Earlier this week, Lieutenant Governor Byron Mallott and I enlisted the help of seventh-grader Shania Sommer from Palmer to announce the amount of this year’s permanent fund check. We wanted one of our promising youth to be the face of the dividend to highlight the importance of ensuring a bright future for the next generations of Alaskans.
It is with those young Alaskans in mind that I write this. When Alaska became a state, Congress mandated that the new state could not sell its resources in the ground. Whereas other states have the right to transfer land so private citizens can own and develop mineral wealth, Alaska cannot. The intent was for Alaska to retain ownership of resources, like oil and gas, to fund our government. Thus, Alaska became an “owner state.”
With the discovery of hydrocarbons first in Cook Inlet, and later at Prudhoe Bay, Alaska developed a state government that is largely funded by oil revenues from state and federal lands. Traditionally, states have taxed oil and gas either under a property tax or a tax on production volume.
Since Alaska chose to tax based on production, we exempted the value of the assets in the ground from taxation. Instead, we only levy a property tax on improvements, like wells and pipelines.
Our current tax structure assumes leaseholders would diligently develop our resources. That has proven unwise. The problem is compounded by the fact that royalty payments by those companies are also based on production.
The consequence is Alaska does not receive income from undeveloped natural gas on the North Slope, and because the leaseholders do not pay taxes or royalty on gas in the ground, there are no penalties for not developing.
When I became Governor, I inherited a gasline negotiation process which began in June of 2014 under SB 138. While the technical work is progressing fine, very little has been accomplished on the necessary commercial agreements.
That is because the process assumes all parties are equally motivated to build this gasline. Unfortunately, that is not the case. Each producer has its own internal corporate priorities designed to maximize stockholders’ rate of return against all other global possibilities. Therefore, the negotiations only progress at the pace of the most reluctant partner. I am doubtful this process, as structured, will ever result in a project moving forward on a timeline, and with conditions, acceptable to Alaskans.
That is why I am taking a significant step to ensure Alaska finally is able to monetize our vast North Slope natural gas. One piece of the legislation I will submit to the legislature for the special session next month will reinstitute a reserve tax on gas that is not developed. Governor Jay Hammond signed a similar piece of legislation in 1975 in order for Alaska to receive much needed oil revenue prior to construction of the Trans-Alaska Pipeline. Those taxes were treated as a prepayment of taxes once oil began to flow.
Similarly, with my legislation, the taxes would only be paid if the gas is not shipped. Governor Wally Hickel famously told those who then held leases on the North Slope, “You drill or I will!” They drilled, and because of that, we have Prudhoe Bay today. We have waited for nearly 40 years to see our gas moved to Alaskans and the world market. There have been many gasline efforts to date, but none have been successful—largely due to reluctance from some producers to allow the gas they control to go to market and because there is no financial repercussion for keeping our gas in the ground.
A gasline is estimated to return several billion dollars of revenue to the state every year. As Alaska grapples with a multi-billion dollar deficit, the project has gone from a wish-list item to a must-have.
As we watch dozens of competing LNG projects being advanced in other parts of the world—many by the same companies we are working with today on AKLNG—Alaska must take steps now to ensure we finally receive revenue and affordable energy for Alaskans from our natural gas.
Some will criticize this bold step. But I say it is long past time for Alaska to stand up, work closely with our partners in AKLNG, but never again have Alaska’s future determined by others. If a producer chooses to advance one of its competing LNG projects rather than Alaska’s, then so be it. However, that producer must not be allowed to prevent the gas the company controls in Alaska from being sold or shipped in our gasline. If the company does, then it will have to pay to keep the gas in the ground.
Think of it as Alaska’s insurance policy for the future. If nobody withholds gas from a gasline, then the tax is never used. However, without it, Alaska runs the risk of never monetizing our natural gas resources and worse, never controlling our own destiny.
With the passage of a reserves tax, the probability of an Alaska gasline being constructed will be vastly improved.
It is time Alaskans step forth, in the great Alaskan spirit of Governors Hickel and Hammond, to act like the owner state we are. If we insist our resources be developed, and create fair economic consequences if they are not, we will be successful—but only if we have the political will and courage to do so.
Bill Walker issued a proclamation for special session to begin Oct. 24