Rep. Olson's HB 198 is an effort to change the tools available for extending state leases. For various reasons, including the fact that Alaska is a challenging environment in which to operate quickly due to permit and other requirements, investors sometimes are not positioned to be in production by the end of their initial lease term despite making reasonable efforts. To some degree that inhibits investment and activity on the front end, as investors consider the potential that they later may lose the value of their efforts by the expiration of the lease term despite their reasonable efforts.
In the past the state has addressed these issues through various means, such as the formation of units, that have longer term implications and potentially lead to friction between investors and the state at later points. While the approach reflected in this bill carries its own potential for friction, if fairly administered over the long term by the Department of Natural Resources, as it likely will be, this approach should provide a less adversarial and more routine means for addressing the issue.
A radio report on the HB 198 is here: One-Time Lease Extension Bill Approved by State House of Reps | Radio Kenai. Materials related to the bill are here. The bill now goes to the Senate for consideration in the final week of the session.
Tuesday, April 9, 2013
Sunday, April 7, 2013
Short Takes| Shannyn Moore must not have been a waitress ...
Shannyn Moore Sometimes when I have other things to do, I follow what is going on in the Alaska Legislature by checking Twitter. For those that haven't entered the Twitter age yet, people posting (or, in the vernacular, "tweeting") can put a "hash tag" on their post, which any of the usual Twitter applications will then aggregate and allow you to read separately, rather than diving into whatever else anyone on your friends list may be talking about.
Because today is the NCAA WBB semifinals, for example, a large part of the current posts in my Twitter feed are about how the Louisville - California game went, or how UConn is doing against Notre Dame. I knew all I wanted about that, but wondered how things were going this afternoon in the House Finance Committee hearings on SB 21, so I clicked on the column I have set up for posts that reference " # akleg.
That's when I ran across the above tweet from Shannyn Moore, a blogger, talk radio host and sometimes columnist for the Anchorage Daily News.
As I have pieced things together, evidently someone in the SB 21 hearings had brought up progressivity and someone else had suggested progressivity was not a good thing (which its not if you are concerned about staying competitive throughout the price range investors use to evaluate potential oil investments).
Shannyn then decided to add her two cents, talking to no one in particular (since she wasn't at the hearing) but reaching out to the Twitter universe in general.
The first thing that caught my attention was her use of the word "idiot." In the very few times in my life I have used that word in public, I have been very careful to make certain what follows is accurate. There is nothing quite as bad as referring to someone as an idiot, and then immediately proving you are a moron.
Shannyn, evidently, doesn't follow the same rule. Immediately following her opener, she posted "when the price of oil goes up, so do our costs to plow roads & heat schools. That's why you need progressivity."
Uh no. When the price of oil goes up, so automatically do state revenues. You don't "need progressivity" for that to happen.
To illustrate, if the state tax rate is 15% at $80/bbl, that produces state revenue of $12/bbl. Even at the same tax rate of 15%, if the price of oil increases to $100/bbl, so does state revenue (to $15/bbl). Even staying at the same 15%, if the price of oil increases to $120/bb, so does state revenue (to $18/bbl).
I recognized this was higher math, so I thought I should check it with the waitress serving us at the restaurant I was sitting in when I read Shannyn's tweet.
My question to her: "even if I am only going to tip you the same 15%, would you prefer me to have an $80 tab, or a $100 tab." Her quick reply, "$100." "Why," I asked. "Because I make more money at $100 than $80," she replied. "I'll be," I said, "even if I don't use progressivity [well, what I really said was, "even if I don't increase the percentage"] in determining my tip."
Looking at me like I was the idiot, she replied "yes sir. I make more money when the tab rises, even if you don't increase the percentage."
Huh. Shannyn must never have been a waitress.
(The really sad thing? Five people have retweeted Shannyn's tweet and three have "favorited" it since she first sent it. I guess there are less former waiters and waitresses wandering around than I had thought.)
Saturday, April 6, 2013
Short Takes| The News-Miner goes off track a bit ...
This morning, however, the column somewhat falls prey to a common Alaska affliction -- arguing on the one hand for spending restraints, but then on the other for the Legislature to fund just this one project. In the News-Miner's view, "[t]he Legislature is trying mightily to keep the 2013 capital budget under control, which is a laudable goal, but it would be a shame if the engineering buildings at our two university campuses failed to receive a second year of funding this year." The column then goes on to argue that the Legislature should find a way to provide the money.
As these pages have made clear throughout, the total, all-in budget for the unrestricted general fund this year should be $5.5 billion. See "A Serious Wake-Up Call from ISER: “In fiscal year 2014, Alaska’s state government can afford to spend about $5.5 billion," Thoughts on Alaska Oil & Gas (Jan. 3, 2013). Spending more shifts the resulting fiscal burden -- in simple terms, essentially imposes a tax -- on future generations.
There should be a rule -- and I urge it on the News-Miner going forward -- that anyone proposing to spend an additional dollar (in my view, above $5.5 billion) should identify at the same time an equal amount of spending to be cut.
Its not that the capital budget announced this week isn't a target rich environment for that sort of thing. In two different line items, for example, the current bill proposes to spend $2.1 million on "Service High School Field Turf and Stadium Amenities," and another $.8 million on "Service High School Track Improvements and Stadium Amenities" (p, 98, lns 18-29).
That's fine, I suppose, but as a state do we really think its appropriate to reduce money that future generations need saved now to pay for basic teacher salaries going forward, so that the current generation can have four games a year on an astroturfed football field? And even if we think spending that amount of money is appropriate, is it more important than spending it on completing needed Engineering Buildings on at least one of the state's two major college campuses?
It might take some work, but even this year's proposed budget is sufficiently full of fluff that over the course of a day it would be fairly easy to identify an offsetting amount of savings in order to make room for what the News-Miner, at least, believes are higher priority items.
In my view, those who understand the state's coming fiscal crisis -- including the editorial column of the News-Miner -- have a continuing responsibility to do something about it. If they (we) want to argue for state spending on this project or that, we should have at it. But we should be responsible, and ourselves help make the hard choices that we argue the Governor and Legislature should be making by identifying specifically an equal amount that should be cut.
Want to spend a penny above the sustainable level -- even on something as laudable as education -- then identify where the offsetting savings can be made. Otherwise, forfeit your turn to ask for more spending.
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. See“Alaska 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."
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. See“Alaska 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."
Short Takes| Jack Roderick is wrong
Tuesday, Dermot Cole wrote a blog piece on Jack Roderick's testimony before House Resources. "Jack Roderick offers sound advice to lawmakers about need for more research on oil taxes," Faribanks News Miner (Apr. 2, 2013). The piece praises Jack for suggesting "[y]ou have to have some guarantee [from the companies that they will spend the money you're giving them in Alaska], and preferably in writing that that will happen ... before giving a tax break."
The problem with demanding such "guarantees" is that the state is neither willing -- and perhaps, constitutionally impaired -- from giving any guarantees of its own. As a result, there is no "guarantee" to a producer if it makes an investment in Alaska based on one set of tax provisions, that the tax provisions won't change two years later and convert to state take a portion -- perhaps a large portion -- of the revenue stream on which the investor relied in making the investment in the first place.
It is not enough to suggest in that instance that the producer can back out if the legislature makes such a change. Because oil and gas investment is front end loaded, by the point such a change occurs the investment already will have been made and, just like the Prudhoe and other infrastructure on the North Slope today, it will have become a sunk, immobile cost.
Knowing that, investors will never make a "guarantee" as long as the state retains the right to change the rules once that investment is made. Insisting on such an upfront commitment simply assures mutually assured destruction between the two sides, as investment -- and production -- continue to decline.
As I have written elsewhere, I greatly respect Jack Roderick -- and Dermot Cole for that matter -- but they simply are wrong on this one. In order to obtain guarantees, the state will have to give them as well. Neither the state (nor Jack, nor Dermot) have indicated any willingness to do so, and absent that, neither will the state's largest investors.
The problem with demanding such "guarantees" is that the state is neither willing -- and perhaps, constitutionally impaired -- from giving any guarantees of its own. As a result, there is no "guarantee" to a producer if it makes an investment in Alaska based on one set of tax provisions, that the tax provisions won't change two years later and convert to state take a portion -- perhaps a large portion -- of the revenue stream on which the investor relied in making the investment in the first place.
It is not enough to suggest in that instance that the producer can back out if the legislature makes such a change. Because oil and gas investment is front end loaded, by the point such a change occurs the investment already will have been made and, just like the Prudhoe and other infrastructure on the North Slope today, it will have become a sunk, immobile cost.
Knowing that, investors will never make a "guarantee" as long as the state retains the right to change the rules once that investment is made. Insisting on such an upfront commitment simply assures mutually assured destruction between the two sides, as investment -- and production -- continue to decline.
As I have written elsewhere, I greatly respect Jack Roderick -- and Dermot Cole for that matter -- but they simply are wrong on this one. In order to obtain guarantees, the state will have to give them as well. Neither the state (nor Jack, nor Dermot) have indicated any willingness to do so, and absent that, neither will the state's largest investors.
Monday, April 1, 2013
Alaska Oil Policy| Irony ...
My first column on Alaska oil policy appeared as a Compass piece in the Anchorage Daily News in October 2009. The title of the piece was "Alaska poorer for outdated oil attitude."
The focus of the piece was on Alaska's failure to keep pace with what the New York Times in a then-recent piece characterized as an industry "hot streak." As the Times reported, "[t]he oil industry has been on a hot streak this year [2009], thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy."
My piece pointed out that Alaska was not participating in the boom and suggested some reasons:
My column went on to criticize the 2009 Parnell Administration and Balash suggesting "Alaska's 'tough terms' have shot Alaskans in the foot."
That piece came to mind again when I was reading a story about Alaska's current situation in yesterday's Los Angeles Times. The story, entitled "Oil revenue fuels intense fighting among Alaska lawmakers," reports on the current debate in the Alaska legislature over oil taxes.
The story echoed what I wrote in 2009. According to the story, "[s]omewhere along the way, the North Slope golden goose stopped laying. Production on the slope's aging fields has dwindled to barely a quarter of what it was in the 1980s; once the nation's largest oil producer, Alaska now ranks behind Texas, North Dakota and California."
The irony? One of the persons quoted in the story yesterday as supporting the need for reform is the same Joe Balash who, in 2009, said "Alaska is right where it ought to be ... [with] tough terms." In the 2013 version of the story, however, Joe -- as has the Parnell Administration -- has changed horses. This time Joe is quoted as follows:
Another irony? I have never met the Governor of Alaska, much less talked to him about oil policy. Joe Balash? He's now the Deputy Commissioner of the Department of Natural Resources, responsible for oil policy. That, frankly, explains a lot.
The focus of the piece was on Alaska's failure to keep pace with what the New York Times in a then-recent piece characterized as an industry "hot streak." As the Times reported, "[t]he oil industry has been on a hot streak this year [2009], thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy."
My piece pointed out that Alaska was not participating in the boom and suggested some reasons:
To put it bluntly, for the past several years, Alaska's exploration signals to the industry have said "go elsewhere."
Recent legislative enactments, such as the Alaska Gasline Inducement Act and the ACES oil tax, come to mind as examples. The root cause runs deeper, however.
Alaska has become smug and arrogant about the industry legislatively, administratively and even on the editorial pages of some newspapers. A good example is the attitude expressed earlier this year by one of the governor's "energy" advisers, Joe Balash.
In a recent international survey conducted by a Canadian institute, Alaska ranked 78th out of 143 states and governments in an assessment of policies designed to encourage oil and gas production. When asked to comment on the results, Balash said, “Alaska is right where it ought to be. ‘We … have tough terms; we set the bar high. … We have world-class resources. Arkansas and Mississippi don’t.’”(The quote from Balash is reported in "Report critical of Alaska's relationship with oil industry," Fairbanks News-Miner (Jun. 28, 2009). A copy of the piece is available by paging down through the collection of articles here.)
My column went on to criticize the 2009 Parnell Administration and Balash suggesting "Alaska's 'tough terms' have shot Alaskans in the foot."
That piece came to mind again when I was reading a story about Alaska's current situation in yesterday's Los Angeles Times. The story, entitled "Oil revenue fuels intense fighting among Alaska lawmakers," reports on the current debate in the Alaska legislature over oil taxes.
The story echoed what I wrote in 2009. According to the story, "[s]omewhere along the way, the North Slope golden goose stopped laying. Production on the slope's aging fields has dwindled to barely a quarter of what it was in the 1980s; once the nation's largest oil producer, Alaska now ranks behind Texas, North Dakota and California."
The irony? One of the persons quoted in the story yesterday as supporting the need for reform is the same Joe Balash who, in 2009, said "Alaska is right where it ought to be ... [with] tough terms." In the 2013 version of the story, however, Joe -- as has the Parnell Administration -- has changed horses. This time Joe is quoted as follows:
"I was talking with a gentleman from BP, back in 2008 when oil prices spiked. He didn't have authority to sign the checks to pay the tax each month. He had to get authorization from London — the checks were that big. And he was the chief financial officer," said Joe Balash ....Hindsight is always 20/20, of course, but what a difference it might have made in Alaska's history if, rather than spending its time boasting of its "tough terms," the Parnell Administration instead had stopped to read the New York Times back in 2009, or Joe had stopped to understand what the "gentleman from BP" was telling him in 2008.
Another irony? I have never met the Governor of Alaska, much less talked to him about oil policy. Joe Balash? He's now the Deputy Commissioner of the Department of Natural Resources, responsible for oil policy. That, frankly, explains a lot.
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.
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.
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