11-24-15 On Being Positive About Alaska's Investment Climate - Big Pipelines Alberta Carbon Policy "Winners"?
|Here is our archive reference to the Resource Development Council's important, 36th ANNUAL
ALASKA RESOURCES CONFERENCE
Seeking Alpha: Enbridge and TransCanada seen as winners from Alberta's carbon policy
Comment: "On Being Positive"
This ADN piece (Left column) by Nathaniel Herz provides additional insight into the attitude and leadership style of Alaska's governor.
Readers will be interested, as well, in this compelling essay on gubernatorial leadership written by retired BP pipeline executive, Al Bolea (NGP Photo).
At times, we have lamented on how our work these days tends to fall on the negative side. We are, therefore, delighted that Al has produced such a positive piece, the blueprint for an Alaskan governor desiring to successfully run the large and complex State of Alaska - and provide the necessary leadership that could lead to construction of an Ak-LNG project.
Meanwhile, we continue to look for positive signs that Alaska's investment climate is positively supported by both Alaska's elected leaders and the Washington D.C. players.
While we are forced to note that ours is an investment climate long ignored or abused, and that may seem to some to reflect negativity on our part, there are rays of hope and Bolea has offered one of them.
Another occurred this weekend when a dear friend and former colleague, Tom Brennan (NGP Photo), described the enormous contribution being made by ConocoPhillips under the leadership of longtime Alaska energy executive Joe Marushack (NGP Photo).
...other rays of hope and light which we are quick to acknowledge.
While we celebrate "hope" in approaching Thanksgiving Day, we are also reminded of the sage advice given by a longtime friend, energy analyst and utility manager Joe Griffith (NGP Photo) who gently reminds fellow Alaskans that, "Hope is not a strategy", a precept to which we believe Al Bolea and Joe Marushack would also subscribe.
To our American readers: Happy Thanksgiving Wishes for Thursday!
(And...remember the reason for the season!)
ADN by Nathaniel Herz. ... Larry Persily (NGP Photo), the former federal gas pipeline coordinator who now serves as an oil and gas adviser to the Kenai Peninsula Borough mayor, said that a new executive with more technical expertise and experience seems to match Walker’s vision for an expanded role for Alaska in the pipeline project.
But the shakeup in the corporation’s board and management, he added, is creating turmoil for the project. So are other recent changes made by the Walker administration, including to the positions held by a pair of highly paid consultants who were heading Alaska’s efforts to negotiate the details of the project and sell the state’s gas.
“Markets (and) buyers don’t care for turmoil,” Persily said in a phone interview. “It needs to be settled; the market needs to be reassured that this isn’t going to happen on a frequent basis.”
One other source of uncertainty was a move by the state corporation’s board Saturday to postpone a vote on the pipeline project’s budget for next year.
A key meeting to approve that budget is scheduled with the oil companies for Dec. 4, and the board rescheduled its own vote to Dec. 3.
Walker said at his news conference that he is “very optimistic” that the board will approve the budget at its Dec. 3 meeting. But he said that he views the state’s authority over the budget as leverage to make sure the oil companies sign formal agreements making their gas available to the pipeline project if they decide not to continue as participants.
“By approving the work plan and budget today, there’s no incentive for us to receive those assurances,” he said. “We’ll see what we get. We’ll make that decision when we get to that point.” (Full story here)
Analysts are betting that renewable energy developers such as Enbridge (ENB+1.2%) and TransCanada (TRP +1.9%) will be among the best placed to make the shift to Alberta's new carbon policies, Bloomberg reports.
As the government boosts the province’s share of renewable electricity to 30% from 9% by 2030, "renewable power contracts are going to go to the bidder that needs the least amount of government support, developers with most financial flexibility and overall lowest cost of capital” such as ENB and TRP, says National Bank Financial's Patrick Kenny.
The two companies already are among Canada’s largest renewable power operators: ENB owns 2,065 MW of wind power across Canada, enough to power 650K homes, while TRP operates wind, hydro and nuclear plants as part of its 11.8K MW of power generation.
|Comment: Honestly, we do keep looking for good news, but in this case must temper the Governor's enthusiasm with a state senator's suspicions. Investment climates are not hurt when criminal acts are identified and prosecuted. But when politicians make allegations, stimulating investigations based on a 'desire' for lower prices, honest investors can be hurt and the investment climate is not helped. -dh
Today (From September 9, 2015), Senator Bill Wielechowski (NGP Photo) sent a letter to Alaska Governor Bill Walker and Attorney General Craig Richards requesting an update of the Attorney General’s report on Alaska Petroleum Products Pricing Investigation to examine the reasons behind the high gas prices in Alaska as compared to the lower 48 states.
“One of the benefits of low oil prices should be a decrease in prices for gasoline and heating fuel. That’s the case around the country,” said Sen. Wielechowski. “With the closing of the Flint Hills refinery, we’ve been seeing a narrowing of the players in the refinery industry in Alaska allowing for less and less competition. Alaskans deserve to know if the near-monopoly in the refining business in Alaska is the cause for their pain at the pump.”
Currently, Alaska has the highest gas prices in the country. These high prices coupled with the high cost of living in Alaska is hampering economic development and taking money out of the pockets of hard-working Alaskans.
Governor Bill Walker's Response To Tesoro Alaska's Announcement
“I congratulate Tesoro on its announcement that the company will be acquiring a portion of Flint Hills Resources’ Alaska-based assets. Tesoro has had a long and successful history working in our state, and this acquisition will allow them to better serve their customers and communities across Alaska. This news further proves that business is alive and well in Alaska, and investors are optimistic about the opportunities that lie ahead in our state.” – Governor Bill Walker
ALASKA RESOURCES CONFERENCE
November 18-19, 2015
Dena'ina Civic & Convention Center
WEDNESDAY, NOVEMBER 18TH
Eye-Opener Breakfast in Exhibit Area – Sponsored by Wells Fargo
Ralph Samuels, RDC President, Vice President, Government and Community Relations – Alaska, Holland America Group
State of Alaska Update: From Alaska LNG Project to State Fiscal Plan
Governor Bill Walker (video forthcoming)
Alaska Economic Trends: 2016 Outlook
Neal Fried, Economist, Alaska Department of Labor video
Alaska Industry 2015 Year in Review and 2016 Outlook
Oil & Gas: Kara Moriarty, President and CEO, Alaska Oil and Gas Association video
Fisheries: Ricky Gease, Executive Director, Kenai Sportfishing Association pdf video
Forestry: John Sturgeon, President, Koncor Forest Products video
Mining: Karen Matthias, Managing Consultant, Council of Alaska Producers pdf video
Tourism: Scott Habberstad, Director of Sales and Community Marketing, Alaska Airlines pdf video
Keynote Luncheon: Sponsored by Northrim Bank
It’s Still North to the Future: Moving Ahead in the Arctic
Wayne Westlake, President and CEO, NANA Regional Corporation pdf video
Rex Rock Sr., Chairman and President, Arctic Slope Regional Corporation video
Alaska Can’t Quit Now: Why the Arctic Still Matters
Randall Luthi, President, National Ocean Industries Association video
Gourmet Break – Sponsored by Colville, Inc.
Pebble vs. EPA: Finally Some Real Progress
Tom Collier, CEO, Pebble Partnership video
THURSDAY, NOVEMBER 19TH
Eye-Opener Breakfast in Exhibit Area – Sponsored by BP
Real Solutions to Alaska’s Budget Crunch
Moderator: Ralph Samuels, RDC President, Vice President, Government and Community Relations – Alaska, Holland America Group
Cheryl Frasca, Former Director State of Alaska Office of Management and Budget, 2002-2006 pdf video
Mike Navarre, Mayor, Kenai Peninsula Borough pdf video
Give the State Some Credit: How Oil Tax Credits Are Changing Alaska’s Investment Game
Moderator: Kara Moriarty, RDC Executive Committee, President and CEO, Alaska Oil and Gas Association Benjamin Johnson, President, BlueCrest Energy, Inc. pdf video
Casey Sullivan, Director, State Public Affairs, Caelus Energy Alaska, LLC pdf video
Gourmet Break – Sponsored by Stoel Rives LLP
10:30 Communities and Mining: Why it Works
Moderator: Lorna Shaw, RDC Vice President, External Affairs Manager, Sumitomo Metal Mining Pogo LLC
Eric Hill, General Manager, Kinross – Fort Knox Mine pdf video
Jan Trigg, Manager, Community Relations and Government Affairs, Coeur Alaska – Kensington Gold Minepdf video
Wayne Hall, Manager, Community and Public Relations, Teck pdf video
Rosie Barr, Vice President, Lands, NANA Regional Corporation pdf video
11:30 Networking Break
Noon Keynote Luncheon: Sponsored by Holland America Line Navigating Alaska’s Inside Passage and Policy
Moderator: Ralph Samuels, RDC President, Vice President, Government and Community Relations – Alaska, Holland America Group
Linda Springmann, Vice President, Deployment and Tour Marketing, Holland America Line pdf video
1:30 p.m. Progress Report on the Alaska LNG Project
Moderator: Jeanine St. John, RDC Executive Committee, Vice President, Lynden
Steve Butt, Senior Project Manager, Alaska LNG Project pdf video
Dan Fauske, President, Alaska Gasline Development Corporation pdf video
Mike Navarre, Mayor, Kenai Peninsula Borough video forthcoming
3:00 Grand Raffle Drawing Send-off Champagne Toast – Sponsored by CLIA Alaska
Northern Gas Pipelines: Video References
Someday, we will align Alaska gas pipeline historical events with political, social and other major mileposts in the state's history.
Included in our sources will be a video produced by the State of Alaska under Governor Wally Hickel's direction (i.e. Broken Promises); and, an important documentary created by legendary, Alaska talk show host and commentator, Dan Fagan (i.e. Alaska Under Seige).
We must add our own documentary, Pioneering, featuring a number of Alaskan influence leaders from many sectors of our society.
Today, we add our most recent, political documentary reference, Unpredictable Finishes (i.e. shown in box), by a dedicated Alaskan and good friend, Dorene Lorenz.
Comment: Premier Notley, like President Obama is taking actions that can be touted at the upcoming Paris Climate Change Conference where the top UN climate change official has said the true goal of environmental activism is to "destroy capitalism". -dh
Calgary Herald by Stephen Ewart.
Alberta Premier Rachel Notley effectively put the first limits on unchecked growth in the oilsands — through a 100 mega-tonne annual cap on greenhouse gases....
Can A "Business As Usual Attitude" Overcome Alaska's Financial Crisis?
Can Alaska be known as a place where, "a deal is a deal" and as a state not known to be, "its own worst enemy"?
At a time of Alaska state fiscal crisis, maintaining high state and local government employment is counterintuitive if not obvious.
Additionally, the Governor has brought in a new Medicaid entitlement program whose costs may ultimately be supported by Alaskan businesses and perhaps individuals -- and which will be sure to attract even more "ne'er-do-well" beneficiaries to the state at unknown additional costs.
Additionally, the governor is working with the Obama administration to bring dubiously vetted Syrian immigrants to the state, five year resettlement expenses of which are estimated to cost taxpayers almost $65K each. For Alaska, because of its remoteness and high costs, that number is probably understated.
"You Can't Make This Stuff Up"
Then, last month, the Governor called the Legislature into special session.
To deal with an enormous annual operating budget deficit? No.
To work toward a sustainable annual budget by cutting low priority programs and trimming others? No.
To pass "fiscal certainty" legislation, providing Constitutional protection to the Ak-LNG project sponsors? No.
He called legislators into session to have them consider a new tax on those wishing to invest in one of the world's largest ever LNG export projects, then withdrew that proposal.
And, he had them consider increasing the state's equity stake in a risky pipeline/LNG project whose feasibility is unproven, whose customers are uncommitted and whose cost to the state, conservatively, would ultimately exceed $15 billion.
And, he provided legislators with no packet of information clarifying the purpose of their special session.
And, he neglected to inform them that he had dictated to the 'independent' Alaska Gasline Development Corporation board his desire to form subsidiary corporations.
And, he refused to permit certain state officials to sign acceptable Ak-LNG confidentiality agreements -- a defiant act that could well stop progress on the entire project.
And, this was on top of his earlier 'request' of the patient producer-sponsors that the Ak-LNG project study the option of building a 48" vs. the planned 42" pipeline, an initiative that likely cost the project 6 months of delay and an overall price increase.
Here are the most recent monthly employment statistics posted by the Alaska Department of Labor (AKDOL).
Today we will explore some relationships between responsible / irresponsible state budgeting vs. energy and other investments.
We note in these AKDOL statistics, the familiar, annual Alaska trend of increased school employment as summer ends and decreased commercial fishing, processing, construction and tourism employment as winter begins.
We are not economists, but have absorbed AKDOL stats for many years.
Anyone who has, knows that Alaska is a very seasonal place of employment for "labor intensive industries" like tourism, commercial fishing, construction, etc.
Therefore, to see post-summer season declines in these categories is no great shock though we know that a continuing, gloomy world economy could affect demand for their products and services as well and affect Alaska's economic health in a coming season.
Oil and gas industries are "capital intensive" and typically have fewer albeit more highly compensated employees filling positions that are not very 'seasonal' at all.
We never forget that those few employees create great wealth for the state and national economies, as well as for their employers.
In fact, these employees' labors pay for most of the infrastructure used by the "labor intensive industries" ... also, the education and local government sectors.
As world wide commodity demand decreases, Alaska can be hit hard where it hurts. Fewer, highly paid non seasonal oil and gas jobs affect the year-around economy.
In a low demand, commodities environment, the investors make less but they also pay less tax and royalty revenue to the state, due to slowing production and lower prices per unit.
In a state choosing to become 90% dependent on oil and gas taxes and royalties, small changes in the price per barrel of oil can lead to large government deficits (i.e. as now), or unexpected, windfall surpluses.
Elected officials, therefore, need to be particularly concerned about and protective of the health of this oil and gas category--the very source of state wealth.
Alaska is in a challenging position now with oil prices hovering at below 50% the price levels of 18 months ago.
Thus, we would have expected responsible state and local government leaders to have begun cutting significant numbers of employees as well as shaving program costs to a sustainable level nine months or a year ago. Some have said, "You can't cut yourself out of this predicament!" What we've seen, however, is an increase in government employment from the beginning of the fiscal year to the present time--whose relationship to seasonal employment is not clear. A minimal effort would be to -- at least -- not add any new programs or employees.
For the most part, this AKDOL report, viewed in isolation, seems to reflect a 'business as usual' attitude on the part of state and local budget policy makers. They* are confronting a huge budget deficit by spending the last dollars in the State's available savings accounts--and counting for the long term on current, short-term low interest rates to fund debt. (*We say, "they" because so much of certain local municipal operating and capital projects are funded from the unsustainable state operating and capital budgets.)
Perhaps a budgetary discipline escaping our untrained eyes has already been put into motion and will become more visible in future AKDOL reports. However, the annual state operating budget shortfall ($3.5 billion, v. 750k population) is so serious and public news releases of government cuts and fiscal discipline are so muted that we fear the worst.
We fear that insufficient steps are being taken to create a balanced, sustainable state budget and at the same time retire a nearly $10 billion unfunded liability of the state employee pension program.
We fear that this scenario -- if not immediately and decisively corrected -- creates a toxic, anti-investment climate in Alaska that could repel investment of all kinds for decades at a time when government needs to build an investment climate based on logical and not political economic principles.
As to a major Alaska north slope gas monetization project, such as Ak-LNG, one logically concludes: The producer proponents of the Ak-LNG project have demonstrated extraordinary patience, diligence and dedication in dealing with government while trying to evolve the project into feasibility. We also observe that while the Ak-LNG project, if proven feasible, could someday begin transforming gas reserves into wealth, it could not do so before 2025. This economic injection would come too little and too late to be of much help in facing the current financial crisis.
As we evaluate State of Alaska actions related to the Ak-LNG project, we believe most of that activity would fall into categories like 'not helpful' and 'self serving' and 'time wasting'.
The best, good faith effort Alaska could now contribute to the Ak-LNG project, would be to get its own financial affairs in order -- and not at industry's expense.
It could also begin cooperating with Ak-LNG sponsors in meaningful ways:
- conforming to private confidentiality agreement terms
- eliminating threats of increased taxation
- not being the cause of project delays
- providing a Constitutionally protected cloak of fiscal certainty to gas and oil producers that invest in the Ak-LNG project.
In short, why wouldn't Alaska want to become a reliable investment climate that transforms its 'Business As Usual Attitude' into a focus on 'Can Do!'
AGDC Accepts President’s Resignation; Approves TransCanada Acquisition
State of Alaska Full 25% Equity Partner in Alaska LNG Export Project
November 21, 2015 Anchorage, AK – At a special meeting held today, the Alaska Gasline Development Corporation (AGDC) board of director’s accepted the conveyance of TransCanada’s interests in the Alaska LNG export project and authorized a payment of $64.6 million to TransCanada for those interests. The board also accepted the resignation of AGDC President Dan Fauske (NGP Photo) who tendered his resignation prior to the start of this morning’s meeting.
More On AGDC Turmoil:
AGDC already holds the State of Alaska’s equity interest in the Alaska LNG project’s liquefaction facility planned for Nikiski on the Kenai Peninsula. With today’s action, the corporation will assume TransCanada’s interest in the project’s 800-mile pipeline and North Slope gas treatment plant giving the state a 25% interest in the entire integrated LNG project. Today’s approval was expected following the board’s November 12th decision to postpone the payment to TransCanada until after the Department of Natural Resources had executed a Purchase and Sale Agreement. The state’s transaction is now expected to close onNovember 24th.
In a written letter to the board, Mr. Fauske said “I am proud of my time as President of the Corporation. During that time we were able to put together a corporation that not only met, but exceeded, all expectations. As an Alaskan for many years, I strongly desire that a natural gas pipeline project will come to pass. In that pursuit, I wish the Governor and this Board of Directors success.”
“Dan Fauske has done an incredible job founding, building and maturing this organization” said acting board Chairman Dave Cruz. “Under Dan’s leadership, Alaska has made more progress on a natural gas pipeline than ever before. I want to personally thank him for his dedication to this incredibly important project and for his years of service to the State of Alaska. He will be missed.”
With the administration's mishandling of the Alaska LNG project (i.e. Project delay due to resizing study demand; amateur handling of confidentiality policy; inept AGDC/state organizational management and personnel disruptions: 1, 2, 3, 4, 5, and as exposed during 11-15 Legislative Hearings, etc.) we are surprised that the three national credit rating agencies have not dealt more rapidly and more harshly with Alaska's credit rating already. -dh
Mr. Fauske’s resignation is effective January 1, 2016. The board directed its governance committee to engage an executive recruitment firm to initiate a worldwide search for a new corporate president. The board indicated that they will appoint an interim president to facilitate an orderly transition of leadership between Mr. Fauske and his successor. Until then, Mr. Cruz will perform those responsibilities.
In other action today, the board postponed a decision regarding the Alaska LNG project’s Work Program and Budget for 2016 until December 3rd. The project’s Management Committee is scheduled to meet on December 4th at which time a unanimous vote of all venture partners will be required to continue preliminary front-end engineering and design. A public notice of the December 3rd meeting will be forthcoming.
FOR IMMEDIATE RELEASE No.. 15-151
Governor Walker Appoints Former Fairbanks North Star Borough Mayor to AGDC Board
November 20, 2015 ANCHORAGE – Governor Bill Walker announced his new appointments to the Alaska Gasline Development Corporation Board of Directors today. Luke Hopkins of Fairbanks will join the seven-member board, which oversees the agency’s efforts to build a natural gas pipeline and liquefaction plant in Alaska. Mr. Hopkins is the former mayor of the Fairbanks North Star Borough. He will fill the seat vacated by former AGDC Board Chairman John Burns.
“I am pleased to welcome Luke Hopkins to the AGDC Board of Directors. As the mayor of the Fairbanks Borough, Luke was instrumental in creating a new municipal gas utility for the Borough, and directing major funds to develop lower cost natural gas supply for Fairbanks residents,” said Governor Walker. “I also want to thank John Burns for his service to the AGDC board and the state. John is a talented attorney and I hope to utilize his skills in a different capacity of this project going forward.”
A resident of Fairbanks for nearly 50 years, Mr. Hopkins has an extensive background in local government and project development. He served on the Fairbanks North Star Borough Planning Commission for seven years, and was a Borough Assembly member for more than five years. In October 2015, Mr. Hopkins completed two terms as the Borough mayor, where he was actively involved in keeping military troops at Eielson Air Force Base and bringing major economic growth to the Fairbanks region. Mr. Hopkins has been involved in a wide variety of local and statewide boards and commissions, including the State of Alaska Municipal Advisory Gas Project Review Board, the Association of Defense Communities, the Alaska Municipal League, and the Alaska Gasline Port Authority.
Governor Walker also appointed Department of Transportation and Public Facilities Commissioner Marc Luiken to the AGDC Board today. Commissioner Luiken will fill the seat vacated by Department of Commerce Community and Economic Development Commissioner Chris Hladick. As the head of DOTPF, Commissioner Luiken oversees the planning, design, construction, and maintenance of Alaska’s transportation system, public buildings, and facilities.
“As the state transitions to play a larger role in the Alaska LNG project, it is absolutely critical that we have strong leadership in place to guide our endeavors. I also plan to work on direct communication between the Governor’s office and the legislature, and I will continue to look for opportunities to include them in discussions about the project,” Governor Walker said. “I look forward to working with the AGDC Board and the legislature in the coming months and years as we work to bring Alaska’s natural gas to the world market.”
AGDC is governed by a seven-member board of directors, which includes five public members and two commissioners. Mr. Hopkins and Commissioner Luiken will join AGDC board members Dave Cruz of Palmer, Rick Halford of Dillingham, Joey Merrick of Anchorage, Hugh Short of Girdwood, and Department of Labor and Workforce Development Commissioner Heidi Drygas.
|Between an overreaching governor who seems intent on commanding if not socializing Alaska's energy industry, and a President who seems intent on crippling if not shutting down Alaska's energy industry freedom is threatened on America's Last Frontier. Today we explore why this is so. -dh|
To our hundreds of Canadian readers: We apologize for the lack of news directly affecting you today; but we must focus on an Alaska Governor who exhibits a certain hubris impacting both the energy industry and Alaska's future. You may find object lessons which also apply on your side of the border. In this not very well organized stream-of-consciousness video, Governor Walker repeatedly emphasizes that his gas reserves tax idea is not intended to punish industry. He goes on to say that he has a budget problem that must be addressed. He adds, unbelievably, that he has no problem taking over the energy industry if it does not conform to his will. Watch out for fireworks ahead! -dh
Alaska LNG Project Risk
Is Alaska's Reliance For Government's Equity Participation In A Multi-Billion-Dollar LNG Project Based On Rosy or Reliable Assumptions?
Yesterday, our radio host friend, Glen Biegel (NGP Photo) asked that we join him for an Alaska LNG project discussion. Most of the discussion revolved around a Black and Veatch document commissioned by the Alaska Department of Natural Resources. Download the B&V study here.
Because these are difficult, complex subject areas, we invite readers to send us additions/corrections.
We have endeavored for nearly 15 years to create the most complete, accurate, and searchable (Upper right column search box) northern energy archive existing anywhere.
To do this, we have relied on our readers in government, industry, academia and the media.
We are more than an energy industry; we are the basis for North American wealth, security, wellbeing and quality of life.
Therefore, it is not only our industry that is under attack at international, federal and local levels, but the foundation of our free society as well.
Let us keep the faith, for a civilization depends upon our continued success, though we don't often think of it that way.
Thank you for your support and steady stream of emails and phone calls.
Listen to part of our Black & Veatch conversations here (Dave Harbour Interview; Glen Biegel and Tom McGrath discuss legislative session and socializing industry; Senator Cathy Giessel on the Legislative Session); especially interesting are the discussions about risks not enumerated in the study.
This writer has concluded that the B&V paper does not rise to the level of a "study" partly because of the noteworthy omission of project risks, but also because, as it states, a good deal of the data for the paper was provided -- without critical analysis -- by the Governor Bill Walker administration's Department of Revenue.
The paper attributes other input to the state-owned Alaska Gasline Development Corporation (AGDC).
In yesterday's Alaska Journal of Commerce (AJOC) report by journalist Elwood Brehmer, Walker was quoted as saying of the B&V paper: "I appreciate this objective review of the consequences of the state purchasing or not purchasing TransCanada’s share of the (Alaska LNG Project)...."
Here, Walker offers a deceptive statement to the people of Alaska. The review is not "objective", as he promises, because it uses Administration input to support the Governor's desire to seek maximum equity position in a highly risky project whose risks are understated or ignored by the B&V consultants.
As close as the paper gets to 'risk factors', can be found on Page 49 which itemizes the paper's assumptions. The "implied" risks are, therefore, associated with how reliable the "assumptions" turn out to be.
The AJOC piece reports that the, "...overall cash flow to the state over the first 20 years of operations would increase $7.4 billion, or about 6 percent, without TransCanada (TC), according to the report. It estimates annual state revenues in the $3 billion to $5 billion range, totaling $76.7 billion over 20 years with TransCanada’s participation and $84.1 billion without the extra partner."
But this and all other projections are based on the Page 49 "assumptions".
For example, do our readers think that:
- This massive project will be completed by 2025/26? If not, there will be a cost of delay. That is a risk. Does having the state involved in the decision making create delays? The paper says the state can hire some of the TransCanada technical experts should the state buy out TC; either way, could personnel disruptions create delay? B&V says on Page 46 that no technical delays are "expected". In short, the rosy revenue picture depends on everything going as "expected". And, if things don't go as "expected", if the "assumptions" don't pan out, well, that will be a budget problem for a future administration and legislature. Don't increased project costs result in a revenue requirement demanding higher, less competitive LNG tariffs?
- The State's royalty will be taken 'in kind' (RIK) as opposed to 'in value' (RIV)? What do readers think; should Alaska's royalty gas be taken 'in kind'? Taking gas as RIK means the state thinks it can market its own gas for a higher price and under better terms than the producers could get. BP, ConocoPhillips and ExxonMobil are some of the most effective, successful, sophisticated, well connected gas marketers in the world. If the state would just take the royalty in value (RIV), as cash, the producers would sell royalty gas along with their own and the state would be the beneficiary of their expertise in achieving the best possible price. It really does seem like egotism-gone-wild when a governor thinks he can successfully joust in a quixotic adventure to negotiate better than those whose entire world-wide business is based on obtaining the best value for their oil and gas resources. In essence, Alaska's gas marketing effort, if it takes royalty gas "in kind", will likely be directly competing with the gas marketing efforts of the producers. Isn't it likely that the state could at some point say to the producers, "You need to back off trying to market to xxCompany/Country. That's where we want to sell our royalty gas"? Accordingly, a new state gas marketing bureaucracy the Governor creates to market gas is untried and unproven and should represent to Alaskan citizens another grave, risk factor not vetted by B&V. (Note: Yes, we are aware that the producers want Alaska to take the royalties they owe "in value" because it supposedly creates better "alignment" among the state and private pipeline participants. We would only caution what what may look like 'alignment' today could more resemble a relationship nightmare later.)
- The Alaska LNG project will cost $45 billion in 2015 dollars, when producers have always said the project could be expected to cost in a range between $45 - $65 billion? The final and best cost projection for the project's capital cost is not currently available but the governor wants decisions to be made in the special session based on a pretty flimsy assumption that the project's capital cost is limited to $45 billion. If, as is likely the case, the project costs more, the tariff increases, gas sale income decreases and Alaska LNG becomes less competitive with other sources. This is a huge risk. Is that huge risk really what citizens want their government to embrace?
- Long term oil prices (upon which B&V) bases a gas price, will be about $85 per barrel? A year and a half ago, the price was over $100. Now, Alaska crude is valued in the $45 - $50 range. So what if the long term price is $45 or less? Do Alaskans seriously want to bet their future on oil prices rising to $85 or more? Because if that dream does not come true, the Alaska investment will be worth much less and at some point the state could be required to sell its gas by subsidizing the transportation costs (and, with what money?).
- Alaska will be able to sell its royalty gas under this formula: 13.5% x Oil Price + $1? But our June LNG price reports demonstrate that the spot market in Japan has tumbled from $18/MMBTU over a year ago to $7.65 this past June. If Alaska were in the business now, it would still have to pay the transportation tariff even though it would lose money on the gas sale. An important risk for citizens to accept with the Walker approach, is that the state may or may not make enough from sale of its gas to pay the transportation tariff. Since part of that tariff goes to pipeline/LNG owners and since Alaska's governor wants to be an owner, there is a very real risk that the state would have to move money from one pocket of the general fund (i.e. for a tariff payment) to another pocket of the state (i.e. as tariff income). The risk is that the state marketers, in a volatile world LNG market, would not be able to "break even". Meanwhile, can you imagine the headlines, the legislative hearings, the conflicts between gas owners, gas transporters, gas marketers and politicians? One would hope for unimaginable consensus and good will; one fears for unimaginable strife, threats, demonizing and economic uncertainty. Note: the governor has said he seeks a 51% equity position in the project. Increased control means proportionally increased risk.
- The cost of debt will be 5% and the return on equity will be 12%. Since the 2008 recession/depression the federal government has gone deeper than ever into deficit spending, with current debt approaching $20 trillion. The Federal Reserve sold bonds (i.e. and incurred debt thereby) to raise cash for deficit spending but has also engaged in QE, quantitative easing, the selling of even more debt for the stated purpose of providing more liquidity to the market place. When you have a lot of something, its value decreases. Accordingly, with the volume of money increasing, the cost of debt has stayed in the low single digits during these years. Money has been cheap. Older citizens will remember the inflated interest rates of three decades ago rising to the level of 18-21%. So this B&V assumption that for the 20 year life of a project debt cost will remain low, in the 5% range, constitutes a predictable and likely risk. If project borrowing rates increase, another assumption is affected: the return on invested equity (ROE). Many of the risk factors above, if not appearing as enticing as B&V and the Governor hope for, could have a drastic effect on the ROE hoped for by pipeline owners. Oil companies are used to taking such risks; it is part of their business and they have become proficient in operating in that risk environment. Do you believe a state government should gamble its resources by undertaking the types of ownership risks discussed here? As an observer, all we ask is that citizens accept such risk to their economic future with eyes wide open, not just on the basis of an - in our opinion - incomplete paper provided by a consultant who obtains his raw input from a biased client.
In addition to the "Assumptions" B&V listed, we would add these:
- Additional cost risk could increase the overall tariff which could make LNG from this project uncompetitive with gas from other LNG exporting countries. Competitors include but are not limited to Australia, British Columbia and the Lower 48, among many others. Most of those projects enjoy all or some of these natural advantages over Alaska:
- gas at tidewater, no need to pay for an expensive, 800 mile Arctic pipeline.
- less expensive operating climates.
- less difficult geography and port challenges.
- lower labor costs.
- lower logistical costs.
- closer proximity to markets.
- The B&V paper concludes with the statement on Page 47 that, "This presentation was prepared for the State of Alaska (“Client”) by Black & Veatch Corporation (“Black & Veatch”) and is based in part on information not within the control of Black & Veatch." While the state and consultant will surely respond that, "Well we put his sort of statement at the end of all of our work products," it should, nonetheless, be taken very seriously by citizens of Alaska whose economic future rides on decisions made, in part, on the validity of information the Walker-purchased paper provides. In essence, this statement points out the risk -- if not the likelihood -- that information provided to the consultant is one-sided, wrong and/or misleading.
Credit worthiness. The rating agencies have calculated increased risks to investors in Alaska. Those risks include: 1) a deficit budget, 2) an unfunded state employee pension liability rivaling Detroit's a few years ago, 3) lack of discipline to cut spending, 4) the propensity to add new entitlements (i.e. Medicaid), and 5) the tortuous relationship between the state tax and regulatory authority and its largest investors. The agencies and a multitude of New York analysts also consider, 6) the reliance of the state on one source of revenue and the tenuous reliability of that revenue source on an oil pipeline that is running nearly 3/4 empty. Accordingly, the risk of lowered bond ratings could increase the interest rates Alaska will pay on General Obligation and/or Revenue Bonds. An increase in interest rates could dramatically alter the happy picture painted by B&V and its client. Are Alaskans prepared to support this and all the other potential risks noted here?
First, the Governor has said he wants legislators to consider a gas reserves tax to use as 'leverage' against the producers; apparently he believes that threatening producers with a tax on gas that is not being marketed will force them into investing billions into a gas project in the event they should not want to pursue a project--or find it infeasible.
But -- as of today, as Senator Giessel noted -- the Governor has provided the legislature with no draft bill to accomplish his idea of a reserves tax. (The video gives our readers a revealing perspective of the Governor's position on matters he wants the special session to cover. What do you make of it?)
The Governor also wants the legislature to consider whether to end the relationship with TransCanada Pipe Lines, Ltd. or not. But neither has he provided draft language to implement his TC desires.
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Our editorial position expressed a hope, when Governor Walker won his election, that he would be successful.
But we have carefully followed his progress. We find, as further substantiated by many recent reports, including this one, that the emperor is not fully clothed.
With humility, we still believe he could develop a positive working relationship with the State's major investors. With courage, he could work with the legislature to craft a sustainable budget. With good judgment, he could seek wise counsel from good counselors rather than dictating policy emanating from an unsuccessful, decades-old career in his quixotic but failed search for an Alaska LNG project.
We seriously hope he can still achieve that dream, for his success could be Alaska's success. We are also certain he will fail again unless he changes his attitude.
His rigid pattern of wanting to force an LNG project into reality "his way", is not the way to create one of the largest construction projects in the history of the world. He often suggests that this is what his past governor mentors, Bill Egan and Wally Hickel, would do in pursuing the interests of an 'Owner State'. Many older Alaskans knew both of the former governors well and some might say, "I knew them and I know Governor Walker; Governor Walker is not them."
Such an enormous accomplishment (i.e. as a major Alaska North Slope gas monetization project) can only materialize with the enthusiastic, voluntary support of the free market, encouraged by a governor's unselfish but firm, diplomatic and inclusive leadership skills.
So far, Alaska's leaders have not very well articulated the risks associated with government ownership of energy projects. Hopefully, the Legislature will identify the risks and make sure that citizens do not see gas pipeline ownership as a sure bet for billions in future revenues.
Since the early 1970s industry as attempted and failed to produce an economically feasible Alaska North Slope gas monetization project. Luckily. For if the project had been built earlier, various economic cycles (i.e. circa. 1996 & 2007) could have killed it.
Today's citizens should not focus on dreams of future dollars. If they ignore the enormous risks, they may ignore the billions their governor wants to spend or borrow now, in his determination to command and control private sector energy projects.
In such hands may rest the largest, most dangerous risk of all: the risk of flawed judgment.
- Tom McGrath - Glen Biegel
- Glen Biegel - Dave Harbour
- Senator Cathy Giessel - Glen Biegel