1-5-15 Alaska Is A Betting State – Aussie Oil & Gas Analyst Review & Outlook

You May Not Be A Betting Man or Woman, But Alaska Has Become A Betting State

For years Alaska leaders have shunned warnings about overspending and being too dependent on volatile oil prices.  How many still think placing bets on the volatile gas market via equity ownership in an LNG project is wise?

Commentary by

Dave Harbour

Today Standard & Poor's and Moody's credit rating agencies lowered the credit rating of the State of Alaska.  

The negative outlook expressed by the agencies applies not only to general obligation debt, which pledges the full faith and credit of the state to bondholders, but also to revenue bonds and other "moral obligation" debt — like that which may subsidize the building of a government created gas utility in Fairbanks.  

We have long predicted this turn of events and have also advised readers that political realities and human nature would not likely result in spending restraint until elected officials were faced with a head-on crash into a fiscal brick wall.  

While today's reports were troubling enough, they do not fully explore the negativity of Alaska's budget imbalance.  

Just imagine how continuing lowering of creditworthiness affects the desire to invest in Alaska by major oil and mining companies!  Or tourism and commercial fishing companies!  Or those considering the buying or building of new homes or offices!  

Will not thoughtful investors be thinking, "Gee, if Alaska can't balance its budget and is within a few years of spending all of its available savings and still owes the state employee retirement funds billions of dollars there's no doubt that state and municipal tax hawks will want me to pay more for their lack of planning!"  

Today's credit downgrades and negative outlooks by credit raters is either step one toward establishing reasonable budget practices in Alaska, or the first step toward an economic depression that could be more severe than the one Alaska experienced in the late 1980s.  

Back then, Alaska and its producers suffered from low oil prices but was producing a huge volume of oil in a full pipeline that helped the economy survive, albeit in rags.  

Today:

• oil prices are low,
• Alaska's dependence on oil remains close to 90%,
• Alaska's oil pipeline is nearly 3/4 empty,
• the State's available savings are fast depleting,
• half the State operating budget is subsidized by plundering savings accounts and, finally,
• elected officials are focusing on expanding taxes on Alaska investors at a time when their economic wellbeing is already threatened.  

Alaska's Institute of Social and Economic Research (ISER) has been warning Alaskans and their elected leaders since the early 1990s to control spending, to develop a sustainable budget, to create a "safe landing" for a state economy overly dependent on the historic volatility of energy prices. 

We will be very disappointed in any leader who begins a scapegoat tirade to the effect that: "We didn't know", or, "It's big oil's fault."

Finally, anyone who still thinks that Alaska should be owing equity interest in a gas pipeline that has not even been proved economically feasible (i.e. betting on the price of gas in a historically volatile energy industry) is wishing the state to become even more dependent on volatility, risk and purely lucky betting.  Meanwhile, equity interest requires, "putting up the ante", as costs to determine feasibility increase.

What if the State continues its socialistic, quixotic quest for ownership of the State's private energy industry?

Some will say, "Don't be so hard on the State; we're not gamblers, we're just taking partial ownership."

To that, a wise observer might respond, "You say you are not gamblers.  We investors already know what you are; we're just waiting to see to what degree you continue your irresponsible behavior."

The truth hurts, doesn't it? 

Maybe thoughtful decision makers will review their history of increasing taxes to create and bloat new, unsustainable spending programs.  Maybe they'll analyze why they've doubled the size of government in the past few years.  Maybe they'll realize their undisciplined practices have been the very reasons pressure is now building to increase taxes.

For, from an investor's viewpoint, Alaska's volatile tax/spending structure is not inviting.  Alaska's retroactive taxation history is downright highway robbery.  

You'd think that a place with the most harsh climate, most difficult geography, highest labor costs, and highest logistical prices and history of mistreating investors would be bending over backward to retain spending and taxing discipline.  

You'd think that such a State — at least from this day forward — would want to be known as a place where, "a deal is a deal."

Energy Perspectives From Our Anonymous Energy Analyst Advisors in Australia and the Mid-Atlantic States:

Yesterday, we brought you the 2016 oil and gas perspective from our Mid-Atlantic, anonymous  energy analyst friend (Scroll down).  Today, comes a perspective half a world away, from our anonymous Aussie oil and gas analyst friend who understands the Alaska and Canada energy picture a well as any North American.  You can also find his blog here….  -dh

Introduction

As well as making prognostications, the start of a new year is a time to look back and learn.  The top 5 lessons for this blogster from 2015 were as follows:

1. Oil supply in the face of falling prices has been far more resilient than we expected.  This prevails across the globe – in the tight oil fields of the USA, the old Russian fields, in a falling-apart Iraq, for small Mom and Pop stripper wells, etc.  This is partly due to good old fashioned ingenuity in the face of adversity – and partly due the extreme prisoner's dilemma that the industry faces (everyone should just cut production by 1-2% and the market would re-balance – but why do so if others won't?).
2. The US gas price continues to be ultra-low and well below break-even levels, even in the face of increasing exports by pipe and soon to be by boat.  And a massively lower rig count.  For 2015 this was arguably due to the afore-mentioned resilience combined with the very mild US winter.  We still expect US gas prices to rise materially – but as John Meynard Keynes famously said – "The market can stay irrational longer than you can stay solvent.”
3. Don't believe in the conspiracy theories of an efficient Machiavellian OPEC that is employing smart strategies to destroy US and/or Russian competition.  These guys cannot organise their equivalent of a p*ss-up in a brewery – the Haj.  OPEC is Saudi Arabia and there is a largely hidden "Game of Thrones" likely afoot in the Kingdom over the succession.
4. "Events" in the Middle East in 2015 did not disrupt oil markets in meaningful ways – surprisingly so compared to other times in the oil market's history.  This may of course change (see 3 above) – the key is where the "events" occur.  Syria is not a material oil producer.
5. The "Golden Age of Gas" has yet to arrive – and indeed in many markets gas is being squeezed between coal and renewables.  LNG markets have accordingly been weak and their outlook is poor in the medium term.  It remains to be seen whether policy mechanisms will change this – the evidence is scant to say that they will, even in mature countries like Australia.

Commodity prices

Crude prices finished fairly flat yesterday, with Brent closing at US$37.27 and WTI at US$36.76.  However, during the course of the trading day there was much volatility, as markets tried to balance bullish news from Middle Eastern "events" (i.e. the shocking escalation of Sunni/Shia tensions induced by the KSA's recent executions) and bearish news from Chinese stock-market falls.

Henry Hub closed down 2% at US$2.30.

LNG and international gas

With US LNG exports imminent, weak Asian demand and an "anybody but Gazrprom" buyer mindset, Europe is the destination of choice for the global LNG market at present.

However, we note that the warm winter weather being experienced in the US is also present across the Atlantic, and this, combined with economic weakness, has led to European gas storage levels being at 6 year highs.

Company news – AWE

AWE announced today that it (and partner Origin Energy