Alaska’s Crisis of Leadership
While today we address Alaska, note that our cousin, the Canadian province of Alberta is also in the hands of a liberal government presiding over stunted production, low oil prices, a protected bureaucracy, lack of pipeline infrastructure, and an unsustainable spending policy. -dh
Since the early 1990s the University of Alaska – Anchorage’s Institute of Social and Economic Research has been advising state leaders to bring spending in line with a declining Prudhoe Bay revenue stream.
Throughout the last fifteen years, we have added our editorial voice to ISER’s more scientific, economic analyses. And with every passing year, ISER’s pleas for fiscal sanity have grown stronger.
The urgency of those pleas for wise leadership is exacerbated by Alaska’s 90% operating budget reliance on oil revenue. Furthermore, the pipeline transporting that North Slope oil is only about 1/4 full, compared to its 2.1 million barrel per day heyday in the early 1980s.
Underlining the urgency for sane action are credit downgrades that rating agencies have imposed on Alaska (i.e. also Alberta) and you have the beginning of an economic death spiral characterized by: rising cost of borrowed money, rising cost of government operating budgets, declining production and a not-so-temporary low oil price environment.
The last two decades+ of governors and legislators have ignored the reality of a coming unsustainable state fiscal policy. And, even if we were to charitably credit the long line of politicians with having good intentions (i.e. We note the many now considering retirement “while the getting is good”), we remind ourselves in the same breath that roads to hell and insolvency are both paved with good intent.
Consequently, spending in the 49th state has continued to balloon, generally pleasing constituent beneficiaries while supporting incumbent reelections. And with every new or expanded entitlement program, Alaska has become a more attractive mecca for migrants seeking benefits as the strength of pioneering wealth producers is compromised by a mounting burden of bureaucratic overseers, regulations, political hostility and unpredictable tax policies.
Add to those private sector inhibiting factors a Governor named Bill Walker who has ignored the public will and legislative diplomacy by (i.e. almost) unilaterally instituting several unpopular initiatives in a deficit spending environment, including expansion of Medicaid; recalculating a formula by which Permanent Fund earnings are made available as citizen dividends and funding for government operations; and, threatening petroleum investors — the state’s most important investors — with higher taxes and even with a questionably legal lease expropriation.
In short, the Governor has sent signals that, contrary to his pre-election promises, he is focused on preserving state agency bureaucracies at the expense of the private sector.
Now, due to Alaska’s unsustainable fiscal policies, the state is on its last economic legs. What does that mean?
- The state’s budget for an area 20% the size of the United States populated by fewer than a million citizens operates at a $3-4 billion deficit.
- Its Constitution has put a ring fence around Alaska’s over $50 billion Permanent Fund principle, requiring citizen support and a legislative super majority to access.
- The number of state employees is realistically unrestrained and their accumulating benefits meet or exceed private standards
- The governor has postponed payments to oil & gas investors for earned tax credits enacted by the legislature to encourage exploration and development and the future stream of state income.
- State revenue has continued to decline since the summer of 2014 (i.e. though companies like ConocoPhillips have continued, until now, investing in new or expanded projects); and, oil & gas investor/companies have begun to both leave the state and divest themselves of oil & gas assets.
- Meanwhile, note that the state depends on the oil industry for the majority of state operations and non-federal capital spending. The implication here is that the roads, bridges, parks, airports, port facilities, schools and countless social services would dry up and blow away, or freeze up, without the oil industry’s continuing interest and investment in America’s only Arctic state.
- The result of insufficient oil support of the state’s operations and infrastructure would be the crippling of Alaska’s world class commercial fishing industry, tourism and cruise ship industry, outdoor industries, etc. GCI communications is heavily dependent on a stable to growing population demanding telecommunications — both paid and “free landlines and cell phones” (i.e. subsidized by paying customers’ universal service fees). The company is determined to protect the bureaucracy and its welfare customer base by advocating its own solution to state solvency. Similarly, the Rasmuson Foundation, is supporting a recommendation for preserving the economy while a multitude of other interest groups pressure decision makers for money, not for limiting spending. Actually, there are a few organizations advocating the “right sizing of state government and making Alaska’s budget sustainable,” including: Alaska Miners Association, Alaska State Chamber of Commerce, Alaska Support Industry Alliance, Resource Development Council for Alaska. Together, these likely represent the majority of employed Alaskans.
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Alaska Gas Pipeline/LNG project: Adding Insult to Injury…Unbelievably!
Since today’s column focuses on the crisis of leadership, all eyes must turn to the elected leaders. While the legislative leadership is important and could be doing much more to resolve Alaska’s fiscal crisis, we turn our critical and focused eye on the Governor, in particular. For, as has been said, Alaska’s Constitution makes its governor the most powerful of all the 50 states.
About a year ago we wrote a column that dealt with what we referred to as a bombshell report by the Governor. We opined on what the Governor did that week:
- Alaska Governor released a “Summary Report on the Review of the Alaska LNG Project Process”
- The “review” should be read in context of his very personal transmittal letter sent to legislators.
- Above is a video he released yesterday.
- Here is a bearish oil price report provided by the Governor
- Here is the Governor’s proclamation calling for a special session to, among other things, establish a ‘reserves tax’ on industry investors applying to gas that is available but not committed to a market.
- Here is the Governor’s news release, discussing the above actions.
- Alex DeMarban’s ADN review of events.
- We think Alaska’s leaders may sometimes forget that sophisticated observers are watching, from all over the world! Here’s an example, our Australian oil and gas industry analyst friend who is quite candid about his view of Alaskan leadership and its LNG project.
- Here is our recent and highly relevant review of the Alaska investment climate.
So this report, last September 25, (i.e. with many other examples) became powerful evidence that Alaska’s Governor lacked many of the tools of a great, or even “adequate” leader when confronting a fiscal crisis. Instead of reaffirming support and good will with the state’s biggest investors, he threatened them with a reserves tax if they didn’t accede to the his timetable for construction of the most expensive construction project in the world: a $45 – $65 billion gas pipeline/lng project. Adding insult to injury, he requested they approve supplemental spending requests adding to the state’s multi billion deficit.
He has called, since then, a number of “special sessions” to try and have the lawmakers “do his will”. He demanded a special session last November/December, in particular, asking the legislature to deal both with his reserves tax wishes and another supplemental appropriation to purchase TransCanada’s equity interest in the Alaska gas pipeline/LNG project whose feasibility is even today unproven, adding more to the budget deficit. And he didn’t even provide them with an information packet before they had to cancel their pre-Christmas plans and head for Juneau.
From a leadership viewpoint, one notes that the LNG project is not even projected to begin operations — at the soonest — until 2025, far beyond the time when Alaska’s savings accounts would have been completely depleted to pay for deficit budgets — including the equity purchase into the LNG project.
A leader prioritizes. Sometimes a leader — like a parent — has to say, “No, child, we cannot afford it right now”. This leader, we have evidence to believe, is consumed by both dislike for oil companies whom he has blamed for his own LNG project failures over the years…and with an unbalanced, romantic and Quixotic image of himself as boss of Alaska’s big LNG project. Scroll down here for “Governor’s Background”.
Approaching the current time, Alaska’s governor has:
- fired a number of appointed volunteers serving on the board of the State’s gasline corporation, replacing them with his own, less qualified frends
- succeeded in increasing state equity ownership in the Alaska LNG project
- refused to create/promote a “fiscal certainty” packet of Constitutional guarantees this fall of 2016, as the project envisioned (i.e. why would investors put $45 billion or more into a pipeline/LNG project and then, after the investment is made, have Alaska revert to its old trick of increasing oil and/or gas taxes, even retroactively?”
- In recent weeks, along with his newly hired and wonderfully compensated CEO of the State’s gas corporation, the Governor signalled to the oil industry that they would be welcome to invest in the project but that their participation wasn’t essential
- suggested that the state could take over the gas/LNG project, owned and operated by a government consisting of temporarily elected and appointed government officials
- proudly proclaimed that the state could get “investors” to replace investment and expertise provided by three of the biggest oil & gas companies in the world who have successfully operated the giant Prudhoe Bay field for four decades
- demanded that the oil companies provide their proprietary, LNG marketing plans to the state or face the questionably legal expropriation (i.e. “lack of renewal”) of their long standing Alaska North Slope leases.
(CONCLUSION: UPPER RIGHT COLUMN)
Continued from lower left column….
We believe this governor has:
- continued to injure Alaska’s reputation as a reliable, “deal is a deal” investment climate.
- broken Alaska’s word with oil & gas explorers and producer by denying them timely payment of lawful credits.
- seemingly done everything possible to repel Alaska’s most important and faithful investors by 1) threatening them with higher and new taxes; and 2) demanding of them proprietary marketing information; and 3) using the bully pulpit to suggest their participation in a gas/LNG project is not needed; and more.
- used poor communications and a dictatorial attitude on the public, legislators and even state employees. This has resulted in growing legislative resistance to his leadership, growing public disdain for his unilateral actions and causing an unusual turnover of executive employees.
- reflected an abysmal sense of priorities and nonchalant sense of financial responsibility regarding risky, expensive, subsidy increasing investments in the LNG project when the whole, undiversified state is at the fiscal mercy of volatile commodities like oil and gas.
- is vigorously pursing a “go it alone” LNG project attitude when 1) the LNG commodity-delivered market price needs to be about three – four times the current $4.50/Mmbtu spot price in Asia; and 2) when there are nearly one hundred competing LNG projects around the world in the same or a more advanced state of readiness than Alaska’s; and 3) when the state’s leader, seemingly oblivious to competition, is doing everything possible to “nationalize” the gas project and perhaps the Alaska North Slope oil & gas leases when Repsol’s Argentina expropriation experience and Venezuela’s contemporary happiness should be telling a wise leader to avoid socialistic behavior.
If there was a significant profit to be made with an Alaska LNG line, I am confident that Exxon would be chasing it. They aren’t. And if Exxon’s shareholders don’t want the company losing money in an Alaska LNG mega-project, why should the shareholders in Alaska’s future, you and me, take such a risky gamble?
Our Conclusion: A Ray of Hope And Word To Elected Leaders
We did not need to belabor the Forbes and Wall Street Journal leadership practices and characteristics linked below. And, we did not need to repeat all of the studied observations by other opinion writers noted below as well. We put them there for those who care for the references.
What we do want to do is offer a ray of hope. If the leadership errors of this governor, partially described above and below are remedied, we can see a reversal of investor confidence, employment and economic vitality in Alaska. In general, the remedy to his errors is the application of wisdom, experience and good judgment to the significant challenges Alaska faces.
Similarly, the Legislature needs to Act. We know the leaders are concerned about maintaining their coalitions. We know that some have always operated on the assumption that to get what they want, they must give the other legislator what he or she wants. We know legislators are besieged, particularly in times of extreme plenty and extreme shortage, by every imaginable special interest pressure.
Nevertheless, this is not business as usual. The state is about to completely collapse due to lack of strong, seasoned, inspired, committed leadership. Our optimism lies in the principle that at times like these, good citizens rise to the occasion.
Our pessimism, were we not suppressing it, would lie in the fact that governors and legislators have given so many incentives to so many political, construction, labor, social and welfare constituencies that those beneficiaries will vote until the state collapses, for continued subsidized spending and unpredictable tax policies.
So, public officials, what’s it going to be? Rightsize right away, or let the Titanic continue to slip under the dark, cold sea of economic reality?
You wanted that prestigious job. You enjoy being called, “the honorable”. You enjoy the adulation, the pension and health benefits, the travel, the trappings of leadership.
So now, forget the trappings and be the leaders. Stare “survival” in the face with gritted teeth. Our pioneering forebears deserve your proper custodianship of their sacrifice and heritage. Your grand children deserve to inherit opportunity, not debt.
My optimism prevails. We must trust that you are up to the task. We are all depending on it.
A few days ago, on Independence Day, we recalled the sacrifice of our founders, asking themselves to do infinitely more than we expect of you. They overcame their crisis of leadership and so can you. You must sacrifice, but compared to theirs we know you will conclude it is really not too much to ask.
A year ago, we suggested that if the Governor and state mistreated their biggest, long standing investors long enough, they could come to regret it. We are reminded of that year-ago prediction in reading about the state’s current treatment of LNG project companies, who happen to be the state’s largest, long standing investors. Having worked for one of those companies and consulted over the years with the other two, I can only imagine what happens when patience wears out, when Alaska shoots itself in the foot for the final time, when the investors give up on an unpredictable, untrustworthy, unreliable, unfriendly state. Here’s what I wrote last September:
In fact, we would be not the least surprised to someday read an announcement from one or more producers to the effect that, “The governor has indicated his desire to own and operate an ANS gas pipeline/LNG system. We respect that desire and, accordingly, are withdrawing from our plan to construct such a project. Instead, we stand ready to sell the state the research and planning material we have developed and will support the governor’s efforts in any reasonable way. Our efforts had led Alaska closer than ever before to launching a successful ANS gas monetization project and we were completely on schedule with that effort, but for the governor’s demand that we spend additional time and money studying a 48″ pipeline alternative. The time honored adage that, ‘too many cooks spoil the soup’, is as true now as it was in the old days. Rather than face a continuingly critical state administration for what we believe has been our on-time, on-budget, good faith gas monetization effort, we conclude it prudent to transform our project support into support for the governor’s state-ownership idea, whatever that turns out to be. Meanwhile, we shall shift the majority of our focus now on investing in expanded throughput of TAPS, upon which the state government and the people of Alaska depend.” -dh
Today we reprint some of Ak-Headlamp’s comments and sources as partial evidence of our thesis today that Alaska is fully immersed in a “Crisis of Leadership”.
Other Crisis of Leadership References: Forbes, WSJ, Alaska Dispatch – Governor Defends, Alaska Journal of Commerce – Gasline Pres Grilled, Anchorage Daily Planet – Jenkins, Anchorage Daily Planet – Editorial, Medred – Reject Prudhoe, Must Read Alaska – Follies, Must Read Alaska – Reject Prudhoe, NGP – Brennan: Walker Stiffs Creditors, NGP – Governor Criticism Grows
- Tesoro Corporation said on Friday that it will sell to Tesoro Logistics LP (TLLP) its recently acquired oil storage and terminalling assets in Alaska for a total consideration of $444 million. The transaction is expected to close in two stages. The acquisition of the Anchorage and Fairbanks terminals is expected to close later in the third quarter once the Consent Decree with the State of Alaska becomes effective.
- According to The Hill, Activists and industry are lining up for what will likely be the last major battle over Arctic drilling during the Obama administration. Obama’s decision on drilling this year is especially important because it is the only chance to schedule lease sales for the next half-decade: if he blocks Arctic leases now, his successor cannot revive them before writing a new five-year plan. That fact alone worries Alaskan drilling interests, who say unilaterally blocking drilling in the American Arctic could drive companies to invest in countries with fewer restrictions. “The risk of not having it included now is that the investment would go away permanently,” said Rebecca Logan, the Alliance general manager.
- World Oil covered Sen. Lisa Murkowski’s comments on Outer Continental Shelf leases. “The problem is that right now, Interior has just two Arctic sales in its next Five-Year Program: one in 2020 for the Beaufort Sea, and one in 2022 for the Chukchi Sea,” Murkowski said. “To me, that’s a bare minimum effort, and a far cry from the area-wide sales that Alaskans have been asking for. This also comes after Interior has repeatedly delayed and canceled sales in the Arctic OCS in recent years, even though it is perhaps the most prospective offshore region in our country.” Murkowski also noted that a strong majority of Alaskans favor energy production in the Arctic and that Interior’s restrictive Five-Year Program runs counter to their support.
- Walker continues list of demands. The Walker administration on Thursday continued to fight Alaska’s major oil producers for details about how they will sell their Prudhoe Bay natural gas, refusing to approve an annual activity plan at one of the nation’s largest oil fields until it gets the information it wants. The Department of Natural Resources said it’s giving BP, ExxonMobil and ConocoPhillips “one final opportunity” to provide the information by Sept. 1, and to provide an explanation when it can’t. The oil producers have long reinjected the gas back into the ground to pressurize the reservoir and squeeze out more oil. BP has argued sharing such “commercially sensitive marketing information” with a potential competitor – the state — “raises significant antitrust concerns” under state and federal law. The Walker administration should practice what it demands and let Alaskans know how it plans to handle a “go-it-alone” method for AKLNG. Private entities shouldn’t be forced into revealing business strategies which jeopardizes market advantages.