9-2-16 Either Way, Alaska’s Investment Climate Is Damaged

Commentary

Is Alaska’s bureaucracy about to take control of both the great Prudhoe Bay oil & gas field and one the world’s largest, most remote, highest cost pipeline/LNG projects without proven economic feasibility? 

Alaska Governor Bill Walker. NGP file photo by Dave Harbour

Since taking office nearly two years ago, Alaska’s governor, has been marching toward accumulation of 100% equity and management control over what may well be the largest construction project in the history of North America, the Ak-LNG project; it is currently, not proven to be economically feasible.  Today, we’ll review his effort to possibly take control of the great Prudhoe Bay oil and gas reservoir, as well.

Governor Bill Walker, with a close cohort of fellow attorneys and politicians, has succeeded in separating public money from municipal taxpayers over the years — ostensibly to put new oil & gas property tax revenue and job opportunities within their borders — by promoting LNG projects that never materialized.

After taking the helm of the 49th state’s ship of state, we believe his actions may have so intimidated, frustrated and alienated his state’s largest investors that they are releasing hold on the $45-50 billion pipeline/LNG project — admittedly with a good deal of help from low oil & gas prices and a world energy market awash in LNG.  (See Keithley and Saddler comments right column.)

While LNG demand is sure to arise again, now is not the time for a big supply, ultra expensive Alaska project.

To their credit, the companies are taking the ‘high road’, though what other road would intelligent, regulated entities take?  They have complimented the governor on his creativity and are being diplomatically courteous in the midst of an environment of fiscal crisis and high emotions surrounding Alaskans’ 45-year dreams of a North Slope gas transportation project!

Yes, it is a dangerous socio-economic environment for politicians and investors alike.  By the thousands, industry workers are losing their jobs, having hours reduced and/or taking reductions in pay.  Special interests from entitlement beneficiaries, unions, NGOs, municipalities, and every other small and large business imaginable are hitting on government officials to take action benefitting them.  Oil and gas companies are struggling to survive low prices, difficult political challenges and a multi-scores-of-billions-of-dollars of existing investment that must be safeguarded as well as possible.

And, it is an election year!

The governor and his hand picked Alaska Gasline Development Corporation board are preparing to take charge of the massive, complex, gas pipeline/LNG project, though this is a time and place where the true experts “fear to tread”.  (Where one’s own money is at stake, one is likely to be more prudent than when one can partake of OPM, other people’s money, public money, in a risky pipe dream quest.)

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Through a series of unfriendly demands on industry since he took office, Walker seems to have developed an aggressive scenario of power acquisition wherein he might also wrest control of the lion’s share of Prudhoe Bay production from the Lessees, Alaska’s largest and most reliable investors.   By his deadline of September 1 (i.e. yesterday), we were supposed to learn if the North Slope producers would bow to his demands for proprietary gas marketing information that could violate antitrust statutes.  If the data was not provided and his administration refused to approve the Prudhoe Bay Plan of Development (POD), involving the unit’s 26 Tcf of natural gas reserves, a number of bad outcomes could result, as we reported here Wednesday, and earlier, on a number of occasions.  Alaska Public Media describes the process.  Alaska Joournal of Commerce analysis.

Alaskans hoped two years ago that a positive oil tax revision would attract enough investment to solve most of Alaska’s impending fiscal crisis.  Under the circumstances (i.e. low energy prices beginning as Fall approached in 2014) Alaskan companies seemed to be placing the state on a higher priority level than their other operating areas, for capital and other investments.  The state’s economy was surprisingly robust even as low prices began to settle in by winter.  We regarded oil companies’ continuing investment as a remarkably “good faith”, voluntary response by the producers to the enactment of the tax reform legislation.

The possibility that Alaska would ultimately reject the POD could deal a fatal blow to some good investment plans that could have taken the edge off of low oil prices and a state operating budget that is almost 90% dependent on oil taxes and royalties.

Suppose that even lacking the proprietary, Prudhoe Bay gas marketing information he demanded, Walker listens to an appeal, backs down, pivots and approves the development plan after all?

Either way, he will have damaged the state’s investment climate–maybe for a generation.  Even if the state’s bureaucracy reverses its direct attack on major investors, and ultimately accepts the POD, this latest threat against Lessee interests will have provided potential new investments with a significant new risk factor: “a risk of expropriation”.

Remember that Repsol came to Alaska several years ago after leaving Argentina where it had experienced the ravages and REALITY of expropriation…and has now closed its Alaska office.

Walker could well be leading what’s left of the state’s damaged investment climate to the point that serious resource wealth developers — and the thousands depending on their decisions — will conclude, “Well, we love Alaska’s potential but after considering the remoteness, high labor and logistical costs, rough climate and half a year of darkness — now complicated by hostile state and federal administrations — we’ve concluded now is not the time.  Sorry, but it’s a little too rich for our blood!”

So could lack of investor commitment to the state result in an attitude change on this governor’s part?  Or, will the slowing economy merely clear the way for him to more quickly and more fully RISK IT ALL to acquire and socialize the means of production, transportation and in-state distribution of energy?

The Governor’s demand for proprietary, Prudhoe Bay gas marketing information likely asks for information not legal for companies to disclose.  It represents a “changing of the rules of the game after investment decisions have been made,” in our view.  It also follows on top of his AG’s decision this week to join as an amicus in an unrelated lawsuit against ExxonMobil.  Bad timing.  His current demand for proprietary marketing intelligence also comes on the heels of:

• threatening North Slope producers during the last year with a predatory, gas “reserves tax”;
• a demand that producers perform an additional gas pipeline sizing study that cost millions and delayed the project by almost a year;
• refusing to allow some state officials to sign mandatory, LNG project confidentiality agreements;
• exercising overreaching influence on “independent” agencies of state government concerned with inter- and intrastate gas pipelines, LNG export and local distribution;
• hiring cronies for highly compensated state oil & gas related positions, contracts and consulting;
• vetoing legislation giving legislators ex officio seats on the Alaska Gasline Development Corporation board of directors;
• refusing to provide industry investors with the fiscal certainty they require before engaging in any large, new gas marketing project; and
• not giving credit rating agencies sufficient reason to maintain a premium rating for Alaska’s increasingly unsustainable economy, etc. (Moody’s, S&P, Fitch)

We have also heard from some of our small producer readers, mostly in the Cook Inlet and Interior on shore areas, that the administration had created administrative as well as budget obstacles to the state’s obligation to provide tax credits as promised in state statutes.  The credit incentives were designed to increase both 1) investment in the state, and 2) additional gas reserves to create reliable, long-term power and heat for the most populous parts of the state.

It is too late to “cry for Argentina and Venezuela”, places where socialist leaders sought to bridle free enterprise and control the means of production, transportation and internal distribution of energy.  It is not too late for all Americans to join Alaskan citizens in crying for the great promise of Alaska that is now being systematically dismantled by dangerous decisions of the current Alaskan governor (and, as we have observed, the current federal administration and its predecessors).

Better yet, citizens should put away the handkerchiefs and rededicate themselves to taking back control of a public process gone awry.  After all, that’s what our ancestors did for us and what we should be doing for our children.

Right?

-dh

Note:

We are always open to factual corrections, for our highest aim is to create and maintain accuracy in the extensive, multi-decade archives of Northern Gas Pipelines.

As to our commentary, we also invite both corrections of fact and thoughtfully prepared response commentary.  Thank you for being a Northern Gas Pipelines reader!

-dh