Community Perspective

Hilcorp is Alaska’s corporate strategy

The Hilcorp purchase of BP assets should not be a problem. The real problem is that Alaska needs to fully fund its agencies that regulate the oil and gas industry so that those agencies have adequate manpower to run their tasks. Indeed, Hilcorp’s announced exploration for oil and gas north of Fairbanks shows a bigger problem. On the surface, it looks like Fairbanks will finally get natural gas that is as low cost as Anchorage’s. But the reality is much more subtle.

First, what Hilcorp’s exploration looks to show is that Hilcorp is a model business citizen in Alaska working not only in the Anchorage and Cook Inlet Basin, where they have been producing oil and gas for a few years now, but elsewhere too. It also serves to make Fairbanks citizens more favorable to the issues surrounding the BP buyout.

Second, by showing that Hilcorp is expanding and possibly hiring workers in Fairbanks, it shores up a governor facing some tough opposition, and that gives Hilcorp a big ally. After all, in Alaska’s rush to reduce the size of its government, the Department of Natural Resources, the Department of Revenue and others have lost employees and cannot look into as many regulatory issues. This means the governor and his staff have an enhanced ability to determine issues for the oil and gas industry, such as how taxes are accounted for.

Third, Hilcorp says it is exploring for oil and gas, but really all it has to do is run a few above-ground aerial gravitational and other tests to see if a prospective oil and gas field could exist. Then it will make a huge announcement that Hilcorp is “drilling.” This is not unlike all the publicity surrounding the wells in the Nenana Basin south of Fairbanks. Does anyone else remember that, “Doyon has spent more than 10 years and $100 million searching for gas in the Nenana-Minto Basin. Totchaket No. 1 was the fourth well drilled by Doyon in the Nenana region,” and yet they did not find anything? And all that drilling cost comes out of your PFD in the form of tax credits. Those credits could have built a small pipeline by now.

Now, whether or not prospect information would normally induce new drilling in the area is beside the point. The very act of drilling “proves” they are expanding business opportunity, even though tax credits pay for a lot of it. And of course Dunleavy, and strategic allies, will pronounce far and wide how this governor was responsible for this business growth. “Fool me once, shame on you, fool me twice, shame on me.”

The interesting point about this is it will tend to keep in place all the credits that keep Anchorage in subsidized natural gas bliss since such a drilling prospect will induce all of Fairbanks to want to “wait and see” before they get cheap natural gas too. This will then reduce any momentum by the state to build an in-state natural gas pipeline. Strategically by not building an in-state pipeline it keeps Anchorage in fearful obsession about running out of Cook Inlet natural gas, and that benefits Hilcorp because then it can keep its tax credits for drilling in the Cook Inlet area.

This is actually not just about Dunleavy but the previous governor as well. Basically, Alaska is reducing overall state economic growth based on the fear of running out of Cook Inlet natural gas. So, once again all of Alaska’s institutions, such as the University of Alaska system, oil taxes and Alaska’s economic growth structure, are being taken hostage by Anchorage. At least the U.S. Constitution gives appropriate political weight to geographic regions.

But as far as Hilcorp corporate strategy goes, you play politics, finance and marketing to get the best deal you can. In fact, any commercial enterprise should be allowed to buy any asset, merge with any company and run any business in Alaska, and it is up to the state to make sure laws and manpower are in place to keep things safe, economically beneficial and above board. Having a charter for such a merger isn’t a bad idea due to monopoly concerns, but if you absolutely need a charter in order to have a merger or acquisition take place, then it must be the case that you cannot govern properly.

Doug Reynolds is a professor of petroleum and energy economics at the University of Alaska Fairbanks. He can be contacted at dbreynolds@alaska.edu.

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