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Even with a natural gas pipeline, oil will still drive Alaska's economy

by Rhonda McBride
Friday, October 30, 2009

ANCHORAGE, Alaska -- One of receptionist Holly Thompson's jobs is to order lunch for weekly meetings at oilfield service company Baker Hughes.

"It's usually for more than 15 people at a time," Thompson said. "And they want something different every time."

The company also pays a local vendor about $700 a month for coffee and supplies.

But the real cream for Alaska's economy is the money Baker Hughes pays to lease a new building, which houses the shop where the company builds and repairs drilling equipment. It also contracts some of the work to other companies.

"We send tools out to get repairs," said plant manager Steve Gould. "There's a number of people that do the repairs on our tools at those machine shops."

The money from oil keeps churning from one sector of the economy to another.

"I bought a new snowboard, getting ready for the snow season," said Baker Hughes employee Jesse Salyer. "I'm looking to buy a house, probably in the next six months I'd say."

Salyer is young and single. He oversees the repair and maintenance of drills that use coiled tubing -- a specialized skill that earns him a good wage.

In recent years, the high price of oil has kept both the state's economy and its government afloat. For now, it's offset the steady decline of oil flowing through the pipeline and postponed some tough decisions. 

"Nobody wants to be the bad guy with any group of constituents so it's always easier to do nothing," said former state lawmaker Ralph Samuels. "That's the political answer, is to do nothing."

When Samuels was in the Legislature, he advocated for the oil industry. He did so as corruption scandals unfolded, revealing that Bill Allen -- the head of VECO, one of Alaska's largest oilfield service companies -- had bought influence in the Legislature to lower taxes.

"I don't think it was a balanced debate," Samuels said. "It was more of an emotional debate driven by a very few people."

"Politically, when you get into these arguments, the pundits say, ‘Well, you're an employee of the oil industry,'" said Northrim Bank CEO Marc Langland. "I say, ‘You're damned right I am.' Because I think that's what drives our economy."

Langland believes oil taxes need to be revisited to give producers incentives to bring more oil out of the ground.

"The biggest risk we have is ourselves," Langland said. "Because we can change some of these dimensions so we don't have a train wreck going down the road."

Lately attention has turned to the natural gas pipeline, and whether it can save the state.

"There's no assurance that the revenues that it will generate will be enough to supplant the lost revenues from declining oil," said economist Scott Goldsmith.

Goldsmith, with the University of Alaska Anchorage's Institute of Social and Economic Research, says a gas line would definitely help. But new discoveries of gas in the Lower 48 could keep the price low and delay construction. Also, a full gas pipeline will only move one-third the energy of a pipeline full of oil. The bottom line: the state still needs oil.  

"Even if you don't work for the oil industry or work for the state, all the roads, all the troopers, all the schools, it all comes from there," Samuels said. "And when the oil starts to run out, it doesn't matter if you like oil companies, don't like oil companies, high taxes, low taxes. That production decline right there, you have to find some way to stem it."

Oil accounts for about 89 percent of the state's budget. That leaves the state two choices -- cut spending or raise taxes.

"You could tax the citizenry to death and you still won't have enough," Samuels said.

The average Alaskan family spends nothing on state income tax. But to replace oil and gas revenue, each one would have to pay more than $13,000 a year.

"Those easy days are probably behind us," Goldsmith said. "And we have to sort of sharpen our pencils and be much more careful about how the state invests in the future."

Goldsmith's prescription for the economy: keep our eye on the prize,   the oil pipeline.

If drilled, the Arctic National Wildlife Refuge might bring 10 billion barrels of new oil into the pipeline -- but the environmental and political battles may be insurmountable. A bigger plum, however, is the 23 billion barrels of offshore reserves estimated to be under Alaska's outer continental shelf. That too faces environmental concerns, however, as well as another hurdle.

The federal government regulates offshore drilling on the nation's outer continental shelf, and under federal revenue sharing four states on the Gulf of Mexico get 37 percent of the revenues from drilling there. Alaska, however, receives nothing from OCS drilling here.

It would take Congress and the White House to expand revenue sharing to other states. With the federal deficit, it'll be tough to get the feds to share the wealth. Coupled with the environmental issues to work out, OCS drilling is not an immediate quick fix.

"Some people look at OCS and say, ‘That's not going to do anything for Alaska. Why should we favor it?'" Goldsmith said. "Which I think, even without the federal revenue sharing, is the incorrect attitude because of the jobs that it would generate."

Jobs, for example, at companies like Baker Hughes.

"I mean, it's an important part to everybody in this operation and we want to see it continue," plant manager Gould said. "I've raised my family here and I want to continue to have them here for a little while."

But the oil -- and time -- may be running out.

Contact Rhonda McBride at rmcbride@ktuu.com