The Human Temptation To Ignore The Value Of  A Competitive Investment Climate

Competition Perspectives: Part II (Part I, Part III)


Dave Harbour

The North American platter is heavy with energy sustenance, now manifested by the boom in oil and gas shale productivity.

Last week, the office of the Federal Coordinator for the Alaska gas pipeline project summarized current and developing trends in Liquefied Natural Gas (LNG) competition for markets.

Earlier, we commented on the same subject.

Over the Weekend, we hear from British Columbia that a new taxing regime on LNG exports will produce billions of dollars of new revenue for the coastal province, and that concerns investors.

We shall refer to these pieces in today's commentary.  -dh 

Suddenly, the fundamentals have changed as the US works toward becoming as big a producer of energy as it is a user, and Canada seeks to expand energy wealth from Alberta to British Columbia.

But, this challenge of plenty, as Alaska and Alberta have found over the last several decades, is almost and maybe more difficult than challenges of shortage…as during the late 1980s when oil prices and oil patch economies bottomed.

You would think that as jobs increase and city/state treasuries grow with additional income, property and sales taxes, the people and politicians alike would be celebrating prosperity.

History in Alberta and Alaska has taught that a growing private sector doesn't buy too much political capital.  No, taking more of the income stream — even at the cost of private jobs and prosperity — buys politicians votes in his/her voting districts.  Supporting status quo prosperity is oh, so boring.

Alberta learned during the last decade that it must moderate its royalty take to bring back jobs and economic growth–and it worked.

Alaska took longer to learn the lesson; it was loathe to give up its death grip on the flow of confiscatory production taxes, even if keeping a tight grip meant a loss of private jobs, dangerously low and diminishing throughput of the Trans Alaska Pipeline System (TAPS) and economic suicide (i.e. since over a third of Alaska's economy and 90% of its government operating budget is based on that diminishing tax base, put into place during the Palin Administration).

But slow as it was to understand the economic reality that its repulsive investor tax policies had pushed Texas, North Dakota and, now, even California ahead of the so-called "Pioneering State" in annual oil production.

Yet act, Alaska finally did.  In the latter days of last Spring's legislative session, a majority of the House and Senate joined the Governor to reform the Palin production tax increase.  

But lest those hoping for a more competitive investment climate in Alaska would find breathing easier, some minority leaders in the Legislature joined with anti-business environmental and social activists to advocate a voters referendum immediately after the session ended.  That referendum would, if passed, repeal the tax reform bill passed not even a year ago.

You can imagine how someone poised to make new investments in Alaska last spring must feel now; "let's give it a good go and if tax reform is withdrawn by a vote of the people, we'll have to reevaluate our project plans."

In the box above, the Federal Coordinator Office analysis of market competition reveals that there are too many LNG projects chasing too little demand.

This means that LNG project investors will be carefully choosing the investment venues more likely to produce a reliable return on and of their capital.

The pending Alaska vote this coming August, at best, does not improve Alaska's reliability or attractiveness as an investment climate.  In 2014, with Alaska's governor, legislature and large producers pretty much find themselves under aligned stars; it would seem that this could be a watershed moment in history for an Alaska LNG project.

Similarly, with British Columbia announcing new taxes that they proudly proclaim could bring billions of dollars in tax revenues, one can only wonder how that changes the metrics of current LNG investor plans–especially if it takes a final 'net profits' format.  Net profit approaches, like the reformed Alaska production tax, cause immediate tension between tax authority and taxpayer.  One will always be refusing expense deductions and the other will always be defending them — at great cost of time and relationships.

Meanwhile, virtually every oil producing state in America is increasing production–except Alaska.  The giant Alaska ​oil producer lies strapped Gulliver-like to the ground by a thousand strands of Alaska political strife, federal opposition to every kind of Alaska development and a growing competition from other producing areas.

Alaska seems to not realize that its resources can be properly developed and reasonably taxed in a way that brings not just maximum benefits to one greedy generation, but maximum benefits to many generations of thankful, employed Alaskans.

BC seems to be less interested — from the perch of a foreign observer, in facilitating LNG projects that can provide generations of good jobs and economic development than in separating gas transporters from their hard earned money as soon as possible regardless of how that treatment may affect long term jobs and prosperity.

With more LNG projects underway than there are markets to satisfy, some will not be built.

We think it logical that jurisdictions treating the new LNG export opportunity as a money tree will find themselves losing competition to those who place greater value on long term industry relationships that foster long term jobs, community support and economic prosperity.