Oil & Gas Legislative Update
Favorable legislation bodes well for Alaska’s future
For the past several months things have been looking up in Alaska’s oil patch. Oil prices are edging up, announcements of big discoveries keep coming, and favorable state and federal legislation bode well for the immediate and long-term future of Alaska’s oil and gas industry.
Perhaps the biggest news came with the passage of the federal tax overhaul bill in December, which includes a provision to open a portion of the Arctic National Wildlife Refuge (ANWR) to oil and gas leasing, a goal Alaska’s congressional delegation has been attempting to reach for decades.
ANWR was created under the Alaska National Interest Lands Conservation Act (ANILCA) in 1980. ANILCA took about 8.9 million acres of land in northeast Alaska previously designated as wilderness and added another 9 million acres of public land to create the refuge. Approximately 1.5 million acres of land along the coastal plain was not designated as wilderness, but Section 1002 of the act mandated studies to assess its wildlife and potential petroleum resources. That strip of land became known as the 1002 Area, and USGS estimates show it may contain 10.4 billion barrels of technically recoverable oil.
However, ANILCA’s Section 1003 states "production of oil and gas from the Arctic National Wildlife Refuge is prohibited and no leasing or other development leading to production of oil and gas from the [Refuge] shall be undertaken until authorized by an act of Congress.”
Since the 1980s, Alaska’s congressional delegation has attempted to open the 1002 Area to leasing but fell short in administration after administration until this past December.
As chairman of the Committee on Energy and Natural Resources, Senator Lisa Murkowski wrote the section of the bill that calls for an environmentally protective oil and gas development plan in the 1002 Area of the refuge. The plan requires two lease sales over the next ten years.
“This is a watershed moment for Alaska and all of America,” Murkowski said after the bill passed. “We have fought to open the 1002 Area for a very long time, and now our day has finally arrived. I thank all who kept this effort alive over the decades, especially Ted Stevens and Frank Murkowski, and all who supported this bill. Alaskans can now look forward to our best opportunity to refill the Trans Alaska Pipeline System, thousands of jobs that will pay better wages, and potentially $60 billion in royalties for our state alone. This is a major victory for Alaska that will help us fulfill the promises of our statehood and give us renewed hope for growth and prosperity.”
Alaska Governor Bill Walker says the move is a “historic opportunity for Alaska.”
“This is an important priority for my administration given the potential for significant new revenues from lease sales and production,” Walker notes in a statement. “The State of Alaska will work with the US Department of Interior to support their efforts to prepare for these lease sales and ensure that local input is taken into consideration. Alaska has a long history of safe development on the North Slope, and new technology is making the footprint of development even smaller.”
In April, the Bureau of Land Management issued a draft notice that it would begin to prepare an environmental impact statement for a leasing program in the 1002 Area. The process includes a sixty-day public comment period and five scoping meetings in Alaska communities.
That notice is the first step in a long process to conduct the lease sales, says Kara Moriarty, Alaska Oil and Gas Association president and CEO.
“Alaskans have long supported leasing and responsible development in the coastal plain, which was set aside for oil and gas development,” she says. That step is only the first in a years-long process.
“You won’t see production for—assuming you have a successful lease sale—probably ten to fifteen years,” she says.
Alaska Oil Tax Credit Bond Measure
In the meantime, Alaska needs to focus on increasing production, she says. For the past several years, state tax credits have been an important tool in state policy. The credits are largely behind an 80 percent boost in Cook Inlet gas production since 2010. Smaller, agile companies such as Caelus Energy, Repsol, and Armstrong Energy entered the Alaska market and larger ones, such as BP and ConocoPhillips, increased their investment on the North Slope.
As a result, oil and gas companies have been making enormous discoveries, such as Repsol and Armstrong Energy’s Nanushuk field, which has contingent oil reserves of 1.2 billion barrels of recoverable light oil, according to Repsol. It is the largest onshore oil discovery in Alaska in thirty years.
ConocoPhillips says 2017 was its best exploration season in years. It could add 100,000 barrels of oil per day to the trans-Alaska pipeline, which has a current throughput of about 550,000 barrels per day. The company planned to drill five wells in the National Petroleum Reserve-Alaska, but drilled six instead because of improved operational efficiencies. All struck oil. The company didn’t release any estimates, but it says it expects to see another strong season next year.
In a statement, ConocoPhillips Alaska’s President Joe Marushack says that if Alaska maintains its current fiscal policies, its exploration work could lead to billions of dollars in investments, including “significant new revenue for the state, the federal government, and the North Slope Borough and villages and the creation of hundreds of new direct jobs.”
The state Legislature ended the tax credit program in 2017, saying it had become unaffordable. For the past three years, the state has made only a partial payment to companies owed money under the program because of budget constraints.
But after years of paying only partial rebates and vetoing hundreds of thousands of dollars in payments, the tax credit program was in shambles and damage was done to both the ability of oil and gas companies to operate in Alaska and the state’s reputation.
By early 2018, the state owed about $900 million under the program and its delay in paying the rebates “has damaged the state’s reputation and chilled future investment; caused projects to be shelved, resulting in negative economic impacts to the state and local communities; and many Alaskans are now out of work, especially in the oil and gas industry,” AOGA’s external affairs manager, Brandon Brefczynski, told the Senate Resources Committee in March.
In December, the governor introduced bills (HB 331 and SB 176, respectively) that would allow the state to sell bonds to pay off the tax credits in a lump sum. The Department of Revenue would issue ten-year bonds covering the total cost of the tax credit obligations. The oil companies would be encouraged to take up to a 10 percent discount in the face value of the credit certificates in order to be paid immediately, which would pay for the bonding measure. The state would face annual payments of about $115 million; much less than the estimated $200 million it would face for 2018.
The House passed the bill in early May, but it took until the very end of its extended legislative session for the Alaska Senate to pass it.
“Refinancing the debt we owe in tax credits will unfreeze global capital for Alaska projects across economic sectors,” Senator Cathy Giessel said in a news release. “We look forward to these companies resuming exploration and development that puts Alaskans to work and supports Alaska’s revenue stream.”
AGOA’s Moriarty says the passage of the bond bill will have an impact in the next one to three years.
“That allows companies to repay loans and continue to reinvest in Alaska,” she says. “And then, you also look at, in the short term, the fact that we did not have an increase in the tax policy even though there was a strong desire by members of the state House to increase taxes. Some even wanted to see an increase of tripling our taxes.” If something like that would have passed, that would have had a devastating impact on the industry immediately.
“So, fortunately, we dodged that bullet, for now,” she says.
While taxes help with the short-term picture and development in ANWR helps shape the long-term, Moriarty says it’s hard to say if one is more important than the other to the oil industry.
“The reality is you need all of it to sustain a healthy economy for the state of Alaska,” she says. “All of these together continue to lay the framework and environment for us to be successful both here in the short term as well as the long term.”
Draft Climate Change Policy
Some uncertainties remain.
Walker created a task force to come up with a draft climate change policy for the state. The draft focuses on a series of short-term targets such as reducing greenhouse gases by 30 percent by 2025; increasing the use of renewable energy sources; increasing the state’s energy efficiency by 15 percent; and producing half of its electric energy through renewable sources by 2025.
It suggests the state increase its investment into clean energy and focus on natural gas as a “bridge fuel.”
An early version of the draft included a line that says, “there is an economic and ethical imperative to pursue a transition away from a global dependence on fossil fuels,” which was removed in the most recent version. The draft does acknowledge that the state economy is dependent on natural resource development. One of the plan’s goals is to “develop an energy transition scenario planning and strategy that leverages current and potential oil and gas development and the benefit of increased clean energy alternatives.”
The draft was open for public input through June 4.
A final report is due in September, which could lead to policy changes in the upcoming Legislature, Moriarty says.
“Depending on what that looks like, that can either be a good thing or a bad thing for our industry,” she says. “So it’s a little too soon to tell.”
Fish Habitat Initiative
Moriarty says she’s keeping the climate policy draft on her radar, as well as what she calls the fish habitat initiative, which could “really ruin everything.” Otherwise known as the Stand for Salmon initiative, the measure would change laws regulating fish habitat and set new Department of Fish and Game guidelines under Title 16 for permitting mining and oil and gas projects. Proponents say the measure would promote responsible resource development. Opponents say it would effectively eliminate large-scale projects around the state.
Backers of the initiative gathered enough signatures for it to go on the November ballot. However, the initiative’s constitutionality has been questioned, with Lieutenant Governor Byron Mallott saying the measure crosses the line as far as appropriating the state’s natural resources, which is up to the Legislature, not the public.
A Superior Court judge overruled Mallott and in April the initiative went before the Alaska Supreme Court, which has been asked for a ruling before September.
Moriarty says the initiative bills itself as a salmon habitat measure, but it is far broader in scope.
“It changes the way you permit all fish habitat,” she says. “The proponents call it Stand for Salmon, which is a convenient misnomer. In addition to salmon, it also applies to twenty-one other species of anadromous fish. So it’s not solely applied to salmon species, it applies to all fish habitat in Alaska.”
A coalition consisting of Alaska’s twelve Native regional corporations, resource development industries, unions and trade groups, and the Alaska Chamber formed an opposition group called Stand for Alaska.
Alaska Gasline Development Corporation President Keith Meyer says the fish habitat initiative would prevent construction of the long-awaited Alaska natural gas pipeline project. Walker also opposes the measure, saying that using the initiative process for measures that could impact development concerns him.
Moriarty says the initiative would ruin the oil and gas industry.
“It wouldn’t matter that they would have the tax credit bond bill and it wouldn’t matter that you have these new large discoveries and it wouldn’t matter that they might have an eventual lease sale in ANWR,” she says. “All of that would not matter if the initiative passes, because the initiative will make it virtually impossible to permit new projects.”
Julie Stricker is a journalist living near Fairbanks.