THORNING: Closer than ever to tapping Alaska’s natural gas

Published in The Washington Times

The current unrest in the Crimean Peninsula has focused a bright spotlight on the world’s ever-growing need for safe, reliable and friendly sources of energy.

Given our own energy renaissance here at home, the United States is poised to become an even larger force in the global supply of liquefied natural gas. Nowhere is the potential more clear than in Alaska.

More than 40 years ago, a massive natural-gas reserve was discovered off Alaska’s North Slope. In the four decades since, the major energy producers and the state have unsuccessfully tried to reach agreement to bring that gas to market.

Today things are different, though. Thanks to the leadership of Republican Gov. Sean Parnell and the state Legislature, as well as a growing demand worldwide for natural gas, the economics of the project finally make sense. The state is moving full speed ahead with capitalizing on the moment.

In January, Mr. Parnell announced the state would take a $5.75 billion stake in a natural gas and infrastructure project — including building an 800-mile-long pipeline from the North Slope down to Nikiski — estimated to cost at minimum $45 billion. Just recently, the state Senate overwhelmingly approved the authorizing legislation needed to formalize the agreement and start theengineering work. The state House is expected to do the same and send the bill to the governor’s desk for his approval before the current session ends next month.

Although it will be years before this natural-gas project starts to deliver the estimated $3 billion a year in additional revenue, the state cannot afford to wait. In recent years, state leaders have watched oil production — long the backbone of the state’s economy — drastically decline. This is a particularly troubling trend in a state where 90 percent of all revenue and one in three jobs is tied to the energy industry.

The high-yielding oil fields in Prudhoe Bay have generated less oil in recent years in large part because of the state’s old oil-tax structure, Alaska’s Clear and Equitable Share. Since 2007, oil production declined 6 percent per year on average under that tax structure, which tied the state’s tax rate to the volatile price of oil.

In fairness, this created a boon for the state during years of high oil prices, but it also made a disincentive for companies to make critical investments when oil prices were too high, because the tax rate was disproportionally high.

While that tax policy dealt only with oil production, it had a profound impact oninvestment decisions by energy companies that produce both oil and gas. Last year, the Legislature enacted an oil-tax reform law that helped reduce the state’s dependence on price volatility.

In turn, tax reform created a far more predictable investment climate for the major energy companies, and those companies are already making sizable investments in future energy production. This includes the millions of dollars invested at places like Point Thomson on the North Slope that wouldn’t make economic sense without natural gas being part of the picture.

Alaska is closer than ever to making this all a reality, but the potential could be lost if Alaskans elect to repeal the oil-tax reform the Legislature passed last year. A vote to repeal the oil-tax reform would take the wind out of the gas project’s sails, return the state to the old Alaska’s Clear and Equitable Share structure, and would make the state far less attractive to investment because of the unpredictability of future oil taxation.

A stable fiscal environment is necessary to make the multibillion-dollarinvestments to extract Alaska’s natural gas and build the necessary infrastructure.

Now the world is waiting to see if Alaska truly embraces this potential and once again becomes a world leader in energy production, or is content to wait another 40 years.

Margo Thorning is chief economist and senior vice president of the American Council for Capital Formation.