Alaska oil policy: achieving alignment.

• Author: Keithley, Bradford G.
• Position: OIL & GAS

The last column in this series ("Out of Alignment," Alaska Business Monthly, November 2012) focused on the reasons why Alaska oil policy is misaligned with the objective of maximizing the development of the state's oil and gas resources.

The column discussed the state's attempted use of two tools--tax credits and direct regulatory intervention--to steer investment to Alaska and why those tools have failed to produce significant results in terms of increased production. As I explained, the state's use of the tools has been similar to backseat driving--and just about as successful.

The column also briefly mentioned a potential solution to the state's alignment problem--developing a means for the state to co-invest alongside industry in the development of the state's oil and gas resources. This month's column further explains that concept.

What is co-investment?

Simply stated, co-investment is the direct investment by the state as a partner in the development of the state's oil and gas resources. The state assumes an ownership share as a working interest owner, bears a proportionate share of the investment and operating cost required to develop the resource, and receives, as a partner, a proportionate share of the production.

The reason that the approach better aligns the interests of the state with the other owners and the development of the resource is because the state directly sees the economics of various projects and responds, as do the other owners, to those that produce the greatest economic returns. It also positions the state to help drive those projects from the inside, as an owner, by putting its own investment on the line.

Under Alaska's current approach, the state does not see those economics and even if it did, frankly does not have the incentive to promote those that produce the best returns. Instead, as I explained in the previous column, Alaska's efforts are heavily influenced by political considerations. As a result, the state and industry often work at cross purposes, with each somewhat stymied by the actions of the other.

Government co-investment in the development of Alaska's oil and gas resources is not novel. In 1996, Anchorage's Municipal Light & Power, a division of the municipality, purchased Shell Oil Co.'s interest in the Beluga Gas Field, located in Cook Inlet. Since that time, ML&P has acted as an owner in the field, contributing its share of the required investment and operating costs, and receiving its...