Earlier this week, we wondered if Alaska’s governor, Bill Walker was rational when, in a letter to ExxonMobil, he cautioned one of his state’s major investors to subdue its Constitutional right of free speech. Today, our Argus Media friends reminded their readers of this blundering statement: “Please do not take steps to thwart Alaska’s ability to monetize our gas,” Walker wrote.
Argus also focused on another gas project blunder. “Alaska governor Bill Walker has told ExxonMobil that the state does not need to provide the producer fiscal certainty on the massive Alaska LNG export project.”
Here is ExxonMobil’s October 4, 2016 3/4 page letter to Walker. Here is Walker’s October 14, 2016 3 page letter to ExxonMobil.
Read for yourself and decide whether Alaska or ExxonMobil has the high ground. Aside from Walker’s sophomoric demand that ExxonMobil watch what it says about Walkers currently uneconomic pipe dream, a far more critical issue is that of fiscal certainty. As long as many of us can remember, producers have given notice to the state that some sort of durable, fiscal certainty is critical to underpinning the enormous Alaska gas project. (In fact, ExxonMobil noted that one of the reasons the Alaska LNG project could not advance next year to the final stage of determining feasibility, is that the Governor had not provided the required condition of fiscal certainty.)
Because if you invest in gas conditioning and LNG conversion facilities and an 800 mile pipeline, your ROI calculation could be blown up by unexpected new tax costs years down the pike.
In his letter, Walker suggests that if a producer merely ships gas and doesn’t own the facility, a fiscal (i.e. read, “constitutional”) guarantee is unnecessary. However, a producer who is not a project owner also faces a fiscal risk. Let’s say that based on existing tax policy, and a very thin profit margin, a producer agrees to ship so much gas to a customer for so many years. Then, suppose the state, with the poor reputation it has developed for doing this, creates new or higher taxes. The producer would then have agreed to sell and ship the gas to a buyer for a price that could be exceeded by the new production cost structure. Would Walker, in that instance, expect the company to abide by its contract to the buyer and sell LNG at a loss, or default on the contract and stop paying the government project owner for unneeded pipeline capacity?
Say you bought a condo that you could afford under today’s conditions. Surely, you could be stressed if not pushed into default if two years from your purchase fellow homeowner association members agreed to double the monthly management fee. …and your electric rates increased. …and you lost one job and found another that paid less.
The principle is similar. It is why when we buy a house, the bank wants to make sure we “qualify” buy having sufficient income and history of income and cash down payment to demonstrate an ability to make payments under reasonable and foreseeable circumstances.
Please note that if a homeowner defaults on a house loan, the lender can fairly easily sell thee property and recoup some percentage if not all of his defaulted loan amount. When investors borrow money to build stationary gas treatment and LNG facilities and freeze an 800 mile pipe into continuous and discontinuous permafrost, they’ll not find too many buyers if the gas transport project doesn’t pencil.
A pipeline investor, therefore, carries much more risk than does a homeowner — even considering the cmparitive project differences. He has no FHA or VA loan guarantee to fall back on…and, a government guarantee covering a pipeline investment would put the government at risk for a king’s ransom. The size of a $60 billion investment is so massive that if unexpected new costs (i.e. including taxes) are encountered, default could bring great corporations — and/or state government guarantors — to their financial knees.
It is not unreasonable for companies which either own, or commit by contract to use pipeline transportation facilities, to require the very reasonable guarantee that a bureaucracy led by politicians will not, someday, make a huge financial commitment uneconomic.
None of us would gamble such money in a state like Alaska 1) with a history of unneeded and predatory and even retroactive tax policy; and, especially when that state, 2) has one economic foot at cliff’s edge and the other on a banana peel.
Let’s face it: Alaska has engrained this slogan on the collective minds of natural resource investors who pioneered the state and trusted in fair play: “Burn me once, shame on you. Burn me multiple times, shame on me.” And that lesson is also not lost on potential new investors.
As our friend and mentor, Dr. Charles Stanley, has taught: “We reap what we sow, more than we sow and later than we sow.”
So what does Alaska do now? Straighten up and fly right. Elect public officials who understand economics, support free enterprise and believe in dignified, diplomatic relationships with both their citizens an with major investors. To elect socialist/hostile mentalities to positions in local, state and federal governments is to guarantee investor fears, employment losses and the delivery to our children of less opportunity and hope than we inherited from our predecessors.