Please scroll down to read today’s unusual Sunday commentary: “Afraid New World”
Alaska Governor Bill Walker (NGP File Photo)
BREAKING NEWS, THURSDAY AFTERNOON: ALASKA’S GOVERNOR CALLS LEGISLATURE INTO SPECIAL SESSION TO DEAL WITH LACK OF AN FY 2016-17 BUDGET TO NORMALLY TAKE EFFECT ON JULY 1. HERE IS THE PROCLAMATION. YOU READ IT HERE FIRST! -DH
Comment. Our mid Atlantic energy analyst friend (who prefers to remain anonymous) comments on another analyst’s viewpoint (Left column below). Their evaluation of world economics, interest rates, supply and demand seem to produce an oil barrel at a maximum of $70 for the foreseeable future, an amount that could “save” major oil industry players. However, governments like Alaska and Alberta that were budgeting on oil income based on $80-100+/barrel oil a couple years ago, can still give the oil industry fits because socialist leaders would rather increase taxes on a hurting industry than diminish entitlement, program and state employee spending. So for companies planning for possible, upcoming lease sales, LNG projects, pipelines, etc., they would be well advised to be very flexible and able to pivot on a dime. For while some investments at $70-80/barrel under today’s tax and regulatory metrics may pencil, more pressure from state and federal governments could put such investments under water at the stroke of a pen. High cost areas like Alaska’s Cook Inlet and North Slope and Alberta’s Oil Sands, of course, need higher oil price thresholds than shale plays in the more temporate Southlands that are also closer to markets.
On the other hand, if a market-driven administration should take charge, one could see the price of capital increase, deficits and debts decrease, competition for capital diminish, prices increase and overall economic vitality and energy demand grow. Once again, we have no crystal ball but our industry readers have always found it their responsibility to shareholders to explore the range of new “givens” that could possibly affect important, new investments — for better or worse — and plan accordingly. -dh
Today’s commentary from our mid Atlantic energy analyst friend:
Art Berman has posted an excellent analysis of the current efforts to adjust production to better align crude oil supply with demand.
There is no magic price number for balancing supply/demand, just as there is no magic volume that brings them into balance. Price, quantity, dollar effect, relative strength of global economies and a host of other factors enter into it. But Art posits that the Industry needs at least $70-80/bbl to “save” it. We are not going to quibble with any given number that is needed, and in fact Art makes a very good case.
But the availability of massive amounts of cheap capital has changed the equation for what constitutes a “return” on investment these days. The old margins needed to reflect risk are no longer the standards. The markets are squeezing out the marginal players who created part of the glut; the process will take at least a year more. But it will not get rid of the overhang of cheap capital, bringing in more players in slightly different forms.
When capital is brought back to a reasonable price (and we are very cynical about how long that will take) it will leave the low cost and efficient producers who will find further ways to reduce costs. A floor of $70 or so might be the right neighborhood, but it will take a whole lot of change in the financial markets AND global economic growth to get there. Art notes the weak global economies as an issue, and says we may have to get along with lower-density fuels . Unlikely, in our opinion.
Bottom Line: Analysts (at least like this writer) do not bet on a changed market in the future to forecast prices. Based on current markets of slow economic growth and cheap capital, the markets will struggle to get to anywhere near $70 in a way that can be maintained. We agree with Art that spikes are likely, as we see expanded volatility continuing. But we see $70 as an upper “normalized” limit until such time as the capital and economic issues improve.
Saudi Panic
by
Keith Kohl, Energy and Capital
5-19-16
It’s just a matter of time — highly likely very soon.
Saudi Arabia will be a shell of what it is today. Its economy is suffering catastrophically after months of low oil prices.
They’re projecting a $100 billion deficit for 2016. Social welfare programs are being cut to the bone.
They’re out borrowing money on the street and pondering whether to sell portions of ARAMCO in a public offering to raise cash.
The Saudi people are getting restless, resulting in tension between them and the royal family. It’s looking a lot like the situation in other Middle East countries just before the Arab Spring of 2011.
The Afraid New World
Our comment on the above: While our study of events finds this commentary valid, reaction to the actions Keith identifies are highly unpredictable. Indeed, we find ourselves today not in a “Brave New World”, but in an understandably, “Afraid New World.”
For example, if the Saudi Kingdom reverses course to limit production to increase price, what will be the effect on demand in a world of debtor nations when energy prices increase? If citizen unrest or interference from Iran, for example, destabilize or eliminate the royal family, will that cause price increases because of the instability or price decreases due to supply uncertainty and depressed economies? How would other OPEC exporters react to changes in Saudi production strategy? Finally, what domino effects within adjacent oil producing areas would emerge from an overthrow of the Saudi ruling family?
Anyone who thinks that the future for oil companies is certain has not studied the gathering storm of risks in much detail. Indeed, the world is full of treacherous and risky investment climates.
This is why U.S. and Canadian federal and state governments would be so smart to stabilize their own budgets and investment climate predictability. For in a more dangerous world, a fiscally certain North American investment climate could attract an unusually large volume of investments and jobs and general prosperity in the relatively near future.
And that prosperity, in turn, would best enable a free North America to defend its interests in the afraid new world.
Today’s relevant energy news links, courtesy of Daniel McDonald:
AJOC EDITORIAL: Money for nothing and the checks for free
I want my, I want my, I want my PFD. With apologies to Dire Straits, the demagogues in the Democrat ranks are back in their comfort zone…
Showdown set over oil tax credit bills
At long last, oil tax credit reform legislation has passed both the House and the Senate.
Bill allowing rural pot opt-out passes 37-1
After a hiatus, House Bill 75 reappeared on May 16 to sail through conference committee unopposed and passed 37-1 on the final day of legislative session.
New database rules aimed at opioid crisis
A database of prescription drugs could help address Alaska’s opioid epidemic and a bill approved by the Legislature will require doctors to use it.
Limiting ER ‘over-users’ an attempt at cost control
Trouble comes knocking at Dr. Anne Zink’s emergency room door at the Mat-Su Regional Hospital near Palmer.
Peninsula support companies feel pinch of oil industry layoffs
The round tables were fringed with people chatting leisurely and exchanging bits of news, like they were on lunch break.
Report: Optimism for salmon prices in ‘16
A new market analysis has an optimistic outlook for the 2016 salmon season — and goes a long way in explaining why Bristol Bay sockeye salmon received a low dockside price for last year’s catch.
State affirms demand for marketing info in Prudhoe plan
Simply put, the State of Alaska wants information about potential North Slope natural gas sales the big three producers are not willing to hand over.
Alaska delegation asks Kerry to review transboundary mining
Alaska’s congressional delegation responded to continued concerns from Southeast Alaskans about Canadian mine plans by asking Secretary of State John Kerry to look into…
Port State Measures targeting IUU fishing takes effect June 5
The international Agreement on Port State Measures to Prevent, Deter, and Eliminate Illegal, Unreported, and Unregulated Fishing will go into effect next month…
FISH FACTOR: Rosier outlook for salmon prices; board changes considered
Alaska’s salmon season has gotten underway with lots of optimism, a far cry from the bleak feelings of a year ago.
COMMENTARY: Long overdue energy bill a federal law Alaska can welcome
In late April, the U.S. Senate overwhelmingly approved a major energy bill for the first time in almost a decade.
Alaska Legislature adjourns with work still to do, called back by Gov. Walker
Alaska lawmakers failed Wednesday to broker a last-minute deal on the state budget or oil taxes and adjourned their regular session after 121 days…
Alaska House leaders losing grip over rank-and-file, complicating finale in Juneau
When the Alaska House passed an oil-tax bill after a month of negotiation, it revealed a deep fissure within the Republican-led majority that’s controlled the chamber for more than a year.
Advocates outraged at last-minute proposal from Legislature to slash $13 million from schools funding
A last-minute proposal made by Alaska legislative leaders late Tuesday would slash $13 million from education funding by stopping a planned $50 increase…
Alaska Attorney General’s office fights House-led appeal in Medicaid lawsuit
The Alaska Attorney General’s office says the Alaska House lacks the authority to substitute itself for a legislative committee in the appeal of a lower court’s decision…
East Anchorage fire station to be named after late Rep. Max Gruenberg
A new East Anchorage fire station is on track to be named after the late Rep. Max Gruenberg, who died unexpectedly in February after successfully fighting for state funds for the station.
U.S. Treasury Secretary talks finance and economic diversity in Alaska
En route to Japan for a meeting of G-7 finance ministers and central bank governors, U.S. Treasury Secretary Jacob Lew made his first official visit to Alaska…
Mat-Su Assembly upholds marijuana moratorium, overriding mayor’s veto
Mat-Su will have a temporary moratorium on commercial marijuana licenses in place through October’s local elections.
Readers write: Letters to the editor, May 18, 2016
LETTERS: Alaska Dispatch News readers comment on news of the day.
House slides $19M toward unpopular road with no long-term plan
On Tuesday, House legislators moved $18,852,256 for a controversial road project in Anchorage opposed by community groups and the mayor’s administration…
Lawmakers move $13M from education to oil & gas tax credits
State lawmakers cut education funding in the proposed budgets by nearly $13 million Tuesday night.
Lawmakers take oil tax debate down to the wire
Lawmakers are taking the contentious oil tax debate down to the wire.
Legislature looks to finish budget, but special session is likely
The Legislature is preparing to vote on the capital and operating budgets Wednesday.
Secretary of Agriculture discusses wildfire season with regional forest officials
Agriculture Secretary Tom Vilsack met with the nation’s regional forest heads on Tuesday to discuss the upcoming wildfire season.
Mat-Su pot moratorium stalls growth of cannabis industry
Three steps forward, two steps back. Mat-Su’s marijuana moratorium ordinance went through another iteration at Tuesday night’s Borough Assembly meeting…
Next interim UAF chancellor will be internal candidate
The next interim chancellor of the University of Alaska Fairbanks will be either a current or former UAF employee.
Juneau breaks ground on its new homeless housing initiative
In 2012, the Juneau Homeless Coalition identified 55 of the most vulnerable homeless people living in the community.
State budget committee cuts $12.9 million from education
A committee hashing out details of the state operating budget reduced the allocation to K-12 education by $12.9 million, the Alaska Senate majority press secretary confirmedWednesday.
Alaska lawmakers facing extra time after an extended session
Alaska lawmakers sought to finish as much work as they could ahead of a constitutional meeting deadline Wednesday.
Permanent fund earnings raid threatens state economy, future
Sometimes shortcuts don’t work. You run into road construction, traffic is backed up or you get lost.
BUDGET CRISIS: Legislature quits without finishing work
Alaska’s budget talks have failed. Shortly before midnight Thursday morning, the Alaska Legislature adjourned without fixing the state’s $4 billion annual deficit and without providing a budget…
Double overtime: As 121st day winds down, Legislature remains deadlocked
The Alaska Legislature is bound for some kind of double-overtime, with lawmakers — even after a four-month extended regular session…
Walker signs bill clearing way for Dave & Buster’s
Gov. Bill Walker has signed into law legislation that would clear the way for the restaurant Dave & Buster’s to do business in Alaska.
Juneau school superintendent says Legislature is ‘using kids as pawns’
In a surprise move Tuesday, a legislative conference committee stripped close to $13 million in public education funding.
My Turn: A vote away form helping Alaska’s foster children
As a mother and grandmother and through my work with foster youth and the Alaska Children’s Trust…
My Turn: Raiding the Permanent Fund threatens the economy and our future
Sometimes shortcuts don’t work. You run into road construction, traffic is backed up or you get lost.
Senate approved oil tax reform faces uncertain future
Yet another version of the oil and gas tax credit reform bill, H.B 247, passed the Senate on Wednesday, 14-6.
Alaska lawmakers facing extra time after an extended session
Alaska lawmakers are trying to finish as much as they can on what is scheduled to be the last day of an extended regular session.
Last-minute proposal from lawmakers would cancel increase to K-12 school funding
Democrats in the Legislature and Alaska school leaders are reeling from a House-Senate budget committee’s…
$12.9 million education cut used as ‘bargaining chip’ in budget endgame
In the final hours before the state constitution says lawmakers must gavel out, House Speaker Mike Chenault told reporters that funding next year’s budget is the only thing on his mind.
Prescription take-back program sees record amount of drugs
Officials with the Matanuska-Susitna Borough say 2016 was a record-breaking year for the state’s drug take-back program.
Assembly burns mayor’s marijuana veto
A temporary ban on marijuana businesses will remain in place for retail operations and commercial grows until after the October elections.
Borough debates school funding, landfill closures
The Kenai Peninsula Borough assembly got into the weeds on its budget Tuesday night, with great attention on funding for the school district and closing the landfill for one day a week.
Energy & Oil Prices
Crude Oil (WTI) $47.13
Brent Crude (ICE) $47.83
Natural Gas (NYMEX) $2.02
Japan LNG (JLNGIP) $7.75
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