Thursday, December 20, 2012

Alaska Co-Investment: The Opening Round

In working on another matter today, I came across an article from last week's Petroleum News that caught my attention.  The article, entitled "AIDEA funds Mustang road," reports on the formation of a new joint venture between Brooks Range Petroleum Corporation and the Alaska Industrial Development and Export Authority, primarily to own a road which will be built to provide access to a Brooks Range prospect.  The joint venture is named Mustang Road LLC; AIDEA will own an 80% interest in the company.

While the entire transaction breaks new ground in terms of state involvement in upstream investment, one aspect in particular caught my attention.  Petroleum News reports that "Mustang Road LLC will also become a 1 percent working interest owner in the Southern Miluveach unit, allowing AIDEA to collect royalties on future productions."  If the characterization of Mustang's ownership interest is accurate, through AIDEA's 80% ownership interest in Mustang the State of Alaska for the first time (to my knowledge) will become an upstream co-investor in an oil and gas project. 

State co-investment in the upstream is something that I have written about -- and advocated -- previously on these pages.  In a widely-published piece earlier this year entitled "Our Oil? Then it is Time for Our Investment," a co-author and I suggested that such an approach would benefit Alaska's interests in several ways.  My regular bi-monthly piece in next month's Alaska Business Monthly will further explore the approach.

I have significant concerns about the state selectively co-investing in only certain upstream projects.  As I explain in the upcoming Alaska Business Monthly piece, one critical key to success where the approach has been used by other countries is co-investment in all of the country's upstream projects.  That approach spreads risk and ensures that the state does not develop a vested interest -- and as a result, a preference -- for some type of projects over others.

For example, the Petroleum News article says that  "AIDEA believes existing tax credits will constitute 46 percent of the total capital cost, totaling some $11.5 million and reducing AIDEA’s initial payments considerably."  While I anticipate that small amount will not affect the state's thinking, at larger investment levels dependence by one arm of the state on "existing tax credits," potentially could lead the Legislature to retain those type of credits simply because another arm of the state is dependent on them for its financial performance.

Moreover, selective investment potentially could lead at least to the appearance of impropriety as the responsible agency engaged in investments selects some projects over others.

Nonetheless, the state starting down the road to co-investment is a welcome sign.  Once the threshold issue of whether to do so is resolved, the debate can turn to how to do so most efficiently and effectively.