BP and Commonwealth North: Two economic reports offer "Good News for Alaska"

Joe Beedle, Alaskanomics, NorthRim Bank, Commonwealth North, Photo by Dave HarbourMead Treadwell, Lieutenant Governor,Alaskanomics, Commonwealth North, Photo by Dave HarbourCommonwealth North hosted its 9th annual Alaska Assets Review on February 18. The program recognizes that as shareholders of “Alaska Inc.” the citizens of Alaska need to be informed about how the assets of their company are performing. This year Northrim Bank President and CEO Joe Beedle (NGP Photo-L) and former Lt. Governor Mead Treadwell (NGP Photo) presented the performance review.  Read full report…. 

BP’s Annual Energy Outlook also appeared this week; it has become one of the most reliable sources on the topic of the future of energy.  According to this new edition of the BP Energy Outlook 2035, global demand for energy is expected to rise by 37% from 2013 to 2035, or by an average of 1.4% a year.  (Our continuing question is: with greater worldwide shale production will Alaska cultivate a competitive investment climate benefiting the marketing of its remote natural gas and oil reserves?"

Reader reaction to our Tuesday column, "If I were President….", from retired Executive Director of the Alaska Oil and Gas Association, Bill Hopkins: "Dave Harbour for President! Love your executive agenda, Dave.  GO, trooper!"  Our readers will be relieved to know that we respectfully declined Bill's nomination.  -dh

Governor Bill Walker, Interior Energy Project, Fairbanks Natural Gas, Photo by Dave HarbourGovernor Sean Parnell, Interior Energy Project, Fairbanks Natural Gas, Photo by Dave HarbourAlaska's Interior Energy Project (i.e. IEP, natural gas to Fairbanks area.  Follow Legislative action.).  Below we have the copy of an opinion expressed today by Ray Latchem, Alaska's longtime expert LNG entrepreneur.  We believe the momentum behind Governor Bill Walker's (NGP Photo) revised IEP created during Governor Sean Parnell's (NGP Photo) administration is almost unstoppable at this point.

We do wish, however, that other creative ways of inducing the private sector to take on a similar project had not been so easily dismissed by decision makers.   (See our IEP update page.)  -dh

… consider adding an alternative move the governor could take that would achieve the goal of lowering energy prices in Fairbanks without costing the State a dime….

Instead of spending cash that's in short supply, make some Prudhoe Royalty gas that is abundantly available for free if someone will move it south to Fairbanks.

The Governor and legislature can do this without costing the State anything. This is how several Middle East LNG plants got started; the states made the gas available for cheap. It draws developers. 

AIDEA has already spent the money to build the gravel pad for the LNG plant on the Slope. Let them contribute this to the effort. There are a couple of other improvements they could add to make it more attractive.

Latchem raises a valid point; more demand and less supply results in higher prices.  Note that South Central Alaska consumers have likely paid hundreds of millions more than necessary for Cook Inlet natural gas as the result of a short sighted and tragic 2006 decision by the Regulatory Commission of Alaska that rejected Henry Hub pricing as a basis for CI gas supply agreements.  Alaska decision makers should put more emphasis on the counsel of experienced Alaskan energy players like Latchem.   (Link to earlier Latchem correspondence re: IEP.  -dh   

Another issue that needs discussion is Cook Inlet gas. It is trading at multiples of HH pricing. This actually costs South Central $MMs. Adding additional Interior energy loads to this market will only reinforce the gas pricing relative to competing oil, rather than gas on gas like HH. If the State encourages CI gas to go to the interior, they are in effect costing Anchorage a lot of money. When this becomes public in Anchorage, the notion of tapping Prudhoe gas for free to Fairbanks will be quite popular. Whisper this into the Governor's ear. Anybody doing anything with PB gas should be given a metal. 

I didn't agree with SB23, but now that it passed and more than $15MM has been spent, they need to seek competitive bids to finish the supply chain.  AIDEA should not own or operate the plant; leave that to those efficient private operators. They can provide low cost financing, the pad site, etc. things that will reduce the bid prices they receive.

The reason AIDEA should provide the financing is that none of the users in Fairbanks are willing to sign a take or pay agreement that ordinary lenders require to address the market risk associated with developing the LNG plant.

AIDEA's pad site could also host other gas development projects. Methanol production is only one. PB gas field is one of the few of its size that doesn't have a petrochemical complex. 

It's time to unlock PB gas for something other than local consumption. Things happen very slowly with PB gas. It was first produced for field consumption about 1975. It took another 14 years before it was made available to Deadhorse next door. For 14 years Deadhorse ran on oil while atop 27 TCF of gas. 

We put forth a plan that would have gotten PB gas to Fairbanks this year, but AIDEA selected a much larger but less experienced developer in what had to have been one of the most convoluted processes ever. The experiment failed. Now they should pick up the pieces and what's left of the money, get rid of the inexperienced consultants, ask experienced developers what type of structure would produce the most competitive price and move forward.

The solution is simple. Start with the cheapest wellhead gas price: free for so many years. This saves the Interior money and will limit the draw on the already over priced CI gas. So South Central benefits, too.

Next, use AIDEA's pad site they bought from us to be a host site for any small scale gas developments, starting with an LNG plant to supply the Interior.

I'm pretty sure the truckers don't want any help from the State, they will stand up for the opportunity to haul an extra 10 or more loads per day without any incentives. The State is providing them the road to run on, like it would provide the pad to the LNG developer.
FNG already is set up to receive LNG, but IGU and GVEA will need a receiving and storage site. GVEA purchased land in North Pole for this.

…

I could go on, but what's the point.  Alaska still has a lot of money and the course is set to spend it. But I wonder, if (an economist) did a study that showed adding more captive demand to the CI gas supply resulted in every person in South Central paying $100 more than they would if there were fewer buyers in that market instead of more, that each of those people wouldn't prefer to tap PB gas instead.

Then (the economist) could study what happens when you actually do tap the gas like we did in 1989 when first gas was delivered to Deadhorse.  Deadhorse has saved $MMs, cleaned up the air, etc. It was a completely private development. 

Commonwealth North Annual Assets Review

Posted: 18 Feb 2015 06:24 PM PST

Commonwealth North hosted its 9th annual Alaska Assets Review on February 18. The program recognizes that as shareholders of “Alaska Inc.” the citizens of Alaska need to be informed about how the assets of their company are performing. This year Northrim Bank President and CEO Joe Beedle and former Lt. Governor Mead Treadwell presented the performance review.

A bit of a history lesson on the reason Alaska has the wealth of assets that it does. During the statehood debate, it was recognized that the state’s population would likely never have the critical mass to finance government through conventional means employed by other states, primarily per capita taxation. In recognition of the need for Alaska to have means to produce its own revenue, the state was granted 104 million acres of land and mineral rights to significant acreage on federal lands. From this, it was felt that Alaska could build and sustain an economy and pay for necessary government services. The annual program tracks the performance of Alaska’s assets, including natural resources, financial assets and enterprises.

The full report and presentation can be found at www.commonwealthnorth.org. A few highlights of the discussion are below.

Alaska's natural resources are abundant and a large part of Alaska's economy.

  • The tax revenue from fisheries has increased and the industry is strong, but there is a potential challenge ahead because not all of last year’s harvest has been sold.
  • Within the Division of Mining, Land and Water, Alaska’s land position is strong. The state had 100.4 million acres in FY2014, which does not include the 65 million acres of submerged land acquired at Statehood.
  • There are five area wide oil and gas lease sales a year. At the most recent sale in November 2014, 300 tracks were leased for $60 million. There is encouraging development occurring on the North Slope and in Cook Inlet.

Financial assets are an important topic of discussion because of the budget issues being seen in Alaska.

  • The Permanent Fund Corporation is strong. In FY2014, the fund saw a 15.5% return, which was only slightly lower than the 15.7% benchmark. There are many investment opportunities that are doing well and the corporation is looking to expand into real estate outside of the United States.
  • The Constitutional Budget Reserve is one of the options that could be used to bridge the budget gap. It currently holds $12.8 billion.
  • Alaska Mental Health Trust Authority is utilizing their land well and making dividends. The state is served well by their investments.
  • Alaska Industrial Development and Export Authority has paid $350 million in dividends to the state since its inception.
  • Alaska Housing Finance Corporation paid $30 million in dividends to the state during FY2014. Energy and low income housing programs have benefited Alaskans around the state.

The state’s enterprises are facing challenges, but are working to stay strong.

  • The Alaska Marine Highway operates in the red, but is essential for Southeast Alaska.
  • Alaska Energy Authority is also operating at a loss but the situation has not changed significantly in the past few years.
  • The Alaska Railroad shows a small net revenue, but is facing some major challenges in federally mandated safety regulations. Its income from freight is strong and will continue with increased activity on the North Slope and in Cook Inlet.
  • The International Airport System faces challenges, but the fact that Anchorage has the fourth largest cargo airport in the world helps add revenue.
  • The Alaska Aerospace Corporation is also challenged, but lawmakers understand its strategic importance and will continue to fight for its survival.
  • The University System has a strong endowment and the investment is doing better than recent years. The system has some challenges ahead but will continue to be a priority because additional human capital is necessary to grow Alaska.

To wrap up, Alaska is challenged, but it is also well funded and well endowed. Many people are working on ways to find solutions to the state’s fiscal problems. Commonwealth North has produced a report for Alaska’s leadership. This report highlights some opportunities to work through the fiscal problems and ways to fix the budget gap. This report, Alaska’s Operating Budget: Critical Crossroads, Choices and Opportunities will be presented in Anchorage on February 25 at a lunch hosted by Commonwealth North.