Arctic Directory Sept 2023: It is time to tell businesspeople and financial institutions outside the state that in Alaska real ESG values are a way of life
for Petroleum News
You can't open a major newspaper these days without seeing at least one story on Environment, Social and Governance investing or on ESG reporting trends.
In 2022, the large ESG investment funds like BlackRock's and Vanguard's posted significant losses, especially when compared to the S&P Energy Index which realized big gains courtesy of the war in Ukraine and the resulting energy crisis in Europe and parts of Asia. Along with the rest of the world, the U.S. saw a return to record high inflation, high energy costs and high food costs. Clearly, the world needs secure, low-cost energy now more than ever.
Yet even with this global backdrop, there continued to be a push toward rapid energy transition, moving from traditional energy sources like oil and natural gas to renewables. In part, this was a political push because historically, when traditional energy supplies like oil and natural gas cost more, it makes the cost profile of renewables look more favorable.
Renewable technology has certainly come a very long way in recent years, and it absolutely belongs in a smart energy mix that is developed based upon, as they say in the real estate world, location, location, location.
In a location like Alaska with extended periods of dark and deep cold each year, having a truly resilient energy mix that includes everything from renewables to fossil fuels is essential.
A great blendAccording to the International Energy Administration, in 2020 renewables accounted for 3% of Alaska's energy supply, 12% came from coal, 16% came from petroleum liquids, 28% came from hydroelectric sources, and 41% came from natural gas. All in, that's a great blend!
So why is it nearly impossible to get financing for new energy projects when 57% of Alaska's utility supply comes from fossil fuels?
Alaska has few options due to our climate, the distribution of our population across this vast landscape, and like anywhere else, the security of our power supply is paramount.
For the answer, we need look no further than the current ESG investing "initiatives" - that's how many banks refer to ESG in their lending policies.
These same institutions and the financial sector broadly, can also possess an often-shocking level of ignorance about Alaska; how we live, how the state regulates natural resource development and how the associated revenue directly supports our communities and benefits us all.
Most people know that Alaska became the 49th state in 1959, but few likely realize that it was the discovery of the Swanson River oil field on the Kenai Peninsula in 1957 that catapulted Alaska into statehood.
That discovery combined with the federal government's recognition of the enormous natural resource endowment that exists across Alaska, provided the assurance that Congress needed to be certain this new state could provide for its citizens and become economically viable. That realization resulted in a Statehood Act that preserved the rights to the resource wealth in the ground for the state and the people of Alaska.
Beginning of ESG in AlaskaAlaska's Constitution later went on to say that every Alaskan would have the right to be notified and participate in decisions made regarding land use and resource development in the state. This was the beginning of "ESG" in Alaska.
The framers of Alaska's Constitution recognized that the use of the state's lands for activities of all kinds needed to be guided by input from the people and communities near those activities. That's one facet of the "S" in ESG.
In order to keep Alaskans informed about land and resource use, it is the state that has the responsibility to notify the public, not just the entity that is proposing a project.
Roughly a decade after the discovery of the Swanson River field, when North America's largest conventional oil field, Prudhoe Bay, was discovered on Alaska's North Slope, the "S" in Alaska's ESG took another giant leap forward.
The passage of the Alaska Native Claims Settlement Act (ANCSA) in 1971 became the largest land claim settlement in U.S. history and addressed the Alaska Native land title considerations that had been held in trust by the federal government since statehood. Through ANCSA, Alaska Natives were granted 44 million acres of land defined in regional areas important to each of the 12 distinct peoples of Alaska and established the private regional corporation structure that has been working on behalf of Alaska Natives ever since. This was an important piece of federal law in that it gave Alaska Natives the title to their lands and the right to develop them and their mineral resources, as they deemed appropriate.
The federal government also compensated Alaska Native corporations nearly a billion dollars for land lost in the settlement agreement.
Unlike the reservation system widely applied in the Lower 48 states, ANCSA resolved Native land claims in a fashion that gave self-determination to Alaska's Native corporations.
ANC's share approximately 70% of resource revenues generated on Native lands among all 12 corporations, which in turn split those revenues with village corporations and shareholders.
Perhaps most importantly, ANCSA recognized the unique cultures and traditions of the Alaska Native peoples and through its structure helps to honor and preserve those cultures.
Alaska Permanent FundRight on the heels of ANCSA, another hallmark of Alaska ESG was born - the Alaska Permanent Fund. The Alaska Permanent Fund was established in the Alaska Constitution by a vote of the people in 1976 and receives royalty revenue generated from principally oil and gas developments on state leases, which feeds the corpus of the fund.
The Permanent Fund represents both "S" and part of "G" in ESG because not only does it pay dividends directly to qualified Alaskans, putting those dollars directly back into Alaska's economy, the Permanent Fund now covers roughly 70% of the state's operating expenses each year.
Operating expenses that include education, health services and programs like power cost equalization that helps reduce the high cost of energy in Alaska's remote communities. This structure, and the state budget process, give Alaskans transparency on how royalties from resource development projects on state lands are being used.
Even after a very tough year on the stock market, the Alaska Permanent Fund finished 2022 with a balance of approximately $75 billion, and that balance continues to work for all Alaskans, every day.
Boroughs and municipalitiesNo discussion of the "S" in Alaska ESG would be complete without a mention of the bonds and property tax revenue that local boroughs and municipalities derive from resource development projects within their borders. This is the life blood of social and community support in some of Alaska's most remote communities.
Local property taxes are unquestionably the single largest source of revenues for places like the North Slope Borough (NSB) which received in excess of $390 million in petroleum property tax revenue in Fiscal Year 2022.
Historically, these revenues have been used to support utility services in the widely spaced communities of the North Slope, used to build critical infrastructure like the Samuel Simmonds Memorial Hospital in Utqiaġvik, and used to support search and rescue operations across Alaska's Arctic.
With an eye to the future, the North Slope Borough has wisely established their own "Permanent Fund" to preserve wealth and ensure sustainable communities within the NSB for years to come. At the end of Fiscal Year 2022, the NSB Permanent Fund had a balance of nearly $1 billion. None of this would be possible without socially and environmentally responsible oil and gas development on the North Slope.
Other communities helpedIn addition to the NSB, petroleum property tax revenues contribute significantly to communities like Valdez, home of the TAPS Marine Terminal, and the Kenai Peninsula Borough from which southcentral Alaska's energy and much of the state's refined products are sourced.
Not as remote as NSB communities, these areas are connected to the road system but still rely heavily upon the revenues generated by fossil fuel projects in Alaska to support their social programs and maintain healthy communities. The very same type of fossil fuel projects in Alaska that the big ESG investment funds and banks across the country can't see their way clear to support - all in the name of ESG!
Environment most importantPerhaps the most important criteria of ESG, especially in today's world, is "E" - environment. Under the original Equator Principles, environmental considerations included ensuring developments used the least amount of water and land, protected other natural resources like fish and wildlife in the development area, and mitigated of potential impacts to the maximum extent possible.
When considering fossil fuel projects today, ESG criteria such as emission reduction, overall carbon footprint and zero venting of natural gas have all become environmental benchmarks. Once again, we can look to Alaska for decades of leadership in this category.
In Alaska, state law and regulation require the minimum land use possible for safe exploration and production operations, and Alaska's operators have risen to that challenge.
Back in the 1970s and 1980s when the legacy oil fields of the North Slope were under development, an industry standard gravel drill pad covered an area of roughly 65 acres. By 2016, the standard drill pad on the North Slope was down to just 12 acres in size, and the area of reservoir being contacted from that pad had increased by 4000% using extended reach drilling.
Alaska's comprehensive, science-based regulatory program provides oversight of project development, mitigation of impacts to water and air quality, protection of fish and wildlife, protection of subsistence rights, and mandates public engagement at all stages of a project from exploration through development. Multiple state agencies work together in a coordinated manner to ensure the protection and stewardship of Alaska's natural environment. Alaska law even prohibits venting of natural gas, recognizing this as wasting of a valuable state resource. And local boroughs and municipalities manage development across their regions under local planning authorities.
In the current discussion of ESG, carbon intensity and carbon footprint are perhaps the most talked about. According to online sources, the carbon intensity of Alaska's oil and gas operations comes in at a production-weighted average of 17 kg CO2/barrel of oil equivalent, placing Alaska in the lowest 25% for average carbon intensity. And operators are taking steps to further reduce their overall carbon footprint through actions like mitigating fugitive methane emissions from wells and production facilities and bundling transportation of people and materials wherever possible. All without ever compromising safety.
Possibly the most impactful progress toward carbon reduction in Alaska could come out of the Legislature this session. Gov. Dunleavy has recently introduced legislation that would create the statutory framework necessary for the state to establish a carbon capture and sequestration program. This legislation is critically important because at the present time, the state of Alaska does not have the legal authority to lease its subsurface pore space for purposes of sequestering carbon dioxide for long term storage.
The right to inject CO2 for enhanced oil recovery has existed for many years, but long-term storage is another matter altogether. This program could open the door not only for Alaska's operators to sequester CO2 produced by their operations, but also establish a new and highly competitive industry in the state. The carbon capture and storage industry is growing rapidly around the world and because Alaska owns its pore space, our state is being looked to as a preferred location for Asian companies seeking places for long term carbon storage when they have no viable options at home.
GovernanceThe final factor in ESG criteria is "G" - governance. In all of the examples already noted, it is the combination of Alaska's constitutional requirements, legal system, regulatory and compliance oversight, and the social license to operate that companies must have to successfully do business in Alaska that creates a business culture and level of transparency in our corporate citizens that is unmatched. Governance factors are inherently woven throughout the fabric of how resource development is undertaken in Alaska, on both state lands and on Native lands. We've all heard the adage that "no one takes better care of Alaska than Alaskans," and I would take that one step further and say, "no one takes better care of Alaskans than Alaskans."
In fact, according to an American Medical Association study, the life expectancy of Alaskans rose right along with Alaska's oil development. Between 1980 and 2014, life spans increased between 4 and 16 years, with the highest increases among residents of the North Slope Borough's Arctic communities. Resource development is good for Alaska, and we have been practicing what is now the popular notion of "ESG initiatives" for decades. Our communities and our people have benefitted greatly.
Alaska has an exemplary ESG record spanning more than 40 years, and it didn't happen by accident. It is intentionally engineered into how resource development is done in this state.
And even today, Alaska continues to demonstrate leadership by developing carbon solutions to support the global energy transition and we are expanding renewable energy sources in-state where it makes sense to do so.
It is imperative when any of us are talking with businesspeople or financial institutions outside of Alaska that we share Alaska's ESG profile and history. Education is key, especially now, as the financial sector continues to grapple with what its ESG "initiative" should look like. It is time to show them that in Alaska, real ESG values aren't an initiative, they're a way of life.