Why Alaska Increasingly Resembles a Petro-State

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Alaska has long been one of the United States' largest producers of oil; it currently ranks fourth in oil production, with about 542,000 barrels per day. But the state has experienced a general decline in production since 1990, when it peaked at around 2 million barrels per day.

 Alaska Field Production of Crude Oil

Less oil means fewer dollars coming into state coffers, which presents a serious threat to the state's fiscal outlook. In an attempt to arrest the decline in oil production, Alaska's legislature, governor, and representatives in Congress have aggressively supported offshore oil drilling in the Chukchi and Beaufort seas, which hold an estimated 29 billion barrels of oil.

But Royal Dutch Shell's (NYSE: RDS-A  ) failed Arctic campaign has doomed those hopes for now. Shell cancelled drilling plans for 2014 and hinted that it may not return next year. With new CEO Ben van Beurden's decision to steer the company away from so-called "elephant projects," the Arctic is seemingly not a priority.

In response, Alaska has decided to take a much more active role in buoying its production of oil and gas. On April 20, the state legislature passed a law that to allow Juneau to directly invest in a natural gas pipeline and LNG export facility. The state plans to invest in 25 percent of the project, which includes an 800-mile pipeline that would connect to an LNG export terminal. The infrastructure would eventually allow for 16 to 18 million tonnes of LNG export capacity.

Gov. Parnell hailed the action as "a historic moment for Alaskans."

"By passing Senate Bill 138, the legislature has put Alaska on a path to controlling her own destiny by becoming an owner in the Alaska LNG Project," he said.

The move was remarkable because if Alaska indeed makes such an investment, it would mark the first time a U.S. state has taken such an enormous position in an oil and gas project.

Government ownership of oil and gas projects is common around the world – globally, state-owned companies own more than 90 percent of global oil reserves and 75 percent of production. But in the U.S., state legislatures, particularly those controlled by Republicans, are keen to protect free-market principles and keep government out of business.

The fact that Alaska's Gov. Parnell has made resisting federal encroachment into state affairs a guiding principle of his administration, and has enjoyed the support of the anti-government Tea Party, makes it all the more odd that his government would take an equity stake in what should theoretically be a private business deal.

His move makes it clear that Alaska has become a petro state. More than half the state's budget, including 90 percent of discretionary spending, comes from oil revenues. In such an environment, it is politically impossible to be anything but fully supportive of the oil industry, even if that means injecting the state into private projects.

Last year, the legislature blew a hole in the state budget when it approved an enormous tax cut for the oil industry by scrapping a progressive tax scheme that linked tax levels to the price of oil. State legislators voted to replace it with a flat 35 percent rate, which translated into a $750 million tax cut for the industry.

Shortly after, in December, 2013, the Alaska Department of Revenue projected that the state would take in $4.3 billion in oil revenues in fiscal year 2014, down from $6.3 billion the year earlier. Next year, revenue will fall further, to $3.9 billion.

To plug the holes in the budget, Gov, Parnell has sought to slash government spending.

But the new tax law could potentially be voted down if it ends up on the ballot in a voter referendum later this year. The oil and gas industry obviously opposes the idea of a referendum, arguing that the new rate has triggered increased investment since it came into effect earlier this year.

"Thanks to tax reform, Alaska is now on course for increased investment and production and even the possibility of LNG," Janet Weiss, BP's President of Alaska Region, recently said in a written statement.

Whether those new investments will be enough to make up the lost tax revenue remains to be seen.

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