Alaska could weather oil storm by taking over production itself

The coronavirus is taking a health care and economic toll on the state. The oil market too is in a predicament. With a 10 million- to 30 million-barrel of oil a day decline in oil demand, and the price crashes that go with it, oil companies could go bankrupt and create consolidations across the United States and elsewhere, no matter what Saudi Arabia and Russia do. Even with U.S. and other non-OPEC oil cut agreements, there will be cheating, dumping and counter-dumping before it is all over. This happened in the 1980s and 1990s, and it will happen again, with oil prices going from $50 to $10 and back and forth again, possibly for the next few years.

Alaska, too, will be forced to make cutbacks; therefore, with a difficult situation hitting Alaska hard, maybe we can take a different approach.

One idea is to go to the federal government and negotiate for a low-interest loan in exchange for Alaska oil cutbacks. Then Alaska can use that loan to buy out BP’s assets and even take over the pipeline. Norway does this; Alaska can too. Alaska can even buy out a number of other Alaska oil operators and maybe negotiate a 50 cents-on-the-dollar price. Then we consolidate everything, create efficiencies and negotiate cutbacks with the rest of the U.S. and OPEC from a position of strength.

Wait! Aren’t government run companies inherently inefficient? Such a company would not be any more inefficient than a company like Hilcorp. What we would have to ensure is that any Alaska company gives its management team a performance bonus, like all the corporations do. Only instead of giving a stock-option bonus, the Alaska company manager would receive a bonus as a percentage of the value Alaska receives. And instead of a bonus after one or two years like normal, make the manager wait five or 10 years to see if he or she can keep costs down, keep production declines to a minimum and reduce debts, all the while giving Alaska a high percentage of the value. In addition, Alaska can give the manager some capital to invest in new projects or allow the use of production sharing agreements with international oil companies. If the manager creates value and the results are reviewed by an independent auditor, then the manager gets a percentage of that value, minus any environmental costs.

Still, how can Alaska make cutbacks when low oil production threatens to shut down our pipeline with its record low levels of oil throughput? We can run the pipeline at low levels and at low cost, if we add coal-fired boilers along the route to add heat into the pipeline and keep the oil from gelling. The oil companies always use the shutdown threat as their own negotiating angle against Alaska’s interests. We do not have to capitulate to that tactic any longer. Instead of shutting the pipeline down in a decade or two, we can also consider converting it into a natural gas pipeline or put smaller pipelines inside of it.

Alaska can better coordinate environmental issues that have impacts in our local communities if it is the owner and producer of the oil. What Alaska needs to do is consolidate its oil and gas industry now while it has a chance to gain value from the North Slope before coronavirus circumstances dictate the low value Alaska will eventually be forced to receive. The oil game is on. The state of Alaska is going to be left behind if it does not play.

Doug Reynolds, Ph.D. (economics), has lived and worked in Fairbanks Alaska and has studied its oil and gas industry for more than 20 years. He can be contacted at ffdbr@yahoo.com.

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