Alaskanomics

New book examines profitability of Arctic Alaskan oil

The Last Alaskan Barrel: An Arctic Oil Bonanza that Never Was by John M. Miller enlightens the fifty-year investment life of Alaska North Slope oil, and what oil prices, development costs, government take, environmental regulations, and development risks did to the earnings. The book presents a groundbreaking case study, based on publicly available information, which analyzes the profitability of the North Slope, and how it was shared among the state of Alaska, the federal government, and oil companies. The book finds, contrary to popular belief, that if oil companies had been able to foresee the future accurately, they never would have developed the North Slope over the past fifty years. The book concludes with a glimpse of future oil and gas potential in Arctic Alaska.

The Last Alaskan Barrel begins with abridged histories of Alaska and the oil age leading to exploration of the Arctic. In 1969, a year after the dramatic discovery of large oil deposits near Prudhoe Bay, a White House Cabinet Task Force commissioned by President Richard Nixon claimed the nation was swimming in cheap Alaskan crude. An updated federal study just two months before the start of production in summer 1977 contradicted the earlier assessment. Over the succeeding decades, unexpected low oil prices, unforeseen high costs, and a variety of taxes shrank the size of the prize. The book concludes with a glimpse at future oil and natural gas potential in Arctic Alaska.

The Last Alaskan Barrel is written to be comfortably understood by the public, with technical jargon and economic calculations (included for those interested) kept to a minimum. Those entries can easily be skipped with no bearing on the story. All details have been completely documented by sources in the public domain. Intending the book to be read by all Alaskans and the public in general, the author revisits decades of news headlines and corrects commonly believed myths and misconceptions.

For more than a decade, John M. Miller managed megaprojects valued at billions of dollars for Alaska's North Slope. In the late 1990s, he chaired the Trans-Alaska Pipeline System (TAPS) Owners Committee. He started his research to answer his own questions. He hopes a well-informed public, especially those with children, will make the adjustments in attitudes and expectations to face the radical changes coming in Alaska's economic, not too distant, future.       

   
Book reviews, biographical and contact information, a radio interview with Mike Porcaro, speaking engagements, and links to Amazon where the book is available can be found at http://www.thelastalaskanbarrel.com/.

Myths - and the Truth - about Alaska’s Natural Gas Pipeline

By Larry Persily
Federal Coordinator
Office of the Federal Coordinator

The Alaska Natural Gas Pipeline will benefit the nation and the state in a number of ways – through reduced dependence on imported energy, replacement of electricity generated by coal with cleaner-burning natural gas, accessibility to gas for Alaska’s energy needs and economic growth, construction jobs, royalties to Alaska’s Permanent Fund, taxes and other payments to state and federal governments.

One of the most important benefits, however, is the increased exploration and production that a natural gas pipeline would stimulate. The Trans-Alaska Pipeline (TAPS) will be almost ¾ empty by 2020, according to the Alaska Department of Revenue’s December forecast. Half of the oil projected to be flowing in the pipeline in 2020 is not being produced today. TAPS is 34 years old and needs billions of dollars of investment to keep it working for decades longer. Tens of billions more in exploration and development investment will be needed to find the oil Alaska is counting on for future budgets. Alaska will be more competitive in attracting those investment dollars if producers can turn not only their oil into profits but also any natural gas they find.

There are a number of myths, however, about the viability and benefits of the Alaska Natural Gas Pipeline project. It’s important for Alaskans to understand the truth in order to make good decisions going forward.

Myth: Shale gas has destroyed the market for Alaska gas. Shale gas has its own problems. Much of it is technically recoverable but not economically recoverable. Many of the new discoveries are near urban areas. Concerns about hydraulic fracturing, a technique used to extract shale gas which requires huge amounts of water mixed with sand and chemicals and injected deep underground, have caused several local and state governments to ban drilling for shale gas or at least consider restrictions. Shale gas production will continue to grow but may not grow as much as some expect, due to the environmental concerns and water issues.

Myth: The Lower 48 doesn’t need Alaska’s gas. There has been a substantial decline in older, mature gas fields in the Lower 48 and Canada, just like the decline in Prudhoe Bay production. Companies are drilling more and finding less – the number of gas and gas condensate wells drilled in the U.S. between 1989 and 2008 increased 80% while production only increased 20%. North America needs new production to meet the decline in conventional sources of oil and gas, plus meet forecasts for increased electrical utility demand. Shale may not fill the entire need.

Myth: It would be better to export Alaska’s gas because gas prices are higher in Asia. Alaska’s gas is at a cost disadvantage compared to other sources of liquefied natural gas (LNG) once pipeline costs are added in. There are $200 billion in LNG projects underway or under development in Australia alone for the Asian market – all at or near tidewater. China has shale gas that the U.S. is helping them develop, or they can import pipeline gas across the border from Russia. Asia is growing fast, but North America will continue to be the largest gas market in the world.

Myth: Well, then we should export our LNG to the U.S. West Coast. It doesn’t make economic and market sense to export Alaska LNG to the West Coast, because that market represents just 10% of total U.S. demand – with no pipes to the Midwest.  The federal Jones Act would require that U.S.-built tankers carry Alaska’s gas to West Coast consumers, but no LNG tankers have been built in the U.S. in almost 40 years.

Myth: Gas prices are too low to make a pipeline project economic. Today’s prices don’t matter. The producers are looking at prices in 10, 20 and 30 years. Today’s gas oversupply is priced into the market and, as in the past, when supplies tighten, prices will rise. There could be a market for Alaska’s natural gas – if demand grows and if Alaska gas is priced competitively, which will require a reasonable state tax structure.

Myth: We don’t want to let Alaska’s gas go through Canada, or let it be siphoned off to meet Canadian needs.  Canada is not going to steal our gas because they don’t need the methane, and they can’t legally tax it. Canada is already the largest supplier of natural gas to the United States, with many pipes crossing the border. In the end, however, it doesn’t matter who buys the gas, where they distribute the gas across North America, or what they use it for – natural gas is a commodity and Alaska’s molecules are no different than others. Any sale of Alaska gas generates taxes and royalties to the state based on the market value.

Myth: The EPA is our enemy. While Alaska has had tussles with the EPA over a bridge over the Colville River and clean air standards for Shell’s exploration program in the Chukchi Sea, when it comes to the Alaska Natural Gas Pipeline, the EPA could become one of our best friends. It is going to become more and more difficult for utilities to justify coal plants for power generation under EPA’s proposed greenhouse gas regulations.

The federal coordinator's office for the Alaska natural gas pipeline is sponsoring a public forum on natural gas markets on January 22, with experts from the government, financial and consulting sectors who will explain Lower 48 supply and demand issues including shale gas, the effect of federal clean air regulations on natural gas demand, and foreign markets for liquefied natural gas. The purpose of the forum is to help Alaskans understand the potential for a North Slope gas pipeline and the economic issues affecting that potential. For more information on the forum, click here.  

 

Alaska's Permanent Fund World's Tenth Largest Oil Fund; 18th Largest Overall

According to a November 2010 ranking by the Sovereign Wealth Fund Institute, Alaska's Permanent Fund ranks 10th in the world by assets among oil-funded Sovereign Wealth Fundsm and 18th among all sovereign wealth funds. Alaska's $37 billion in assets is small in comparison to the leader - the United Arab Emirates Abu Dhabi Investment Authority Fund, with $627 billion in assets. Alaska's is one of three U.S. funds and the only U.S. fund completely funded by oil revenues; Wyoming has a minerals-based fund of $4.7 billion and New Mexico has a $13 billion fund based on land and resource revenues and the state's tobacco settlement.

Judge to State: "Taxes are Taxes"

by Dan Dickinson, CPA

Last week Alaska State Superior Judge Peter Michalski ruled that as a matter of law, “lost taxes” are not among the damages that the State can recover from BP as a consequence of leaking and shutdown North Slope pipelines in 2006.

I’m not an attorney. I haven’t read the briefing.  I’ve attended just enough of the oral argument to know that these are very complex issues. The State and BP appear to have excellent legal teams, and there will be many hours billed before these issues are finally resolved.

However, I have read the judge’s three page decision and it makes a point worthy of consideration in a wider context.   Oil taxes are imposed by the legislature on a “taxable event.”  If the taxable event doesn’t occur, there is no levy of tax.

That decision counters an unfortunate notion that seems to be gaining in popularity: namely that state oil taxes aren’t really like the “bad taxes” administered by the IRS – they are just the price at which we sell our oil.  The people of Alaska own the oil, this line of reasoning goes, and the constitution demands that Alaska’s natural resources be developed for the “maximum benefit of its people.” The highest oil prices – in the form of taxes -- maximize the benefit to the people.  Anything lower, and we are impermissibly moving benefits from the people to big oil.

Judge Michalski points out one of the major problems with this line of argument.  Taxes are not an agreed upon sales price the state has negotiated with a willing buyer; rather, he reminds us, the “State collects taxes in its role as a sovereign.”
 
We have chosen to tax oil production while allowing many other economic events in other industries to enjoy limited or no taxation.  We should be having a debate about tax policy and how much economic activity has grown or been stifled from low taxes in certain industries and high taxes in others.   This decision reminds us we shouldn’t pretend the debate is about negotiating a sale price for our oil.

 

U.S. Crude Oil Reserves Increase 8.2%; Alaska's Reserves Up 1.7% in 2009

Crude oil reserves in the U.S. were 20.7 billion barrels at the end of 2009, compared to 19.1 billion barrels at the end of 2008, according to a report by the U.S. Department of Energy. The 8.2% overall increase resulted from a number of positive and negative changes to reserves:

• A net increase of 1.9 billion barrels from adjustments and revisions
• A net increase of 950 million barrels from sales and acquisitions
• An increase of 122 million barrels from new field discoveries
• An increase of 1.2 billion barrels from extensions and new reservoir discoveries in existing fields
• A decrease of 1.7 billion barrels of production during the year

Alaska's reserves increased by 59 million barrels, to 3.57 billion barrels, from the end of 2008 to the end of 2009, primarily on revisions. There were just 9 million barrels of new field discoveries and 25 million barrels of extensions - reserve additions resulting from additional drilling and exploration in previously discovered reservoirs. Other changes included:

• A net increase of 242 million barrels in revisions
• A decrease of 7 million barrels in sales
• A decrease of 210 million barrels of production during the year

The net revisions were primarily related to higher oil prices, as operators consider more of the resource base to be economically producible. Prices for West Texas Intermediate crude were 39% higher at the end of 2009 than prices at the end of 2008. When oil prices dropped in 2008 operators made "near-record" negative revisions to reserves.

The 34 million barrels of new reserves added in 2009 in Alaska was just 16% of the 210 million barrels produced.

Alaska's Population to Grow 25% by 2034; Number of Seniors will Double

Alaska's population will grow 25% from 2009 to 2034, to 862,750, according to a forecast in the December issue of the Alaska Department of Labor's Trends publication. The forecasts are based on demographic factors - births, deaths, and migration (in and out). Highlights from the report include: 

• The over-65 age group will more than double, with seniors representing 14.5% of the state's population by 2034. Alaska will still have a younger overall population than the U.S., however. Over the same time period, the U.S. senior population is expected to increase from 12.9% to 19.8% of the total population.
• The Mat-Su Borough's population will grow 80.8%, to more than 152,000 people - from 12% of the state's population in 2009 to 18% by 2034.
• The Municipality of Anchorage's population will grow 25.6%, to nearly 365,000 people - staying at a constant 42% of the state's population over the 25-year period.
• Population in the Fairbanks North Star Borough will increase 16.8%, to nearly 110,000 people.
• The Northern Region, including Nome and the North Slope Borough, will grow 25%.
• The Southwest Region, including Bethel, Bristol Bay, Dillingham and the Aleutians, will grow 27%.
• Growth will be slower in the Gulf Coast region, including the Kenai and Kodiak boroughs and the Valdez-Cordova census area. Their population will grow 6.8%, to nearly 82,000 people.
• All of the Southeast Alaska boroughs and census areas will shrink, with the Southeast Region as a whole losing 14.2% of its population, decreasing to about 59,000.

U.S. Natural Gas Reserves up 11% on Shale Gas Discoveries; Alaska's Up 18% Due to Revisions

The U.S. Department of Energy (DOE) released a report on U.S. natural gas reserves last month based on an annual survey of 1,200 domestic operators. Total U.S. proved natural gas reserves, including Alaska, grew from 255 trillion cubic feet (tcf) at the end of 2008 to 284 tcf at the end of 2009.

• Shale gas reserves increased 76%, with 24.8 tcf of new discoveries in 2009.
• Coalbed methane and Lower 48 Offshore reserves dropped 10% and 7%, respectively, as low discoveries did not replace production for the year
• Lower 48 onshore reserves increased 2.5%, with new discoveries outpacing production by about 6 tcf

Alaska's reserves grew from 7.8 tcf at year end 2008 to 9.2 tcf at year end 2009, but there were no discoveries reported in Alaska for 2009. The net increase of .7 tcf, after .4 tcf of production, was all categorized as "revisions and other changes." The DOE notes that "revisions occur primarily when operators change their estimates of what they will be able to produce from the properties they operate using existing technology and prices." Low natural gas prices typically result in downward revisions to existing reserves, but operators' revision in Alaska increased reserves by 1.1 tcf.

Low Foreclosure and Delinquency Rates Continue in 3rd Quarter

Alaska continues to have one of the lowest levels of foreclosures and delinquent residential mortgage loans in the country according to the Mortgage Bankers Association 3rd quarter survey.

 
Alaska ranked 4th best in the nation behind North Dakota, South Dakota, and Montana as having the lowest percentage of mortgage loans delinquent, meaning more than 30 days past due, but not yet in foreclosure. Alaska’s rate of 4.95% was significantly better than the national average of 9.4%. The U.S. remained unchanged, while the delinquency rate in Alaska did increase 0.2% from 4.76% in the 2nd quarter of 2010. The highest rate for Alaska was the third quarter 2009 survey at 5.1% and the recent low was 2.7% in the third quarter of 2008. Nationally the delinquency rate was 6.2% in June of 2008 and increased to 10.4% by the end of 2009. It then showed an improvement of 1% in the first quarter of 2010 declining to its current level of 9.4% for the last three quarters.

Alaska ranked 2nd best of all 50 states in both total foreclosures in progress and those started in the 3rd quarter of 2010. Alaska’s total foreclosure rate of 1.1% compares to 4.4% nationally and both areas showed improvement in the third quarter. Alaska’s rate improved 0.3%. It had averaged 0.9% in 2008 and then began to rise in 2009 to a high of 1.4% at the 3rd quarter. It remained at that level in 2010 until this quarter’s improvement. Nationally the foreclosure rate was 2.8% in 2008 and continued to rise each quarter, reaching 4.6% by year end 2009. It has remained constant at this level in 2010 until the 0.2% improvement in the third quarter.

Subprime loans, to traditionally unqualified borrowers, were a major source of the mortgage problems that plagued the country recently. However, Alaska continues to have the lowest level of subprime loans delinquent or foreclosed in the nation. Alaska’s subprime delinquency rate is 12.3% while the national average is 26.6%. The second lowest state is Colorado at 19.2%, so Alaska is far ahead of the pack in this key category. It is important to note that Alaska is still 6% worse than its recent low of 6.3% in the 3rd quarter of 2008.