See Our Aussie Energy Expert's Current View On Alaska's Energy 'Leadership'

See Senator Lisa Murkowski's Reaction To Shell's Announcement

ADN/AP Shell Announcement by Dan Joling/Yereth Rosen

Our Commentary On Shell's Alaskan Arctic OCS Exit

With Alaska's "Plan B" failing what's wrong with relying again on "Plan A"?

by

Dave Harbour

Alaskans will be seriously questioning the future of their state when they wake up and read the news this morning.

This is because Alaska is more than any other North American state or province dependent on oil production and production is down, down, down.  

Alaska North Slope (ANS) production once fed about 20% of domestic oil supply at a rate in the '80s that exceeded 2 million barrels per day.

The Trans Alaska Pipeline System (TAPS) transporting that oil is about 40 years old now and — as important as it still is — it is merely a reflection of its former, vigorous self, losing about 5% of its throughput every year as ANS field production declines.  It's nearly 3/4 empty and without added production could shut down in a few years.

Shell's success could have helped sustain Alaska's job economy and ANS throughput in TAPS.

Alaska depends upon taxes and royalties from oil flowing through TAPS for almost 90% of its lavish state operating budget.  

Recent statistics label it the highest per capita spending state in the nation and the highest per capita debtor state in the nation.  It has the highest number of non-profit corporations in the country per capita, most of which are directly or indirectly dependent on oil for at least part of their budgets.

Available state savings accounts currently protect a $3.5 – 4 billion annual operating deficit, but that savings will be gone in a year or two.  Even a return to $100/barrel oil would not put Alaska in the black based on current production and state spending trends.

In addition, over a third of the 49th State's total economy depends on oil revenue and oil-dependent jobs.

Plan A

With falling production and increased opposition to oil operations both within and from outside Alaska, state policy has drifted aimlessly for many years.

It has pretty much been a policy of tax oil and spend that oil money while minimizing taxes/fees on people and maximizing transfers of state wealth to them.

"Plan A" first began to surface in the mid-1980s when various business groups began advocating for a constitutional amendment limiting government spending via a population and inflation formula.

By the early 1990s the University of Alaska's Institute of Social and Economic Research (ISER) began showing the public and elected leaders how very modest spending controls THEN could have provided a "safe" and sustainable glide path toward a long-term, sustainable economy for current and future generations.

ISER has provided another path to sustainability (i.e. "Maximum Sustainable Yield") for the last few years, also largely ignored.

Neither an effective constitutional spending limit nor economically viable "safe economic landing" were embraced by those holding the purse strings and whose pleasure and reelection were sustained by taxing oil and spending on constituent desires.  (Note: Civic groups did succeed passing, in 1982, an amendment, but lawmakers loosened it to allow capital project designations, among others, to weaken the stricter "population and inflation" formula.  (Alaska Constitution, Article IX, Sec. 16)

Plan B

With oil income falling and spending continuing to increase over the years, even the most deluded politicians could see that "something should be done".

We call that "something" the strategy of hope, which took four forms:

a.  Hope that the 1980 Alaska National Interest Lands Conservation Act's congressionally authorized "1002" area within the Arctic National Wildlife Range (ANWR) would be successfully developed, contributing to TAPS throughput, jobs and economic stability; and

b.  Hope that sufficient new oil would be found in the National Petroleum Reserve Alaska to maintain robust throughput of TAPS, state economic stability and jobs; and 

c.  Hope that sufficient new oil would be found within existing Alaska North Slope fields and other state lands to maintain robust throughput of TAPS, jobs and state economic stability; and

d. Hope that sufficient new oil would be found in the Alaskan Arctic OCS to maintain robust throughput of TAPS, jobs and state economic stability.

And wouldn't it have been nice if all four hoped-four outcomes had materialized?

How has the strategy of hope worked out for Alaska?

Well, the State has continued its upward spending and taxing trend, somewhat ameliorated by an oil tax reform law two years ago, but continually challenged by liberal lawmakers and their constituencies since then.

The president is operating the federally owned land in ANWR as if it were a wilderness area — part of his end run around Congress using the 'pen and a phone' tactic.

The president's Bureau of Land Management (BLM) has promulgated regulations that effectively 'lock up' half of the National Petroleum Reserve Alaska (NPR-A).  Together with other regulatory agencies like the EPA, BLM has also significantly delayed and increased the expense of new oil production in areas of NPR-A that are open to exploration and development.

The current Governor is raising the old Palin flag of populism and anti-oil rhetoric, threatening the oil industry, endangering a pending LNG project, and signaling investors that investment even in existing oil fields — and other state lands — is accompanied by a high risk premium.  Some even believe that the objective of the current governor is to socialize the energy industry (Our notes, here and here).

Now, on top of these first three disappointing Plan B results comes Shell's decision based, in part, on a hostile, federal regulatory regime.

Conclusion

Plan A — involving support for Alaska's major industry and spending discipline — didn't work out when the Plan B strategy of hope offered the above 4 lifelines.

Now that the reality is setting in that there is so little hope for the strategy of hope,  Alaska may be forced to reconsider the best approach of all: the original Plan A.

Plan A has the negative qualities of being distasteful to big public spending and high oil taxing constituencies.

It requires citizens to 'do without' certain government amenities.

It requires lawmakers and the governor to seek the high road, be the adults in the room and prepare a sustainable economy for the next generation.  This includes fighting the hostile and debilitating overreach of the federal government.

But Plan A has the major benefit of preventing intergenerational inequity, of providing a sustainable economy for Alaska's children rather than robbing their generation to secure the selfish wants of this generation.

Keep watching.  We'll know the political class for what it is after absorbing today's news.  

Will politicians embrace Plan A along with the dedication and self discipline it requires?  

Or, will they do everything to avoid political pain at the expense of the next generation (i.e. as the federal government has done), perhaps by constructing a Plan C that is no more responsible than Plan B's strategy of hope?

Royal Dutch Shell will cease exploration in Arctic waters off Alaska's coast following disappointing results from an exploratory well backed by billions in investment and years of work

….

Shell has spent upward of $7 billion on Arctic offshore exploration, including $2.1 billion in 2008 for leases in the Chukchi Sea off Alaska's northwest coast, where an exploratory well about 80 miles off shore drilled to 6,800 feet but yielded disappointing results.

…

"Shell continues to see important exploration potential in the basin, and the area is likely to ultimately be of strategic importance to Alaska and the U.S.," Marvin Odum, president of Shell USA, said in The Hague, Netherlands. "However, this is a clearly disappointing exploration outcome for this part of the basin."

Shell will end exploration off Alaska "for the foreseeable future," the company said, because of the well results and because of the "challenging and unpredictable federal regulatory environment in offshore Alaska.  (Our emphasis added.  -dh)

The Burger J well drilled this summer will be plugged and abandoned, Shell spokeswoman Megan Baldino said. 

Read more at ADN…

Other references will be added here:

 

Alaska's LNG Prospects

Today, our Aussie oil and gas analyst friend wrote:

Further to the news story on Friday about the sovereign risks facing LNG projects even in the USA, such as Alaska LNG (AKLNG)  – Alaska's populist Governor has subsequently formally introduced a concept that no doubt will look attractive to his peers in Mozambique, Tanzania, etc – a "gas reserves tax".  

The intent of this concept is to tax resources in the ground, thereby presumably encouraging oil companies to develop assets.

The concept shows a fundamental lack of understanding as to what are "reserves" – which seems surprising for a State which is built on the oil industry.  

Although Alaska's North Slope contains very substantial and well understood contingent resources of gas – it contains no gas reserves and will not do so until AKLNG reaches FID (i.e. reserves require commerciality).  

By seeking to tax in-ground resources, Alaska's Governor reduces the chances of such resources actually becoming (commercially available) reserves.

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FRIDAY

September 25, 2015

LNG

Regular readers will know that this blog considers the Alaska LNG (AKLNG) project to be the Aesopian tortoise of the LNG project world – not as flashy as some, but plodding towards first gas next decade.

However, that tortoise carries a heavy shell that would be familiar to LNG project proponents in most locations around the world – a Government that wants to maximize its share of something that does not as yet exist – and therefore risks getting a larger share in nothing rather than a reasonable share in something.

Australian readers of this blog will likely be familiar with only one Alaskan Governor – the surprisingly socialist (when it comes to taxing oil companies) Sarah Palin.  Her populist instincts live on in the State and even the Russian news service Interfax today points out that AKLNG risks being bogged down by politics 

Alaskan based website Northern Gas Pipelines  today provides an update on the latest Government meddling in AKLNG and asks the reasonable question – “with so many government cooks in the LNG kitchen, really, what could possibly go wrong?”

SitNews, Ketchikan, Alaska, by Mary Kauffman

Alaska Governor Bill Walker issued a proclamation Thursday calling the Alaska Legislature into a special session next month to consider legislation to move a project forward to get the natural gas on the North Slope to market. Efforts to to commercialize North Slope gas dates back to the 1970s.

Addressing what the Governor describes as the urgency of North Slope gas production, Walker called the special session to be held in Juneau on October 24th.

“With a $3.5 billion budget deficit, this gasline project has gone from a wish-list item to a must-have,” said Governor Walker. “Under the negotiation process I inherited, very little has been accomplished on the commercial agreements. It is time to make the necessary legislative changes so a single party cannot delay the production of Alaska’s natural gas resources and sway our destiny.”

Senator Lisa Murkowski's reaction to Shell's announcement

U.S. Sen. Lisa Murkowski, R-Alaska, today released the following statement regarding Shell’s decision to suspend operations in Alaska’s offshore waters:

“I am extremely disappointed by this decision, just as I have been deeply frustrated by the years-long path that led to it.

“In the more than seven years that Shell has held leases in the Chukchi, it has only recently been allowed to complete a single well. What we have here is a case in which a company’s commercial efforts could not overcome a burdensome and often contradictory regulatory environment. The Interior Department has made no effort to extend lease terms, as recommended by the National Petroleum Council. Instead, Interior placed significant limits on this season’s activities, which resulted in a drilling rig sitting idle, and is widely expected to issue additional regulations in the coming weeks that will make it even harder to drill. Add this all up, and it is clear that the federal regulatory environment – uncertain, everchanging, and continuing to deteriorate – was a significant factor in Shell’s decision.

“What we need – but still do not have – is a predictable and sensible regulatory system both onshore and offshore that encourages companies to make major investments in our future. Continued uncertainty will only further damage our competitiveness and our economy. And so today, I call on the administration to work with Alaskans – to develop a legitimate plan, driven by our input and preferences, to ensure the prolific resources in our federal areas are produced.

“There are many steps that can be taken, if the Interior Department and others commit to working with us. We must enable the sanctioning of GMT-1 and further development in NPR-A, rapidly progress Liberty and open new areas in the nearshore Beaufort Sea, extend offshore lease terms, conduct Lease Sale 237 as scheduled, finalize a strong Five-Year Plan for 2017-2022, provide for offshore revenue sharing, and expedite leasing throughout the state – including the non-wilderness portion of ANWR.

“There is also more at stake here than the current status of one company’s exploration program. Development in the Arctic is going to happen – if not here, then in Russia and Canada, and by non-Arctic nations. I personally believe that America should lead the way. The Arctic is crucial to our entire nation’s future, and we can no longer rely solely on private companies to bring investments in science and infrastructure to the region. As the Arctic continues to open, we urgently need to accelerate our national security investments in icebreakers, ports, and other necessities.”  (See the source here.)

TODAY'S RELEVANT CONSUMER ENERGY ALLIANCE ENERGY CLIPS:

Southeast Green: PACE Says EPA's Clean Power Plan Would Raise Consumer Costs, Yet Fail to Lower Earth's Temperature 
The Partnership for Affordable Clean Energy (PACE) issued a statement today that criticized the Environmental Protection Agency's unprecedented mandate on carbon dioxide emissions under its Clean Air Plan, especially the change to demand more reductions by 2030.
 
DC City Biz List: Offshore Drilling Could Boost The Economy Or Be An Unnecessary Risk
Drilling for oil the coast of Virginia is either a chance to boost the economy or an unnecessary risk for beachfront communities and the environment. Voices on both sides of the argument were in Richmond on Thursday for a forum hosted by the Consumer Energy Alliance.
 
Consumer Energy Alliance: CEA Leads Discussion on the Need for Responsible Atlantic Offshore Energy Development
Consumer Energy Alliance today hosted the 2015 Atlantic Energy Forum in Richmond, Virginia, featuring Abigail Ross Hopper, Director of the Bureau of Ocean Energy Management and other distinguished panelists.
 
New York Times: Shell Abandons Disappointing Offshore Alaskan Well
Royal Dutch Shell said Monday that it would stop exploration off the coast of Alaska “for the foreseeable future.” The decision came after the Burger J well, which the company drilled this summer, produced disappointing results. The company said the well had “found indications of oil and gas, but these are not sufficient to warrant further exploration” of the Burger prospect, a geological structure.
 
The Hill: Senate Dems tell Obama to end Arctic drilling
Some Senate Democrats are once again asking President Obama to end oil and natural gas drilling in the Arctic Ocean. In a letter Friday, 12 senators asked Obama to block any additional drilling after Royal Dutch Shell wraps up its exploratory drilling in the Chukchi Sea, northwest of Alaska, this fall.
 
The Hill: Clinton explains shift on Keystone, other key issues
Hillary Clinton on Sunday pointed to the nation’s shifting energy profile for her opposition to the Keystone XL pipeline after she had initially seemed to voice support for its construction. In an interview on NBC’s “Meet the Press,” Chuck Todd asked Clinton if her position on Keystone had changed as a matter of political expediency.
 
Post and Courier: Hillary’s slick move on XL pipeline
Hillary Clinton continued her unimpeded march toward the Democratic presidential nomination for 2016 by announcing her opposition to the Keystone XL pipeline. In doing so, she checked another box on her campaign strategy list, reassuring some core Democratic voters and probably ensuring some large campaign contributions.
 
The Hill: Energy empowers the world’s poor
The White House, the United Nations, even the Vatican are in full court press for action to reduce manmade global warming at the climate summit in December. Many well-intentioned people believe manmade global warming is so dangerous we should spend trillions trying to prevent it by reducing emissions of carbon dioxide (CO2), which would require tremendous reductions in fossil fuel use.
 
Fortune: Why America’s power grid needs natural gas now more than ever
Now that the Obama administration has finalized its Clean Power Plan regulating greenhouse gas (GHG) emissions from the power sector, the focus of attention turns to the states, which must now find a way to reduce emissions consistent with the Plan. One question states face as they envision a lower carbon future is how much to rely on natural gas-fired generation.
 
Washington Examiner: House sets vote to lift oil export ban
The House is set to consider a bill on the floor this week to lift a 40-year-old ban on exporting crude oil from the United States. The bill is being supported by the House leadership as integral to the Republican energy agenda this Congress, and many high-level lawmakers have vowed to see it passed before the end of the year.
 
Bloomberg: Oil Traders May Look to the Sea for Profit Amid Price Collapse
The global oil glut may soon expand to the ocean. While traders are already cashing in on the surplus by housing oil in onshore tanks across the globe — including on the tiny Caribbean island of St. Lucia– expanding the storage to tankers at sea may near a point where it becomes profitable, according to Citigroup Inc., Goldman Sachs Group Inc. and IHS Maritime & Trade.
 
Associated Press: Alaska’s Walker brushes aside reserves tax criticism
Gov. Bill Walker on Friday brushed aside criticism from Republican lawmakers that they were blindsided by his call to reinstate the gas reserves tax during the upcoming special session. “I sat right at this table and talked about fiscal certainty and project certainty,” Walker said during a news conference at his Anchorage office. He met with lawmakersMonday to inform them of his call for the special session, which starts Oct. 24 in Juneau.
 
Alaska Highway News: Despite fracking fights, resource extraction key for Peace Region, says NDP candidate
When Kathi Dickie was considering whether to run for parliament as a New Democrat in Northeast B.C., one question was on the top of her mind. "My question to the NDP was if you're against development of our natural resources, then I'm not your candidate," Dickie told the party brass.
 
Beaumont Enterprise: Keystone XL Pipeline needs market decision
Democratic presidential candidate Hillary Clinton came out against the Keystone XL Pipeline last week, a decision that will have an impact on the 2016 race. And Southeast Texas, because the Valero refinery in Port Arthur would process 150,000 barrels a day of tar sands crude from Canada – if it ever gets here.
 
Midland Reporter-Telegram: Government agency plans intensive safety study – Two-year project targets all aspects of oil and gas industry
High salaries and soaring numbers of new jobs were not the only things attracting attention as the oil and gas industry boomed in recent years. Industry fatality, injury and exposure rates drew focus, especially from the National Institute for Occupational Safety and Health, part of the Centers for Disease Control and Prevention.
 
Fuel Fix: California regulators restore emissions-cutting fuel rule
California regulators on Friday restored ambitious rules to cut transportation fuel emissions 10 percent within 5 years. The rules further strengthen California’s toughest-in-the-nation carbon emissions standards, but oil producers warn the changes could drive up costs for consumers at the gas pump.
 
Denver Post: Colorado oil companies say they are safer, stats say otherwise
The country's oil and gas companies say they are cooperating more and working harder to make jobs safer for employees even as a new report suggests oil-field work has never been more dangerous. The industry touts the rise of training networks, partnerships with governments and tough certification standards as helping to improve the work environment in one of the most dangerous jobs in the country.
 
Fuel Fix: Pro-industry group throws support behind drilling on Texas university land
A pro-industry group is firing back at calls by environmental advocates to restrict drilling on university land in Texas, arguing that oil and gas revenue has provided massive financial support for the University of Texas and Texas A&M.  
 
Houston Chronicle: Community colleges offer training for petrochem jobs
Petrochemical plants along the Texas Gulf Coast and the Port of Houston are spending billions of dollars to expand facilities. It is estimated that these projects, along with the retirement of existing workers, will provide jobs for more than 50,000 skilled workers.
 
Austin American-Statesman: Houser: Concerns about fracking on UT land overstated
University Lands, which comprises about 2.1 million acres of land in West Texas, is a resource unlike any other in the nation. The lands were set aside in 1839 specifically to benefit Texas higher education. Today, more than 20 academic and health institutions in the University of Texas and Texas A&M systems benefit from these assets.
 
Baton Rouge Advocate: Our Views: New roles for natural gas, including on the road, will help Louisiana’s growing natural gas industry
The price of oil is sharply down from last year, but if there’s one thing Louisiana has still got, it’s lots of natural gas at a historically low price level. That is of course good news for the metropolitan areas of the state, including big refineries in Baton Rouge and Lake Charles and in the River Parishes above New Orleans.
 
Columbus Dispatch: Oil, gas industry boosts local economy
There is no question, these are tough times for Ohio’s oil and gas industry. Prices for crude oil and natural gas are at their lowest levels in decades. The downturn in prices and drilling activity has caused many people to ask questions: Is Ohio’s oil and gas industry still a major contributor to our local economy? How important is this industry to the average Ohioan? The answers are yes, and, in fact, more important now than ever.
 
Washington Times: GOP will allow tax vote, if Democrats secure enough support
Leaders of the Pennsylvania Legislature’s Republican majorities will allow a floor vote on a budget package that includes an income or sales tax increase if Democrats can secure enough support to pass it, officials said Friday.
 
Tribune-Review: 2 Marcellus pipeline projects move forward
Two large pipeline projects aimed at easing a glut of natural gas from the Marcellus shale advanced in the federal permitting process this week. Houston-based Columbia Pipeline Group said its proposal to build the $2 billion, 165-mile Mountaineer Xpress in West Virginia entered a pre-filing phase before the Federal Energy Regulatory Commission.
 
WKBN: Judge tosses Pa. landowners’ lawsuit against fracking opponents
A judge has dismissed a lawsuit that landowners filed against people and groups who oppose fracking in a western Pennsylvania township. Natural gas drilling has been delayed in Middlesex, Butler County while some of the rural community’s 800 residents challenge a zoning ordinance that would allow drilling in 90 percent of the rural township.
 
Myrtle Beach Sun News: Offshore Wind a Viable Source for Future Electrical Energy
It’s evident, or should be, that electrical energy in the future will come from sources other than fossil fuels such as coal, oil or even natural gas. Offshore winds are one of the most viable alternate energy sources and coastal South Carolina residents should applaud ongoing efforts to produce power from the wind.