Thursday, April 4, 2013

Short Takes| David Gottstein raises good questions, but has the wrong answer

In a piece in yesterday's Alaska Disptach ("The State of Alaska is Recklessly Flying Blind With Your Future," Alaska Dispatch (Apr. 3, 2013)), David Gottstein argues that "Alaska is behind the times and is woefully lacking the proper and standard business practice analysis tools and methods necessary to make sound and good investment decisions over the management of its natural resources."

From that he suggests that Alaska should invest in developing some specific financial modeling tools he describes in order to improve its decisionmaking progress.

Gottstein's opening premise is valid.  In other pieces, I also have argued that Alaska is flying blind to its detriment in making various decisions related to oil policy.  SeeAlaska Oil Policy|  Out of Alignment,” Alaska Business Monthly (Nov. 2012).

But the solution is not more studies and consultants.  Frankly, Alaska has hired more consultants and conducted more studies than any other government with which I ever have been involved or observed.  This legislature is no exception and, in fact appears already to have done some of the work suggested by Gottstein.

Toward the end of his piece, for example, Gottstein suggests that a tool should be developed for evaluating the relative shares of the revenue stream being received by the federal government, Alaska and the producers.  In fact, that analysis -- and a chart very similar to that suggested by Gottstein -- already are part of the work underlying SB 21.   See pages 26 and 27 of EconOne's March 25th presentation on SB 21 before the House Resources Committee.

But the fact that some of the analysis he suggests has already been done does not undermine Gottstein's central point.  Alaska is flying blind -- or at least in heavy overcast -- with respect to the development of its oil policy.  As I have argued elsewhere, what Alaska needs is not more analysis and more consultants.  Instead, what Alaska needs is to participate as an investor in its own future.  See Alaska Oil Policy|  Achieving Alignment,” Alaska Business Monthly (Jan. 2012)

The oil investment market is a continual and complex dynamic.  Occasional, one time analysis -- even good, occasional, one time analysis -- at best gives a viewer only a snapshot into what is driving investment in Alaskan's natural resources.  Just like individuals should not make a one-time decision about the investment of their retirement plans and then let them sit unattended and unevaluated as the financial markets swirl around them, Alaska should not rely on occasional, one time evaluations of its competitive position in investment markets and then let the result sit unattended and unevaluated, as others make the decision when and how to develop Alaska's resources.

The solution to the "flying blind" issue raised by Gottstein is not more studies or tools.  Like other governments have when faced with the same situation, the solution is for Alaska to become directly involved in the development of its own resources through co-investment and partnership with industry.

As I have said elsewhere, "Alaska owns the oil and gas resources located on the state’s lands; it inevitably is integrally involved in their development. The question is: what management approach best develops the resource? Co-investment is a proven [and indeed, the global standard way] to achieve that objective."