Sunday, August 4, 2013

Short Takes| Oil industry trends and another reason why Alaska is being left behind ...

This week's Economist carries one of the best, high level analyses of the oil industry that I have read this summer.  Entitled "Supermajord√§mmerung," the article explains the Economist's reasoning why it believes "[t]he day of the huge integrated international oil company is drawing to a close."

One key fact, incredibly relevant to Alaska but barely on most state policy makers' radar screen is captured by the following:
In the 1950s the seven sisters [the largest private oil companies of the day] controlled some 85% of global reserves. Today over 90% of reserves are under the control of national oil companies (NOCs) which are owned, at least in part, by the governments sitting on the oil in question.
Why has that occurred?  For several reasons, but important among them is the fact that governments have found being directly involved in the industry both produces more wealth and brings a greater focus to the development of the resources they own than completely contracting that role out to third parties, who are focused on pursuing projects that make the most economic sense globally, not necessarily those located in the host government's back yard.

That is not to say that these governments have rushed to the opposite end of the boat and completely displaced private companies from the field.  As we see repeatedly in nations that are just discovering oil and gas reserves, the global best practice today is the development of a government owned entity to partner with, or as I sometimes refer to it elsewhere on these pages, co-invest with, industry in the development of the nation's resources.

That partnering produces benefits for both sides. The government captures what the Economist refers to as the "the technological expertise, project-management skills and global reach of the big international oil companies to produce, refine and sell their oil."  At the same time, done the right way the private side benefits from having the host government as a partner, not an adversary, sharing the same economics and seeing the opportunities and roadblocks in the same way as the companies.

Despite this global trend, however, few policy makers in Alaska recognize the trend or its benefits.  Instead, they remain tied to an outdated, 1950's-era model for the development of government owned resources, arguing that it best preserves "private enterprise," while the very private enterprise it is preserving increasingly focuses its attention -- and investment dollars -- elsewhere, ironically enough, in many instances in regions where the host government has adopted the partnering model.

Finally, before his supporters claim it to be the case, this also is not the model that Bill Walker has in the past, and in his latest incarnation as an "independent," continues to pursue.  What Walker argues for is that the state should become involved in the midstream phase of the business -- owning the pipeline.  

He has not in the past -- and does not now -- argue that the state also should co-invest in the upstream end of the business, where most of the money, and more importantly, the development decisions, are made. Instead, there he argues simply that the state should become a super-regulator, attempting to force the oil companies by lawsuit and regulation to do what is "in Alaska's interest."  Walker has, and continues, to miss the central point by miles.

There are additional reasons why Alaska is being left behind by the oil industry, but in my view this is one of the important ones.  At the rate we are going -- especially at the rate we are spending what wealth we are receiving from the state's resources -- it won't be long before the Economist leads with a story entitled "Alaskad√§mmerung."