Jenkins: Pursuing gas instead of oil is stepping over dollars to pick up pennies

By Paul Jenkins |

An easily excitable friend wondered the other day: If Alaska is an oil state, which it most certainly is, and if it has a spending problem, which it most certainly does, why is it dorking around, spending boatloads of cash on a mega-LNG project when the real dough is in oil?

“It makes absolutely no sense,” he huffed. “Why not go after more of what made you rich? It’s like slurping broth when you could be having New England clam chowder.”

He could be right. As lawmakers continue selecting one budget fix from Column A and another from Column B, trying desperately to muster the political will to close a more-than-$3 billion spending gap, they are ogling everything from taxes to using the Permanent Fund to stanch the budgetary bleeding.

A reasonable person might wonder why the state, given the dire circumstances, would be spending millions in treasure and sweat on a mega liquefied natural gas project the North Slope’s major players artfully dumped in the state’s lap because it did not pencil out. Why, it could be asked, is the state not spending those millions to get the oil industry punching more holes in the North Slope to shore up the state’s shrinking revenues?

The real money these day, as my friend noted, is in oil — not LNG. The state has received more than $58 billion in oil production taxes since statehood; $11.5 billion in corporate income taxes; nearly $4 billion to the state and cities in property taxes; and, about $47 billion in royalties. That is a wad of cash.

The tab for the LNG project would be in the $45 billion to $65 billion range. Who would pay for it remains unclear. There are no customers; no contracts; no financing. It is estimated such a line carrying natural gas to a liquefaction plant in Nikiski would bring the state — depending on who you believe — about $1.5 billion a year.

What Alaska needs is more oil to fill the trans-Alaska oil pipeline, which now is gurgling along at about 25 percent of its 2 million-barrel-a-day peak. More oil would cushion the pain of lower prices. Despite the very pressing need, oil industry haters, Democrats and fellow traveler “fair share” loonies — ask them to define a “fair share”– want to cut tax credits that attract smaller, independent companies to explore the North Slope.

It is appallingly shortsighted, especially when you consider there is much oil yet to be found and produced on the North Slope, in new and legacy fields, and there is ample proof the credits draw companies like moths to a porch light.

Caelus Energy LLC discovered gigabarrels of recoverable oil at Smith Bay, near Utqiagvik. The company says it could not have done so without oil tax credits. Repsol and Denver-based Armstrong Oil and Gas say they have found the largest onshore discovery in the United States in three decades — perhaps as much as 1.2 billion barrels of light crude. Then, there is the potential for increased oil production near the National Petroleum Reserve-Alaska, where ConocoPhillips fields may pump as many as 150,000 barrels a day in a few years.

We need more of these companies, not fewer, as Alaska wrestles with its spending fixation. To make ends meet, the political left is taking to taxes like a puppy to white carpet and the GOP-led Senate is eyeballing the Permanent Fund, but there is little talk of a real, long-term solution.

The answer is obvious. More oil. To get it, we must stop throwing good millions after bad on a gas line that is more gas than line. Second, government must pivot to ensure our development partners — the oil companies, large and small working and exploring the North Slope — get what they need to find the oil we must have. Streamlined regulations, faster permitting, tax credits. Then, we must keep our word, pay the credits we owe and keep them available.

Imagine yourself in a partnership where your responsibility is to keep the books and set rules for what the partnership does. Your partner’s end is to develop and deliver a product for profit. How long would the partnership thrive if you spent your time poking your partner in the eye?

Alaska is an eye-poker among eye-pokers. Instead of constantly changing horses in midstream, or getting in the way simply to get in the way, state government should be trying to find ways to make its partnership with the industry work.

Nobody says we must give it free rein, but we need to abandon the LNG project, at least for now, and focus on ensuring the industry finds, produces and puts oil into the pipeline.

Stepping over dollars to pick up pennies is not a good fiscal plan.

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