• 2001 SPECIAL OLYMPICS WORLD WINTER GAMES, ANCHORAGE, ALASKA
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The issues surrounding the ARCO/BP merger place Alaskans at a turning point in the evolution of the oil and gas industry in Alaska. Should Alaska allow a single foreign corporation the opportunity to control 72% of the state's oil and gas?

The regional development of oil world wide has resulted in the creation of two types of major producers - multinational corporations and government owned oil companies and smaller independent firms. In the course of the last several years I have considered the possibility of what would happen if Alaska, like many third world countries, began to produce its own oil. The third world reached a point in their oil development where they began to cost out the value of owning and controlling oil production, resulting in new marketing alliances with the industry while retaining the bulk of the wealth produced through oil and gas production within their boundaries. It became clear to them that the industry's interests were reflected in their stockholders interests regardless of the advertising campaigns conducted by the industry. Perhaps it is time to consider the economic consequences of a state acquisition of ARCO versus a BP oil monopoly on the state's single greatest income producing asset - our oil.

Our relationship with the oil and gas industry has provided Alaska a 12.5% share of royalty oil production and approximately an equal amount in tax revenue. Some other regions of the world have been able to obtain substantially greater shares of their production (in many cases over 50%) while at the same time gaining significant capital investment commitments for producing the oil.

Who owns the Oil?

Alaska owns the oil on state land and is entitled to 90% of the federal tax revenues generated from oil on federal land in Alaska according to the Statehood Act. Each person in Alaska has a vested interest in the development of the state's resources not just by virtue of the existence of the Permanent Fund but because fundamentally the citizens are the state of Alaska. Alaskans own the oil as the lessor, as the owner with the industry being our tenant. Our state constitution also mandates that our resources shall be developed in a manner which offers the greatest benefits to all Alaskans. At the time that North Slope oil leases were being sold to industry Alaska was not in a position to produce its own oil. The best use of the resource at that time was to enter into production leases and create a right-of-way for the transportation of oil from the North Slope to Valdez. Alaska is in a much different position now in that we have the economic base to reevaluate our role in oil and gas development in the region. We are in a position, we are at a crossroad, where we can choose to be dominated by the stockholder interests of a foreign corporation - British Petroleum - or we can begin to chart our own course through control of the energy resources owned by Alaska. We can no longer let our tenant dictate the course of development.

Buying ARCO - The Price

At the present time British Petroleum (BP) has set a value on all of the world-wide assets of Atlantic Richfield Corporation (ARCO). The Alaska portion of this value could be easily separated from the value of the rest of ARCO's assets. The prorata share of the assets could be valued based on either their income producing history or their depreciated book value or, perhaps, some combination of the two. I believe the value of Alaskan ARCO owned assets would likely range between 7 and 11 billion dollars.

The Assets

ARCO owns about 22% of the oil pipeline(TAPS), 30% of current production and 42% of the gas cap on the North Slope.

The natural gas ARCO owns is several trillion cubic feet and at present it is not being marketed at all.

Additionally, ARCO has already established a complete staff, office complexes and corporate infrastructures needed to operate in Alaska.

The Advantages of Acquisition

Alaska's share of oil and gas moving through TAPs would increase from 12.5% to about 40%.

Permanent Fund contributions could increase over 300% above present levels, resulting in significant increases in dividends in the short and long run. The problem then facing Alaskans would change from worrying about the dividends going down to considering at what level we should cap the dividend, if at all, in order to avoid an increasing influx of people from other states.

Funds available for the State Operating and Capital Budgets would also increase by a similar factor. These funds could be used for a number of things including building water, sewer, road, railroad, ports and other improvements needed in the long term in Alaska.

The State would receive the ARCO share of all oil transportation profits, including those from the operation of the oil pipeline, which over time could repay the State's initial cost of buying the asset in the first place.

Another advantage is that as a state owned enterprise the ARCO assets would be exempt from federal corporate taxes which would further increase the profitability of state ownership. In fact, if the state chose to as part of its acquisition plan, it could divert these funds to Municipal Revenue Sharing in order to replace property taxes in Alaska cities and boroughs.

At present a movement towards the formation of a Port Authority has begun. This initiative would place ownership of the gas line in the hands of some municipalities and boroughs while it should be more rightly placed in ownership by a state if public ownership is being considered at all. Adding this to the asset mix acquired from ARCO together with the state's existing oil and gas interest in development an incredible set of possibilities emerges.

The economic possibilities would put Alaskans in the position to accomplish almost any future vision put forward. The added income to the state from the resources already in production would also change the rate of development of future resources. The pressure to give tax concessions to the industry in exchange for development considerations would end the pressure to develop risky off-shore oil and gas fields would diminish or disappear altogether in the short run and the need to tax citizens would be avoided.

Alaskan employment, hire and in-state contracting issues would be resolved.

Taxes

The idea that Alaskans "pay no taxes" is not true. State revenues are generated by either a direct tax of money from business or individuals or through the sale of Alaskan resources which already belong to the people who reside here by virtue of their state citizenship. The industry-favorable leases and terms of exploitation negotiated with the oil industry has allowed us the opportunity of avoiding state taxation of private persons in favor of a policy of generating revenue from our resource base. This taxing method is being managed in a way which, in my personal opinion, is unfair to all Alaskans. Acquisition offers us the opportunity of maximizing our income from our resources, perhaps putting off the question of direct taxes forever.

Over the last fifteen years we settled a number of oil tax, royalty and pipeline disputes with our oil "partners". Those settlements resulted in billions of dollars in savings to the oil industry. Most recently, the Knowles Administration, then entered into other agreements which gave the industry "marginal" oil fields virtually royalty free, generating nothing for the state but the promise of a few jobs. Most of the producing fields in Alaska has been underestimated in terms of size after initial drilling programs. Field size is delineated over time. What incentive is there to delineate a field's size when there is a counter incentive to keep it small?

In the coming years additional tax questions will arise for Alaskans. The issue of property taxes will begin to affect Native Corporations which are land based and currently exempt from property taxes. In addition, with the anticipated deceases and perhaps elimination of state municipal revenue sharing, we will be faced with either significant decreases in public services or significant increases in property taxes. The revenue stream produced from the ownership of ARCO could in part be used to eliminate property taxes in Alaska, allowing people to one day truly own their land free off all encumbrances.

Industry Trust

The interest of the oil industry is counter to good public policy in that the industry is accountable first to its stockholders rather than the citizens whose resources they are developing. The Alaska based industry has been a less than good citizen. The pipeline was built on a cost-plus basis with all the costs being assessed against future oil coming through the line. The value of the transportation was based on underestimated oil reserves. The industry then stalled settling TAPS tariff (shipping costs) disputes until the state knuckled under and agreed to an unfair transportation price. The industry also moved on to take advantage of the tax laws in order to avoid paying the state its fair entitlement resulting in multi-billion dollar losses for the state. The industry then captured new tax concessions resulting in increased profits for them and reduced revenue for the state.

What many Alaskans do not consider is that the oil revenue the state gets from its oil is not just effected by the price per barrel but also by the quantity of oil shipped through the pipeline and out of Valdez. The pipeline was designed to ship up to 2 million barrels a day. At present we are shipping 1.3 million barrels per day. The industry can not control the world price of oil but by controlling the shipping and refining they can control the state's income. At the present time a shortage of tankers limits the carrying capacity available for Alaskan crude oil. The ability of a single oil company to constrict the flow of oil and thus the income to the state must be avoided by proper state policing of the industry.

Competition

Competition between BP and an Alaska owned company could take place. ARCO - Alaska really would represent a partnership with Alaskans and it would be free to compete for the opportunities to develop all of Alaska's oil and gas resources available in the future. It would be a company operated by Alaskans for the interests of Alaskans. The idea the industry has put forward in the past is "if you tax us or change the rules we will go elsewhere," which has been the cry of the oil industry everywhere in the world. Competition between multi-national corporations and a state owned oil company would yield the greatest benefits to all Alaskans.

Method of Acquisition

From my vantage point, the proposals to purchase 72% of TAPS and the Port Authority for building a gas line, while intelligently conceived and meritorious, do not go far enough to protect the public interest. Acquisition of ARCO could take place through a number of possibilities:

1. ARCO-Alaska could be purchased through the use of Alaska Industrial Development Bonds which could be repaid out of the oil revenues and transportation fees.
2. ARCO-Alaska could be purchased by the Permanent Fund.

Summary

This concept paper has been put forward to stimulate public debate of this important issue. The impacts of the issues surrounding the acquisition of ARCO by BP must include an analysis of the option of state ownership. It is in the public interest that this analysis be carried out and the results presented to the public. We have an opportunity to change the course of our state from one worried about declining revenues at the mercy of a foreign corporation or to create a new vision capable of meeting the challenges we face in the next century. We are the richest region in the world and are being exploited much like a third world colony at a time when we have the resources, talent and capability of rising above the current circumstances and once again gaining control of our state's destiny.