Tuesday, March 26, 2013

Alaska Gas| What is Valdez thinking ...

The City of Valdez has hit the airwaves with a campaign against HB 4, the enabling legislation for an instate gasline introduced by Rep. Mike Hawker and backed by Speaker Mike Chenault.  According to the City, the campaign "is geared at supporting what Valdez believes to be the better project ... a large-scale line capable of feeding overseas exports."

In the meantime, back in the real world Ernst & Young has released a new study on global LNG demand, supply and pricing.  The study is an effort to take a serious look at realistic demand and supply scenarios in an effort to identify where global LNG pricing may be headed.  In doing so, the study seeks to provide a realistic assessment of various supply options and how they fit into the overall global LNG supply outlook.

Mentions of Alaska in the study?  Zero, yep zero.  Mentions of Canada in the study, 16.  Mentions of the US Gulf Coast in the study, 6.

Sometimes, some Alaskans become confused between how they believe the world should think about us, and how the world really does.  This is one of those times.  The global LNG industry is leaving the station and Alaska is not on board.  Under various scenarios it is possible that Alaska may yet catch one of the last cars before the train fully leaves the station, but those scenarios are the equivalent of completing a Hail Mary pass.

Alaska certainly shouldn't forego other options in the meantime waiting for a receiver to come open.

Ironically, according to the AP news story reporting on Valdez's efforts, the city is supporting the estimated $900,000 ad campaign "using money it has won in challenges over taxation of the trans-Alaska oil pipeline."  That money has increased the cost of operating TAPS, reducing the netback -- and thus, the money received by the state from royalty and production taxes -- for North Slope oil.  Taking that into account, more than half of the money Valdez is spending on the effort actually is coming at the expense of state revenue.

Legislators may want to keep that in mind the next time they are asked about where they can make budget cuts.  With an increasingly tight budget, does the state really need to be indirectly funding Hail Mary passes aimed at itself.

Sunday, March 24, 2013

A New Blog: AmandaCoyne.com

One of the benefits of waking up early on Sunday morning is that there is time to scan the morning papers with a cup of Kaladi coffee in hand and Folk Alley playing on the pad.  This morning's scan was worth it.

Today's "Ear" column in the Anchorage Daily News reports on a new blog from Alaska Dispatch co-founder and former ... editorialist ... Amanda Coyne.  While it appears that the blog just started recently, the initial posts are insightful and well worth the read.  To follow along -- and enable readers to do the same -- I have added a link to the blog on the side column of Thoughts on Alaska Oil & Gas.  Amanda also appears to have reactivated her Twitter feed and presumably will post links to blog pieces there as well. 

This may be interesting ....

Friday, March 22, 2013

Alaska Oil & Fiscal Policy| On the Glen Biegel Show

I was on the Glen Biegel Show yesterday to discuss the latest developments in Alaska oil & gas, which yesterday was the passage the evening before by the Senate of SB 21, the Governor's proposed oil & gas tax reform legislation, as amended.

Because of its impact on investment, during the discussion we also covered the current status of state budget policy and the changes that are necessary in that area.  The podcast of the discussion is available here.  The discussion runs about 24 minutes.

Wednesday, March 13, 2013

Alaska Fiscal Policy| Watching different movies ...

There is a phrase that lawyers (and perhaps others) sometimes use that came to mind as I was reading a KMXT (the Kodiak NPR station) post containing some recent remarks by Rep. Alan Austerman, the Co-Chair of House Finance.

The phrase that came to mind was "watching different movies."  What that phrase sometimes means is that two people who are in the same place at the same time and are seeing the same string of events (i.e., watching the same "movie"), nevertheless perceive a different series of events and as a consequence, come to vastly different conclusions, as if they are watching a different movie.

The phrase came to mind when I read the following in the KMXT story:
Based on numbers from the Department of Revenue, Austerman said he expects the state to tap into its savings to do the budget this year. In general, he said Alaska is looking toward some tough times ahead, and shaping the state’s budget will only get more difficult.-- 
(Rep. Austerman 2 :30 “The big question is if you look at the projections from the oil industry, that it takes 7-10 years to develop new oil coming into the pipeline. That if we have a 7-10 year period that we don’t have new revenues, then the question is how far can you stretch your savings out to buffer that 7-10 year period. ..."
The hi-lited portion is what caught my attention.

Alaska is not facing a 7-10 year gap over which it needs to stretch its savings, but after which things will be back to normal.  Instead, every -- and I mean every -- piece of information that is publicly available about Alaska's fiscal future points to the fact that Alaska is in the midst of a significant fiscal paradigm shift, where future state revenue streams (at least based on oil) will continue to decline.

A recent study by the University of Alaska Anchorage's Institute of Social and Economic Research (ISER) does an excellent job summarizing the conclusion that the current data supports.  In its January report entitled "Maximum Sustainable Yield:  FY 2014 Update," ISER concludes
"Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. In its 10-year fiscal plan, the state Office of Management and Budget (OMB) projects that spending the cash reserves might fill this gap until 2023 .... But what happens after 2023? 
Reasonable assumptions about potential new revenue sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that fiscal crisis will come an economic crash."
The graphic representation that captures those facts is at the top of this post.  The revenue line -- which is based on the state's own forecasts through 2023 -- is represented by the light blue layer toward the bottom of the graphic.  ISER simply has trended that line into the future and, in an effort to give credit to that future, added additional layers for the revenues which could result from the successful development of some new oil fields and an LNG gas export project.

The upward sloping black line at the top estimates the level of state spending also based on current trends.  The red is the use of the state's two current reserve funds -- the Constitutional Budget Reserve and the Statutory Budget Reserve -- to fill the gap between spending and revenue.  The white space after about 2023 between the black line and the top of the revenue layers is the fiscal shortfall ISER sees coming -- the one that ISER predicts will create the "economic crash."

There is nothing in the ISER assessment, and nothing in any state forecast, that predicts a fiscal turnaround in 7 - 10 years.  Nothing.  The only thing that some people -- including me -- suggest is that the slope of the revenue decline curve may soften some if oil tax reform results in a renewal of investment in the development of the state's resources.  But no one is predicting a complete turnaround of revenue, such that at the end of a 7 - 10 year gap, the state returns to current revenue levels.

Sometimes its not important that people see a "movie" the same way; the consequences of seeing events differently are not significant.

That is not the case here, however.  If policy makers assume that there is a relatively temporary, 7 - 10 year, gap in state revenues, but that the state will return to the current norm after that event, then you think about using the current state budget reserves -- which, combined, are currently in the range of $20 billion -- to wait out the disruption (i.e., "fill the gap") until "normal" times return.  That is the "movie" that Rep. Austerman, and by implication, the House Finance Committee, evidently is watching.

But, based on the hard data, that movie is fiction and, as the above graph shows, leads the state directly into a fiscal abyss -- in ISER's words, an "economic crash" -- of unprecedented proportions.

As the ISER report later discusses, there is another way to deal with the state's fiscal future.  That approach involves reducing spending now, not the immediately "popular" thing to do.  But implementing that step allows the state to create an endowment which ultimately enables state spending to continue at a consistent, "sustainable" level (which ISER calculates to be in the range of $5.5 billion/year) indefinitely into the future.

From the perspective of current Alaskans intending to remain in the state for the long haul or concerned about their children's future in the state -- which is the same long term perspective the legislature should have as well -- that ultimately is a much more popular result than simply continuing on the current course until the inevitable economic crash occurs.

The key to achieving that future, however, is reducing spending now (not trying to sustain it through the use of current state reserves) and committing current state reserves to a current endowment now (not spending them in an ultimately futile effort to maintain current state spending).

In short, in this situation it does make a difference what "movie" the state's policy makers are watching.  Hopefully, they will understand soon the version they are currently "watching" is fiction, and shift over to a "reality" channel, before we all are watching a feature entitled "the great Alaska crash of 2023" on the History Channel.

Tuesday, March 12, 2013

Alaska Oil Policy| Really? ...

This week's edition of Juneau AP reporter Becky Bohrer's "3 things to watch for in the Alaska Legislature" contains an interesting admission from the Governor.  Discussing the oil tax bill, Bohrer writes:
... Response from industry on the measure has been mixed. 
While some of the independent producers see room for improvement, they've also been seemingly more enthused about the proposal than the North Slope's three major players (BP, ConocoPhillips and Exxon Mobil), who say there are positive elements. However, they don't like the proposed increase in the base tax rate or the fact that a tax break known as a gross revenue exclusion would not apply to currently producing areas. 
Parnell, who has failed in his two prior efforts to change the tax structure as a way to encourage new investment and production, said recently that he doesn't need to hear from companies that the plan will make the state more competitive. 
"Instead of waiting on the companies, we've had independent analysis done, by Econ One, for example, that shows how those tax changes would make us more competitive" compared to other energy-producing areas, he said. "And that's the independent, third-party analysis that we're getting to demonstrate we've moved the needle, rather than sitting around waiting for the producers to tell us that."

ead more here: http://www.adn.com/2013/03/10/2819509/3-things-to-watch-for-in-the-alaska.html#storylink=cpy

Read more here: http://www.adn.com/2013/03/10/2819509/3-things-to-watch-for-in-the-alaska.html#storylink=cpy
To be honest, for a state that relies -- and has for going on four decades -- on oil revenues for 90% of its state budget, that is a startling and disappointing statement.  Whether it likes it or not, this state is in the oil business, yet it is relying on Outside consultants -- who themselves also are not in the oil business -- essentially to determine a critical variable central to the state's future.

Its not just that the state is relying on consultants, but the Governor's statement about the lack of significance he attributes to the reaction of the state's largest investors also is concerning.

As I was reading the piece, I was reminded of reading another piece last month about a new LNG tax being considered by British Columbia.  There, British Columbia Premier Christy Clark explained that the government was not ready yet to discuss the level of the tax publicly because it had not yet completed negotiations with the industry.

When asked why, Clark explained "if we want to be competitive, we need to do that [establish the tax rate] through the course of negotiations with (industry) ...." 

As someone who has observed oil investment in this state for approaching 20 years (and who has followed the industry overall closely for 35 years), I have been a strong supporter of the fairly simplistic approach taken in the Governor's oil tax bill (SB 21).

But the bill came with some significant flaws that made it less than effective in reaching its goal of stabilizing and potentially beginning to rebuild oil production from the North Slope.  Some of those flaws were addressed by the Committee Substitute (CS) produced from the Senate Resources Committee; but others still remain.   As someone familiar with how investors perceive this state, I can attest that the concerns being raised by the producers are real and, if not addressed, will frustrate achieving the investment levels the state's oil resources otherwise justify.

BC Premier Clark is paying attention to the people who move the needle; Alaska should as well.

It is unfortunate the state has put itself in the position so that the call on one of the most important decisions the state will make for the coming decade -- which otherwise promises to be a financially difficult decade for the state and its citizens -- largely is being made by Outside consultants, who will not have to live with the consequences.  If this Administration wants to promote "Alaska hire," it should start with itself.

More importantly, the Governor's statement may be the best argument yet for developing a state co-investment arm .  Generally speaking, other governments which have established co-investment entities don't have the same degree of difficulty as Alaska in identifying appropriate financial terms.  Through the co-investment vehicle, they have someone on the government's side who is nevertheless in the industry, intuitively understands the industry's investment dynamics and competitive structure, is charged with maximizing the state's benefit (which includes, achieving maximum production) and is able to steer the state toward the establishment of solid fiscal terms.

Alaska has positioned itself in reaching the same decisions instead to be able to turn only to Outside consultants.  Its clearly not the same, and Alaska is suffering the consequences.

As for the ultimate question of determining the state's revised fiscal terms, as I said in another column (in Alaska Business Monthly) recently,
This is not a time to nickel and dime the state’s response to the challenge. The potential rewards – and the potential lost opportunity costs – are sufficiently great that Alaska’s policy makers should make certain that any reform puts Alaska squarely within the zone of competitiveness and not try to play the edges. 
What should drive Alaska’s policy makers is the desire to identify the tax rates necessary to keep investment at the level required to achieve the greatest possible overall revenue levels from state lands on the North Slope. That is what produces the “maximum benefit” to all Alaskans, not the levels that may produce merely the greatest revenue levels in the next two, five or even ten years.
Hopefully that message resonates.

Sunday, March 10, 2013

Alaska Oil| An interesting exchange with Jack Roderick ...

There are few Alaskans more experienced in the oil industry and few books from which I have learned more about that industry than Jack Roderick and his book Crude Dreams.  If you are interested in the topics I discuss on these pages and haven't read the book, you should.

As a result, it came as something of a surprise over the last couple of days that Jack and I have become engaged in a debate in, of all places, social-media outlet Linked in, on Alaska oil tax policy.  It began when I posted there and elsewhere a comment on a recent Anchorage Daily News editorial that I thought was particularly short-sighted, but which Jack thinks is well grounded.

Linked in is not the perfect forum to host a debate because of the space limitations imposed on comment boxes, but sometimes you can't pick your forum.  Because our exchange echoes a debate beginning to build statewide as the legislature heads toward the last half of the regular session, I post it here for whatever interest others may find in it as well.  I will update if the debate continues.

(Note:  Unlike other social media, Linked in posts the most recent comment first, so in order to read the discussion in order, after reading the initial entry (mine) its best to go to the bottom comment (Jack's initial comment) first and then work up.)

4 days ago
  • Bradford (Brad) Keithley
    Bradford (Brad) Keithley Jack ... The reason the state needs to act now is to correct what, in retrospect, was an overreach that occurred in 2007. The move that year from a production tax approach comparable to that used elsewhere in the US to the current system has made most Alaska investments -- including those necessary to increase the ultimate recovery rate inside existing fields (and regardless of whether made by current or future producers) -- much less competitive with alternative opportunities. The state is not "helping" investors by changing the existing tax structure. Instead, the state is helping itself by reducing Alaska's government take a level necessary to reignite needed levels of investment.21 minutes ago
  • Jack Roderick
  • Bradford (Brad) Keithley
    DeleteBradford (Brad) Keithley Jack ... The reason the ADN is wrong is because it misses the point that the best near term opportunity for developing additional production is through additional investment in the existing fields. As I have explained elsewhere, there is more oil remaining in the existing fields than outside them, but it is largely economically challenged oil. See, "Alaska Oil Tax Policy| Ships Passing in the Night," http://bit.ly/Yh98vZ. We need to adopt competitive tax rates within the existing fields in order to attract the investment necessary to develop it.2 days ago
  • Jack Roderick
    Jack Roderick The ADN is right!3 days ago

Thursday, March 7, 2013

Alaska Budget| Some progress, but a long, long way to go ...

This week's release by the House Finance Committee of its proposed FY 2013 Operating Budget is worth noting.   It provides a good time to check in and see where the legislature is on developing a sustainable state budget.

As readers will recall, earlier this year the University of Alaska-Anchorage's Institute of Social and Economic Research (ISER) published a report on Alaska's current fiscal policy and where it is leading the state.  The study is entitled "Maximum Sustainable Yield:  FY 2014 Update."

The report concludes,
"Right now, the state is on a path it can’t sustain. Growing spending and falling revenues are creating a widening fiscal gap. In its 10-year fiscal plan, the state Office of Management and Budget (OMB) projects that spending the cash reserves might fill this gap until 2023, as the adjacent figure shows. But what happens after 2023? 
Reasonable assumptions about potential new revenue sources suggest we do not have enough cash in reserves to avoid a severe fiscal crunch soon after 2023, and with that  fiscal crisis will come an economic crash."
The report suggests that, in order to avoid the result, the state adopt a sustainable budget model.  Under the model, the state would establish an endowment similar to an individual retirement account, commit to putting current savings and annual revenues in excess of the sustainable spending level in the endowment account, allow the endowment account to build as revenues continued to exceed sustainable spending levels, and then, as with an individual retirement account, gradually start to take earnings from the endowment as revenues started to dip below the sustainable spending level.

The result would be a revenue stream that maintained sustainable spending levels not only currently, but virtually perpetually into the future as earnings from the endowment proved sufficient to maintain the same level of spending.

The approach treats all generations of Alaskans equally, supporting future generations with the same level of government spending as current generations.  Absent such an approach, the current generation will leave future generations with a much lower standard of living, likely requiring the imposition of income, property and sales taxes to maintain even a moderate level of government spending.

Absent such an approach, the state also will severely undermine its current efforts at oil reform.  Oil investors depend on predictability when making investments.  As Greg Laliker, the President of Hilcorp Energy, put it in a recent interview with Petroleum News,
“The main thing I need, care about and worry about is predictability,” Lalicker said. “What I can’t put up with is the notion that two, three, four years down the road the deal’s going to change, because then I’m going to stop investing because I can’t predict what’s going to happen.”
Looking at a future in which the state faces a "severe fiscal crunch" after 2023 -- right in the heart of the payout cycle for major investments made in the next few years -- it is reasonable to believe that the state's major investors will avoid making long-term investments in the first place, unless and until they become confident that a more secure future is likely to occur.

Key to accomplishing that result is reducing spending now -- to the current sustainable spending level -- while current revenue levels exceed that level and are available to be invested in the endowment.  According to the ISER study,
In fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion. That’s an estimate of the level of Unrestricted General Fund spending the state can sustain over the long run ....
Which leads us to the proposed House Finance Committee Operating Budget.

In his December FY 2014 budget, Governor initially proposed Unrestricted General Fund spending of roughly $6.5 billion -- or $1 billion over the ISER-calculated sustainable level.  In January, the Governor subsequently amended that number slightly, but with rounding proposed spending stayed at the same level.

Alaska's budgets essentially divide into two categories -- operating and capital.  In his January budget, the Governor proposed $5.7 billion in the Operating Budget and $800 million in the Capital Budget.  The House traditionally takes the lead in evaluating the Operating Budget, and the Senate takes the lead in evaluating the Capital Budget.  The challenge facing both bodies this legislature is to find ways to reduce both budgets -- significantly -- in order to reach sustainable levels.

The proposed House Operating Budget indicates some slight progress has been made thusfar this session, but that there is a long, long way ago before the legislature can claim to have produced a sustainable budget.

As noted, the Governor's amended budget proposed $5.7 billion for the FY 2014 Operating Budget.  According to the Legislative Finance Office, that figure apparently subsequently grew another $100 million to $5.8 billion.  The proposed House Operating Budget proposes to cut that figure to $5.6 billion, a 3.4% reduction from the Governor's amended budget (as reported by Legislative Finance), and importantly a 2.7% reduction from the FY 2013 budget.

Both figures are encouraging but not enough to achieve a sustainable budget.  Even standing alone, the House's proposed $5.6 billion Operating Budget exceeds the $5.5 billion recommended in the ISER study.  It certainly does not leave room for a Capital Budget of any size.  If the Legislature, as anticipated, ultimately adopts a moderately sized Capital Budget, the "fiscal burden passed on to future generations," to borrow ISER's terminology, will be significant.

According to the ISER study, at current levels each $1 billion in excess spending over the current sustainable level will require $25 billion in additional savings (or other unanticipated increases in the endowment) in future years to make up the difference.

The proposed House Operating Budget is an initial step down the right path, but there is still a long way to go to put Alaska on the course of a sustainable fiscal future.  Hopefully, taking a fresh look the Senate will find additional ways to reduce the Operating Budget, and the Senate and House combined will similarly find ways significantly to reduce the Governor's proposed capital spending plan.

If not, Alaskans are in for a much more difficult future than they currently anticipate.

Sunday, March 3, 2013

Alaska Oil| An interesting Federal policy decision ...

CNOOC2_edit-306x177Under the Foreign Investment and National Security Act of 2007 (FINSA), the federal government is empowered to "review transactions that could result in control of a U.S. business by a foreign person, in order to determine the effect of such transactions on the national security of the United States."   FINSA reviews are conducted by the Committee on Foreign Investment in the United States (CFIUS), an interagency committee chaired and coordinated by the Department of Treasury.

While primarily focused on the Canadian assets, the recent acquisition of Nexen, Inc. by CNOOC Ltd, a subsidiary of the Chinese National Offshore Oil Company ("CNOOC"), also involves some US assets, primarily lease interests owned by Nexen in the Gulf of Mexico.  Nexen operates some of the leases, and is a non-operator in others.

The reason I have followed this case is because, according to its website, CNOOC also owns some lease interests in the Alaska OCS and because Chinese and other wholly or partially owned foreign national oil companies often have been rumored as potential successors to various Alaska North Slope oil interests.  Indeed at least one partially owned national oil company -- ENI (30% owned by the Italian government) -- already operates on the North Slope and another -- Rosneft (75% owned by the Russian government) -- recently acquired an option from Exxon for a 25% interest in the Pt. Thomson field.  Statoil (67% owned by the Norwegian government) also continues to assess exploration opportunities in the Alaska OCS.

The FINSA issue was whether CNOOC's acquisition of Nexen's GOM OCS interests adversely affected US national security.  As some may recall, several years ago CNOOC called off a proposed acquisition of Unocal Corporation in the face of such concerns.  Since that time, however, CNOOC has successfully acquired non-operating interests in various US shale plays, surviving the required FINSA reviews.

The difference between those and the Nexen acquisition is that Nexen currently operates certain leases, raising a new issue about whether the US would approve CNOOC operation of US oil production.  The US approved the CNOOC acquisition mid-February, but it was unclear at the time whether CNOOC had made any concessions in order to obtain approval.

News reports this weekend, however, indicate that CNOOC indeed made concessions, apparently agreeing to withdraw as operator of any of the leases that Nexen operates.  It is unclear whether the agreement also reaches current or future leases not yet in operation.

While no proposals related to Alaska currently on the table are affected, the decision likely does have a marginal dampening effect on at least one category of potential entrants into Alaska.  For an area reliant on outside investors for development capital, limiting the universe of potential investors seldom is a good thing.