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After sweeping legislative victories, Alaska governor says it's time for oil industry 'to do their part'

For Alaska Gov. Sean Parnell (R), 2013 is turning out to be a pivotal year.

Early this month, Parnell won passage of sweeping state energy legislation that he said will clear the path for expansive new oil and gas industry investment in Alaska.

Before the state Legislature left town a week ago, lawmakers approved the governor's controversial plan to slash oil taxes, adopted his streamlined permitting requirements for new energy projects and paved the way for construction of a small-diameter natural gas pipeline to carry energy to south-central Alaska.

Fresh from his victories in the Legislature, Parnell is now counting on the oil and gas industry to ratchet up its investment in Alaska energy development.

The governor asserted that the revised oil tax system will encourage energy companies to sink new wells in the state. "I'll be circling back to the energy companies, saying that we've done our part to adopt a more competitive tax regime here in the state," Parnell said in an interview. "It's time for them to do their part."

He is also counting on Exxon Mobil Corp., BP Alaska, ConocoPhillips Alaska and TransCanada Corp. to move forward with an 800-mile pipeline to export Alaska liquefied natural gas to Asian markets. The companies' most recent blueprints for the gas line also would allow state residents to tap into the pipeline at five off-take points.

Since elected to a full term in 2010, Parnell has been pinning his hopes on the oil and gas industry to help him turn around Alaska's economic problems.

Alaska's oil production is steadily declining, a serious problem for a state that relies on oil taxes for 90 percent of the state's $9 billion in unrestricted revenue. State residents pay no personal income or sales taxes.

"Alaska faces production declines," Parnell explained. "We're down in the 560,000-barrel range a day from a high of 2.2 million barrels per day" of oil flowing from North Slope oil fields through the Trans-Alaska Pipeline System.

Parnell argues that radical changes are needed to make Alaska more attractive to the oil companies that are increasingly investing in overseas projects and in shale oil and gas development in the lower 48 states.

"We basically have flat oil industry investment in Alaska while the rest of the world has been booming with these high oil prices," the governor said.

Focus on large gas pipeline

A key part of Parnell's energy game plan for Alaska involves building a large-diameter natural gas pipeline from the North Slope to an export terminal along the state's southern shores.

The multinational energy giants that pump oil in northern Alaska regularly encounter pockets of dry natural gas. But without a method of shipping the natural gas to market, the companies have been reinjecting it into their oil wells to boost production.

After decades of delay, Parnell is hoping to finally get a natural gas pipeline built.

In his January State of the State message, Parnell challenged Exxon Mobil, BP, ConocoPhillips and TransCanada to meet a series of deadlines for building the project. In keeping with that timeline, the energy giants are currently negotiating a commercial agreement to begin preliminary front-end engineering design work on the pipeline this summer.

"Things are starting to come together," said Joe Balash, deputy commissioner for the Alaska Department of Natural Resources. "It looks like the summer field season is going to be achieved, and the commercial agreement beyond that is also coming into clearer view."

So far, however, the multinational companies have not made a financial commitment to built the large-diameter export pipeline, which their analysts say could cost more than $65 billion (EnergyWire, Oct. 5, 2012).

Over the years, residents have grown weary as industry plans for a natural gas pipeline have repeatedly fallen apart. As a result, some Alaska leaders began pushing for a smaller-diameter line to carry North Slope fuel to the energy-starved Fairbanks region.

The state bill adopted by the Legislature this month would give the Alaska Gasline Development Corp. (AGDC), a state-owned corporation, greater independence and authority to move forward with the small-scale project.

But Parnell pointed out that the bill also would empower AGDC to "represent the state's interests" in any future negotiations over a merger of the state pipeline project with TransCanada's plans.

The governor noted that the separate gas line proposals "are currently on two parallel but merging paths." But he asserted that "we'll eventually see one pipeline. And my belief is it'll be a large-diameter pipeline."

Lessons from industry

Critics who oppose Parnell's oil and gas proposals often accuse the governor of siding with his former employer, ConocoPhillips. Parnell worked as a lobbyist for the company for four years and spent two years with the lobbying firm Patton Boggs, which frequently represents energy industry clients.

While denying that he favors the industry, Parnell said his experience with ConocoPhillips gave him an important inside look at industry investment strategies.

"It showed me how important the tax and permitting regimes are to the company's investment in the state," Parnell said.

The governor described one instance in which ConocoPhillips walked away from an Alaska project to avoid continued state regulatory setbacks.

"When the delays got to be too much, the company moved capital from the Alaskan project to another project in a competing area outside of Alaska," he recalled.

"That really shaped the way I act as governor," he said. "Hundreds of jobs were lost in that instance."

Parnell, 50, was born in Hanford, Calif., but grew up in Anchorage. He served in the Alaska House and Senate before being elected state lieutenant governor on the Republican ticket with gubernatorial candidate Sarah Palin.

When Palin resigned in 2009, Parnell filled her remaining term as governor.

After Parnell was elected to his own term in 2010, he immediately sought to scrap the progressive oil tax system put in place by Palin. His tax reform campaign has been backed by Alaska's three major oil companies: BP, ConocoPhillips and Exxon Mobil.

However, the governor's proposals were met with skepticism in the state Senate, where a bipartisan group of lawmakers warned that the revisions would shrink the oil tax revenue that the state depends on and quickly deplete Alaska's budget surplus.

Before adopting the tax reforms, the critics wanted the oil companies to guarantee that they'd hike oil investment -- a promise that the energy executives refused to make.

Instead, Parnell and a business-led coalition launched an election-year counterattack in hopes of rolling back oil industry taxes.

They actively campaigned against state senators who opposed tax reform legislation. In the end, two Republican and four Democratic tax reform opponents were defeated in the primary or general elections (EnergyWire, Nov. 8, 2012).

Short-term gamble

This year, with conservative Republicans controlling both houses of the Legislature, Parnell's tax reform proposals were eventually adopted, although not until the last day of the 90-day legislative session.

The new oil tax plan also abandons the state's progressive tax system and imposes a 35 percent flat tax on net profits. The plan offers a tax credit of $5 per barrel for new oil production.

And it includes a sliding tax credit to encourage companies to continue to develop energy fields when oil prices are low. That credit is set at $8 per barrel when oil prices are at $80 per barrel or less, but declines as oil prices rise.

Parnell concedes that in the short term the new oil tax system is likely to reduce oil tax revenues coming into the state. The governor's financial team predicts that if no new oil development occurs, the state will receive $500 million a year less by 2015 and $1 billion less by 2017.

But the governor said the oil industry revenue will climb as companies begin new projects in Alaska. "Two to three years out, we believe new production will come online," Parnell said. "The question is how much."

Just what projects should gain the tax benefits offered to "new" development under the revised tax system is already being debated in Alaska.

Days after the Legislature adopted the governor's tax cuts, ConocoPhillips announced that it was expanding work at three North Slope oil development sites to take advantage of the new tax regime.

Critics charged that projects were part of a business plan that ConocoPhillips unveiled to investors in February, before the tax legislation was adopted. But Conoco officials said the projects mentioned in the investors call did "not represent an increased level of capital spending, nor reference any new projects or initiatives."

Meanwhile, tax cut opponents have begun a petition drive that would allow Alaska voters to overturn Parnell's tax cuts. Organizers acknowledged, however, that they may have trouble gathering the required 30,000 signatures throughout the state by mid-July to have the referendum added to the ballot.

The governor insists that despite the hurdles Alaska faces in attracting new oil and gas development, the state can compete against the smaller costs of developing shale energy in lower 48 states.

Balash, the deputy commissioner for the state Department of Natural Resources, noted that the Alaska oil pipeline provides a convenient route to ship North Slope oil -- a convenience that is missing at shale oil projects in North Dakota.

"That makes Alaska a very attractive place from an oil perspective, because you get a higher price with lower transportation costs," he said.

In the aftermath of the 2013 state legislative session, Parnell began the ambitious job of rallying public support for his energy initiatives.

In an opinion column that ran in the state's major newspapers, the governor wrote that as a result of the new oil and gas policies adopted by the Legislature, "Alaska can now compete with states like North Dakota and Texas for investment capital and jobs."

"The Alaska Legislature has sent a strong message to the world: Alaska is back, ready to compete, and ready to supply energy to America," he continued. "Having produced only less than half of our known reserves, Alaskans have every reason to be optimistic about the future of our state."

Talking to a reporter the next day, Parnell echoed those sentiments. "The Alaska comeback starts now," he said. "I believe that, and I'm excited for what the future holds."

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