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.

Alaska LNG| An important development ...

The Department of Energy released this afternoon the long awaited and much anticipated two studies (one from the Energy Information Administration and the second from private consulting firm NERA Economic Consulting) it had commissioned on LNG exports.  The studies were commissioned to evaluate the potential impact on the US economy of permitting exports of LNG from the Lower 48.

Early news reports indicate that the studies conclude, on net, that LNG exports are good for the US economy.  According to an article this afternoon in the Oil & Gas Journal

In what is perceived as a victory for the oil and gas industry, the US Department of Energy has endorsed the idea of liquefied natural gas exports as good for the US economy. A just-released study commissioned by the DOE states that the net economic benefit of LNG exports outweighs the downside even though it may bring higher natural gas prices to American consumers and manufacturers, says the agency. 

North American natural gas producers and midstream companies hoping to begin the lengthy process of building new LNG export facilities and retrofitting import terminals have welcomed the Energy Department report. They hope it will help sway the Obama administration’s decision on whether to approve more than a dozen proposed LNG export projects. The decision had been put on hold until the report was completed. 

The study delivers a solid endorsement of natural-gas exports at a time when the issue is hotly debated.

Alaska gas is not mentioned in any significant way in the reports.  By potentially broadening the competition for Asian markets and introducing a new, much lower (at the moment) pricing structure than previously has prevailed in the Asian market, permitting broad scale LNG exports from the Lower 48 may actually serve to undermine the export of Alaska LNG.

We will write more on this development in the coming days.

The reports are available through links at from the DOE website at the bottom of the following page:  http://www.fossil.energy.gov/programs/gasregulation/LNGStudy.html.