Restructure Alaska’s Revenue System

If one considers all the options that could occur in the future for the State of Alaska, all of them lead to a similar conclusion. Alaska’s revenue system needs to be restructured.

There are two basic alternative scenarios that could occur in Alaska’s future. Alaska could get an Alaska Gas Pipeline, and additional revenue could either trickle or flow into the state general fund based on the profitability of the gas pipeline. Or Alaska’s gas could still be sitting in the ground on the North Slope because other forms of gas development in the lower-48 and the rest of the world were more economic than Alaska gas to produce. In that case no additional revenue would flow into the state’s general fund, and Alaska would be dependent on the existing oil revenue to balance its budget. Either alternative points to the need for a long term fiscal plan that takes into consideration the two above possible scenarios and all the variations in between.

The state’s worst case scenario would be for no gas pipeline to be built and for no major additional oil reserves to be found on the North Slope and the oil pipeline to eventually be reduced to a trickle. At that point the state’s major revenue stream would have dried up. We must be prepared for that as a viable alternative.

On the other extreme the state could be overflowing with additional revenue. The new exploration brought about by the building of the Alaska Gas Pipeline could bring on new discoveries in both oil and gas. The Department of Energy has stated that there are up to 35 billion barrels of oil and 137 trillion cubic feet of natural gas to be discovered on the North Slope of Alaska. If a substantial part of that is discovered by the oil and gas industry, then the oil pipeline will be full once again and the gas pipeline will be built and expanded to provide the space necessary for all the additional reserves that have been found.

A friend reminded me that there is one additional viable alternative that should not be discounted. That is GTL's. The GTL (gas to liquid) technology could take North Slope gas, convert it to a liquid, e.g., diesel, and ship it down the oil pipeline, extending the life of the pipeline and monitizing the natural gas on the north slope. If natural gas prices stay low for the long-term, this process could provide the greatest economic benefit to Alaska of all of the other viable alternatives. The benefit of the GTL process is that it can be brought on in phases. The cost of each phase would be substantially less that the greater cost of building a natural gas pipeline from the North Slope through Canada or to Valdez.

Prior to any of the above alternative scenarios occurring the state needs to develop a rational method for managing those funds, or lack thereof, instead of attempting to make decisions in the midst of “winning the lottery” or ending up in the poor house. A rational approach to managing funds is difficult when thousands of constituents are proposing great ideas on how to protect their interests.

The time has come for the State of Alaska to revisit the way it manages its money. If gas is not our future, then we need to make decisions now on how we are going to manage the oil wealth we have left. If gas is in our future, we need to decide now how we want to structure the state finances to manage that wealth into the future. If we decide now, we have up to 10 years to provide for a reasonable transition opportunity. If we wait until the last minute to decide, we limit our options and probably experience some level of pain, possibly a substantial amount of pain, in attempting a short transition.

The legislature is responsible to develop and maintain a budget that accounts for the needs of both the present and future generations. The funds received today, next week, or next year need to be handled responsibly. Extravagant projects today lead to maintenance burdens tomorrow. Funds should be expended or saved with an eye to their value and burden on the future.

If the state were to base its budget on what it could afford long term, then this would give the industry comfort that there would not be pressure on the legislature to increase taxes to bridge short term budget gaps.

If the oil and gas tax revenue were not immediately available to balance the State’s budget, then there would be less pressure to change oil and gas taxes to meet the State’s current needs.

If the State developed a rational long-term plan that accounted for the various scenarios that are possible in its future, then the producers would be less concerned about future changes in the tax structure.

If the State were able create a rational long-term fiscal plan and a reasonable oil and gas tax structure, then the producers would have fiscal stability, the open seasons would be given the chance they need for success, and the State would have a strong and viable oil and gas exploration and development industry in the State.