Businesses and investors are often subject to the whim of capricious government regulations. While appropriate oversight can be necessary and proper—beneficial for both the taxpayer and the overall business environment—when those in political office change their mind about pre-existing arrangements, they scare off investors, risk future negotiations, and ultimately hurt the people they’re supposed to represent.
Such is the case currently in Alaska’s ongoing efforts to harvest its oil and natural gas resources, where the actions of Gov. Bill Walker, an Independent, have proven increasingly vexing since he took office in January. In his short time in office, he has introduced a number of changes that have created massive uncertainty for an industry that provides an amazingly large proportion of the state government’s revenue, some years approaching 90 percent.
Among these changes was a proposal to introduce a reserve tax on undeveloped gas resources, which Walker planned to introduce but pulled back from a special legislative session at the last minute. That session began on October on 24th. While the tax is off the agenda for now, what Walker will do next is anybody’s guess.
Alaska’s history with oil
Since achieving statehood, Alaska’s resource-rich environment has been its primary source of revenue, and most of that has come from the oil production on the North Slope.
This dependence has become problematic of late. With the price cost of oil dropping by half in the last year, every oil-producing state has lost money. However, none are feeling the pain quite like Alaska, with its monthly oil income dropping by nearly 75 percent since the start of the fiscal year, leaving a $3.6 billion fiscal deficit.
Thus, Alaska faces a massive deficit, and the forces buffeting its revenue this year show no signs of receding. The state has $9 billion in its rainy day fund, enough to keep government afloat for three more years, Jerry Burnett, deputy commissioner for the state’s Department of Revenue, told Pew. But there’s no reason to believe that prices or North Slope production will rise before then.
In a grim portent of things to come, both Standard & Poor’s and Moody’s Investor Service recently downgraded the state’s outlook from stable to negative. S&P gave elected officials one year to reorganize the state’s fiscal outlook or subsequent downgrades may be on the table. The organization’s report read:
Relying solely on spending cuts to close the fiscal deficit would necessitate that lawmakers oversee a dramatic downsizing of the scope of state government in Alaska. It's more likely, in our view, that policymakers will need to pursue of mix of sustained spending restraint and some form of revenue enhancement.
Rather than try to cut and tax its way to short-term stability, Alaska would be better served by growing its economy for the long-term and diversifying its revenue streams. To that end, the best option for growth in Alaska is natural gas development.
The future of natural gas in the Last Frontier
Today, Alaska is is poised to make new gas development a reality. The state is an equity partner in an ambitious $45 billion project to develop and commercialize its substantial known North Slope natural gas reserves. One of the largest infrastructure projects in North American history, Alaska Liquefied Natural Gas (LNG) should eventually provide billions of dollars in fresh revenue annually for generations.
The AlaskaLNG project consists of a North Slope gas treatment plant, an 800-mile natural gas pipeline, a liquefaction plant, and an LNG export terminal. The project is expected to produce and export up to 20 million metric tons of LNG per year. In addition to the terminal’s optimal location for exporting gas to Asia, the pipeline will be able to bring fuel to remote communities in the Alaskan interior that need their oil and gas to be flown in.
The project has aligned the collective interest of North Slope producers—BP, ConocoPhillips, ExxonMobil, and TransCanada—with Alaska, which shares a 25 percent interest in the product sold to market. As a result, all parties are united on keeping the cost of supply low and delivering as much gas as possible to market.
The Alaska Legislature passed legislation ratifying the state’s involvement as a co-investor to monetize the 34 trillion cubic feet of natural gas stranded at fields on Alaska’s North Slope, and Governor Sean Parnell signed it into law in May 2014.
But Parnell lost his job to Walker a few months later.