Alaska's Business Environment: Changing Direction

July 19, 2010: Two recent studies on the various aspects of doing business in Alaska have resulted in the state being ranked at or near the bottom, depending on what survey you're reading.

In CNBC's survey, Alaska is America’s bottom state for business again this year, hampered by its high cost of living, relatively high cost of doing business, and a weak infrastructure.

However these factors have long plagued the state, with its distance from major markets, low population base and vast geographical challenges. But in a state that derives .90 out of every dollar from the oil & gas industry, the second survey ranking Alaska should raise serious concerns.

According to the recently released study by the conservative Vancouver, BC-based Fraser Institute's 4th annual survey of petroleum industry executives and managers regarding barriers to investment in oil & gas exploration and production, found that Alaska on-shore ranked 68th out of 133 oil and gas regions.

We ranked behind Vietnam (64th) a Communist, 3rd world country.-Page 13

8 US states ranked in the top 10 most attractive regions along  with Austria and Manitoba.-Page 17 

Alaska's Commercial Environment Index was considered worse than Romania's and Egypt's-Page 23

This is a sign of the Parnell times in Alaska.

With a litigation and tax happy administration like Alaskans have experienced over the last four years with Governor Sean Parnell, it's no wonder why our most critical industry is being strangled at a time there needs to be more oil & gas development.

In 1997, the ACES tax hike generated a snowball effect that has not only dropped Alaska in the Fraser rankings, but has put a serious damper on the state's ability to attract oil & gas investment dollars.

Because oil & gas projects don't happen over night and take years in the making, the longer we wait as a state to become more globally and domestically competitive, the closer we push ourselves to the time when the Alaska business community will be looked upon to pick up the tab.

Last legislative session adjourned without any tax relief for Alaska's oil patch. Despite starting the session with the best intentions, when the final gavel fell, the industry that pays for .90 cents out of every dollar the state spends was still facing hard times.

Since the ACES tax hike of 2007, investment in new production adding projects in Alaska's oil patch has been deferred, well counts have declined, workers have been laid off and the unemployment rate in Alaska is the highest in eighteen years. Seems like there would be enough warning signs to motivate policy makers to generate real economic opportunity rather than simply load up a $3 billion capital budget that does nothing to increase state revenues.

So lets cut through the chatter and look at the real numbers. Below is a graph that depicts the production numbers estimated between 2010 and 2019. There are several key areas to analyze.

The red line represents what the Administration predicts will be the level of production over the next ten years. Notice how wide the difference is between what the state expects to have to pay for state government and what the historical production figures have shown (yellow)given the North Slopes annual six percent decline. The 6% historical production decline rate is the decline with significant level of investments from the oil and gas industry. 

In addition, notice the light grey shaded area which represents those same projections, only this time with higher tax rates and lower investment levels factored in, which accelerate the decline tremendously.

In the year 2014, the Parnell administration predicts oil production will be at 620,000 barrels. However with the historical six percent decline factored in the number is closer to 550,000. Then, when you factor in that ACES is chasing off investment and putting projects back on the drawing board, the number appears more like 400,000 barrels per day.

This is just four years away.

Given the fact that most oil & gas projects take five plus years to develop, every year the legislature waits to change Alaska's punitive tax structure, including progressivity, the closer we get to fiscal armageddon.

The second graph details the amount of investment that will be needed to keep the core fields producing. It is estimated over $40 billion will be needed to invest to keep fields producing. At a time when Alaska's oil taxes are punitive and companies have elsewhere to take their capital dollars, this seems highly unlikely without any changes.

The danger of waiting too long is that the state will end up in a position of burning cash from its savings account, while the cost of government continues to grow.

And lawmakers need to be aware; nothing fills the state's purse like oil revenues.

In 2002, the Fiscal Policy Caucus looked at every tax in the book. School tax, head tax, real estate tax, sales tax, income tax even a tax on taxes. The bottom line: it amounted to a little more than half of what we needed to fill a billion dollar budget gap.

Unfortunately, that was back when the state was spending $2.3 billion in general funds. This year the state will spend close to $5 billion in general funds. The budget hole will be massive and the continued loss of oil revenue will cripple the state.

The Right Direction

First, if you're concerned about Alaska's economy, then it's time to send Governor Sean Parnell home.

He has been a dismal governor for the business climate. Between his poorly argued support of AGIA to his support for ACES, Parnell has once again proven that we need a governor who understands business.

Another four years of Parnell and his cast of clowns equates to four years closer to fiscal armageddon in Alaska.

Second, in 2011 the legislature must take another look at the oil & gas tax structure in Alaska, and this year they need to do something rather than just posture. Alaska needs to attract new investment today and without significant changes the golden goose will continue to turn bright red as the foot of taxation rests on its throat.

If not, the financial cliff that awaits Alaskans is steep. Just to pay for the operating budget would demand a contribution of over $7,000 for every man, woman and child in Alaska. In addition, the operating budget will continue to grow as the population increases and demands on services from an aging demographic continue to add up.

Third, the next governor needs to make improving the economy a cabinet level position. For far too long the Department of Commerce has been moribound, with few ideas and even less funding.

The bottom line is in order to change direction, it's time to replace state government with those who have a sense of urgency and recognize that Alaska is not a friendly place to do business.

While we cannot do anything to alter our geographic challenges, we can do everything to alter our lack of leadership in Juneau.