8-3-12 Alaska's Perfect Economic Storm

 

A loyal reader, Tom Maloney of CH2M Hill-Alaska (NGP Photo) sent us this Alaska North Slope (ANS) extended production forecast gleaned from Alaska Department of Revenue data.  The data reflects a disastrous continuing decline of ANS production which is leading to the collapse of Alaska's economy.

 

Here's why.  With 90% of Alaska's state operating budget relying on production, to maintain a sustainable government, that production must never be allowed to decline nor must the price of oil decline (unless spending is drastically decreased).  Many factors leading to decline are beyond the control of politicians and even the occasional diplomat: world oil supply and demand changes, federal oil and gas policies for example.  Some factors are within the control of local politicians.

 

To provide sustained production, more oil must be discovered, developed and transported via the Trans Alaska Pipeline System (TAPS).  This oil can come from federal lands, depending on federal leasing and permitting policies.  The most prospective lands include the Chukchi and Beaufort OCS areas along with the National Petroleum Reserve Alaska and the Alaska National Wildlife Refuge.  The Obama Administration has followed what we can prove to be a deceitful, passive-aggressive Alaska federal natural resource policy.  The President and his largely anti-development appointees -- infiltrated throughout the federal biomass -- constantly talk about the need to develop energy.  They then stall or stop lease sale plans and provide countless roadblocks to projects for which there are leases.  They provide critical habitat protection for species not needing critical habitat protection.  They require air quality permits that are discriminatory and unnecessary, even foolish.  They erect new barriers without the support of Congress or due process, including a broad new 'Ocean Policy' that could cripple the entire American economy--not just Alaska's.

 

So, with no significant new oil allowed by federal bureaucrats, we turn to Alaska's own ANS lands.  The major production on the ANS occurs on state land.  Indeed, the quickest way to increase production is for the state to lessen the tax costs involved in production on its own land.   Who can argue that what we tax more of we get less of, and vice-versa?  Instead, under the Palin Administration with a blind cooperation from republican and democrat legislators alike, a massive new production tax increased costs, and many observers knew that would exacerbate declining production.

 

But the extra money was a cup of seductive elixir the politicians could not pull away from their lips.  They still can't.  At least enough can't to support a several year long effort to reform the production tax and improve the investment climate.  It's not new.  Several years ago, in almost the exact same time frame, Alberta revised its royalty rates upward, saw production decline, then reduced the royalty take and saw exploration and  production dramatically increase.  But Alberta wasn't even as dependent upon oil for its economic health as is Alaska.  Alaska has one golden egg in one basket and it's about to starve and devour the goose that laid it.  Sure, Alaska currently has several billion in various savings accounts, but everyone knows the State Public Employee Retirement System (PERS) liability exceeds what is available in the savings accounts.

 

Not only is the 90% of government operating revenue at stake but also almost half of the private economy.  The private players rely on government services and on the economic prosperity of other companies that obtain sustenance from the Alaska North Slope.

 

School teachers, Non Governmental Organizations, social workers, government employees, private employees all depend on ANS production.  That production gets to market via TAPS.  With the pipeline 2/3 empty, it's death is within sight for minimal production is already wreaking havoc with management's effort to control wax buildup in the line, corrosion and even a possible unplanned shut down during a coming, cold winter.  As the chart shows, our massive production decline is tangible; we started this year with nearly 625,000 barrels per day.  By July, that was down to 430,000.  One hopes that members of the Alaska State Senate who've been blocking tax reform, proposed by the Governor and House leadership, will be awakened by this reality of numbers.

 

The perfect storm for Alaska's economy could occur when diminishing production -- combined with lower crude oil prices than the Department of Revenue has projected -- intersect with still-robust spending increases.

 

There is hope for a reversal of fortune with better federal leadership and better state leadership.  Without a change in political leadership, the hope of prosperity for present and future generations of Alaskans must necessarily diminish in harmony with declining production.