Providing coverage of Alaska and northern Canada's oil and gas industry
May 2017

Vol. 22, No. 22 Week of May 28, 2017

The Explorers 2017: Long-term vision critical now

By Alaska Sen. Cathy Giessel

For Petroleum News

On June 20, 1977, history was made and the Trans-Alaska Pipeline System transported the first North Slope oil out of its Arctic confines. Since then, more than 15 billion barrels of crude would make the 800-mile journey across the largest state in America, providing energy security to the United States and transforming the state of Alaska.

It is remarkable that the Trans-Alaska Pipeline System, TAPS, came so close to never leaving the engineering drawing room. It took the persistence of the Humble Oil and Atlantic Richfield teams to weather the frigid winter of 1967, and several dry holes, to locate what is still North America’s largest oil field at Prudhoe Bay. It took a tie-breaking vote from the then U.S. vice president to stop a colossal lobbying effort from environmentalists in order for construction to forge ahead. It took thousands of dedicated workers, engineers and project managers to overcome some of the world’s largest construction challenges ever faced. And it took money: the building of TAPS was the most expensive private infrastructure project in history.

Forty years, 15 billion barrels and tens of billions of dollars later, Prudhoe Bay has created wealth for Alaskans in ways unimaginable in 1977. Optimistic projections at the time the first tankers left the marine terminal in Valdez was that the boom would last, at best, 20 years and recover 9 billion barrels of oil. Through innovation and hard work, the oil and gas industry poured two generations of wealth into our communities, our state treasury, and most importantly, into the homes of hardworking Americans.

This reminiscence is important on the fortieth anniversary of the Prudhoe Bay field development, not because we should look upon the past with nostalgic complacency, but because history, without the ability to inform the future, is not helpful to us. We need to reflect on the lessons of the past and assess where Alaska has been. We need vision for the future to remain relevant in a globally competitive commodity market.

The most important element for Alaska in attracting international investment to Alaska is in the reduction and management of risk.

Remoteness makes doing any type of business more costly; the larger the project, the greater the costs. Alaskans have wrestled endlessly with ways to overcome deal-killing project costs for decades.

One of our efforts to offset those high costs was through targeted incentives. Alaska became unique in the world by offering an upfront cash credit to an explorer, developer or producer that had yet to develop a substantive tax liability. By forward funding these projects, our end-goal was to maximize the time value of money and get production on line sooner, recouping investment more quickly for both Alaska and industry.

We worked to lower costs so that our basins would attract new entrants. Prudhoe Bay comprises only a fraction of the area available for exploration on the North Slope. After four decades, the assemblage of companies doing business in the north began to dwindle, and the rate of new discoveries decreased as well. By inviting a wider array of aggressive, independent explorers into the basin, we hoped to unearth its untapped wealth and prolong the life of our brownfield infrastructure.

The question I am often asked is, “Did those credits work?” Consider Hilcorp, who came to Alaska as a player in the Cook Inlet, who turned that basin around and secured the gas needs for Alaska’s major population centers. Then Hilcorp subsequently acquired North Slope leases and infrastructure, and is now bringing its dynamic and bullish approach to Prudhoe Bay and beyond. Caelus Energy made an extremely promising find in Smith Bay, which, if proven, would send over a billion more barrels down TAPS. Repsol, with partner Armstrong Energy, has made prospectively the largest find in North America in over a generation. These companies came to Alaska to do business because of the incentive structure we put in place.

Our greatest challenge now is managing the other aspect of risk: the risk of frenetic government interference. The oil price collapse in 2014 bludgeoned the budgets of companies and the governments that rely on energy production and revenue.

When faced with a massive drop in revenue, prudent managers reduce costs strategically, yet with forward vision. The rationale for this discipline is simple: do not destroy tomorrow’s seed corn to fix today’s problems.

Yet in 2015 and 2016, over half of a billion dollars in promised credits were unilaterally delayed by our state government, with no plan or modified payment schedule in place. Additionally, Alaska lawmakers counterproductively locked horns in the 2016 legislative session on this during a recession on this vital sector of our economy that was, by then, bleeding cash.

As this Thirtieth Legislature progresses, policy makers and citizens continue to engage in heated debate about the future of our state, and how essential services will be funded. Oil has paid for most of Alaska’s budget since 1977, and a portion of our fiscal gap will likely be funded through the earnings of our Permanent Fund. This fund turns our finite hydrocarbon resources into a perpetual, generational source of income that grows annually with royalties from oil and gas production.

The challenges we face as policymakers are daunting. The politically easy solution is to forgo the hard work of restructuring how our government is built and funded. It’s politically easy to look to industry cash flows every time we face a budget challenge. It’s politically easy, but short-sighted.

We Alaskans need the discipline to reflect upon the past 40 years, appreciate the delicacy of our resource inheritance, and recognize how precarious its survival is when short-term wants undermine long-term vision.

The discoveries announced in the last year have the potential to extend the life of our oil wealth heritage well into the future. I can think of no better legacy for Alaska than seeing its natural resources developed, creating opportunity and stability, while continuing to benefit future generations of Alaskans.

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