Following Tuesday's editorial on the rating agencies' downgrades of Alaska's creditworthiness, see these reader comments by: an Alaska couple, an Alaska university professor, and our anonymous, Australian energy analyst friend (We hope his tough but realistic predictions are ameliorated by a successful TransCanada suit, as described below. -dh
Speaking of the Alliance (i.e. upper right), our Mid Atlantic anonymous energy analyst friend has this to say about the plight and the future of petroleum industry service companies. Hopefully, the better support industry environment in Alaska will sustain it!. -dh
Oil Voice by Tim Bradner. 'Our operations in winter are becoming increasingly complex,' Alyeska CEO Thomas Barrett (NGP Photo) said in a briefing. ... 'The real solution for us is finding more oil on the North Slope and adding new production and throughput,' Barrett said.
TransCanada will sue the Obama administration...
...for $15 billion for violating NAFTA because the President disapproved the Keystone XL pipeline by fiat, and because he overreached his authority on multiple occasions. (Read the Calgary Herald story here, and subscribe!)
Sound familiar? Hopefully this will be another defeat in the growing record of so-called executive actions that the courts reject. We are respectful of TC for standing tall, in the spirit of the old Peter Finch movie theme by saying, in effect: "I'm as mad as hell, and I'm not going to take this anymore!".
During Obama's last year in office, Congress, companies and individuals experiencing harm by an unlawful administration should push back very hard, lest more freedoms become lost during these last few months. -dh
Calgary Herald/Canadian Press by Ian Bickis. TransCanada launched a double-barreled legal salvo Wednesday against the U.S. government over its rejection of the company's proposed Keystone XL pipeline.
The company said it intends to file a claim under Chapter 11 of the North American Free Trade Agreement in response to the decision, which it called arbitrary and unjustified.
... TransCanada alleges that, as a signatory to NAFTA, the U.S. government failed in its commitment to protect Canadian investors and ensure the company was treated in accordance with international law.
In its notice of intent to initiate the NAFTA claim, TransCanada said that the U.S. government concluded five times that the pipeline would not have a significant impact on greenhouse gas production, but still rejected the pipeline to appear strong on climate change.
"Stated simply, the delay and the ultimate decision to deny the permit were politically-driven, directly contrary to the findings of the administration's own studies, and not based on the merits of Keystone's application," TransCanada says in its notice of intent.
... TransCanada said it has also filed a lawsuit in the U.S. Federal Court in Texas asserting that President Barack Obama's decision in November to deny construction of Keystone XL exceeded his power under the U.S. Constitution.
... The White House and the State Department both declined to comment on the lawsuit or the NAFTA challenge.
... Adam Barratt, a spokesman for Foreign Affairs Minister Stephane Dion, had little to say on the matter Wednesday, although he noted the lawsuit is "not entirely unexpected" and falls within TransCanada's purview.
"We're aware of recent developments with this file and TransCanada," he said. "As this is a matter which is expected to go before arbitration, or before a court, we don't have a comment at this time."
... "This is about a foreign company trying to undercut safeguards that protect the American people," said Anthony Swift, director of Natural Resources Defense Council's Canada project. (Note: typical, non substantive outcry by a special interest activist. -dh)
Saskatchewan Premier Brad Wall, who supports the project, tweeted: "We support @TransCanada #KXL NAFTA challenge. Pipelines safest way to move energy in N. America, get more $ for SK oil."
Note from our anonymous Australian energy analyst following Tuesday's editorial:
Firstly - thanks for promoting my blog again recently!
Point Thomson condensate will help TAPS. Beyond that though, things look tough. Exploration on the NS with current oil prices (and current Governor of AK…) will not be material. A likely Hilary win in the 2016 Presidential election will mean ANWR will remain inactive. Offshore is dead for a “generation”. AKLNG has great merits - but it is a tough LNG market and it is ~10 years away. Help!
PS - Happy New Year!
From an Alaska couple after reading Tuesday's piece:
A VERY HAPPY HAPPY HAPPY NEW YEAR, DAVE HARBOUR……... Stay safe and ENJOY 2016 . . . AND THANK YOU FOR CONTINUING TO INCLUDE US ON YOUR LIST OF INTERESTED ALASKANS!!!
An Alaska professor commented on Tuesday's editorial. He writes frequently and is extremely hostile to oil companies, the biggest benefactors of education in the state. When he retires, he will have free insurance for life and an extremely enviable defined benefit pension payment. I'm sure if I asked him what more the state could reasonably want of oil investors, he would say, "More".
"Dave: I agree that we have been very inconsistent with our oil tax policy, but if we would have taxed them more way back when, we would be really sitting pretty. Just saying."
(Our response: You know I couldn't let the last part of your statement stand without response.
If our elected officials had taxed oil more, 1) we would likely have seen less investment, less oil over time; and, 2) the government would have started new programs with the extra money, which would have been an additional anchor around the economy's neck during volatile, low price eras -- like now.
We should be encouraging and not criticizing oil investors, because we want them to invest more and not less. To attract more investment, we should be a place where, "a deal is a deal".
More investment leading to more production is essential if the state is to meet its financial obligations. One of those obligations is eliminating the almost $10 billion unfunded liability of the PERS/TERS public employee/teacher retirement funds, of which you are a beneficiary.
Currently, there are not sufficient, available funds to both run our subsidized government for the next few years and make the retirement fund whole.
Accordingly, teachers should be among the most vociferous supporters of oil investment, not some of the industry's most hostile critics.
Happy New Year!
From ALASKA SUPPORT INDUSTRY ALLIANCE General Manager, Rebecca Logan (NGP Photo):
"The Alaska Support Industry Alliance is once again proud to announce that our annual Meet Alaska Conference and Tradeshow is TOMORROW!
"As the largest one-day event of its kind in Alaska, Meet Alaska features more than 500 Alliance members including industry leaders from across the state. In addition to meeting fellow Alaskan industry leaders, attendees will be invited to hear a dozen presentations from economic authorities and Alaskan lawmakers on the industry climate in Alaska.
"Meet Alaska hasn’t disappointed in 33 years – and Friday will be no exception. If you are interested in joining us, click here to find registration information. Stay tuned this week to Headlamp’s blog and Twitter through #MeetAlaska16 for the latest.
"And for those joining Meet Alaska in person AK Headlamp will be on hand. Ever wondered how you and your business can stay engaged on key political and business issues facing Alaska? Need help signing up for Twitter? Come find us Friday at the AK Headlamp booth."
From our Mid Atlantic anonymous energy analyst friend:
Last night, as a closing preview, we said, “In the next few days, we will deal with another major evolution to the pricing mix: Major changes for the Oil Service Industry.” (Unnamed) immediately challenged us: “I'm going to be very interested in your next articles on the OFS industry.”
Anyone who follows this corner knows there are few, if any, better analysts of the Oil Service business than Unnamed. He was an excellent sell-side Oil Service Analyst with CIBC for many years, and serves on the board of several Oil Service companies. Also, we are quite confident he will cover the issue soon in his bi-weekly Musings (possibly next week). Unnamed's dive into any subject is always deeper than mine, and more informative (in fairness, we cover at least ten topics in a two-week period, compared to Unnamed’s four-to-six subjects). That is why we always pass along Unnamed’s great writings.
That being said, we have decided to get into the subject of the outlook for the Oil Service industry, with an eye to what it means for the longer-term outlook for crude oil and natural gas prices. But it will take several comments over the next couple of weeks; any note too long will not get read. So bear with us.
Our Thesis: Projected cash flow for the E&P industry will likely be bleaker in to 2016 than almost all analysts have been projecting. Further, most companies have vowed to live within their opex cash flow in 2016 (mostly because they have little choice), a dramatic change from prior years. In order for the E&Ps to survive (or in the stronger cases, muddle through), they will insist that the Service Companies work for what amounts to either 1) a fixed cost, or 2) a price contingent upon the rate of production. In short, the Oil Service business will have virtually no pricing power. Further, they will be subjected to the heightened credit risks associated with their customers. The good (?) news: There is likely to be another surge in innovative efforts to generate greater efficiency in field operations.
We have referred to our analogy of the Orlando Hotel Syndrome so often that many readers will skip past this section. But there is a specific reason for bringing it up again now. Briefly, when Disney announced it would build Disney World in Orlando, every developer, orthodontist and his brother invested in building hotels/motels in Orlando. Anyone could look up and down the streets and know it was being overbuilt. But almost no one wanted to give up his project and concede market share to the other developers. After all, the only real barrier to entry was money. As a result, by the time Disney World opened up, almost all of them were wildly overextended, and went bankrupt. Some of them went through bankruptcy twice. It was not until the cost of the projects (through forced sales) came down AND Orlando developed more attractions that the lodging industry stabilized. In the process of the overbuilding, many of the contractors were also subjected to extreme financial distress by the construction of the hotels/motels.
The point of bringing this up is that we are entering the bankruptcy phase of the Syndrome. And the Oil Service is going to feel the financial stress even more than is being projected. As a result, we have entered the bankruptcy phases for the E&Ps, but it should get much worse in the first six months of this year. In advance of this we will see many more outlooks lie this one from CONSOL Energy today:
CONSOL Energy (CNX/$8.53) reduces 2016 E&P capital budget by 40% and production guidance. Responding to challenged natural gas prices, CONSOL management significantly reduced its E&P capital budget. The E&P division budget was reduced to $205-325 million, down ~40% from previous guidance of $400-500 million and down ~67% y/y.
The Bottom Line: The Service industry will have almost no pricing power over their services. Quite the opposite; they have almost completely become price takers, to an industry teetering on the edge.
We will have more on this topic in the next few weeks. We will start with this article from Fuelfix about the ongoing shrinking of capex and opex budgets.
CBC. Enbridge Inc. says flow on a pipeline through southwestern Ontario was shut down for several hours by protester activity near Cambridge, Ont.
Spokesman Graham White says the protesters partially restricted flow on Enbridge Line 7 on Sunday night by tampering with a manual valve.
You May Not Be A Betting Man or Woman, But Alaska Has Become A Betting State
For years Alaska leaders have shunned warnings about overspending and being too dependent on volatile oil prices. How many still think placing bets on the volatile gas market via equity ownership in an LNG project is wise?
Here is Governor Bill Walker's response to those ratings. (We are a little surprised that he considers these third party creditworthiness ratings "premature".
Alaska's whole budget problem is that it has, in effect, considered disciplined budgeting "premature", year after year. Note 1. Also, the agencies have warned Alaska that, absent significant improvement, this was coming. -dh Note 2. Note 3.)
Other reference points:
Today's energy outlook from our anonymous Australian energy advisor, and
Yesterday's energy outlook from our Mid-Atlantic energy advisor.
According to a December Gallup Poll, when asked to choose among "big government," "big labor" and "big business," respondents overwhelmingly selected big government as the biggest threat to the country in the future.
The negative outlook expressed by the agencies applies not only to general obligation debt, which pledges the full faith and credit of the state to bondholders, but also to revenue bonds and other "moral obligation" debt -- like that which may subsidize the building of a government created gas utility in Fairbanks.
We have long predicted this turn of events and have also advised readers that political realities and human nature would not likely result in spending restraint until elected officials were faced with a head-on crash into a fiscal brick wall.
While today's reports were troubling enough, they do not fully explore the negativity of Alaska's budget imbalance.
Just imagine how continuing lowering of creditworthiness affects the desire to invest in Alaska by major oil and mining companies! Or tourism and commercial fishing companies! Or those considering the buying or building of new homes or offices!
Will not thoughtful investors be thinking, "Gee, if Alaska can't balance its budget and is within a few years of spending all of its available savings and still owes the state employee retirement funds billions of dollars there's no doubt that state and municipal tax hawks will want me to pay more for their lack of planning!"
Today's credit downgrades and negative outlooks by credit raters is either step one toward establishing reasonable budget practices in Alaska, or the first step toward an economic depression that could be more severe than the one Alaska experienced in the late 1980s.
Back then, Alaska and its producers suffered from low oil prices but was producing a huge volume of oil in a full pipeline that helped the economy survive, albeit in rags.
- oil prices are low,
- Alaska's dependence on oil remains close to 90%,
- Alaska's oil pipeline is nearly 3/4 empty,
- the State's available savings are fast depleting,
- half the State operating budget is subsidized by plundering savings accounts and, finally,
- elected officials are focusing on expanding taxes on Alaska investors at a time when their economic wellbeing is already threatened.
How does a state or nation controlled by freely elected politicians control its addiction to over tax and to over spend?
Wise minds have already provided a proven answer to this question. Perhaps the first step toward controlling overtaxing and overspending is to admit the problem exists.
Alaska's Institute of Social and Economic Research (ISER) has been warning Alaskans and their elected leaders since the early 1990s to control spending, to develop a sustainable budget, to create a "safe landing" for a state economy overly dependent on the historic volatility of energy prices.
We will be very disappointed in any leader who begins a scapegoat tirade to the effect that: "We didn't know", or, "It's big oil's fault."
Finally, anyone who still thinks that Alaska should be owing equity interest in a gas pipeline that has not even been proved economically feasible (i.e. betting on the price of gas in a historically volatile energy industry) is wishing the state to become even more dependent on volatility, risk and purely lucky betting. Meanwhile, equity interest requires, "putting up the ante", as costs to determine feasibility increase.
What if the State continues its socialistic, quixotic quest for ownership of the State's private energy industry?
Some will say, "Don't be so hard on the State; we're not gamblers, we're just taking partial ownership."
To that, a wise observer might respond, "You say you are not gamblers. We investors already know what you are; we're just waiting to see to what degree you continue your irresponsible behavior."
The truth hurts, doesn't it?
Maybe thoughtful decision makers will review their history of increasing taxes to create and bloat new, unsustainable spending programs. Maybe they'll analyze why they've doubled the size of government in the past few years. Maybe they'll realize their undisciplined practices have been the very reasons pressure is now building to increase taxes.
For, from an investor's viewpoint, Alaska's volatile tax/spending structure is not inviting. Alaska's retroactive taxation history is downright highway robbery.
You'd think that a place with the most harsh climate, most difficult geography, highest labor costs, and highest logistical prices and history of mistreating investors would be bending over backward to retain spending and taxing discipline.
You'd think that such a State -- at least from this day forward -- would want to be known as a place where, "a deal is a deal."
Energy Perspectives From Our Anonymous Energy Analyst Advisors in Australia and the Mid-Atlantic States:
Yesterday, we brought you the 2016 oil and gas perspective from our Mid-Atlantic, anonymous energy analyst friend (Scroll down). Today, comes a perspective half a world away, from our anonymous Aussie oil and gas analyst friend who understands the Alaska and Canada energy picture a well as any North American. You can also find his blog here.... -dh
As well as making prognostications, the start of a new year is a time to look back and learn. The top 5 lessons for this blogster from 2015 were as follows:
- Oil supply in the face of falling prices has been far more resilient than we expected. This prevails across the globe - in the tight oil fields of the USA, the old Russian fields, in a falling-apart Iraq, for small Mom and Pop stripper wells, etc. This is partly due to good old fashioned ingenuity in the face of adversity - and partly due the extreme prisoner's dilemma that the industry faces (everyone should just cut production by 1-2% and the market would re-balance - but why do so if others won't?).
- The US gas price continues to be ultra-low and well below break-even levels, even in the face of increasing exports by pipe and soon to be by boat. And a massively lower rig count. For 2015 this was arguably due to the afore-mentioned resilience combined with the very mild US winter. We still expect US gas prices to rise materially - but as John Meynard Keynes famously said - "The market can stay irrational longer than you can stay solvent.”
- Don't believe in the conspiracy theories of an efficient Machiavellian OPEC that is employing smart strategies to destroy US and/or Russian competition. These guys cannot organise their equivalent of a p*ss-up in a brewery - the Haj. OPEC is Saudi Arabia and there is a largely hidden "Game of Thrones" likely afoot in the Kingdom over the succession.
- "Events" in the Middle East in 2015 did not disrupt oil markets in meaningful ways - surprisingly so compared to other times in the oil market's history. This may of course change (see 3 above) - the key is where the "events" occur. Syria is not a material oil producer.
- The "Golden Age of Gas" has yet to arrive - and indeed in many markets gas is being squeezed between coal and renewables. LNG markets have accordingly been weak and their outlook is poor in the medium term. It remains to be seen whether policy mechanisms will change this - the evidence is scant to say that they will, even in mature countries like Australia.
Crude prices finished fairly flat yesterday, with Brent closing at US$37.27 and WTI at US$36.76. However, during the course of the trading day there was much volatility, as markets tried to balance bullish news from Middle Eastern "events" (i.e. the shocking escalation of Sunni/Shia tensions induced by the KSA's recent executions) and bearish news from Chinese stock-market falls.
Henry Hub closed down 2% at US$2.30.
LNG and international gas
With US LNG exports imminent, weak Asian demand and an "anybody but Gazrprom" buyer mindset, Europe is the destination of choice for the global LNG market at present.
However, we note that the warm winter weather being experienced in the US is also present across the Atlantic, and this, combined with economic weakness, has led to European gas storage levels being at 6 year highs.
Company news - AWE
AWE announced today that it (and partner Origin Energy [ORG]) has FID'ed stage one of its Perth Basin gas project. Underpinned by a short term gas contract with retailer Alinta Energy, the joint venture has committed to connect a couple of cased-and-suspended recent delineation wells to existing production facilities.
Capturing market (albeit on confidential terms and only for small volumes for a couple of years) is arguably the key news item here. The future of Western Australia's gas market is currently clouded with uncertainty as massive volumes of "domestic reservation" gas from Gorgon and Wheatstone over-hang the supply side.
Company news - ORG
Yesterday's Australian Financial Review (AFR) noted that ORG's sale process for its Perth and Cooper Basin assets was on track to receive expressions of interest by the end of this month.
The AFR quoted an analyst from Citibank as estimating the value of ORG's Perth Basin assets as being ~A$300M - a figure we note as being higher than the market cap of its partner AWE.
Analysts are less bullish on ORG receiving good (or indeed any) bids for its Cooper Basin assets. We reflect on the strong competition between Santos and Beach Energy the last time (2006) a stake in this venture came on the market and note the vastly different animal spirits that now prevail.
Company news - FAR Ltd
FAR came out of yesterday's trading halt this morning with good news on the testing program for its SNE-2 well offshore Senegal. Strong and sustained flow rates of high quality oil were reported.
FAR's share price has gone up 7% on this news. In a bull market the response would likely have been an order of magnitude higher.
Quote of the day
The Donald dosen't have a monopoly on colourful quotes, as evidenced by the following from Poland's new Foreign Minister:
Governor Bill Walker's response today to rating agency announcements:
“The action taken by Standard & Poor’s to lower Alaska’s credit rating is concerning and premature given that the legislature has not had time to act on a long-term fiscal plan. However, this further solidifies the need to address our state’s fiscal challenges in the immediate future. As noted in S&P’s release today, Alaska has significant financial assets that, if properly utilized, can help build fiscal stability for our state. I agree with S&P that the stakes are high for Alaska to enact a sustainable fiscal package, but it’s important to do what is right for our state’s future versus what may be politically appealing. As we approach the 2016 legislative session, I encourage every legislator and Alaskan to read the memos released by Standard & Poor’s and Moody’s in their entirety. I look forward to working with lawmakers to enact a complete fiscal package that protects the opportunities available to future generations of Alaskans.”
For Whom The Bell Tolls
- Alaska's government operates with a $3-4 billion annual deficit and its leaders display pitifully little determination to restrain spending; and
- its accessible savings accounts will be dry, unable to support deficit spending within a couple years; and
- it has not been able to pay down a nearly $10 billion unfunded liability of its state and local government employee and teacher unfunded pension liability; and
- its $50 billion+ Permanent Fund (PF) corpus cannot be tapped by the Legislature without a Constitutional amendment, which its PF Dividend-addicted citizens are loathe to give; and
- its deficit situation grows worse as the nearly 3/4 empty Trans Alaska Pipeline System (TAPS) continues to lose oil throughput at a 5-6% annual rate; and
- its state budget is 90% dependent on that dwindling TAPS throughput; and
- its entire economy is over 1/3 dependent on TAPS economic activity, and
- the credit rating agencies are beginning to downgrade the credit worthiness of the state, thus compounding its troubles as the cost of borrowed money increases. (Yesterday, if you were watching the Legislative video, you heard financial advisers warning that borrowing money now would be at the most favorable time, before further rating downgrades occur...but that if the state had to borrow later to support failing Alaska LNG project equity commitments, the whole world would know its financial problem and lenders would require still higher risk premiums in return for their investments.)
We would wonder how a state in such circumstances would waste even a weekend discussing the possibility of providing a multi-billion dollar 'deficit investment' in an project when 1) payback is not likely to occur for a decade, and 2) the depletion of deficit supporting savings accounts and perhaps the termination of TAPS operations could occur within just a few years, and 3) completion risk of an LNG project in today's world environment is sky high.
Meanwhile, caught in the quagmire of these circumstances amid a perfect economic storm, the Alaska governor is pressuring the Legislature to pass a contingent natural gas reserves tax on the very companies he hopes will build an LNG project.
The federal hostility against Alaska is cutting off sources of new TAPS-replenishing, Arctic oil income and a hostile state administration cannot help but have the effect of further discouraging, if not alienating, investors.
New readers might ask of us: "For whom does the bell toll?"
Don't forget to tune in after church. This will be interesting.
Read more here....
Our Mid-Atlantic energy analyst friend writes:
The Browning World Climate Bulletin is the best source we have seen for weather forecasting. Copyright restrictions prevent us from sending the whole document along, but the following excerpts summarize the its outlook rather well (spoiler alert: This is not for the faint of heart if the reader is in the natural gas production business):
· The cold pool in the North Atlantic is blocking the flow of the Gulf Stream and creating a positive NAO atmospheric pattern, which has superheated Eastern North America and warmed Western Europe. This will continue through winter.
· The strong El Niño is creating more precipitation and where the cooler air meets the hot Gulf and Atlantic air, from Texas to the Midwest, there have been deadly storms and floods.
· The El Niño is expected to fade by early summer and there is a 70% chance that drought-inducing La Niña conditions could start by late autumn.
The small “good news” for the natural gas industry? As the Bulletin notes:
So enjoy the bizarre winter, as the West chills out and the East enjoys a warmer winter with lower fuel costs. You probably won’t see another like it for centuries.
With all this bad weather forecast, record gas storage, and continued improvement in drilling results, why has Henry Hub pricing rebounded fairly strongly lately?
Aside from the possibility that natural gas may have gotten oversold, another reason might rest with some decent evidence that natural gas production might (finally) be declining. The decline in gas rig count over the last 18 months has had about the same effect on production volume as punching Mike Tyson in the face. But the latest EIA-914 report on monthly natural gas production shows a Lower 48 month-over-month decrease of 1.1% in October. Almost every major producing state had a decrease (Ohio, BTW, had the biggestgain). It is obviously too early to call this a trend, and we know it would not take too much in the way of increased pricing to generate a demand response. But: Baby steps. More on the natural gas production later this week.
ADN by Alex DeMarban. What Are Alaska Politicians' New Year's Wishes?
|www.danfagan.us. Not trying to be cynical here but can someone please explain to me why Republican Sen. Kevin Meyer is demanding the average Alaskan give up more of their hard earned money via a new sales tax while at the same time state leaders for all practical purposes refuse to cut the bloated budget. I can see politicians like Meyer asking you for more of your cash if they had shown any kind of effort controlling state spending. They have not. (More....)|
ADN by Annie Zak. Sen. Kevin Meyer, R-Anchorage, said in an email this week to 14 state senators that “in light of the taxation legislation package recently submitted by the governor, it seems a statewide sales tax should also be part of the discussion.”
Meyer and House Speaker Mike Chenault, R-Nikiski, later said the Legislature would pursue deeper cuts but didn’t offer many concrete ideas for how to close the budget gap.
Meyer, who didn’t respond to repeated requests for comment, said in the email that he has requested a draft of a sales tax bill -- to be modeled on proposed legislation from the House Special Committee on Ways and Means from 2003 -- “that can be used to bring the discussion forward.” (More here....)