I have been bombarded with requests to comment on BP's announcement to withdrawal from Alaska and what it means for the State.  Most of my readers have attended my leadership training programs and know that I retired from BP after a long career, and it’s not unreasonable to expect me to have a view.  So here goes – it hit me at a deeply emotional level initially – sort of felt like being abandoned by my parents at a truck stop.  A couple of minutes later I became more thoughtful.  In my mind, at the core of the withdrawal is the BP/State of Alaska relationship.  This relationship deteriorated slowly – then suddenly – over many years, one missed conversation or bad decision at a time.  As we know from leadership training, "It's all about relationships."  Within these relationships, context is created and shared, and leaders become attuned to constraints and opportunities.

Therefore, to make sense of BP’s decision to withdraw from Alaska we need to first understand the context within which such a decision would be made.  “Context”, as described in leadership training, is not one thing, rather it’s the accumulation of many influences and factors that shape an environment through which the world is experienced.  Although I'm not in any way involved with BP now, and have no inside information, here's my view of what shaped the company’s Alaskan context (be forewarned - BP’s been in Alaska for a long time and there’s a lot of context):

• BP is fundamentally a strategy-based company rather than tactical in its actions.  Meaning, it takes a strategic position, sticks to it, and manages risks and opportunities as they occur.  The fact that it's been in Alaska for 60 years demonstrates that.  Other oil-field investors like Chevron, Shell and Anadarko, have come and gone during this time.
• If I recall correctly, BP either cut back or stopped exploration drilling roughly 15 years ago due to poor drilling results at the time.  With little exploration, the company's portfolio has been based on known reservoirs, essentially capping growth. That said, they have done a fine job exploiting these reservoirs to maximize recovery and production.
• The Alaska oil province is old, and the most prolific reservoirs were developed first.  These have been in decline for years. Smaller and more marginal fields have been discovered.  The largest recent discovery that I know about is the Nanushka field, estimated at up to 700 million barrels. It's noteworthy that Armstrong Oil & Gas, a main owner in the field, chose to sell the majority of its interest rather than invest to develop it.  The company that bought Armstrong's interest, Oil Search, has no experience in Alaska and is almost entirely based in Papua New Guinea.
• ANWR gets profile from time to time as the next great oil opportunity for Alaska.  There’s been only one exploration well drilled in ANWR and that was done by a BP/Chevron joint venture.  The results are “tight-holed”, meaning they are not known by other investors.  Both companies have now withdrawn from Alaska and that’s an indicator of how they feel about the potential of ANWR.
• In 2013 a Shell drilling rig, the Kulluk, lost its tow line and went adrift for two days on its journey through the Gulf of Alaska and beached on Sitkalidak Island.  The incident got global attention.  Pressure from environmental groups and Shell’s shareholders ultimately led to the abandonment of the company’s arctic exploration and development program after a $5 billion investment.  The entire oil and gas industry was watching Shell at the time to determine if a successful arctic development were feasible.  The event negatively impacted investor perception of the viability of arctic exploration.
• The Trans Alaska Pipeline (TAPS) has been maintained to a very high standard by Alyeska Pipeline Service Company, but the pipeline has been in place for nearly 45 years.  Substantial investments in pipeline replacements and/or modifications are inevitable.  It cost $9 billion to build TAPS.  Replacement cost is probably ten times that amount.  It’s going to take an expectation of huge forward production and related revenue to justify this investment.
• In 2006 there was a 4000-barrel leak at Prudhoe Bay which BP operates. Instead of helping BP through this, State officials brutalized them (my view). The memory is lasting in my mind (many of you have heard my story) and surely the same is true for the BP psyche.
• In 2010 BP had a big incident in the Gulf of Mexico.  It cost them over $60 billion and would have bankrupted 99% of the companies in the US.  As a result, more than any other company in the oil and gas industry, BP's perspective about an oil spill is more pragmatic than theoretical – they know how bad things can get.  The risk and cost of something going wrong with 45-year-old infrastructure in Alaska is quantifiable.  At an economic level, there's probably not enough forward income for BP in Alaska to justify the probability-based assessment of the cost of a major incident at either the fields or the pipelines.  Based on what happened it 2006, the precedent has been set for how BP would be treated by the State if such an incident occurred.
• As I recall, the way the leases are written for Prudhoe Bay, the producers must restore the surface at the end of production to a standard that is not clearly defined.  Meaning, it's difficult to quantify what restoration will cost.  If the gravel pads need to be removed, for example, the cost could be in the tens of billions.
• In 2008 the State initiated a legal action through the Federal Energy Regulatory Commission that denied the owners of TAPS the recovery of $500 million in critical investment cost for a project that ultimately achieved the dual objectives of lowering operating costs and extending the life of the pipeline.  There’s no question that the project could have been managed better, but the State’s position stung all of the owners of TAPS and was a wake-up call to how tenuous a return on investment actually is in Alaska.
• It's difficult, if not impossible, under the Alaska constitution for an Administration or Legislature to enter into a binding contract with an oil and gas investor.  Meaning, an investor could put say $10 billion into an infrastructure investment under an agreement with the State and the next Legislature can effectively and unilaterally change the terms of the agreement.  We’ve seen this manifested in the recent decision by a small Cook Inlet gas producer, Furie Operating Alaska, to declare bankruptcy reportedly because the State of Alaska suspended the payment of investment tax credits which had been promised to exploration companies like Furie.  I’m sure there’s more to this story.
• There is no reliable State policy about taxation of the oil companies.  Each new session of the Legislature can change the taxing regime.  Meaning, every year the producers face potentially radical changes in how they are taxed.  The current ballot initiative about production taxes is just another example of the uncertainty faced by investors in Alaska.
• Each Governor from Knowles, Murkowski, Palin, Parnell, Walker, and now Dunleavy, has abandoned their predecessor's plan for the natural gas pipeline and restarted their own version of what should happen.  There's no policy-level continuity upon which investors can rely.  Investors need some level of policy durability to be attracted to investment opportunities especially when it comes to infrastructure.
• An unintended consequence of the Permanent Fund Dividend (PFD) over the years has been the creation of an entitlement mindset among many Alaskans.  By entitled, I mean that many people believe that they and their children deserve $1500 - $3000 each year for no other reason than their status as Alaskan residents. I don’t mean to cast these people as either right or wrong, but there is no other place in the developed world to my knowledge where governments give residents “free” cash without a need’s basis.  It's virtually impossible to change this expectation once it is in place, either politically or practically, because such an action would be seen as a regressive tax by those who have come to rely on the dividend to support their standard of living.  Only a state-wide crisis can reset the expectation.
• Alaska is either in or nearing a state-wide crisis – it can no longer afford to fund essential and desired discretionary services and pay a PFD at the levels expected.  Due to the relatively small population of income earners in the State, taxing their income can't generate enough revenue for both. Governor Dunleavey has attempted to make substantial cuts in expenditures and now faces a mounting recall initiative. The only course of action for the Legislature over time is to tax the oil industry more, climactically to the point of zero returns. This will destroy the industry, of course, but elected officials will have no other politically viable options in the end. This will occur through “1000 cuts” so that causation will be blurred by many other factors.  As a result, there will be many places where decision makers can deflect accountability.

So, with this context in mind, it’s not unreasonable to expect that an oil and gas investor, who thinks strategically (e.g., BP), would seriously consider leaving the State.  The investors who are not in this mindset simply do not share BP’s context.  They could be more tactically based, short-term oriented, trapped by some sort of contract, have fewer and/or less attractive investment options in their portfolio, or have a view about North Slope potential that is more optimistic than an investor, like BP, with a long history in the region.

From my perspective, there's one thing that could have altered BP’s Alaskan context and potentially enticed them and other investors to stay – and ultimately extend the life of the oil and gas industry in Alaska – and that's a constitutional amendment that allows the Legislature to enter into binding contracts with oil industry investors.  If that would have been in place during the Murkowski administration, for example, the natural gas pipeline would be nearing start up and the State would be in a much better fiscal condition.  It takes a vote of the citizens to amend the constitution and the probability of achieving that is very low. It's funny, the current mindset among those involved in the natural gas pipeline is that the Chinese will front the $60 billion investment required.  That assumes that the Chinese are either not strategic or stupid.  The current trade dispute with the US clearly debunks both of these myths.

Leadership Lessons

Isn’t it interesting how quickly we can get into a blame game with this situation? For example, we could call BP bad for cutting back exploration and abandoning the State in favor of higher economic returns elsewhere, or we could say that six consecutive Governors have been shortsighted about the natural gas pipeline, or Legislature after Legislature over the years has shirked its responsibility and allowed the State to devolve to a crisis, or that overzealous regulators and government officials have chased away a world-class investor, or that Alaskans are unreasonably greedy and expect the government to subsidize their lifestyles.  All of these positions are, depending on your context, as true as they are false.  Remember, people don’t take things out of context – they take them into their context.  The only consistent truth is that poor relationships have caused the State to be in a position that it is currently not achieving its full potential.  Let me explain what I mean.

As many of you know from the leadership training, we live in a quantum world that is constantly shifting.  What worked for Alaska in 1975 is not going to lead us into a viable future in 2019. Reality exists in the moment and moves, often without detection, from one new state to another. Most of us are blinded to shifting realities by either language that limits our cognitive ability, and/or by the neurological functioning of the brain that seeks to minimize stress by shielding our perception of the vagaries in our environment.  We can grasp, and really feel the reality of, only a fraction of those things around us even when they are personally encountered. Unconsciously, we ignore information that does not confirm our pre-existing views and we reframe evidence that disagrees with our beliefs as the brain works to achieve self-justification.  As noted by one brilliant theorist, “most effective cover-ups are perpetrated not by those who are covering their backs, but by those who don’t even realize that they have anything to hide.”

As a result, only the enlightened will realize that there is no objective environment or absolute truth – just our observations of each and the shared observations of others.  In order to grow potential and avoid crisis we must actively relate to (i.e. connect to) our environments to understand when we need to adapt to shifting situations and when we have an opportunity to create something new.  Nothing happens in the world without something relating with something else.

The real leadership lesson from BP’s withdrawal from Alaska is that in order to prosper in the world, decision makers (including all of us) need to do two things: (1) interrogate reality constantly and (2) always seek creativity and change over the allure of status quo. As to the first requirement, there are four objectives (Inspired by work done by Annie Duke):

1. Make Quality Decisions by considering facts, knowledge, and what we believe, as well as having a mechanism to constantly challenge each.
2. Take Off Blindfolds by acknowledging the randomness of influences in our world and be free of a “self-serving” bias where we blame bad outcomes on luck, or factors beyond our control, and attribute good outcomes to skillful decision-making.
3. Optimize Hidden Information by anticipating “unawareness” at the time of decision-making and expecting further complications from unknown future information and influences.
4. Access “Error Signals” by socializing a mindset of knowing and sharing learning from mistakes.

Had decision-makers in Alaska embraced these objectives over the years, the State would not be in its current situation.

The second requirement begins with intentionally building and maintaining diverse relationships in our personal and business lives.  These relationships give us the capacity to see shifting environments and those factors that influence the shifts.  With this awareness we are able to (1) detect constraints, or what could hold us back from achieving our potential due to the environmental influences.  Once detected, we must (2) confront the constraints through thoughtful actions, then (3) respond to either the positive or negative feedback from the confrontation, and ultimately (4) adapt to what is learned from the confrontation.  When done consistently, the four steps – detect, confront, respond, and adapt – will lead us to a point where we actually create opportunities and the influences that cause environments to shift.  Creativity does not occur passively.  It is the consequence of intentionally confronting constraints in our lives.  A modified version of the famous Picasso quote comes to mind, “creativity exists, but it has to find you working.”

Investors, legislators, governors, and government officials have a shared accountability for relationships.  Each group in a state like Alaska must strive to initiate and maintain relationships in order for the State’s potential to be achieved.  There is no such thing as one party in a failed relationship being entirely right and others entirely wrong.  Everyone has their fingerprints on a failed relationship as they do for successful ones. Ultimately, relationship shapes reality; it’s not the other way around.  Relationships evoke potential.