ALASKA NATURAL GAS EXPORTS: FISCAL STABILITY VERSUS THE STATE’S
CONSTITUTION
Douglas B. Reynolds, University of Alaska Fairbanks, (907) 474-6531, DBReynolds@Alaska.Edu
Key Words: Natural Gas, Alaska Gas Exports, Fiscal Stability
Overview
Alaska has long discussed exporting its vast natural gas resources on the North Slope to Pacific Rim
destinations in China, Japan and Korea. However, the North Slope natural gas resources have been deemed too far
away from consuming markets to be economically exploitable, although that is now changing with the high growth
rates, high environmental and energy security concerns and high natural gas prices in the Pacific Rim region. Other
determining issues in the past that precluded North Slope natural gas from being exported included: the loss of oil
production due to reduced pressure; United States energy security concerns; the high costs of Alaska construction;
and, importantly, Alaska’s fiscal stability. While many of these problems can be overcome, one issue—Alaska’s
fiscal stability—is still a problem. Over the years, the Alaska tax fiscal system has been a thorn in the side of any
agreement to get an Alaska natural gas export project approved, because oil and gas producers are reluctant to
commit to any project unless Alaska guarentees its natural gas production tax rates wont change in the future.
However, Alaska’s constitution specifies that Alaska may not bind tax rates for future legislatures using a tax
contract.
This issue is interesting since it is an issue that many oil and gas countries and regions around the world deal
with, i.e. trying to maximize the value of a resource while simultanesouly not giving away the right for any future
government revenue increases. For example on the one hand, most countries want to make binding contracts on
mineral rights, including the government take on those rights, in order to develop specific oil and gas reserves and
maximize the value of those reserves, but on the other hand, those governments also want the flexibility to change
any contract later. Indeed countries have been known to change contracts after oil and gas development has
occurred by for example nationalizing those fields when the government no longer likes the terms of their contracts
and fiscal systems.
Nevertheless, this paper is an analysis of the Alaska Constitutional restrictions on fiscal system contracts that
exist in Alaska. The paper gives an analysis of one way to deal with this issue. First, Section 8 of the Alaska state
constitution specifies that the maximization of natural resource value in Alaska shall be pursued. However, Section
9 of the same constitution specifies that there can be no tax contracts that bind future legislatures’ right to change
taxes. The idea of this paper is to show a game theory analysis of how obtaining bids in the form of a fiscal tax
contract and a purchasing contract could create a credible threat to lease holding producers to give their best fiscal
terms to Alaska in a binding contractual form. Then because Alaska will have two government take contracts from
which to choose its best option to develop its natural gas, then it will show that the contracts maximize the resource
value.
The result would be that Section 8—maximization—can trump Section 9—no tax contract—of the
constitution.
This is one way to maximize the value of Alaska’s natural gas resource without changing its
constitution.
Methodology
This paper will show the costs and benefits of one alternative solution to Alaska’s fiscal system (taxation)
dilemma. Specifically, the idea of a competitive contract bid on competing contracts for fiscal and other terms.
Former governor Palin already tried a competitive contract concept to get a natural gas project started, but that
contract has so far been unsuccessful. Nevertheless, that competitive bidding and contract did not include a
competitive bid on fiscal tax contracts which are needed to set fiscal stability agreements in place in order to get a
large export project financed. An alternative competitive bid is specified here that is different from the Palin
competitive bidding in many ways. The idea is to sell the state’s royalty natural gas to the highest bidder by having
two different bids that would include a fiscal contract as a part of the bid in order to nullify the no tax contract article
of the State’s constitution. Considering that the other constitutional article—section 8—specifies that Alaska must
maximize resource value, this might work to nullify section 9 that specifies that no tax contract can be engaged in.
It would be a contract on fiscal systems that would include competition from non-resource lease owners.
Results
This paper will show the game theory analysis results and the need for a credible threat to the producers to
obtain the best fiscal contract and other terms. It will show the costs and benefits of the idea of a competitive fiscal
contract bid as well as a possible set up and a possible stick that would get the producers to give a competitive
contract that would maximize the state of Alaska’s resource value.
Conclusions
The Alaska constitution section 9 is set up so that you cannot get a California situation where the state
legislature is not allowed to increase taxes even though inflation is high and the tax caps and therefore the tax
revenues have inflated away to nothing in real terms, as has happened in California under proposition 13 in 1978.
The Alaska legislature cannot make a binding tax contract deal to develop a resource under the Alaska state
constitution. This is so that if a contract were make and then it was found out later that the deal is a net loss to
Alaska with no way to change the fiscal contract, that Alaska would have no way out of the contract. Nevertheless,
the North Slope natural gas value is subject to much risk and volatility, therefore a tax contract could be the
difference between making a natural gas project viable or not, and thus maximizing the value of Alaska’s resources.
This paper will show how a bidding system for a contact will work.
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