Natural Gas Reserves Tax: Governor Bill Walker's 'Brilliant Strategy' For Encouraging Industry Investment in Alaska
by
Dave Harbour
|
Today, our Aussie oil & gas analyst friend's comments apply to this commentary as he addresses Shell's Alaska OCS exit and LNG competition. See today's comment by our Mid-Atlantic analyst friend on Shell's departure and an earlier, expensive, Alaskan dry hole. See our additional, 3-1-12 commentary in box below-right. -dh Reader comment re: Yesterday's and Monday's editorials are here. |
As a governor, he is now using bullying tactics to achieve his latest vision of an Alaska LNG export project controlled, at least in part, by him.
Not being personally satisfied with the reasonable progress producers are making toward gas pipeline investment decisions, Walker has ordered a special session of the Legislature and is "upping the ante", calling for implementation of a "reserves tax" on natural gas that would, in essence, tax companies for not marketing the gas.
(…as if oil and gas companies do not want to sell their expensively obtained, proven reserves.)
|
Special Session Press Availability from Alaska Governor Bill Walker on Vimeo. |
He convened a media gathering on September 25 to discuss the special session and we encourage our critically thinking readers to carefully evaluate the tenor, logic and quality of his interaction with reporters. Also make note of questions reporters did not ask that you would have asked.
On September 25, 2015 — the same day — the Legislative Budget and Audit Committee invited a presentation by legislative consultant, Enalytica, on potential impacts of a reserves tax on gas.
The slide presentation results are both logical and predictable and we link the presentation here for you to review and assemble your own conclusions. Aside from the potential impact on a gas pipeline and its potential investors, the Walker reserves tax proposal sends a chilling signal to all potential Alaskan investors.
|
…from our 3-1-12 Commentary. "No one objects to reasonable and predictable taxes for the oil industry or anyone else, but a taxing authority, to command respect and encourage investment, should not only seek a fair share for itself but give a fair shake to the taxpayer. That means predictable tax policy, stable policy, policy that does not discriminate, policy that is never retroactive–unless retroactivity benefits the taxpayer. A good tax policy would also focus on filling the pipeline, making a sustainable investment climate for our kids; indeed, husbanding our resources as if we were responsible adults who care not just for the need-greed of this generation but for the economic survival of future generations of Alaska's children." -dh |
We believe it unassailable that the Walker reserves tax idea sends this signal to those who may be contemplating an investment in Alaska: "You can invest and agree to the rules of the game. But we are a 'sovereign state, by golly,' and if we want we can increase taxes or add new taxes anytime we want–and as in the past we can make those tax changes apply retroactively if we want.
"Be advised: if we spend state money irresponsibly and create a deficit, you have deeper pockets than our citizens, small businesses, the hallowed fishing industry or the tourism industry; accordingly, in such a case we will come after YOU."
This provincial, "think locally not globally" attitude has permeated the thoughts and actions of a loud, vocal minority of Alaskans throughout Walker's pro-oil tax, anti-Canadian pipeline, gasline partner hostility career. This unhealthy, illogical and myopic attitude ignores that Alaska's resources compete with other oil & gas provinces, mostly close to tidewater. Most of Alaska's competitors:
- don't have to construct an 800 mile pipeline to move resources to tidewater, and
- have lower labor costs, and
- are in closer proximity to the markets, and
- operate in friendlier climates, and
- enjoy lower logistical costs
Therefore, Alaska must be EXTRA competitive. In the past, the Prudhoe Bay oilfield saved Alaska from having to act responsibly and be competitive. It was the largest field in North America, prolific beyond imagination and supplied 20% of America's domestic oil demand. In spite of predatory state taxation Prudhoe Bay was profitable.
Alaska now has to learn humility in order to be competitive. Alaska is no longer the biggest oil producing state. It is now 4th, after North Dakota, Texas and California.
Production — upon which 90% of the state operating budget and over a third of the state economy depends — continues to decline.
Today, world oil prices are half as high as state revenue forecasters predicted and upon which politicians based their high public spending decisions.
In our columns since Monday, readers have learned much about what Shell's Alaskan Arctic OCS departure portends for the state's undiversified, oil-dependent economy.
One would think that with Alaska's economy teetering on the edge of insolvency (i.e. Scroll down for our commentary since Monday), a prudent Alaskan leader would respond accordingly.
One prudent response would be to kindle dynamic efforts to become attractive to natural resource investors, especially in light of Shell's departure.
But now, our Quixotic champion doubles down on threatening the state's three major investors — BP, ConocoPhillips and ExxonMobil — whose presence has sustained Alaska in unprecedented wellbeing for half a century.
He proposes levying a new tax on the three major investors for the gas that is not yet marketable. We believe it's partly because of his actions and words: he is desperate to be a part of — if not in charge of — a real, live LNG export project. But his irresponsible industry-hostility is a form of populism which could mobilize some pro-tax citizen sentiment in a state that has not responsibly controlled its lavish public spending.
Throughout life, we have generally avoided the temptation to engage in sarcasm or petty and trite clichés.
But when a person happens into high position and acts contrary to logic, basic courtesy and fairness, critics might with justification refer sarcastically to that behavior as, "brilliant".
And, as to clichés, well, "…if the shoe fits, wear it!"
Yesterday's news about Shell pulling out of its Arctic exploration program could also have some good news for long term oil markets. The USGS had previously estimated that the Arctic contained ~90 billion barrels of recoverable oil – with a goodly part of this being in the US sector. Some recent media reports had quoted this number as being "reserves", whereas they are in fact highly speculative prospective resources.
Given the very very few drilling based data points that this number was based on, Shell's failed Burger J well is likely to significantly downgrade this number – possibly by a number as large as tens of billions of barrels.
Henry Hub gas prices fell yesterday to US$2.59. Expected mild Autumnal weather in the US was the key driver.
LNG
Platts has recently reported that Asian spot LNG prices (for delivery in October) are expected to fall again. Mild weather on this side of the Pacific, combined with currently high inventory numbers, is the main causal factor behind the fall. A strong El Nino later this year will only reinforce this.
The interaction of these low Pacific prices with the expected wave of US LNG due to start by the end of this year is unclear. Existing contracted gas purchases will trump spot price economics and the likes of Cheniere should be protected by take or pay contracts for their liquefaction capacity – but the actual volumetric output from the plants (and hence the effect on Henry Hub gas prices) may be less than previously expected.
First … the dry hole Sohio and BP drilled off-shore of the North Slope of Alaska many years ago. In the link below, others apparently also remember it. Mukluk was one of the mis-steps by Sohio management that finally convinced BP to buy out the minority public interest of Sohio, and replace the management.
This old memory still works (sometimes).
As it is described in the link:
There, in the Beaufort Sea, a consortium of companies invested nearly $1 billion in the 1980s drilling a well named Mukluk.
They were confident they’d find oil. At the time, geologists boasted that it was an incredibly low-risk venture, in part because the formation appeared to mimic the massive Prudhoe Bay oil field on Alaska’s North Slope.
But their bullishness was misplaced. In December 1983, it was revealed the well contained nothing but salt water and traces of long-gone oil.
Decades later geologists armed with new data theorized that the oil actually had been sucked out by BP from an existing site onshore on the North Slope.
For decades, Mukluk has been considered the industry’s most expensive dry hole — a case study in what can go wrong below ground, even when everything else operationally goes right.
Shell’s Burger J well might give it competition.
Leave A Comment