Charlie Munger, Warren Buffet’s financial officer of Berkshire Hathaway, once said, “incentives matter.” Take the oil tax credits in place here in Alaska.
The current Alaska oil tax law, SB 21, gives oil tax credits that incentivize the producers on the North Slope to drill more oil wells. This type of incentive is touted as a way to expand Alaska’s economy and create jobs when Alaskans first implemented it.
However, the credits also give Cook Inlet natural gas producers the cash to drill and consequently increase natural gas reserves specifically in the Anchorage metro area. This incentive was less publicized in 2013 and needs to be understood today as we consider SB 21 again.
In 2013, there was fear that Cook Inlet supplies would dwindle to the point where there would be cutoffs in natural gas availability during the coldest parts of the winter. The threat of cutoffs caused many people to think a higher price for Anchorage natural gas was needed in order to incentivize more storage and more drilling in the Cook Inlet area. But the tax credits proved the incentive necessary to increase Cook Inlet drilling and keep Anchorage’s natural gas bills from rising. Indeed, Anchorage has benefited more than any other region from SB 21.
To put it in simpler terms, all of Alaska is helping Anchorage benefit from energy subsidies when Anchorage already has the cheapest energy in the state and the rest of Alaska is breathing in a lot of wood smoke. And if any new crises occur in the Middle East, non-Anchorage area fuel bills will head into the thousands of dollars per household per season range. Unfortunately, SB 21 also takes badly needed revenue away from the state as a whole because it also forces the state to pay the producers to do their drilling on the North Slope.
The simple fact is that in the Interior, we are forced to pay a high fuel oil price, whereas Anchorage pays less than what would be their cost because the implicit subsidy, through SB 21, has added a great deal of natural gas supply to their reserves inventory.
Canada, though, shows an alternative solution, which is road-side, small-bore natural gas and propane pipelines that have been built westward and northward within Alberta and British Columbia, even in the Northwest Territories.
Based on Canada’s costs and experience, a North Slope to Anchorage roadside pipeline carrying about 100 billion cubic feet per year of propane and natural gas could easily be financed using normal credit markets and without a state government subsidy if Anchorage were to pay fair market prices for its natural gas.
The rate would be one based on the Department of Natural Resources Cook Inlet natural gas cost and reserves analyses. The pipeline would serve the Interior, including mining interests like those near Tanana.
Such a pipeline would not solve everything and would still need to be integrated with other energy sources such as continued Cook Inlet drilling (at a fair market price), coal-fired power and prudent use of fire wood.
But bringing in cheap propane to the outskirts of Fairbanks, supplying additional natural gas to Fairbanks, helping Alaska’s mining needs all across the state and even giving Anchorage a more secure energy supply would cost a lot less than the energy subsidies going to Anchorage and the producers.
Alaska is in a tough situation with a poor economy, lower government revenue and high costs. So judiciously using what resources Alaska has is important. Alaska is also in the economic doldrums, so why not help add some industry also by using the lower cost gas for the mining industry? A small-bore pipeline would create two, three or four times as much economic activity for the state as it would cost. And it will reduce a number of health-related problems for Alaska, a burden more apparent in some areas of the state than others.
You see, the cost of Anchorage’s energy subsidies is not just the lower prices of Anchorage metro area fuel bills but also the loss of revenue to the entire state due to the lower oil taxes. Anchorage is in essence bankrupting the state for the sake of a slightly reduced fuel bill in its already low energy cost area.
Right now, the federal Environmental Protection Agency is forcing the state to regulate Fairbanks’ energy solutions, sometimes to the tune of thousands of dollars per season per household, in order to follow clean air mandates. If anyone in Anchorage ever spent a day in an average family’s wintertime home in North Pole, they would be appalled and would immediately support a pipeline.
Doug Reynolds is a professor of petroleum and energy economics at the University of Alaska Fairbanks. He can be contacted at firstname.lastname@example.org.