Statesmen will be willing to be vilified and defeated in order to make decisions that best serve the public interest.

So now, we suggest that all those who wanted to serve and are serving will meet their moments of truth in short order.

Will they take the easy road and keep all beneficiaries of state spending whole — subsidized by remaining savings, then split…?

Or, will they lay it all on the line for their fellow citizens knowing that their 'thanks' may well be the disdain of thousands of constituents who wanted and did not receive money transfers from government.

We truly do sympathize, Honorable Elected Officials…just as we sympathize and respect military veterans who have served their country and been willing to give it all for the rest of us.  

Thank you, in advance, for your service.

-dh

Exacerbating President Obama’s delay and perhaps an ultimate blockade of TransCanada Corporation's Keystone XL oil pipeline –designed to move stranded oil sands oil in Northern Alberta to America’s gulf coast — is a second negative development.  Environmental groups and utility interests in Quebec are trying to block the converting of an old gas pipeline into an oil pipeline, through which TransCanada could ship Alberta’s oil to European markets (See our commentary).

Then we have TransCanada’s effort (i.e. along with that of dozens of companies and governments) for a half century to move stranded Arctic gas from Alaska and the McKenzie Delta to Midwestern markets via a number of projects.  We could certainly sympathize with TransCanada shareholders and those paying tariffs on its existing pipelines, for they have been sporting stiff upper lips for a long time.

Surging oil and gas shale technology less than a decade ago, evolved into a true energy revolution.    The extended and expanded reach of shale production on mostly private lands touched almost everyone.  Consumers have experienced lower prices for gas fired electricity, home heating and gasoline.  Manufacturers depending on low cost energy began expanding North American operations.  Investors launched several dozen American and Canadian LNG export projects.   Job growth has been phenomenal.  European energy markets began to envision a day when Russian producers could not control their destinies through price and supply manipulation.  Finally, Asian markets used to paying premium prices for imported LNG began to see a softening of consumer prices.

The Canadian provincial and federal governments were supporting energy development in spite of significant environmental activism.  Oil prices supported the relatively expensive production of Northern Alberta bitumen.

In the US, the last few years saw production on private land cause economic rejuvenation in many pro-energy states, in spite of Federal government support of environment activism aimed at killing projects on both private and public lands.  Ironically, the Administration has gone on to claim credit for the economic improvements, even as it intensifies EPA opposition to energy specifically and job development generally.

As economic cycles would have it, all is not well in the world.  The shale revolution was not just good for consumers; it was GREAT.  So great that with supply increasing oil & gas prices began to retreat along with commodity values.  That, in turn, has brought many shale operational revenues beneath or close to the cost of production.  Combined with Canada’s inability to export necessary volumes of Alberta oil, North America’s two great economies are now facing giant economic challenges.

Federal, provincial, state and local governments throughout the US and Canada are now engaged in cutting or plans to cut government services in response to the diminishing production of energy wealth.

*     *     *

Alaska may be facing the single greatest economic challenge in the free world for many reasons that, together, compose a perfect storm of economic hurdles, including:

  • With its operating government budget over 90% dependent on oil income, along with over a third of its entire economy, Alaska is the most dependent of North America's state or provincial governments on oil revenue— now down by 50% over the last few months.
  • Alaska is the U.S. producing area most dependent on high prices.  High oil prices help compensate for some of the highest oil taxes, the harshest climate, the highest labor costs, its remoteness and distance to the markets and the additional cost liability of having to move its oil via an expensive, underused and ageing 800-mile pipeline to tidewater where it has to be loaded onto seagoing tankers capable of transporting it thousands of miles to markets.  In stark contrast, its biggest competitors produce oil mostly at tidewater, mostly in temperate zones, mostly in lower labor cost areas, with lower logistical costs and cheaper transport to their market areas.
  • Alaska’s nearly 40-year-old Trans Alaska Pipeline System (TAPS), has already moved the lion’s share of Prudhoe Bay oil.  It once transported the greatest share of America's domestic production (i.e. But has now fallen behind North Dakota, Texas and California) at the rate of about 2.1 million barrels per day.  That production rate has since sunk by over 70%.
  • Governor Sara Palin’s (NGP Photo) administration Alaska Governor Sarah Palin, Vice Presidential Candidate, lipstick, oil taxes, progressive production tax, IOGCC, Photo by Dave Harboursucceeded, nearly a decade ago, in attaching high, progressive production taxes on Alaskan oil in spite of what was then a pattern of annual 5-7% declines in TAPS throughput.   That economically suicidal action dried up new investment even though producers needed to hire more people and initiate more projects just to maintain the decades-old production and transportation facilities.  Two years ago, the Legislature saw the error of Alaska’s shortsighted ways and passed SB 21, modifying the production tax.  Talk quickly spread around the industry that new investment and exploration was now possible and being planned – hundreds of millions of dollars’ worth.  Unfortunately, opponents of SB 21 and environmental groups undertook a voters initiative to repeal SB 21, inserting dark clouds of caution over the investment climate.  After spending millions of dollars to combat the initiative Alaskan citizens and businesses defeated it last August.  Still, investors are left with the nagging knowledge that in Alaska, “A Deal May Not Be A Deal”, since a few guys and gals with a volunteer lawyer and dozens of activist organization volunteers could initiate a new voters initiative at any time.

  • "If"

    If Alaskan citizens and their leaders summon the faith, humility, wisdom, cooperation, sacrifice, initiative and diligence required by GREAT ACCOMPLISHMENT, the future can still be bright for this generation and those to follow.  

    This is where optimism is to be found.

    -dh

    One must add to this mix the fact that Alaska’s huge resource potential has been slowed or stopped at almost every turn by a hostile and overreaching federal administration whose cheerleaders are activist environmental groups that in the last 3 decades have implanted some three dozen anti-development campaign offices around Alaska.

  • Alaska’s North Slope gas remains stranded.  Several projects over the years – all involving TransCanada – have endeavored to free that energy wealth since the early 1970s.  All of the projects have failed after having met the wrong end of unforeseen economic or technological forces.  When natural gas prices exploded at the turn of the century, producers again began eyeing the economic feasibility of “monetizing Alaska North Slope gas”.   After spending a hundred million dollars to update studies, they affirmed one of the critical requirements for investment to be, “fiscal certainty”.  This meant that investors couldn’t justify building the largest construction project in history with the chance a “sovereign” state government could enact massive new taxes after a multi-billion dollar, high pressure gas pipe was buried into the frozen tundra.  Then, just as feasibility was looking promising, came the Palin Progressive Production tax.  Today, following the passage of SB 21, producers and the State of Alaska have dramatically changed the gas project.  Because of shale, the gas is not needed in the Midwest.  So now, with falling revenue and fading economic hopes, the state, producers and TransCanada are endeavoring to prove out the feasibility of an Alaska LNG export project …targeting Asia…just as gas prices are falling and over a dozen LNG projects (i.e. see map) throughout the US and Canada are mostly vying for the same markets.
  • Map, Alaska overshadows Lower 48Alaska defends its high cost of government because of its enormous size (i.e. 20% the size of the entire US), its low population (i.e. less than a million), and logistical costs.  But excuses don’t matter in a world of competition and excuses cannot erase the facts:
    • Alaska spends more per capita than any other state.
    • Alaska’s debt is larger per capita than that of any other state or the federal government.
    • Its per capita education costs are the highest.
    • Alaska government and citizens fund the most non-profit organizations per capita.
  • Alaska’s anti-business legislators and activist groups normally seek higher taxes to meet the challenges rather than restrain government spending.  The republicans locally, as nationally, are generally in support of a sustainable economy.  But just as all democrats are not socialists, all republicans are not prudent guardians of other people’s money and often let spending/entitlement increases slide through in exchange for capital projects, constituent tax breaks, etc.
  • Alaska’s legislative session is now beginning and the previous governor’s budget under consideration is now several billion dollars short.  This requires a possible tapping into about $3 billion of nearly $10 billion in savings.   Any second grader knows that’s not sustainable for long.  But to make matters more interesting, rating agencies are noting that Alaska also has an unfunded liability to its retirement program of almost $10 billion.  The obvious way to fund that deficiency is to tap Alaska’s $50 billion permanent fund.  The permanent fund was created two decades after statehood to fund ‘rainy day’ budgets but has been traditionally used to pay citizens an annual allotment, last year approaching $2,000 for each man, woman and child.  It has become sacred income to voters.

Alaska Governor Bill Walker, oil taxes. sb 21, budget crisis, Photo by Dave HarbourLast November Alaskans elected a new governor whose primary constituencies were rural Alaskans, democrats, and labor.  So far, Governor Bill Walker (NGP Photo) has ordered a slowing of spending on capital projects but has not, at this writing, undertaken serious cuts to state government operations or entitlement programs.  We'll hear more this week as he delivers separate state of the state and budget speeches.

Some hope, through stiff upper lips and gritted teeth that another boom of some sort will appear just in time to facilitate continued high state spending.

Others believe that Alaska’s unparalleled rise in oil riches has come to an end and that serious, adult decisions must quickly be made.

Still others believe that Alaska’s 1959 Statehood Compact has been mortally wounded; they believe that federal regulation has so exacerbated the scenarios described above that only the most brilliant, persuasive, intelligent, savvy and charismatic leadership can now save the “Last Frontier” from federal hostility and its own tax and spend decisions.

So join us now in observing the tensions that will surely appear over the next four months of Alaska’s legislative session as, together, we witness leadership rising to the occasion, or not.

Meanwhile, keep a stiff upper lip!

_______________________________________________

Dave Harbour is Publisher of Northern Gas Pipelines.  A former Chairman of the Regulatory Commission of Alaska, he also served as Chairman of the Gas Committee, Western Conference of Regulatory Utility Commissioners.  Harbour is former Chairman of the Anchorage Chamber of Commerce and the Alaska Council on Economic Education.  He has served in executive positions with three producing/pipeline companies and as a board member and officer of a number of non-profit corporations.  His articles have appeared in hundreds of magazines, newspapers and on-line publications.  He has delivered hundreds of speeches throughout North America and chaired oil and gas programs and conferences from Houston to Calgary, Edmonton, Anchorage and Inuvik.  Contact the author.