Digging in: Alaska’s resource ownership helped build the state, but it won’t last forever

Friends, if we can bear it, let us turn our attention away from the scintillating topic of the budget to a more relevant and lasting subject: subsurface mineral ownership. As it relates to mineral ownership, Alaska truly is different as the only state in the Union with a section of its constitution devoted to natural resources. Follow the breadcrumbs of the current debate over the Alaska Permanent Fund and the fiscal environment in which we find ourselves, and you’ll find yourself at one beginning: statehood.

Alaska owns the subsurface mineral estate beneath state lands. What does this mean? It means that if you own a plot of land and you find oil, you don’t own it (generally, as with all things, there are exceptions). All of us collectively own that resource, and the Legislature is charged with creating laws that allow for the responsible development of those collectively owned mineral resources:

The rancher in Texas or the farmer in North Dakota can become fabulously wealthy suddenly if oil or gas is found beneath their land. Companies approach private landowners, who (in a simple situation) own the surface and subsurface estates. Leases are negotiated and development and production can proceed. Landowners often charge royalties and rents to producers, a royalty for removing the resource and a rent for occupying the surface.

It was the The Mineral Leasing Act of 1920, which replaced the General Mining Act of 1872, that set the stage for the unique way Alaska would manage its natural resources. The MLA was a response to the stampede of oil prospectors heading west, staking claims all over California and gobbling up thousands of acres around the time that Standard Oil was found guilty of  monopolizing the petroleum industry. The new act set up a leasing regime whereby companies would apply to the federal government to prospect for, or lease, minerals on public lands.

The Mineral Leasing Act of 1920, and the actions of Standard Oil and others, were on the mind of legislators working in Congress debating Alaska statehood, and on the minds of the framers of the Alaska Constitution as they went about the work of writing our Constitution over 75 days in 1955 and 1956.

As a result of this debate, and the reservation of minerals to Alaska, the state is the entity that oil and gas companies usually do business with because the state is the largest subsurface mineral estate owner. The oil and gas fields in Cook Inlet started producing before statehood so much of it is a patchwork of regulations and ownership of homesteaders and others. But Alaska was a state by the time explorers hit it rich in 1968 at Prudhoe Bay.

Whether by luck or fate, the state found itself as the beneficiary of great wealth after the discovery of the largest oil field in North America. Because the state owned the surface and subsurface mineral estate at Prudhoe, companies would pay rents, royalties, and taxes directly to the state. The Legislature would then craft a budget from those revenues, thereby fulfilling the promise to Congress, and to the people of the state, that Alaska could and would sustain itself by responsibly developing its natural resources.

An understanding of this concept, state ownership of the minerals, is important to Alaskans for a few reasons.

First, it helps to explain why our state’s economy is so intimately tied to the price of oil. No other state relies on oil for both tax and royalty revenue to fund so much of its budget, though that’s partly a function of no other state having the same set up as Alaska.

Second, the debate over the Alaska Permanent Fund, and the ever more likely seeming nightmare scenario, should be informed by the way the fund itself came into being. If it wasn’t for 25 percent of all royalties (and at varying times, an additional 50% of later leases) being constitutionally funneled into the account, where would we be today? Royalties, sometimes forgotten, are the essential foundation to our revenue stream and to the Permanent Fund.

The Alaska we all know and love has been built on oil money and it will continue to be. While production taxes have a tendency to garner all the attention, it is royalties that created a floor for the Alaska budget during each and every fiscal crisis. It’s the 12.5 percent, or 16.67 percent, of the gross value of the oil produced on state lands, minus the contributions to the Alaska Permanent Fund, that have been the saving grace of the state.

But, take a closer look and you’ll see, even with flattening production, royalties begin to falter in the coming years.

As production moves into federal and Alaska Native owned areas, royalty revenue will begin to flow away from the state. Also, disguised by this presentation of the numbers is the fact that increased production from the NPR-A will see royalty revenue from it be paid out in the form of impact mitigation grants to communities, not the state.

I said we would, if we could bear it, tear ourselves away from the fiscal crisis talk but inevitably, it creeps back in.

The message here is that the small bit of unrestricted general fund revenue that partially pays the state’s bills comes from these royalties and little else aside from, recently, the Permanent Fund earnings which, critically, are also funded by royalties. As those funds begin to dry up the state will, once again, have to look elsewhere to fill its coffers.

It’s interesting to imagine what Alaska would be like, how its government would be funded, what industries would have popped up here, how many would be here, were it not for this essential quirk in our state DNA the effects of which form the outline of every policy debate we are having today.