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Mysterious Oil Numbers Tell
A Troubling Story in Juneau:
Adding "H" to ACES, You Get
ACHES (Alaska's Confusing,
Hidden and Elusive Share) and PAINS (Piecemeal, Artificial,
Incomplete Number Systems)

Bad Numbers, Legislative Stalemate

A funny thing happened on the way to the state legislature's special session: Legislators simultaneously encountered the past and the future. In doing so, they demonstrated that those who don't learn from their history are condemned to re-live it.

The factors that determine the profitability of oil start with constantly changing world oil prices. From this uncertain figure, elements that must be subtracted include varying and unverified field costs, disputed pipeline costs that contain a chunk of profits if the company happens to own the pipeline (which the major North Slope producers do but the smaller new producers don't) and uncertain federal income taxes that are reduced from the nominal rate by deductions that can be taken in future or past years, to the company's best advantage, rendering current year figures mythical.

Even the tax label ACES - Alaska's Clear and Equitable Share - is misleading. There are so many hidden factors that the letter "H" might be added, changing ACES to ACHES: Alaska's Confusing, Hidden and Elusive Share. The root of the problem might be characterized as PAINS: Partial, Artificial and Incomplete Number Systems.

The following summary review of oil and gas activities during the last two inconclusive legislative sessions in Juneau suggests that legislators and administrative officials both suffer from ACHES and PAINS.

For the second year in a row, Governor Sean Parnell seemed bent on throwing large sums of state revenue to oil companies in the questionable belief that tax breaks were necessary and the desperate hope that the tax inducements could successfully trump geology and economic realities. In 2011, HB 110, the governor's reckless giveaway proposal, passed the lower chamber like runaway stagecoach in an old Western movie. The situation stalemated when members of the Senate, led by their President Gary Stevens (R-Kodiak), displayed an impressive preference for reason over rhetoric. [1] The resulting special session failed to break that legislative impasse.

The Governor's approach and the industry's advertising campaign in 2012 bore a striking similarity to those of 2011. This time around, by mid-session there were three major oil and gas bills in play:

• Passed by the House in the first session of the two-year legislative term and still in the Senate, HB 110 hovered over the session, backed by an industry advertising campaign.
• The House majority pushed another ill-conceived energy bill; HB 9 would give a new, untested state agency unbridled powers to push an in-state natural gas pipeline. [2]
  
• Meanwhile, the Senate Resources Committee was studying matters carefully and crafting a different oil tax approach. Instead of the giveaway giveaway to the operators of the historically profitable but declining legacy fields proposed in HB 110, the Senate Resources Committee's SB 192 favored increasing existing incentives for new development. [3]
  

Alert reporters occasionally picked up stories on the Senate Resource Committee's efforts, but the headlines could not be considered big news. The audit problems, for example, were not a new development. In 2008 Revenue Department officials had warned that in the absence of automated systems to gather data on revenue payments, the antiquated state revenue collection system was headed for an administrative train wreck. In 2011 the Legislature belatedly authorized $34.7 million for a multi-year project to set up an automated revenue collection system that would integrate the dysfunctional petroleum leviathan with the state's other revenue collection systems. [4]

With work on the new revenue collection program just beginning in 2012, the Revenue Department was still unable to tell inquiring legislators where hundreds of millions of dollars from state coffers, authorized to offset industry capital expenditures, had landed. Was that money promoting exploration and development of new fields, as some legislators hoped, or was most of it being used for drilling and well workovers in existing fields, including the "legacy" fields, Prudhoe Bay and Kuparuk, which had already recouped investment costs many times over in preceding years? [5]

While the Governor and the House majority coalition seemed to be vying with each other in an irresponsible race to give state money to the industry, the Senate Resources Committee was quietly trying, quietly and carefully, to identify information and fiscal policies most likely to be of use in the uncertain world of rising oil and falling natural gas prices.

For example, in early February 2012 the Senate Resource Committee held hearings on the Dec. 30, 2011 state Superior Court decision on property tax valuation of the Trans-Alaska Pipeline System (TAPS) for the years 2007 through 2009. In April 2011, Senate President Stevens had relied heavily on the predecessor to that decision, by the same judge, when he stepped down from the Senate podium to call for a halt to HB 110. The latest pipeline property tax case in Superior Court covered three tax years together - 2007 through 2009 - and updated the arguments of the previous decision.. A major issue in determining the property tax was the longevity of the pipeline. The court findings - that TAPS was likely to continue carrying North Slope crude oil for at least another half century - functioned to counter the assertion that the HB 110 tax breaks were needed to keep TAPS from shutting down. [6]

The following items are offered as examples of the significant historical facts the Senate Resources Committee brought to light in its carefully documented 2012 deliberations:

• The historical fact of TAPS tariff overcharges and the failure of the regulatory process to remedy this problem in a timely manner suggests that the three major oil companies, who own a 95% share of TAPS and control a similar percentage of North Slope production, may wield to the detriment of independent competitors. Alaska has experienced (and continues to experience) oil pipeline overcharges that contradict the conventional wisdom that owner-shippers will seek low tariffs because they are shippers, too (as reported frequently in the pipeline economics section of this web site). Under these circumstances, it seems presumptuous to assume that the state can easily negotiate low tariffs for natural gas shipments from the North Slope.
  
  
• The committee records include testimony on the dominating power of TAPS by veteran economic expert Charles Cicchetti, Ph.D., Cicchetti, who specializes in energy, finance and environmental economics, testified in the TAPS property tax case that after Conoco, Inc., traded its North Slope properties to BP and left Alaska in 1993, the company's Chairman and CEO, Archie Dunham, declared:
  

"We traded all our Milne Point properties in Alaska to BP …. It broke my heart to trade Milne Point, but we had to do it. All the value of that property was taken away from us in the pipeline tariffs." [7]

(Read More: click here.)

(August 2004)

At this web site you will find fact-based information and commentary about economic and environmental aspects of oil industry operations in Alaska, with special emphasis on the North Slope oil fields and the Trans-Alaska Pipeline System (TAPS). Due to the oil industry's power, political clout and media skills, much of the information you will find here is not widely reported or readily available elsewhere.

Three major petroleum companies -- BP, ConocoPhillips and ExxonMobil (originally Sohio, ARCO and Exxon) -- control more than 90 percent of the North Slope production and own a similar share of the Alyeska Pipeline Service Company, which built and operates TAPS. The sprawling North Slope complex centers around Prudhoe Bay, the largest producing oil field ever discovered on the North American continent. About one million barrels of oil per day is pumped from beneath the frozen substrate and loaded into TAPS for the 800-mile journey across Alaska to the ice-free port of Valdez in Prince William Sound. There, the oil is loaded on tankers that carry approximately one-third of the oil consumed daily in the western United States.

Alaska's North Slope development and its pipeline link to market provide unusual opportunities to observe the actions of decision makers, as well as greater access to the central participants than most other places afford. Based on this experience and supplemented by information from two pipeline-dependent petroleum provinces of the Former Soviet Union, the information presented here points to two significant conclusions:

• (1) petroleum developers can and frequently do use pipelines to maximize profit and inhibit competition, to the detriment of host populations; and
• (2) the chronic discrepancy between promise and practice on major oil projects frequently places the populace and the environment at significant and needless risk.

The material presented here was researched and compiled by Richard A. Fineberg, founder and principal investigator of Research Associates of Ester, Alaska. Fineberg has observed Alaska petroleum development for three decades as a prize-winning reporter, as an advisor to the Governor of Alaska on oil and gas policy and as an independent consultant to investors, government agencies and non-profit organizations. In recent years his horizons have expanded to include two oil provinces in the Former Soviet Union, the Caspian Basin and Sakhalin Island. Often controversial, Fineberg's petroleum research has earned a reputation for dedication to factual accuracy and carefully reasoned analysis.

A fundamental premise of this web site is that it falls to each of us, as citizens, to inform ourselves and respond appropriately to the issues and events that shape the broad directions of our society and the detailed fabric of our social interactions. Based on the fact-driven information presented here, readers can come to independent judgments regarding the authenticity of the content, the significance of the relevant facts and the logic and appropriateness of the conclusions. In effect, each of the topics reported here can stand alone as a documented case study in petroleum development.

During the 3-1/2 decades since the discovery of the nation's largest oil field at Prudhoe Bay on Alaska's North Slope, events from Watergate to the collapse of powerful corporate entities such as Enron and WorldCom demonstrate that large institutions frequently fail -- often by grotesque margins -- to live up to legal and moral obligations and to deliver on their public pronouncements. Concurrently, the major oil companies who have played such a large role in Alaska's development have performed their tasks with a chronic and troubling discrepancy between promise and practice.

Despite lavishly funded advertising campaigns and public relations efforts urging that Alaska's oil companies can be trusted as the avatars of social salvation, closer examination reveals a profound gap between what these companies say and what they do. With equally disturbing regularity, when confronted with evidence of those failures, government has failed to protect the public interest. This web site explores the economic and environmental impacts of those failures in concrete terms in the belief that well-informed individuals can and will make a positive contribution to the course of human development.

Reports on pipeline and petroleum development issues found in the "Oil Patch" section of this web site may be understood as case studies providing insight into the relationships among powerful corporate and government institutions and the complex interactions between individuals and institutions. At this broad level, a growing body of research on the political and economic aspects of petroleum development known as petropolitics suggests that the price of oil wealth includes, with disturbing frequency, poverty, a widening gap between rich and poor, economic stagnation, corruption, dictatorship and war.

The petropolitical approach to petroleum development goes far beyond the conclusions presented here regarding pipeline economics and the industry's chronic discrepancy between promise and practice. While one reader may take the fact-based case studies presented here to support a petropolitical interpretation of petroleum development, another reader may apply the same information to a different understanding of social activity; in any event, these case studies are fact-driven and therefore stand alone.

In sum, the principal purpose of this web site is to gather in one place many of the basic facts regarding the environmental impacts and economic results of oil development in Alaska and elsewhere - information that industry and government prefer to ignore or to spin. Using case studies presented with fidelity to reason and factual accuracy, FinebergResearch.com brings to public attention information about economic and environmental issues related to petroleum development that is not readily available elsewhere.

First-Hand Looks at Sarah Palin's Wacky World

The following were archived Aug. 25 and are still available for viewing (many in downloadable PDF format):

Under a Rogue Star chronicles Sarah Palin's late-2009 book tour and the Alaska oil spills that silently accompanied her -- a clear demonstration of the results of her general failure as governor to pay attention to what she was doing and her particular failure to protect the environment.

ACES in Palin World, from December 2009, takes a clear look at what really happened during the Special Legislative Session of October-November 2007, in which the Legislature (reversing Governor Palin's proposal) established progressivity for the state's production tax.

A November 2009 post covers the Alaska Risk Assessment project, a Palin administrative wreckage that has attracted little national attention to date.

Completing the Palin package on this web site, the following articles were previously archived:

Click here to review July 2009 posts providing more information on the Alaska Risk Assessment project and other problems Palin left behind when she resigned as governor.

In July 2008, I prepared a report for the Alaska Public Interest Research Group on major unanswered questions regarding Palin's Alaska Gas Line Inducement Act (AGIA) and the natural gas pipeline tariff regime. Following up, I put together a packet of documents ("The Palin Papers") that I gave to Governor Palin. During that brief encounter, I requested a sit-down meeting to explain my respectful disagreement with her natural gas team. The governor was either unwilling or unable to meet with this former member of her consulting team and never responded to these concerns. Two weeks later, she ascended to the national stage. Click here for the story.