Resource Development Council

Former Governor Tony Knowles:
Reflections on Alaska's Relationship With the Oil and Gas Industry

November 1, 2007

Note: This is a copy of his speech, as provided

With a program that open the doors at 6:30 am I glad The RDC is providing a safe haven for sleep walkers.

This is the first speech in a year so I hope you’ll give me the same benefit of the doubt that Mark Twain did in his opinion of Wagner’s music when he said  – “it’s better than it sounds”

I was really reflecting on this morning’s invitation of the 5 panel cartoon that illustrated the life-cycle of a politician.  Beginning with a young man talking to a few friends, the to a larger group So in that mode Susan is very thankful that you invited me so she can take the morning off of being my audience.

Of course all the focus of the oil patch and the media is on the special session about oil taxes. One of the big arguments is how often the legislature should go adjust the oil tax with many saying that if they do if frequently it will discourage investment. How often they should go  reminds me of a story.  Let me warn you that all of the stories my fishing buddies have urged me to use over the years were not quite podium quality.  Now as a former politician my idea of podium quality has loosened considerably.  So here it is.

There was an elderly widower and widow who had become quite close.  They decided that it might be very nice to move in together.  They sat down one day to decide what would be the rules and responsibilities of this new relationship.  Who would do the shopping, who would do the cooking, keep the books, and finally at the end of their discussion the man asked the woman “what about making love?”  She replied “infrequently”.  The man scratched his head for a moment and then said “Is that one word or two”?

And if you asked the legislators how often they should go in special session to change the taxes they would all say “We should go infrequently”. Of course you be the judge if that’s one word or two.

What the real question should be is what should we be doing in oil and gas policy to create long term prosperity for Alaska. Tax policy is a part of that question and the answer in sorting out the details has to be done in the context of a much broader vision of the future.  As we use the microscope I hope someone also picks up the telescope and assumes the mantle of statesmanship that takes advantage of the incredible opportunity we have today for prosperity.

I believe with that telescope we will see how critical a long range financial plan is. How important that we use the high price of oil as the key to unlock the multigenerational oil development projects we have.  How urgent we must be in aligning all of the parties to construct the legacy project of the gasline. These three pillars of far sighted policy along with a fair tax policy can be the positive legacy of statesmanship our Governor and Legislature provides Alaska.

All of this requires an attitude.  Certainly a change in today’s atmosphere of personal attacks, accusation, blame, and fault that all too often prevails in the airwaves and print of public discourse. We need to first agree on just what kind of relationship Alaska should have with the oil and gas industry.  In my experience and observations I submit that it is a very simple one and non judgemental.  It is a financial partnership. No more no less.  We must not be afraid to call for a strong positive financial partnership because of accusation of being a schill for industry nor more than a tough negotiationg stance for fear of being labeled anti oil.  For success in any business partnership – public or private- there must be constant communication, a clear outline of purpose and goals, stability, and trust but verify. That’s the positive way to fill the airwaves and print and conduct public discourse.

Nobody disputes the magnitude of the financial partnership between the State of Alaska and the oil industry with oil industry expenditures creating, 34,000 direct and indirect high paying jobs, the creation of hundreds of small businesses, and providing 88% of the State’s budget with 5 billion dollars estimated in FY07.  The forty billion dollars in the Permanent fund has been completely seeded completely with oil revenues and there has been an additional 40 plus billion dollars in state revenues and another 40 plus billion invested in North Slope development.

Given the magnitude of the financial partnership let’s take a quick look at the four pillars of a long term policy for prosperity.

First the critical need of a long term financial plan. I believe it is irresponsible to enjoy, thanks to the high price of oil, a large budget surplus and not have a restraint on spending and a savings plan in place to prepare for the future.  The incredible oil revenues of the past two years were matched by the two largest budgets in state history under two different administration and Legislatures.  As might be suspected nothing was left on the table.

As Yogi Berra said predictions are hard especially if there about the future, but you don’t have to be wizard to figure out with the volatile price of oil and a reduction of oil flow the surpluses of today can quickly turn into deficits.  We are cheating future generation by not setting aside today’s surpluses into the Constitutional Budget Reserve where earnings from that fund could help pay for the essential services of education, public safety, and transportation.

Not only would this be the right thing to do for Alaskans, it would send a clear signal of deeds not words to the business community and the oil industry in particular that there is long term stability.  Every industry knows that with the first downturn in state revenues their pockets will be the first ones the government goes into.  Spending restraints not only grow the surplus but they limit the amount of future unsustainable programs.  A growing savings account assures that the earnings from that account will be a sustainable source of revenue that will protect the Permanent Fund, keep taxes low, and encourage business investment. Nothing threatens a stable tax climate (if you are the deep pockets) than overspending and failing to prepare for the future.

With a responsible plan for restraining spending and building savings we also need a focused long range plan to grow the oil economy.  The high prices of today are the key that can unlock multigenerational projects.  Satellite fields and new exploration will attract new capital and the State must be ready to partner with this surge of potential investment. Financial incentives for both new and existing fields, opening new areas for leasing, working with the Federal Government should all be part of a well orchestrated campaign for new production. Additionally the massive oil potential of the heavy oil fields needs both technical and financial strategy for successful progress.

For those cynics who think this is all pie in the sky I would refer them to a different time.  It was a time when oil prices hovered in the low teens and even dipped briefly to single digits and state revenues were plummeting.  In 1995 a new Administration and Legislature took on as the first order of business developing a long range financial plan.  It was bi-partisan with cooperation between the Legislature and the Governor.  I met with Senate President Drue Pierce and House Speaker Gail Phillips to hammer out a goal and a process.  We opened discussions with business and civic leaders.  We didn’t agree on everything and didn’t get it all finished but there was progress.  Alaska was the only state in the union during the nineties to cut their budget which we did for six years, we protected the Permanent Fund and the Constitutional Budget Reserve, we kept a stable tax policy, we identified alternative sources of revenue, and we worked to grow the economy.

One of the main sources of economic growth was the revitalization of the oil patch.  We started by clearing up two decades old tax disputes and brought clarity to future tax law. With John Shively as DNR Commissioner, new lands were opened for exploration with the first ever area wide lease sales.  We insisted that the Feds open up the NPRA for the first leasing in almost a generation.  We renegotiated the fiscal terms of Northstar to get that project going and worked with industry to open Alpine.  Oil production actually stopped declining for the first time in a decade.  There was a buzz of optimism and industry leaders were talking about “no decline after 99”.  The first ever serious discussions with industry and the public were taking place on the possibility of a gas line.

Isn’t is ironic that there was a strong financial partnership when oil prices were on the floor and everybody was hurting and now with oil at $90 dollars a barrel and record state revenues and corporate profits were at each others throats? And it doesn’t seem like anybody’s talking about how we can we grow the economy and bring Alaskans together.

Finally let’s talk a moment on the legacy project of our generation – the gasline.  Let’s speculate for a moment.  Don’t you think there would be an incredible sense of optimism if this special session instead of about taxes was about approving a gasline contract?

It’s been a year since the first contract was rejected. Under the terms of legislation that was passed last year there will be proposals due, after a delay, by the end of this month.  But I worry about the results.  I don’t hear anybody talking about whose going to outbid who.  There is no buzz or excitement about the opening date. Maybe I’m just out of touch. Instead of speculation about how many bids or how high they are the talk is about how few there may be. Perhaps only one or maybe two. 

Whatever the intent I hope Alaska is not dangerously setback in this project. I spoke out last session with concerns that the conditions of the gasline legislation were exclusive and not inclusive.  It limited competition not encourages it. The legislation says the state will pick one proposal and one sponsor who has, I believe, an exclusive right on the project for five years.. The state is required to spend 500 million dollars of contribution to the project but has no ownership for that.  Furthermore the state cannot even talk to any other sponsor for five years or suffer treble monetary damages – whatever that means.  And there is no guarantee that a project will ever be completed. Contrary to the thoughts of some it is not a project that can be forced or taxed into existence. If anyone thinks otherwise please give an example. The emotions run high but so are the stakes.

Now, maybe everything will be alright with lots of bids all with solid proposals and where all parties are willing to work together. But let’s also be prepared for the alternative.  If there are only one or two questionable bids do we have the courage to reject all bids and move forward with a truly competitive proposal?  One that lets all bone fide proposals move forward and compete to be the best one for Alaska.  The market place should decide the winner not the government. It’s not too late for openness and transparency. Better to lose one year than send our legacy project down a dead-end rabbit trail. I think we need all interested parties to pull together for a shared risk in a project that dwarfs any other private sector funded project ever built in America. Pipeline companies, producers, the State of Alaska, and the government of the USof A - we need them all in alignment working together.

Oh yes, the special session and taxes - what about them ?  What I have tried to put forward today is a call for a long range strategy consisting of a state financial plan,  using high oil prices to trigger a new multigenerational phase of oil development in existing and new fields, and a unified approach to building the multigenerational project of the gasline.  It is in this context that a rational and fair oil tax can be established. It is in that spirit that the PPT tax should be reviewed and only for those reasons should it be changed.

We should share the gain of high prices just as we should share the pain of lower prices. We should above all use a system that keeps interpretation out of court. It should be an incentive for our oil development package.  It cannot be determined outside of a fair and rational approach to establishing a good financial partnership. I, like every other Alaskan tax expert, have specific recommendation on what should be done and I would be glad to discuss further during a question and answer or individually after the program.

What an exciting, challenging and rewarding time we live in.  Let’s have our decisions today not be the basis of another bumper sticker praying for another boom and promising not to squander it.   Let’s turn our attention to working together for  long range success and making positive contributions as we fulfill our responsibilities for the privilege of calling Alaska home.

Thank you for your kindness and courtesy and I hope to be in frequently (that’s two words) to your important and enlightening meetings.