Alaska Dispatch. The Alaska Legislature endorsed Gov. Sean Parnell’s gas pipeline negotiations Sunday, approving plans to spend close to $100 million in the short term and agreeing to collect future taxes in the form of a share of the natural gas, instead of in cash.
Northrim Bank and its President, Joseph Beedle (NGP Photo), hosted a packed house economic briefing yesterday at the Dena'ina Convention Center in Anchorage featuring Economists Mark Edwards and Bill Conerly. We'll have more for readers by Monday. -dh
Opportunity For Alaskans In Canada?
Petroleum News: British Columbia Premier Christy Clark, supported by a delegation of top cabinet ministers and petroleum leaders, has persuaded the Canadian government to declare that the LNG sector is a potential “nation-builder” which could create 100,000 jobs.
Although the accord signed in Ottawa earlier in April is non-binding, it includes a commitment to promote the active use of temporary foreign workers, TFW, which could ease one of the deepest concerns among investors in the industry.
CBC News. Comment: The Northwest Territories government hopes to bury a high speed, 1,100 km fiber-optic cable from Fort Simpson to Inuvik.
It proposes using the Mackenzie Valley Pipeline route and much of the pipeline filing data to justify a light, environmental review.
What is the practical difference between cleared rights of way, using the same real estate, for a buried gas pipeline or fiber cable? We are sure that this question will arise during the permitting process and that the answer will not be very satisfying to Inuvik citizens, small businesses and aboriginal corporations that, for two generations, fought for and failed to have approved the routing for a Mackenzie Valley Gas Pipeline.
Countless hopes, dreams, and lives of every NWT and YT resident were affected by the loss of the pipelines' opportunities--one way or another.
Hopefully, an easier permitting process awaits a buried cable using the same right of way.
Perhaps the lessons of gas pipeline failure and fiber-optic cable success will not be lost on more logical, future decision makers. -dh
The Publisher and the Professor Opine: You Decide!
Reader Comment: A highly accomplished university professor, a friend for over 20 years, sent this comment in response to the above editorial on Alaska's underfunded pension program, which we are delighted to bring to you below, along with a response.
Dave: As usual a sound analysis of the underfunded pension liability.
However, I read that you suggest that we return various spending or taxing to the Median levels of other states. That point is where 50% of the states would lie above and 50% below.
Would those states above the median in spending and taxing be obviously thwarting business growth and profit? I doubt it.
Stability is probably the key in my mind. Also, corporate America charges us more or it cost us more to acquire those goods and services. Kids who depend of “welfare” to eat, go to school on a bus, or get health care don’t eat 50% of the meal, ride halfway there or only get kinda well. And if our “bureaucracy” is more expensive, I am not surprised.
I wonder if you checked to see how much higher engineers, doctors, accountants, oil execs, etc. earn compared to those in “median states”. I suspect they would howl in indignation if you suggested that they all get less.
But your analysis of the problems created by the underfunded pension liability is well stated and I wish we had more leaders in our legislature who understood the realities of our financial system as well as you.
(Note: I don’t think we pay our bureaucracy enough. We ask someone making $100k to negotiate with and regulate industries and executives making millions, with staffers and lawyers making outrageous salaries as well. And maybe if we paid the Legislators more, we could find some independent minds who could work in everyone’s best interest, including the oil industry.)
Harbour's response to the Good Professor's comment above.
We appreciate the good professor's two observations: his compliment for our view on the underfunded pension liability of the state; and, his thoughtful comment on why the remedies to Alaska's unsustainable budget which we offered are, in his opinion, wrong.
This is why we followed our recommendations for solving Alaska's fiscal challenges, with the further acknowledgement that, "Of course, there are as many suggestions as there are people with opinions."
Professor B. did not offer his own suggestions for solving Alaska's fiscal challenges; he only attacked our recommendations.
His further comment was that Alaska should spend more money on executive salaries so that those who "negotiate with and regulate" industry could, presumably, more ably do so.
The beauty of a oil & gas lease sale is that the private market produces for Alaska the highest value for a natural resource that the market will pay. The highest.
Most of our current investment climate problems occur as a result of changing the rules of the game for investors after a lease sale has taken place. Politicians are tempted to greed once they see that an investor is profiting from a lease sale bid that he had first put at risk. They are tempted to relieve the investor of the profit "reward" earned by the lease sale investment, subsequent exploration, capital investment and development (i.e. because the investor is 'greedy, makes outrageous salaries, etc.'). The point of investor success is where the good Professor would hire high priced bureaucrats to extract even more from investors than their own due diligence had determined valid at the time of the lease sale.
This is why we have always held that Alaska should spend within its means -- so that the temptation to change the rules for investors is not exacerbated by a desperate need for cash to cover undisciplined spending.
If Alaska, as we have editorialized, becomes a state where "a deal is a deal", then decision makers will spend and tax with prudence and restraint. Life will be simpler. The need to demonize investors will diminish as will the temptation to discriminate against them. Since lawmakers won't tolerate rule changes after investor commitments have been made, there will be no need for a new cadre of highly compensated bureaucrats to "negotiate and regulate" in ways that extract more from investors than they themselves thought prudent when investment decisions were made.
The good professor argues for 'stability' for government beneficiaries. While beneficiaries of taxpayers (i.e. including educators) will always want the guarantee of stable taxpayer income, it is easy to forget that those who risk their own money tend to invest more and more confidently when they work in a 'stable' tax and regulatory climate.
We appreciate reader comments, especially from those who are highly educated and thoughtful about the issues -- and, especially when they disagree with us. It gives us a chance to reevaluate our own logic and conclusions.
In this case, we emerge from the additional thought and dialog more convinced than ever that Alaska's real secret to a bountiful future is learning to treat investors as we wish to be treated when we are considering a personal investment.
Hold a lease sale for natural resources to VOLUNTARILY extract the highest value from investors that a competitive bidding process will yield. Then, try to MINIMALLY interfere with -- and even safeguard -- the metrics upon which an investor based the lease sale bid, for the life of the project.
It is the Golden Rule applied in a different way than we normally do ... but the principle is the same. And it is that principle that will most likely lead to sufficient investor confidence for a multi-billion dollar gas pipeline investment to be made.
That is why, for years, industry has told the state and its residents that big investments require assurance of "Fiscal Clarity".
Rejection of the Golden Rule of treating others as we would wish to be treated can only lead to a life of misery and greed...and a lower likelihood of significant investments.
Can anyone dispute that this enduring principle applies to states as well as it does to families and individuals? -dh
Our friend, Pedro van Meurs (NGP Photo) will host his special sequence of three fiscal oil and gas courses to be held in Amsterdam:
- June 4 – 6: The Advanced Course in Fiscal Systems for Unconventional Oil and Gas. The course deals with unconventional projects in North America and worldwide, including spreadsheet based economic analysis of a wide variety of applicable fiscal systems.
- June 9 – 13: The world famous regular course in World Fiscal Systems for Oil and Gas, providing a comprehensive overview of fiscal systems related to leases, licenses, concessions, PSCs and risk service contracts based on our student spreadsheet for conventional oil and gas.
- June 16 – 20: The Advanced Course in PSCs, with detailed spreadsheet based economic analysis and discussion of all twelve different PSCs types and styles. The final two days of the course deal with legal aspects.
According to van Meurs, "The total sequence of three courses presents an unusual opportunity to learn about every aspect of oil and gas fiscal systems in the world and receive comprehensive and in-depth training in the details of economic and fiscal analysis and negotiation. Participants receive a discount of 10% for participating in 2 courses and 20% for participating in all three."
For more information about van Meurs' courses, click here.
Remember this announcement, 5 years ago today? ANCHORAGE, April 8, 2008 - BP [NYSE: BP] and ConocoPhillips [NYSE: COP] today announced they have combined resources to start Denali - The Alaska Gas Pipeline. The pipeline will move approximately four billion cubic feet of natural gas per day to markets, and will be the largest private sector construction project ever built in North America. The project combines the financial strength, arctic experience and technical resources of two of the most capable and experienced companies in the world.
|Globe & Mail. The U.S. Energy Information Administration reported last week that Canadian oil exports to the United States are the highest in at least four decades.|
Today, Congressman Doc Hastings' (NGP Photo) House Natural Resources Committee held a Full Committee legislative hearing on four straightforward bills to update the Endangered Species Act (ESA) for the 21st century and improve species recovery. This effort works in the favor of Alaska's and America's economy without diminishing reasonable support for protecting truly endangered species. -dh
Does Alaska's Pension Liability Threaten Gas Pipeline Viability?
Alaska spends more than it takes in. To that extent must investors worry about when -- and not if -- the next tax proposal will creep over the horizon toward THEM.
Below is the link to an Op-Ed wherein mayors (i.e. whose own retirements are at risk with underfunded pension liabilities) urge lawmakers to support the Governor's proposal to reduce the $12 billion unfunded pension liability by $3 billion.
|Today's Juneau Empire Op-Ed. See long-time Alaskan utility and natural resource expert, Bill Corbus' (NGP Photo) related opinion. -dh|
To do that, lawmakers will have to remove $3 billion from state savings accounts at a time when their deficit spending level requires use of depleting savings.
Oil production from Prudhoe Bay is declining, upon which 90% of state spending is based. Oil revenue could continue its dramatic, annual production decline putting more reliance on savings accounts to balance an unsustainable state budget.
|See Alyeska Pipeline Service Company President Tom Barrett's (NGP photo) response to yesterday's Alaska state revenue forecast. We believe that better than projected production decline rates are due to the passage a year ago of SB 21, which reformed Alaska's oil production tax. -dh|
Paying off the entire pension liability is impossible since Alaska doesn't have $12 billion in total savings available. (4-10-14 Note: See "Understanding Alaska's Budget". Some might say we have over $20 billion in savings available; but since political reality prevents expenditure of most of these sources for "government pension fund liabilities," they should not all be considered available.)
Gas pipeline investors have to be wondering, "If I commit to a portion of a $40 - 60 billion gas pipeline/LNG export project and the state continues running out of money, how safe is my investment from predatory tax policy?"
Alaska has a track record of taxing for more than it needs to operate and, to add insult to injury, taxing the oil industry retroactively. It has built the highest cost per capita bureaucracy in the nation. Now, in the face of rising costs and diminished revenues it is urging oil companies to invest in a mega gas pipeline project so that revenue from that project a decade from now can fund the state's spending appetite.
Link to our reports and commentary on LNG competition, here.
Energy advisor, Keith Kohl, says in his communique today that, " Like us, Canada's National Energy Board has approved seven LNG export license applications — but unlike us, the first project slated to start tapping the Asian LNG markets as early as next year."
Meanwhile, dozens of pending LNG export projects in the the US and Canada are all romancing the same Asian energy consumers. Experienced observers know that profit margins will likely be thinner than they hope for. Asian utility managers are not stupid. They will want the lowest possible "ship or pay" cost for LNG energy in return for their own "take or pay", long-term financial commitments. (Some good, Lower 48 researchers are excited about Alaska's prospects, but may not be fully aware of investor concerns or competitive pressures from other export projects that we have covered in these pages. -dh)
The LNG project that offers the lowest, competitive price to an Asian utility in return for a 20-year, firm contract, cannot afford to risk company solvency on "assurances" that Alaska will not create new energy taxes out of thin air and even apply them retroactively--thus altering project metrics and risk. The risk that the contracted delivery price of LNG to an Asian market could be lower than the cost of delivering the LNG -- under a "ship or pay" arrangement, may be an unacceptable risk to a responsible investor.
So the final question that any gas pipeline investor might be asking now is, "Can Alaska assure my company that today's gas pipeline investment is safe from future tax increases when unfunded pension liabilities, run-away budgets and diminishing oil production pose a dreadful danger in spite of any politician's soothing assurances and best intentions?"
As our friend, utility manager Joe Griffith (NGP Photo), has often said, "Hope is not a strategy." We all hope for conditions that will enable sustainable budgets and projects to supply both the jobs and the financial resources of the future. But hope alone will not achieve that goal.
What then is an answer to this Gordian knot of intertwining politics and energy policy? Cut public spending to be consistent with income. Cut welfare/entitlement spending to be consistent with median welfare spending of all other states. Business taxes should not exceed median of business taxes in other states. Institute new taxes only on new investment, not on prior investment. Never tax retroactively. Cut tax and regulatory burdens to essential and responsible needs. Avoid state investment into private sector projects--which always involves politicians risking "Other Peoples' Money". Of course, there are as many suggestions as there are people with opinions.
So is some combination of these and other responsible remedies too difficult?
If workable solutions are "too difficult" they will not be undertaken and undisciplined, unsustainable economic policies will ultimately result in involuntary compliance with economic realities.
Parents warn children that this is called, "learning the hard way".
Fairbanks News Miner, by Mayors John Eberhart, Luke Hopkins and Bryce Ward.
Gov. Sean Parnell’s budget includes a $3 billion line item to reduce the Public Employees Retirement System (PERS) and Teachers Retirement System (TRS) unfunded liability, which is about $12 billion. The mayors of Alaska, through the Alaska Conference of Mayors and the Alaska Municipal League, fully support the governor’s initiative to stop the can from being kicked down the road.
The state has attempted to make inroads in regard to this huge liability, but so far hasn’t had success. Every year the deficit has increased. The governor has stepped forward to address this issue in a responsible way.
Comment: Yesterday, April 7, 2014 the Alaska Department of Revenue issued its Spring 2014 Revenue Forecast. We believe it provides a brighter outlook for a future, sustainable economy, if decision makers continue to support the sort of tax reform to which the increased production may be largely attributed. But for future years, a sustainable economy based almost entirely on the back of one industry needs serious, objective attention and problem solving.
Note that the forecast includes improved North Slope production and projects a lower decline than has been anticipated. The following is from the office of Alyeska Pipeline Service Company President Tom Barrett (NGP Photo). -dh
Barrett issued the following statement this morning:
“The Department of Revenue’s forecast is great news for TAPS. This much needed upward shift in throughput is critical, because moving less oil through TAPS creates significant challenges for the men and women who work to keep the pipeline operating safely and reliably. Every barrel in TAPS counts and the prospect of thousands of additional barrels moving down the line is welcome news.”
“We understand that Alaska depends on us to safely deliver the oil that funds so many state services. That’s why Alyeska and the TAPS Owners have aggressively pursued solutions to declining flow. But, as I have often said, ‘the best and most direct solution for TAPS is more oil.’”
“I applaud the Governor and the Legislature for fostering an environment that encourages more development. The forecast reflects that the investments being made by the producers should pay off soon for Alaska. That’s good news for TAPS and for everyone in the state.”
More information about the challenges of declining throughput is available at http://www.alyeska-pipe.com/TAPS/PipelineOperations/LowFlowOperations
About Alyeska Pipeline
For more than 36 years, Alyeska has operated the 800-mile Trans Alaska Pipeline System (TAPS), safely moving oil from Prudhoe Bay on the North Slope of Alaska south to the Port of Valdez, the northernmost ice-free port in the United States. The pipeline traverses three mountain ranges, permafrost regions and 34 major rivers and streams. Alyeska personnel work in Anchorage, Fairbanks and Valdez and at pump stations and response facilities all along the pipeline. They also operate the Ship Escort/Response Vessel System (SERVS) for Prince William Sound. Alyeska was created to construct, operate, and maintain TAPS for owner companies which today are BP Pipelines (Alaska), ConocoPhillips Transportation Alaska, ExxonMobil Pipeline Company and Unocal Pipeline Company
WILD CANADA: This spectacular four-part series on the wildlife and the wild lands of Canada reveals a Canada that few have seen before.
This morning, U.S. Senator Lisa Murkowski (NGP Photo) ...
|This afternoon at 7:30 p.m. Eastern Standard Time, readers may watch a legislative hearing (i.e. live streaming) in Juneau before the Senate Resources Committee. One of the items heard will be "Updates From The Field", including testimony concerning Alaska's tax and investment climate by Alaska Support Industry Alliance representatives, Rebecca Logan and Doug Smith (See photos).|
... commented on Rio Tinto's divestment of its interest in the Pebble Partnership.
Her position is consistent with the view we have expressed over that last two years that EPA's potential, preemptive action is a gross violation of the rule of law and creates a dangerous precedent for any oil and gas, mining, commercial fishing, agricultural, construction or other public works project.
* * *
Here is Governor Sean Parnell's statement, released early this afternoon: Governor Sean Parnell (NGP Photo) today released the following statement after learning of Rio Tinto’s decision to divest its 19 percent ownership stake in Northern Dynasty Minerals and the Pebble copper and gold project. “It’s disheartening to see a company like Rio Tinto take its business elsewhere as a result of the current federal regulatory environment,” Governor Parnell said. “Even more troubling is the EPA’s efforts to preemptively veto a project before any proposal has been submitted and before a public permitting process has even commenced. Mining provides thousands of jobs for Alaskans and is a critical sector of our state’s economy. Looking ahead, for Alaska to compete globally for investment dollars, it will require a fairer and more stable regulatory process than what the federal government currently pursues.”
* * *
The EPA's unrelenting ardor is aptly demonstrated by Administrator McCarthy's speech tonight to the US Water Alliance in Washington, National Geographic Headquarters Grosvenor Auditorium, 6 p.m. She will discuss EPA’s continued efforts to "safeguard our waterways" (if not our economy -dh), including the Agency’s recent landmark proposal to clarify protections for the nation’s streams and wetlands under the Clean Water Act. -dh
Peninsula Clarion/AP by Becky Bohrer. The House Resources Committee version of a bill to advance a major liquefied natural gas project was starting to take shape Saturday, as members dug into a thick stack of proposed changes. The committee, with a reputation for finely parsing language, was making slow but steady progress in an amendment process that began Friday. The panel planned to resume work Sunday, after making a slight dent in the stack after hours of meeting Saturday.
From Robert Dillon, Senate Energy Committee Staff. The U.S. Energy Information Administration today released the first part of its Annual Energy Outlook for 2014. Under the EIA’s high-resource case for U.S. oil production – that is, a scenario where oil production sees sustained production increases over the next 25 years – net imports drop to zero:
“In the High Oil and Gas Resource case, growth in tight oil production continues for a longer period of time than projected in the Reference case. Domestic crude oil production increases to nearly 13 MMbbl/d before 2035 in the High Oil and Gas Resource case, and net U.S. oil imports decline through 2036 and remain at or near zero from 2037 through 2040.” – EIA.gov/forecasts.
U.S. Sen. Lisa Murkowski (R-Alaska) today released the following statement on Rio Tinto’s decision to divest its 19-percent shareholder interest in Northern Dynasty Minerals and the Pebble gold, copper, and molybdenum prospect in Southwest Alaska:
“I appreciate the way Rio Tinto is handling this decision. Instead of simply divesting, it has committed to investing in the education of Bristol Bay’s next generation. This will help ensure that local residents have the skills to get or create the kind of jobs that will allow them to provide for their families.
“I understand that many mining companies are reevaluating their project portfolios right now, but I’m concerned by what else may have prompted this decision. If we want to attract investment to our state and our economy, we need a regulatory system at the federal level that is predictable enough to allow responsible development to go forward – at least to the permitting stage, and without the threat of a preemptive veto from the EPA hanging over it."
Kenai Peninsula Clarion Editorial. Last week, Gov. Sean Parnell created a municipal advisory board to weigh in on issues surrounding a natural gas pipeline project that could eventually tie communities together from Prudhoe Bay to Nikiski (i.e. See News Miner Story). While it’s laudable that the governor chose to allow several of those communities to weigh in — representatives from North Slope, Fairbanks North Star, Denali, Matanuska-Susitna, and the Kenai Peninsula Borough will be able to weigh in — we find other parts of the pipeline development process to be troubling. More....
Latest On the Enviro-Industrial-Governmental Cabal
But the UN climate body now says it is no longer so certain. The second part of the IPCC’s new assessment report is due to be presented next Monday (I.E. TODAY) in Yokohama, Japan. On the one hand, a classified draft of the report notes that a further “increased extinction risk for a substantial number of species during and beyond the 21st century” is to be expected. On the other hand, the IPCC admits that there is no evidence climate change has led to even a single species becoming extinct thus far. . .