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Oil, gas adviser to the world Too much reliance on oil revenues can lead to trouble, says Pedro van Meurs Larry Persily Petroleum News Juneau Correspondent This is the last in a three-part series on Pedro van Meurs, who has advised the state of Alaska on oil and gas tax policy since 1996. Alaska has the same problems as many other oil- and gas-rich nations around the world, says international consultant Pedro van Meurs. Other than the fact that Alaska is a state, not a country, it has the same overdependence on resource revenues, the same competitive quest for the industry’s limited investment dollars, and the same troubling reluctance of its citizens to pay for government services.
“Alaska is the only state that has world-class problems that require international expertise,” said van Meurs, who answered the phone more than seven years ago when the state Department of Revenue called in search of advice on Alaska’s competitive position in world markets for liquefied natural gas.
The state has called on van Meurs several times since that first consulting contract in 1996.
“Alaska is a very informed democracy … a very participatory democracy,” he said, adding that the state’s near-total reliance on oil and gas revenues, mixed in with its participatory democracy of vocal citizens, can add a formidable element to the task of finding long-term answers to the state’s fiscal future. Budget problems worry industry “The oil industry is worried in every nation where government depends excessively on oil for balancing its budget,” van Meurs said. That’s true in Venezuela, Kuwait, Saudi Arabia and Alaska. Industry’s fears of a government relying too much on one revenue source “colors their investment decisions.”
Alaska is benefiting from today’s high oil prices, but van Meurs said he does not imagine they will last, and said $20 to $25 per barrel is a reasonable price expectation for the next decade. “It would be very wise if Alaska balanced its budget in that price range.” A stable, diversified budget is more attractive to investors, he said.
And it’s not only Alaska that has budget problems. Kuwait and Saudi Arabia run a deficit even at high oil prices, van Meurs said. “Oil is not always a blessing. A dependency philosophy is being created among the people.
“People think oil has to pay for everything.” Citizens lose connection Too much reliance on oil revenues means citizens can lose the connection between government services and their own contributions toward those services, he said, adding that he has seen it in Venezuela, Kuwait, Mexico and Alaska. “In all these there is a sense in the public that they don’t have to pay taxes, they don’t have to contribute because there is oil.
“Every time you come to Alaska you detect the same unwillingness on the part of citizens to contribute to the services government is providing,” van Meurs said.
Kuwait and Venezuela face similar problems. Kuwait’s government would not survive if it even thought out loud about imposing a personal income tax, said van Meurs, who has done a lot of work for the country. And Venezuela has imploded because its citizens can’t deal with paying for services.
Fiscal stability is the key to attracting investment dollars and to assuring oil and gas companies that your country — or state — is a good place to do business, he said. That’s why Alaska’s Stranded Gas Development Act makes so much sense. Stranded Gas Act a good move The act, adopted by the Legislature in 1998 and amended this past session, allows the administration to negotiate a contract with companies for payments in lieu of state and local taxes on a proposed natural gas pipeline from Alaska’s North Slope. The fiscal certainty of a schedule of contractual payments would be a benefit to the state and to the companies that want to build the project, he said.
The state anticipates receiving a project application from the North Slope producers sometime this fall, and has signed on van Meurs to advise Alaska on the eventual negotiations. Although he declined to discuss any specifics of his work for the state, he was quick to offer his opinion that Alaska needs to act quickly to grab a piece of the North America gas market.
“The window on selling Alaska gas to the Lower 48 is coming down,” van Meurs said.
Alaska Gov. Frank Murkowski and the state’s congressional delegation are pushing hard to win congressional support for federal tax incentives to encourage construction of a $20 billion gas pipeline from the North Slope to the North America distribution grid in Alberta. It’s a smart move, said van Meurs. Answer needed to price risk The North America gas market is fickle. “Rather quickly you get upturns and rather quickly you will get downturns.” Although he sees long-term gas prices hanging around $4 to $4.50 per thousand cubic feet — sufficient to cover expected costs of the Alaska project — the risk of inevitable low prices worries the producers, he said.
“This is a market with an almost daily attitude.” And that is why the producers and the state are working for federal tax supports. “The governor has made absolutely the right decision to push this very hard at this time,” van Meurs said.
And while it may seem as if Alaska has the option of turning its gas into LNG and shipping it overseas, so do many other suppliers around the Pacific Rim and in the Middle East, he said. And all of Alaska’s competitors will benefit from falling LNG liquefaction plant construction costs and larger and more cost efficient tankers.
As Alaska LNG proponents see their cost estimates drop, so too do the competitors, none of which need an 800-mile pipeline through the arctic to bring natural gas to tidewater. Highway line Alaska’s best bet The state’s best bet at the moment to get its natural gas to market is to look to North America, van Meurs said. It’s simply a matter of price stability, he said. “The problem with the North America market is that the price movement is so extreme that investors can’t deal with it.” In the past three years, gas has run up to almost $10 an mcf and back down to $2 in some U.S. markets.
The United States needs to find a way to overcome market instability, he said, adding that federal tax credits to help North Slope producers is one option. “What is happening in Washington is eminently logical.”
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