Part IV: Can Alaska be a place where A DEAL IS A DEAL?

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

Is Alaska Flirting With The Last Gas Pipe Straw?

Dave Harbour

We had written a very long commentary which tried to shed light on the effect of currently discussed issues on Alaska investment climate competitiveness. We then delved into the effect various pending decisions could have on prospects for an economically feasible gas pipeline.

And we concluded that, as in Canada’s MGM case, investors would do the best they could until the day a straw “broke the camel’s back,” resulting in an unhappy press conference that catches everyone off guard.

Acknowledging to ourselves today that the whole political structure of Alaska is focused on resolving gas pipeline issues, we decided to not add our voice to the suite of cacophonous debates. After all, the symphony of special interests will sing and toot for their own ends no matter what we may think.

Instead, we will offer to readers who may find them interesting, rationale applying to current sub issues of the gas pipeline debates:

1. Efforts to force use of gas pipeline project labor agreements (PLAs), by LAW, will have at least several major effects:

Even if investors were to want PLAs, forcing them to use PLAs by law makes their bargaining position with unions weak. To get the best deal for shareholders and the lowest transportation costs for consumers and the highest royalty and tax returns for government requires the investors to secure the most reasonable and competitive possible employee costs (i.e. which we are told could approach a third of the $45-65 billion project cost). If unions which will negotiate PLAs with investors, know there will be no pipeline without PLAs they can hold out for exorbitant hourly rates and benefits. Indeed, their negotiations could push the project into a competitive wilderness from which no viable project would emerge.
PLAs will not, as advocates claim, further the hiring of Alaskans. Virtually all competent and qualified oil & gas backgrounded Alaskans in this lightly populated state are now employed. It would be in the interest of investors to hire as many long time, qualified Alaskans as possible. Having a several year boom-time of pipeline jobs will — as with the Trans Alaska Pipeline System (TAPS) in the 1970s — suck much qualified talent away from existing Alaska employers forcing them to hire 1) less qualified Alaskans, and/or 2) immigrants to Alaska. After construction, the long term, qualified Alaskans who left normal, private sector jobs will be faced with taking less attractive jobs in the normal market or moving away from the state to oil and gas projects that demand more experienced talent. The real beneficiaries of government-forced prevailing wage/PLAs are unions that can expand membership, collect dues and use that wealth, in part, to support their favorite political candidates. Accordingly, lawmakers should be wary about interfering too much with the invisible hand of economics and free enterprise less they reap unintended — rather than utopic — results. In political debate, union apologists, claim that a union negotiated PLA still allows non-union companies to bid on pipeline work. While true, the larger effect is to raise the hourly wage scale of employees to an artificial, negotiated level above competitive market rates which both union and non-union employers would have to pay. It certainly does “even the playing field” between union and non-union companies, making it no more advantageous to hire competitive non-union than union contractors.

2. “Pay-offs”. We have warned over the years that the singular focus of “monetizing Alaskan resources” is in the constitutional best interest of Alaskans. With maximum monetary value derived from natural resources, the legislature and governor can then allocate the money to public uses. However, special interest advocates claim that the gas resource must –by law — provide more than monetary benefit to Alaska. Some rural politicians have even said they would only support current gasline legislation if their remote communities receive a direct benefit of the pipeline. Monetizing Alaska’s gas to help the state continue delivering programs throughout Alaska is not enough. This is where politicians encounter a thousand rabbit trails, seducing them into tempting areas far removed from simply monetizing the gas. For example:

Alaska communities not near gas pipeline facilities will argue for funding socialized energy programs in their areas.
Some might ask for propane to be split off from the gas stream and provided to them via subsidized projects.
Some will ask for subsidized LNG/barge distribution projects to serve coastal communities.
Some will want subsidized LNG storage and local distribution facilities, because their cost will be exorbitant.
The pipeline project involves a state agency (i.e. Alaska Gasline Development Corporation {AGDC}). That will usher in other challenges, including both subtle and bold requests from public officials, friends, family and private influence leaders to provide employment, contracts and other favors involving public funds. Without a formal audit procedure, public monies and project performance are at risk.
Then, there will be those who will politically harass investors (i.e. oil and gas companies) to subsidize the cost of natural gas, LNG and propane to their communities in return for not molesting them with tax bills during legislative sessions or tax referenda at any time.
Many of these unanticipated burdens accompanying state participation in a private project can not only lower state income but also increase state operating costs.

Our Gentle readers can see why we decided against publishing a longer treatise on this matter today, as the Alaska Senate and then the House approach decisions on Alaska gas pipeline Senate Bill 138. There is much more that could be said, but it could only add to an impression that we are “just being negative”, rather than what we believe we actually are: optimistic by nature, but realistic.

Even after reading this summary of current challenges, we believe reasonable minds will conclude that the weight of government interference in a private enterprise project inversely affects the project’s efficiency and competitiveness.

So, question: rather than just be relegated to the critics’ peanut gallery, what would we be inclined to do were we to have absolute power?

Answer: We would sell oil and gas leases in the private market for the highest price. We would loudly proclaim that, “in reliable Alaska, a deal is a deal and we put great value on protecting our reputation”. While our constitution gives us the sovereign power of taxation, we are loathe to use that power selfishly, negatively or in ways that diminish our integrity as a respected, sovereign state. We would endeavor to never change the tax/royalty/regulatory rules of the game affecting an investment for at least 20 years–except to moderate the impact of those burdens in response to logic and our competitive position with respect to competing markets. We would control the nearly insatiable appetite for increased spending beyond our means, knowing that run-away spending could force us to raise tax burdens and decrease our competitive ability to attract investment. We would not impose any unnecessary costs (i.e. “must haves”) on energy projects that diminished the maximum monetary returns; we would then be free to consider use of those maximum returns for social or capital needs of our citizens.

In this way, we would seek to not add an unnecessary and burdensome straw to the back of a project that needed every possible advantage to compete in the world energy marketplace.

We would not risk adding one single incremental project cost that could kill a project.

We would not flirt with disaster.

And that, Dear Reader, would lead us to become a place in the world where investors have confidence that, “a deal is a deal“.

(We invite comments!)

Today’s gas pipeline related energy links from the Office of the Federal Coordinator: