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Will offshore oil development in Alaska’s Arctic make state rich? Don’t count on it.

Alex DeMarban | Jul 01, 2012

Editor’s note: This is the second of a three-part series. Part three will focus on the pipelines Shell must build to ship offshore oil to the trans-Alaska pipeline. Read Part 1: “Shell readies to roll dice on multibillion-dollar bet in Arctic.”

Royal Dutch Shell is on the verge of starting its exploratory drilling campaign in the Arctic waters off Alaska’s shores, a move that comes after years of false-starts, litigation and other challenges. At stake for the company is a nearly $5 billion investment so far, with billions more to be spent if it strikes it big.

The payoff could be huge for the Netherlands-based company. Shell usually gives itself 1-in-20 odds of discovering commercial quantities of oil during exploration. But in Alaska’s Arctic, Shell believes it has 1-in-2 odds of striking it big.

For Alaska — a state that has become used to having oil fund much of its government and fuel its economy — a showdown of sorts is emerging between the state and federal governments. As federal law currently dictates, chump change is what Alaska can expect if Shell and other oil giants punch into the bonanza-sized fields they hope to find in the Arctic Ocean.

Shell’s oil prospects sit in federal waters, and under current laws, the state of Alaska doesn’t stand to benefit much because royalties from Shell’s oil production would go to the federal government. We would get jobs from the development. And more explorers would look for oil in the wake of a big discovery by Shell. That might eventually lead to more oil development on state land, where Alaska generates nearly 90 percent of the taxes, royalties and fees funding its government.

But the big money is in the federal royalties. Alaska’s congressional delegation is working to change the laws dictating how royalties from offshore oil development in federal waters are shared with states.

Four Gulf Coast states forged such a deal six years ago. But Alaska, where offshore exploration in federal waters hadn’t occurred in decades, was largely left out, despite efforts led by the late U.S. Sen. Ted Stevens.

‘Most people don’t realize that we get nothing’

As it stands now, Alaska can expect no new oil royalties and no new production taxes if Shell produces offshore oil in federal waters. Those income streams are the state’s lifeblood. For example, in 2011 the massive Prudhoe Bay oil field, which sits on state land, alone pumped $6.4 billion in royalties, taxes and fees into state coffers.

Meanwhile, Alaskans would bear much of the environmental risks from offshore oil development, as well as pick up much of the tab to improve roads, ports, airports and other land-based facilities associated with offshore development. Still, the state would generate some income from Shell’s oil being transported through the trans-Alaska oil pipeline — the 800-mile-long conduit that moves crude from Alaska’s Arctic oil fields southward to the deepwater port of Valdez, where tankers transport the oil to markets.

A 2011 study by the University of Alaska and Northern Economics examining the economic impact of several producing oil fields in the Arctic Ocean shows the state can expect to earn $162 million annually if the trans-Alaska pipeline flows at full capacity. That money would come mostly from a lower tariff and additional corporate income taxes. The state could gain $144 million in additional revenues to add to the $162 million, but only with new taxes or new production on state land, including the creation of a natural gas pipeline, the study shows.

The income is a pittance for a state with a $12 billion budget. If the $162 million was paid to every Alaskan via their Permanent Fund dividend, each resident would receive just $250 a year. We pocketed more than four times that amount last year from our dividend checks.

“Most people don’t realize that we get nothing,” says state Sen. Bill Wielechowski, D-Anchorage.

It would take a lot more oil being pumped through the trans-Alaska pipeline for the state to see significant income. The line currently carries less than 600,000 barrels of oil a day, down from a peak of more than 2 million barrels a day in the late 1980s.

If an additional 1.5 million barrels of oil was shipped through the trans-Alaska pipeline each day, the state could expect $122 million annually, according to the University of Alaska and Northern Economics study. That’s the biggest chunk of the $162 million. The state would earn that revenue because the tariff — the charge for shipping oil in the pipeline — would drop, as costs to operate the line are shared by every barrel of oil moving through it. A lower tariff would reduce the breaks on royalties and production taxes enjoyed by oil companies. Thus, the state would collect more money.

Property tax income would also rise, as oil companies build up infrastructure, such as pipes and roads on state land to service Shell and perhaps other offshore oil producers’ operations. As for jobs, they would be legion. If 11 fields produced oil and gas, the nation would see 54,000 new jobs coming online over nearly 50 years, according to the 2011 study.

Those jobs are important to the state’s economy, and Alaskans would land bunches of them. But if North Slope tradition is any guide, many could also end up being filled by out-of-state workers flying in and out of Alaska for two-week shifts, Wielechowski says.

“They’ll fly up there, maybe buy a Coke on the way,” he says. “Shell will pick up everything — their housing, their food. They’ll make a lot of money and go home, and we’ll get no revenue from it.”

Neither would the state earn money from income or sales taxes for all of those workers coming to Alaska from the Lower 48. The state nixed its income tax in 1980, a few years after the North Slope oil fields began pumping crude in the pipeline. Oil prices were high then and the state was in the throes of a boom.

The study by Northern Economics and the University of Alaska suggests Alaska lawmakers might consider reviving the personal income tax, or create a state sales tax, to help maintain public services. Alaskans might not like it much, but it could sop money from all of those new workers, producing about $56 million a year.

Other potential moneymakers include new oil production on state land, made possible by new facilities that help get offshore oil into the trans-Alaska pipeline. Those pipelines, roads and bridges could improve the economics for untapped fields on state land. Perhaps this would also spur development of the estimated 30 billion barrels of what’s known as heavy oil — crude that is costly and difficult to extract from the North Slope’s sands, says Bryan Butcher, commissioner of the Alaska Department of Revenue.

Alaska takes on Feds over offshore royalties

The one way to ensure Alaska benefits financially if Shell or other oil companies start producing offshore oil in federal waters is to change the law. Alaska’s congressional delegation is gunning to do just that.

U.S. Sen. Lisa Murkowski, a Republican, has co-introduced legislation requiring the federal government to share more than one-third of its offshore royalties with Alaska. The state lost out in 2006, when lawmakers from Alabama, Mississippi, Louisiana and Texas won their states a 37.5-percent share of federal royalties from lease sales and development off their shores.

Lawmakers from Alaska and other coastal states wanted the same agreement, until they realized their involvement could derail the effort to allow royalty sharing at all. Instead, Alaska won a 1- to 2-percent sliver in a law set to expire this year. Better to get part of the loaf while setting a precedent — and then build on the opportunity when Arctic offshore development moved closer to reality, Murkowski says.

“It was not an acceptable decision for what it meant to Alaska, but at that point in time, we were a long ways from seeing anything viable from offshore Alaska,” Murkowski said.

Alaska lost out on hundreds of millions of dollars, including from the 2008 Chukchi lease sale that landed the federal government $2.6 billion, says Robert Dillon, Murkowski’s aide on the Senate Energy and Natural Resources Committee.

Murkowski’s bill to expand revenue sharing, co-sponsored with Sen. Mary Landrieu, D-La., might have a greater chance of passing in 2013, after Sen. Jeff Bingaman, D-N.M., retires from office. As chairman of the committee, Bingaman is blamed for stopping past efforts to expand revenue sharing because of his concerns over worsening the federal government’s debt crisis.

Sliding into his seat could be Sen. Ron Wyden, D-Oregon, who has expressed “much stronger support for revenue sharing and is willing to work with us on this issue,” Murkowski says.

If the Republicans take back the Senate this fall, Murkowski will become chairman of the energy and resources committee, and that’s even better for the bill’s chances. She’s hopeful lawmakers will realize production in federal waters burdens state budgets, just like development on federal lands, where royalties are currently shared.

“If we can’t make something happen between now and the end of this Congress, I’m relatively optimistic, we’ll” win an agreement next year, Murkowski says.

Contact Alex DeMarban at alex(at)


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