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."

R
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.