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      This is your public service 1-stop-shop for Alaskan and Canadian Arctic energy commentary, news, history, projects and people. We update it daily for you. It is the most timely and complete northern energy archive anywhere — used by media, academia, government and industry officials throughout the world. Northern Gas Pipelines may be the oldest Alaska blog; we invite readers to name others existing before 2001.  -dh

 

Interstate Gas

1-11-16 Supreme Court Reins In EPA On Carbon Dictates

11 February 2016 10:07am

TODAY'S Gas and LNG Pricing Comments From Our Aussie Energy Expert


 

Mining.com.  The IEA just came out with their monthly report... headline - grabbing sentence that they had in there was that oil markets might "drown" in over-supply due to rising inventories. 

Oil & Gas Journal Report Applies to Alaska and Canada: “Given the cost of restarting production, many producers will continue to take the loss in the hope of a rebound in prices,” says Robert Plummer, WoodMac vice-president of investment research....​  (How long can this possibly go on, we ask....  -dh)


Supremes Stay EPA Coal Dictates

EPA Carbon Rule, Michael Whatley, Consumer Energy Alliance, Dave Harbour PhotoUpon hearing news that the U.S. Supreme Court issued a stay on the EPA’s massive Clean Power Plan regulations, CEA executive vice president, Michael Whatley (NGP Photo) had the following reaction:

“CEA is pleased with the Supreme Court’s decision to stay the Clean Power Plan pending lower court action. Compliance with the plan presents states and utilities with significant challenges, to say nothing for the cost and effort associated with producing the plans necessary to achieve future compliance.

“In granting the stay, the Supreme Court has indicated that justices are suspicious of the Clean Power Plan and its radical restructuring of the U.S. electricity grid, generation fleet, and consumer impacts. They have also spared states and consumers the burden and cost of creating compliance plans for a rule which has a good chance of being invalidated by one or more courts.

“The last thing that energy consumers need is for states and electricity providers to take major steps to comply with a rule and then have the rule invalidated – especially when those steps will very likely raise rates across the country. If future courts validate the rule, the states can begin to work on implementation at that point – with nothing lost except a small lag in the rule’s schedule.”

Journal of Commerce by Elwood Brehmer.  A lack of progress in negotiations between the state’s producer partners on major Alaska LNG Project agreements is likely to throw the project off schedule, according to a key member of the Walker administration.

Deputy Department of Natural Resources Commissioner Marty Rutherford said in an interview that BP, ConocoPhillips and ExxonMobil are still working on the structure of the Alaska LNG Project’s critical Gas Balancing Agreement after more than a year of negotiations.

Rutherford is the state’s lead negotiator for commercial terms on the project, Gov. Bill Walker has said.

The Gas Balancing, or gas supply, Agreement is the underpinning contract for at least seven more issues that must be resolved within several months to keep the project on


Journal of Commerce by Elwood Brehmer.  Anchorage’s electric utilities have partnered to purchase part of a Cook Inlet natural gas field, a move that secures a long-term fuel supply and could save ratepayers up to $9 million per year, utility leaders said Monday.


TODAY'S Comments From Our Aussie Energy Expert:

Commodity prices

Crude prices jumped around yesterday - with Brent pretty flat by the end of its trading day at US$30.84, whilst WTI closed down ~3% at US$27.45.

Good "numbers" from the EIA's weekly report did not help. Crude inventories went against predictions earlier in the week by falling by 0.8 mmbbls (admittedly offset by a build in product numbers of 2.6 mmbbls).

Deeper into the numbers, very high figures at the WTI pricing node of Cushing encouraged a Goldman Sachs source to reiterate the vampire squid's pronouncement of late last year that US$20/bbl could be seen as absolute on-shore storage limits were reached.

Reported increased OPEC production numbers also were seized upon by the bears.

Henry Hub was down ~2% at US$2.05.

LNG and international gas

Emboldened by its success in re-negotiating an LNG purchase deal from Qatar, India's Petronet is now reported as seeking a price reduction from a potentially tougher supplier: Exxon.

Petronet has a purchase contract with Exxon from Australia's massive Gorgon LNG project - with a reported price per mmbtu of ~14.5% of crude benchmarks - i.e. considerably higher than current spot and new contract pricing.

If even the mighty Exxon buckles, then predictions of wide-spread contract re-openings will be on globally.  The LNG market will be watching this carefully.

Categories:

2-1-16 My Pipe Dream At Any Cost?

01 February 2016 2:16am

My Pipe Dream At Any Cost?

by

Dave Harbour


First: An Auction Story

You have been waiting for the big auction and this is the day.  

The most famous artist in your great land created an oil painting decades ago that happened to feature the big black and white husky which begat the great, great, great, great, great grandson which fathered your constant companion, "Jake".

Your emotional attachment to the estate sale painting of that famous sled dog sire has captivated your attention for weeks, since the passing of your neighbor and best human friend.

Owning it would be a dream come true. 

And the painting's value is enhanced as you recalled the countless hours you and Jake spent at the next door home of, old Robert, the last male descendent of the revered artist.  

You two would sit there by the fireplace, beneath the large painting, with your faithful huskies sitting at your feet, a cup of black coffee or a libation in hand.  

You would talk endlessly of youthful adventures on the sea, in wild forests, avoiding 'sweepers' while floating down some salmon stream in an old air-filled raft, dealing with dangerous winter sled dog races through sub zero winter storms.

You save for the auction.  You hope no one else has the attachment you do, or values the painting as you do.

The bidding begins and, to your surprise, the action is robust.  Hands raise and the auctioneer catches every outcry, wink and nod.  The price swiftly moves from $250 by one hundred dollar increments to $3,000, then with $250 increments to $5,000...well past your savings and pre-determined bidding limit.  

A crowded and animated room -- full of friends, neighbors, local business leaders, the museum director and the largest local art gallery owner -- begin chasing $1,000 increments to a final sales price of $26,250.

You wish with all your heart -- as you say good-bye to everyone and turn to walk home -- that the familiar painting and its image could have hung over your own fireplace.  It would have been so comforting to sit in your own family room with Jake and a million memories, fire blazing under that familiar image.

How you wish you could have returned home with the prize!

Should you have forgotten your savings limit and simply captured that beloved image with credit card debt?  Wouldn't it have been worth it to make payments for something so dear?

But then, reality settles in.  "I established the limit at what I knew I could have afforded", you say to yourself.  

"I knew that if the bidding took the price higher, I would be tempted to go into debt," you thought.  

You knew that debt at your age -- and the effect of indebtedness on your family -- would far outweigh the selfish satisfaction the prize would have given you.

Rational thought seemed to comfort you. 

"I knew that sitting under the painting would provide fleeting satisfaction as I contemplated the impact of debt for the next five years", you reminded yourself.

You knew that the simple joy of being with Jake -- without the presence of the painting and its cost -- would continue to be quite enough.

And, so it was, that while you coveted and wished for a thing that became unattainable, you soberly recognized the truly valuable elements of life.

And, I'm guessing that your last thought was one of gratitude to the great Creator who had given you a wonderful life, loving family, friends like Robert and a faithful companion.

Actually, your dreams have come true, haven't they?

Second: A Gas Story

The efficient Arctic Gas Pipeline of the 1970s failed when a National Energy Board Decision upheld Justice Berger's (See 6-14-02 entry)  recommendation for a Mackenzie River Valley, 10-year pipeline moratorium.  (Canada can be its own worst enemy, too.)

The Alcan pipeline project failed with advent of the 1980s, as gas prices plummeted and the project became infeasible.  Producers like ARCO studied LNG export options but those alternatives then were also infeasible.

Then the late 1980s recession made virtually all oil and gas projects infeasible.

As gas prices recovered in the early 2000s, industry and governments began once again pursuing projects to monetize Mackenzie Delta and Prudhoe Bay gas -- with separate overland pipelines to Canadian and Lower 48 consumers.

Then, a half-decade later, with the advent of new shale oil & gas technology and low, domestic prices, Arctic gas pipelines south became infeasible.

Arctic gas proponents then shifted their focus on LNG export options that had grown in feasibility.  

By the mid 2010s, LNG feasibility had become more popular with the evolution of more LNG import demand, local distribution systems, shifts from other fossil fuel power generation projects and growing populations.

The Mackenzie Delta gas seemed more permanently stranded while Prudhoe Bay gas owners again began reviewing LNG alternatives.

The gas owners and large gas transportation companies seriously studying feasible ways to market gas from the 1970s forward, had always concluded that pipelines were cheaper after studying ALL alternatives, including LNG.

And, they had never delayed development of Alaska gas, from our first-hand knowledge, based on some allegation of bias against LNG export projects. 

During those decades, Alaska LNG advocates, who did not own the gas, sought to use political influence to cause gas to be marketed via LNG transport through their own marketing organizations -- with insufficient attention to project feasibility.

To use the left column analogy, they seemed to want to buy the dream at any cost, as long as someone else shouldered the major cost.

The gas owners, however, were not careless enough to allow gas to be marketed via -- what was over those years -- inefficient, self-serving LNG transportation project feasibility.  

To this day, early advocates of LNG, continue to be upset with and demonize the gas owners.  The gas owners are North Slope producers, who have paid for leases and have the right to market the gas they discovered.  

Alaska's North Slope producers are among the most important companies in their industry, with LNG and pipeline expertise and oil/gas marketing expertise and world wide contacts.

They are best suited to create the most feasible projects and market gas most profitably.  Since Alaska's oil & gas tax revenue rests on a percentage of value, the greater value obtained by producer experts will enhance the value of Alaska's tax and royalty revenue.

The producers continue to professionally and diligently work this year.  Their effort will determine the feasibility, once again, of exporting Alaska North Slope gas.

But this time, there are nearly a hundred LNG projects hoping to compete for the limited demand in a very competitive market.

And Alaska is not one of the lower cost projects; that is, Alaska is attractive because of its vast reserves but unattractive because of its market remoteness, climate, logistical challenges, high labor costs and an unreliable investment (i.e. political) climate.

What is competitive?  Whereas LNG used to sell in Asia at a price range in the high teens per million Btu, the price now hovers, miserably, in the mid single digits in today's abundant, shale-stimulated gas market.  

It is also a reality that any investor in major Alaskan projects must know that once an investment is made in a jurisdiction with an unsustainable budget, the investment risk -- the risk of wealth expropriation via predatory taxation -- is great, perhaps too great.

Alaska LNG diehards, like the neighbor lusting after a long coveted painting (Above, column left), desperately want ownership in an LNG project -- if they can get government to assure the project is built.  But at what cost?  At any cost?

We citizens and consumers are pretty objective.  We want to monetize Alaska North Slope gas profitably.  We don't want to be in debt.  We don't want to waste public money.  We want a stable economy.  We want and desperately need new oil and gas investments -- from investors who trust us -- to sustain falling production on top of rock bottom oil prices.

The LNG diehards, like Alaska's governor who advocated infeasible LNG projects for their own special interests, now try to convince Alaskans something to the effect that, We will make a lot more money if we are equity owners in a gas pipeline.

But Alaska's citizens and consumers are not stupid.  They have seen many (i.e. actually, "all") Alaska North Slope gas projects die because of changing markets and technologies.

They know that while a gas project might be built at just the right time, it also might fail, as others have.  

No one can predict today whether in 2025, when the Alaska LNG project is scheduled to go on line, it will be making money or losing money.

If Alaska's government (and citizens) are equity owners of an economically feasible gas pipeline, they might make more money than they would as passive acceptors of 1) royalties, and 2) a severance tax, 3) a property tax, and 4) an income tax.

But if the pipeline costs more than shippers are willing to pay for transporting gas -- or ends up with few or no credit worthy customers -- Alaska could be in the disastrous position of being an part-equity owner that must PAY the difference between the cost of transport/financing vs. transportation income.

It has been said and pretty well confirmed that in energy and economic matters, "Alaska is its own worst enemy".  How could any thinking person disagree, based on Alaska's history?  This earned reputation lives on today, because of its history of predatory taxation, retroactive taxation, attempts to pass a reserves tax, and irrational, political hostility toward the state's largest investors.

But now, citizens and legislators know the risky history of:

  • The Arctic Gas 1970-era project ; and
  • the 1980-era failure of the NW Natural Gas/Alberta Gas Trunk Line, Ltd. Alcan project; and
  • Failure of several generations of LNG advocates, including: El Paso Natural Gas; Yukon Pacific; Alaska Natural Gas Development Authority; Alaska Natural Gas Port Authority; and
  • the 1990-early 2000 Alaska Highway Gas Pipeline project (owned by TransCanada) and Mackenzie Valley Gas Pipeline failures (in which TransCanada participated with Canadian aboriginal groups).

The vast Alaska natural gas reserves certainly may justify investment by private energy companies in a new effort to monetize their gas.

The success of energy companies for well over a century has entailed risk.  But the risks are often acceptable because they are risking their own capital and because they are experts in the business.

In today's world of increasing socialism, Alaska seeks to take equity risk, without having commensurate expertise, perhaps knowing that it can always just burden individual and corporate citizens, with new taxation, to keep government whole when the investment sours.

ADN by Alex DeMarban.  In December, 1,020 Alaskans who had been working in the oil and gas industry collected $1.1 million in unemployment benefits. That compares to 518 in December 2014, Lennon Weller, a state Department of Labor economist, said Friday.

Alaska faces a bleak economic future wherein its decision makers have allowed the state to become dependent on the fortunes of a volatile and risky oil business.  And that risk has led to an unsustainable economy destined for bankruptcy in less than ten years.  Of course, disaster could be averted with a "eureka discovery" of newfound wealth or a harsh, disciplined expense cut...so we need not be completely demoralized by the options.

Unfortunately, the governor whose experience rests on failed, self serving LNG advocacies, now advocates risking public money on equity risk in an LNG project when immediate economic realities threaten the state's economic survival:

  • a state operating budget almost 90% dependent on Prudhoe Bay oil; and
  • a state economy over a third dependent on the oil industry; and
  • a Trans Alaska Pipeline System (TAPS) transporting Prudhoe Bay oil which is 3/4 empty; and
  • oil prices that are 3/4 lower than they were 18 months ago; and
  • oil production diminishing; and
  • a nearly $4 billion annual operating budget serving a population of fewer than 800 thousand folks, and
  • a multi-billion dollar state employee retirement unfunded liability; and
  • the highest per capita spending and debtor state in the nation; and
  • government constituencies seeking to impose new taxes and fees on the private sector so that the public sector can remain as unharmed as possible; and
  • impartial New York rating agency creditworthiness announcements revealing an increasingly dark, Alaska economic outlook, exacerbated by a higher cost of borrowed money.

No one wants to see the economically viable construction of a gas pipeline project more than this writer, having worked directly and indirectly for or with a number of them since 1972.

But we join fellow citizens in not being willing to support public money being invested in any company's ownership, much less one involved in the highly complex, highly risky field of oil and gas.

As we walk away from the idea of paying more for pipeline risk than we can afford, like the neighbor in the other column, we can nevertheless comforted, if:

  • we have endeavored to act like adults, and
  • if we tried to be prudent custodians of public money, and
  • if we tried to restrain our zeal for a gas project in light of economic realities, and
  • if this is the heritage we should look back on later, once the present has become prologue.

We take final comfort in knowing that with many decades of gas pipeline experience, North American energy investors have the best chance of developing an economically feasible project.

Alaska's North Slope producers have the best chance of succeeding, that is, if they can be treated reasonably and fairly in a prudent state -- with malice toward none -- that finally learns how to balance a budget based on a volatile but provident source of natural resource wealth.

Sure, we may not have had the gas monetization project I wanted, or you wanted, or the governor wanted.  

But, acting now with intelligence and honor, and knowing our own limitations in expertise, we and the next generation may escape from a dreary outlook, into the bright light of a prosperous future featuring a feasible, profitable Alaska North Slope gas pipe dream turned into reality. 

Categories:

1-25-16 Alaska Legislative Report On Week 1 - Today Begins Week Two

25 January 2016 7:59am

ALASKANOMICS LEGISLATIVE WEEK 1 REPORT (See Original Here)

Here's a chance for our readers to comment on Alaska's Fiscal Crisis, an invitation from Senate President, Kevin Meyer (NGP Photo).  We've commented and hope you will, too!  -dh


Kevin Meyer, Alaska State Senate President, fiscal crisis, poll, Photo by Dave HarbourAs Alaska faces an unprecedented budget challenge this year, the Senate Majority
would appreciate your feedback in our annual start-of-session survey here:

www.alaskasenate.org/poll

Your opinions are important to us as we deliberate the issues facing our state.  Thank you 
for taking the time to provide your input.    We look forward to hearing your thoughts.

Kevin Meyer
Alaska Senate President

The Alaska Legislature is back in session this week and all eyes are on the budget. In two separate meetings on Wednesday, presentations were given by David Teal, the Legislature’s Chief Fiscal Analyst, and Diane Kaplan, President of the Rasmuson Foundation. Both discussed the current situation and the need for action from the legislature. Teal noted that the Governor’s plan to fix the $3.8 billion budget gap was a step in the right direction. He also stated that using the earnings from the Permanent Fund “is the most painless and sustainable way to fill deficits.” Things have to change in order to balance the budget.

Diane Kaplan, President of the Rasmuson Foundation, presented the findings from the Foundation’s recent poll of Alaskans. The complete presentation is located at http://www.rasmuson.org/wp-content/uploads/2016/01/RAS-Juneau-Presentation-Final-Edits.pdf

 

 

 

 

 

Energy Consumer Perspectives in an Age of American Energy Abundance and Regulatory Expansion - How will today's energy policies impact American competitiveness? "

Presented by Michael Zehr, Federal Policy Adviser, Consumer Energy Alliance

REGISTER.  February 2, 2016, Anchorage Sheraton.

The survey, conducted between January 3 and 10, 2016, showed that there is increasing concern regarding the fiscal crisis. It also showed that Alaskans prefer to see the fiscal gap filled by both cuts and new revenue. Legislators should have a clear message from the survey. Seventy-five percent of respondents said that they were more likely to support or no difference in their vote if their legislator voted for a combination of cuts and new revenue. Respondents were split on how their support would change or not when it came to including taxes and a reduction in the Dividend. Eighty-three percent would be less likely to support a legislator that took no action to address the budget shortfall.

There is support for the Governor’s New Sustainable Alaska Plan. Among those who have heard of the plan, fifty-five percent support the plan where only thirty-two percent oppose the plan. The survey also asked what components of the plan were acceptable to help fix the problem. Results are listed below.

*from Plan4Alaska.com and presentation by Rasmuson Foundation 1/20/16

The survey continues with a breakdown of responses by political party, region of the state, and household income.

Legislators have a lot of difficult work ahead of them this session, but they also have the support of many throughout the state who understand the delicate situation that Alaska is facing. Individuals and businesses understand that inaction is unacceptable for this situation and compromise will be the way to bridge the budget gap. Alaskanomics will continue to follow the session closely and share with our subscribers.

Categories:

1-21-16 "Our Own Worst Economic Enemy"

21 January 2016 7:45am

Arlon Tussing, Photo: Copyright Dave Harbour 2012Yesterday, we commented on the passing of our dear, respected economist friend (and sometimes friendly antagonist) of almost 50 years, Arlon Tussing (NGP Photo).  Apropos of today's title, he once testified in a way that more liberal readers might have found offensive:

Comment: Arlon's wise counsel outlives him as those close to him knew it would.  Often politicians try to solve, with other peoples' wealth, economic problems better left to free enterprise solutions guided by Adam Smith's invisible hand.  -dh

Before the Congress succumbs to any renewed yearning for a "National Energy Strategy" to serve as a moral substitute for war, it ought to take a hard, cold look at the energy policies of the 'Seventies.

He continued: As a whole the massive intervention of the federal government during the Energy Crisis years did more harm than good, and the good that did emerge was often at an exorbitant cost to consumers and taxpayers. The failures stemmed from the false premise that real energy costs tend to rise instead of fall over the long term, an overemphasis on oil and oil imports, and the assumption that public officials and panels of experts are more competent to pick future technical winners than risk-taking investors. 


TODAY'S ALASKA HEADLAMP:  

Alaska Governor Bill Walker, Alaska fiscal crisis, oil taxes, Photo by Dave HarbourGovernor Bill Walker  (NGP Photo)  proposes to cut 185 jobs....    More here....

We believe that Alaska Headlamp is providing the single most useful daily report on legislative happenings in Juneau that affect the oil and gas industry.  We will link our readers, daily, to that excellent site (See right column), produced by the Alaska Support Industry Alliance.  -dh


Analysis, CBC, by Kyle Bakx. The fate of new oil pipelines in Canada is in a sorry state.

"Our Own Worst Enemy"

Our commentary:  

And we remind readers to not forget that Governor Frank Murkowski (NGP Photo) in the last decade had created a deal with producers to move forward with a gas export project years ago.

...and in a previous generation, your publisher served as Director of Public Affairs for the Arctic Gas Project, participating in passage of the Alaska Natural Gas Transportation Act of 1976.  We will not forget that magnificent project that would have provided a market for both Alaska and Mackenzie Delta gas.  It was supported by virtually all of the major North American gas pipeline companies, producers and large city distribution companies--but opposed by Alaska's Governor, Bill Walker, among others.

We will not forget that the Arctic Gas Project, due partly to Canadian politics arising from the Justice Berger report and a compliant NEB decision gave the project instead to an ill equipped applicant who then faced a depressed natural gas market upon being certificated in Canada and the United States.

Yes, over the years, it can be said that Alaska and Canada have been their own worst enemies, economically at least.  

With disapproval of Keystone XL and so many other natural resource projects, the U.S. federal government might also join the consortium of those whose motto is: "We are our own worst economic enemy".

-dh


Reader response: Randy Kerr, Canada, to 1-21-16  "Our Own Worst Economic Enemy":

No question, you are right about that Dave. Crazy what’s happening in Canada these last couple of years.  It just keeps getting worse and AK doesn’t seem any different.

The imperiled Northern Gateway project. The Obama-rejected Keystone XL venture. The protest-filled Trans Mountain expansion. And the suspect political support around the Energy East proposal.

With the oil market in a severe downturn and stiff opposition greeting every pipeline proposal, there is debate over whether this country will ever break ground on new export pipelines. 

"We run the risk that we missed the window of opportunity."    

Even veterans of the oil patch aren't certain of the answer.

"It's a legitimate question," said David Collyer, the former president of the Canadian Association of Petroleum Producers (CAPP). "It's not out of the realm of possibility."  Dave Collyer - former CAPP president

Read the rest here....


 

Today's Alaska Headlamp, continued:

 

Those cuts would leave the state with just over 24,000 workers across all agencies, the smallest figure since 2007. 

Anna McKinnon, State Senate, Alaska Finance Committee, Photo by Dave Harbour​Senator Anna  MacKinnon  (NGP Photo), co-chair of Senate Finance, said the governor’s proposal “hasn’t really reduced spending overall in the state’s budget” ... “I’m not sure we’re really reducing state government,” she said. “We’re just moving the shell.”  

Read full Alaska Headlamp Daily Entry Here....

Categories:

1-13-16 Getting Alaska's Financial House In Order

13 January 2016 5:21am

Meera Kohler, AVEC, Photo by Dave Harbour(Yesterday Anchorage reader Meera Kohler (NGP Photo) told us about an error and Ottawa reader Tom Harris informed us of an addition to include.  We are always quick to make necessary changes.  For the 15-year life of NGP, we have asked readers to help us make this a valuable research resource.  Accuracy is critical and for your continuing help, we are grateful.  -dh)


Alberta, Alaska's natural resource sister in Canada is facing it's own fiscal challenges.  The revered Fraser Institute says Alberta's problem has more to do with over spending than with low oil prices.  Some Alaskans are nodding their heads in understanding and agreement.  -dh

Getting Alaska's Financial House In Order

Alaska's Fiscal Crisis

More reference to this subject here, includes BPs announcement today, and the Alliance's AK-Headlamp opinion:

(More coming....)

Today we bring you Bob Kaufman's commentary on preparing Alaska's financial house for long term revenue challenges.  It earlier appeared in the Alaska Dispatch News (ADN).  He suggests we have much to learn from the private sector.  He is right.  -dh

*     *     *

Bob Kaufman.  Let’s face it: Low oil prices mean that Alaska is about to fall off a fiscal cliff. And that’s a scary thought. But a lot can be done to minimize the damage.

Early in my career, I led numerous turnarounds of private companies in financial distress, and while public-sector cost cutting is more difficult, I believe there’s a lot that government can learn from the private sector. Here are four insights.

Plan for the worst — it can lead to big ideas

In the early stages of turnarounds, things usually get far worse before they get better. Why? Because enterprises in financial distress often get there by not paying attention to early warning signals, and usually don’t know the true extent of their problems. Even after the crisis hits, they typically remain in a state of denial about how bad things really are. 

The best way to break the cycle is to construct the worst imaginable scenario — and put together a viable plan if that happens. Unfortunately, in many cases, the “worst imaginable scenario” turns out to be closer to reality than most people think.

In Alaska’s case, the worst imaginable scenario would be one in which oil prices stay low for most of the next 10 years — not unreasonable given the U.S. alone has hundreds of billions of barrels of recoverable shale oil that can quickly meet new demand at prices in the $60-per-barrel range.

So the question we need to ask ourselves is, “What is a sustainable long-term model of government services and revenue in such a scenario?”

It sounds ugly at first, but forcing people to confront Draconian scenarios actually frees them up to think big and creatively. They contemplate ways of doing things that were previously unimaginable. For this reason, it’s often easier to cut costs by 20 percent than 5 percent. In fact, my experience managing many turnarounds taught me that the prospect of change is worse than the change itself. The hardest part of any turnaround is taking initial action. People fear change. Our brains are wired to exaggerate the effort or cost involved in switching from the status quo.

Reduce costs and improve productivity

Traditional, incremental cost cutting simply won’t work when the underlying operating model remains in place. Once the low-hanging fruit has been harvested, it may appear as if there’s nothing left to cut.

The truth is that enormous savings — up to 30 percent or more — can be reached by eliminating non-obvious waste: an overly complex organizational structure, unnecessary requirements imposed by one part of the organization on another, a lack of root-cause problem solving, poorly designed processes and an ignorance of other underlying cost drivers.

Communicating the need for efficiency improvements is not enough to realize these larger gains. A skilled change manager or facilitator needs to engage the workforce, take an end-to-end view of the process and solicit ideas to fundamentally re-engineer it.

How do you get people to share restructuring ideas that might cost them their job? Have an explicit conversation about what happens to anyone impacted by the changes. Ideally, you would offer generous severance packages, so participants are less concerned about the potential of moving on. In the long run, what you spend in short-term transition activities is far less significant than evolving to a sustainable, lower-cost operating model.

Stop the bleeding immediately

Cash is a huge asset in engineering a successful turnaround. You don't want to use it to postpone the inevitable hard choices, but rather to invest in transitioning to and implementing your long-term plan. 

In private turnarounds, organizations are usually hemorrhaging cash, and it’s often necessary to immediately suspend all non-critical disbursements. This buys time to put together a long-term plan and shows the bank — which is your lifeline — that you can correct the situation.

Fortunately, Alaska’s cash reserves make our current situation appear less desperate. However, while Alaska does not have a bank, we do rely on credit markets, and they are not dissimilar. We need to instill confidence in them so they don’t downgrade our bond rating. If that happens, debt payments go up, squeezing your budget even further. Money that would have gone to services goes instead to bondholders in the Lower 48. People who have been through difficult situations will all tell you they would give anything to get back cash they frittered away before taking bold action.

 

In Alaska’s case, the most immediate, obvious way to preserve cash would be to cut or eliminate the Permanent Fund dividend while we assess the long-term picture. The challenge with this is that some people will be disproportionately impacted — which brings me to my last insight. 

Leadership matters

It’s a rare leader who can get people to buy into lasting, transformational change. After all, this process usually involves asking people to take big risks and sacrifice things they’ve gotten used to.

Fortunately, our current governor is not explicitly identified as a Democrat or Republican. That could help him overcome the mistrust that would result from being associated with a specific set of partisan values. But he also needs to hold himself to the highest standards of honesty and impartiality.

I’ve found that most people are willing to do their part, as long as they perceive an equitability of sacrifice across the board. The more they see others concede, the more they will concede. The minute they perceive that others are gaining ground at their expense, that virtuous cycle ceases, and they will viciously fight for their own interests. In the public sector, that could quickly deteriorate into a political stalemate and lack of action.

I’ve also found that people don’t give up their old ways unless called to a higher purpose — one that goes beyond improving profits or performance. In Alaska's case, many of us fear our way of life may be at risk due to low oil prices. The cause needs to transcend partisan differences and focus on our common values.

Fortunately, most Alaskans share two core values that are relevant now. First, we’re resilient. We’ve met great challenges before. It’s true that years of fabulous oil riches may have made us a bit soft. But now we’re being asked to summon the determination and creativity that have allowed us to thrive up here. And second, we’re compassionate. Alaska is a small enough state that we still look out for one another.

The question we should be asking ourselves now is this: “In a world where oil prices will never rebound, how can we draw on these qualities to still build a great state, with a good education system and good public services?” Getting to that sustainable end goal will inevitably and sadly require cuts in government and to certain beneficiaries. But the sooner we confront these challenges, the more cash we’ll have to help those affected in the transition.

Bob Kaufman is the founder of Alaska Channel, an Alaska video and stock footage company. He also is a business consultant and venture capitalist who worked in turning around struggling companies while at Bain & Company and as an interim CEO.

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1-11-16

11 January 2016 12:46pm

A New News and Policy Analyst In Town

Describes

A New Team Of Alaska Oil and Gas Exploration Companies

Below we bring you excellent policy commentary on issues related to the Alaska gas monetization project, www.AkLNG.com, and the state's related fiscal crisis.  Alaska Headlamp also describes efforts by Alaska's Regional Native Corporations to explore for oil and gas in rural Alaska.

We've monitored Alaska Headlamp in these pages since it appeared late last year.  Now, we officially welcome it to the public dialog!  

Today's Alaska Headlamp analysis and commentary:

New wildcats. Alaska Native regional corporations are wildcatting for oil and gas in the state's frontier basins, eyeing little-explored prospects after dusting off old studies by major oil companies. They aren't seeking the huge petroleum discoveries like those on the North Slope. Instead, they say smaller finds will serve their goals of creating jobs for local residents, while providing affordable energy in villages beset with crippling gasoline and heating oil costs. Native corporations eyeing frontier basins include Ahtna, who's planning to drill a gas well this spring near its headquarters in Glennallen. Further north, NANA wants to conduct seismic surveys not far from its Northwest Alaska headquarters in Kotzebue. The exploratory work is eligible for the state tax credits that some lawmakers want to eliminate to help counter a massive budget deficit caused by sliding oil prices and historically low oil production. A Senate working group that held hearings on the tax credits last fall cited Native corporations' unique role in Alaska as one reason frontier exploration should continue to receive a benefit if the $500 million program is scaled back. Created by the 1971 Alaska Native Claims Settlement Act, the corporations and nine other regional Native corporations are supposed to use their large land holdings to promote "economic health" in their regions, said the summary report from the Senate working group. They also return profits to their Alaska Native shareholders.Headlamp fully supports the new exploratory work being conducted by the Alaska Native corporations. Resource development, no matter the scale, is an ever-important aspect of Alaska's economy. Such development projects should be pursued across all corners of the state to create new jobs, especially in regions with high unemployment rates.

Sen. Kevin Meyer, R-Anchorage, has signaled to his majority caucus that it's time to consider finding new revenue to balance the state budget by putting a statewide sales tax on the table. This move follows Gov. Bill Walker's proposal that included a state income tax. When Walker declared his candidacy for governor in April 2013, he told reporters, "Alaska has gone from an owner state to an owned state, and we have no one to blame but ourselves." One thing he was referring to was SB21, the new oil tax law that the Legislature had just passed. He believed it compromised the state's resource development interests.Alaska absolutely needs a bipartisan solution to the fiscal crisis it is facing. That said, Headlamp, and most Alaskans know, that taxing our way out of the hole we're in is not a solution. Headlamp reminds policy makers that every dollar taken out the private sector, which is being hit the hardest in this era of low oil prices, through taxes, to support government, is a dollar that could have been better invested or spent. Increasing taxes will continue to hamper Alaskan businesses and families already plagued by declining oil prices. There are plenty of ways to balance a budget without more taxes. Headlamp hopes that when the legislature reconvenes next week solutions, that inflict the least harm on the private sector and Alaskan families, will be found.

The Alaska Dispatch News published a profile of Attorney General Craig Richards. Richards has taken on high-profile lead roles on Walker's plan to fix Alaska's huge budget deficit, and on state efforts to develop a $55 billion natural gas pipeline from the North Slope -- two items at the top of the governor's wish list. Walker recently placed Richards on the board of trustees of the Alaska Permanent Fund Corp., and also appeared in a Fairbanks courtroom last month for the announcement of a settlement that freed the men known as the Fairbanks Four from prison. Richards also has his day job of being in charge of the Alaska's 550-person Department of Law. Randy Hoffbeck, now Alaska's Revenue Commissioner, described Richards as "supremely smart and "confident" based on legal cases in which he was involved prior to Walker's election. Nonetheless, some lawmakers question whether Richards has taken on too much. "He's been delegated a tremendous amount of responsibility in areas that you wouldn't typically expect," said Sen. Bill Wielechowski, an Anchorage Democrat and also an attorney. He added: "It's a little worrisome from a workload perspective, because the attorney general is the top attorney in the state -- now you're putting on top of that the gas line, and now you're putting on top of that the Permanent Fund, basically the crux of the state's fiscal plan." Anchorage Republican Rep. Charisse Millett, the House Majority leader, said some of the animosity toward Richards stems from what she described as "maybe a little bit of an attitude that he's above, that the administration is above the Legislature -- and we're on a need-to-know basis…That's not the way government was designed." Headlamp hopes to see more cooperation and dialogue between the Walker administration and the Legislature in 2016.

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