Huge Alaska oil discovery fuels debate over state support for energy industry
A huge oil discovery in Alaska has put into stark relief the state’s battle over the government role in promoting fossil fuel exploration and financially supporting the energy industry.
Caelus Energy announced last week it made one of the largest U.S. oil finds in recent history on Alaska’s North Slope — a behemoth in the shallow waters of Smith Bay from which the independent driller believes it can extract 1.8 billion to 2.4 billion barrels of crude.
Production on that scale could help turn the tide for an energy-dependent state whose oil output has been in decline for three decades and which faces forecasts that crude prices will not soon breach the $100-per-barrel levels that once filled government coffers.
But the two-year oil price downturn has stoked challenges to the Alaska tax incentives that were implemented to attract fossil fuel explorers like Caelus Energy in the first place.
Facing a multibillion budget deficit, Alaska has begun paring back those incentives, and further reform is on the table. At the same time, Democratic presidential front-runner Hillary Clinton says she will seek to eliminate $60 billion in federal tax benefits and loopholes for the energy industry, while simultaneously pushing policies aimed at reducing U.S. oil consumption.
Striking a balance between fiscal stability and encouraging future drilling is critical for Alaska, because the state has generated as much as 90 percent of its revenue from oil and gas operations in the past. The industry also feeds the Alaska Permanent Fund, which pays out an annual dividend to every man, woman and child in Alaska.
Caelus Energy, formed in 2011 and backed by private equity firm Apollo Global Management, has advocated keeping the existing tax structure in place. In a release announcing the Smith Bay find, Caelus CEO Jim Musselman said: “Fiscal stability going forward is critical for a project of this magnitude. Without the state tax credit programs, none of this would’ve happened, and I’m not sure Caelus would’ve come to explore in Alaska.”
Musselman acknowledged the state is weathering tough times, but he expressed optimism the industry and legislators will forge a path forward.
“This is such a large project. I think we’ll all roll our sleeves up and figure out a way to make this work,” Musselman told CNBC. “Frankly, I can’t tell you how that’s going to happen, but it’s too important for the state not to work.”
As a sign of Smith Bay’s benefit to the state, he said production from the area could add 200,000 barrels per day of light crude to the Trans-Alaska Pipeline. The pipeline, which delivers North Slope crude to the southern shores of Valdez, now carries only about one quarter of its full capacity, making it less efficient and more costly to operate.