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In a recent editorial, Senator Kevin Meyer touted the importance of the recently constructed and to be constructed energy projects around Alaska. He stated that there are 66 projects in the pre-construction phase and 58 projects under construction or completed. That’s 124 projects supported by legislators from around the state, 124 projects where legislators brought home the bacon, 124 projects that helped legislators get reelected. Regarding those projects, Senator Meyer suggests that it is “important to monitor the state’s investment. The legislature must remain vigilant, as granting money without strong oversight, review or audit can sometimes be more harmful than investing none at all.”
The problem is that the legislature failed to use the same vigilance, review and analysis when approving the projects. Projects were placed on the Legislature’s renewal energy project wish list with little or no analysis of the future viability of those projects. Most were merely ideas without any analysis of the long term viability of the project after it gets built. Most were not even required to submit a business plan that could show the long-term economic viability of the project.
The result will be that most of the approved projects will fail from an economic standpoint no matter how much vigilance the legislature puts forth. You can’t make a poor project successful merely by auditing it to death. You will, at least, be able to record your own failure in approving the project in the first place. The old adage “fail to plan and plan to fail” will once again raise its ugly head.
As with any appropriation, there is some value in the approved projects. Some projects actually put forth viable business plans and would have been approved on their own merit if the legislature had done the analysis they should have done before approving the projects. The projects will probably succeed because they can prove, at least on paper, that they will be successful and economically viable in the long-term if built. For those projects, I congratulate them for their diligence, their preparation, their analysis, and their willingness to do what it takes to ensure the successful viability of their project. For the rest of the projects that were approved without the proper preparation, without the proper analysis, without a business plan, good luck. Perhaps another old saying “by the luck of the draw” will be your story. Perhaps you will be successful inspite of your own poor efforts.
And to the legislators that approved the 124 projects without the proper analysis, if you approve any more renewable energy projects, at least make sure they have submitted a viable business plan. Even an optimistic business plan, which it inevitably will be, is better than none at all.
My prediction is that 10 percent of the approved projects will clearly succeed, 50 percent will fail, and 40 percent will be hoping for “the luck of the draw.”
Sunday, October 9, 2011
Thursday, September 22, 2011
Loan Guarantees and Pipeline Economics
In a recent letter to Governor Parnell, Alaska Senator Mark Begich stated that it would be difficult for Alaska’s congressional delegation to get an increase in the federal loan guarantees anytime soon; so, Senator Begich proposed that the state should consider loan guarantees for the remainder of the debt that the federal government would not cover – in the realm of $9 billion in loan guarantees. The problem with his proposal is that it requires a substantial amount of legislative energy, time, and effort and does nothing substantial to change the economics of the gas pipeline.
Loan guarantees tend to reduce the cost of debt and consequently reduce the tariff. This is good, but it reduces the cost of debt only by a small margin making only a minor change to the tariff.
The loan guarantees are important to the pipeline builders, but they do little to create incentives for the shippers. The risk to the shippers is substantially unchanged. The State of Alaska needs to look for solutions that reduce the risk to the shippers and solutions that make a substantial reduction to the tariff and thus increase the economics of the pipeline.
I have two recommendations regarding how to change the economics of a large diameter pipeline: one for the Alaska portion of the pipeline and one for the Canada portion of the pipeline.
Alaska Portion of the Pipeline
Regarding the Alaska portion of the pipeline, I recommend the State of Alaska fund the equity portion of the pipeline, take a debt rate of return, and not start receiving payment on its investment until the original debt is paid off. This funding mechanism could take the form of a financial interest or an ownership interest. That could be determined by discussing the proposal with companies that might want to participate in the ownership of the pipeline.
The benefit of this proposal is that it would change the economics of the pipeline and reduce the tariff more than any other single proposal that has been put forth so far. Combined with other risk reduction actions, it may be sufficient to move the gas pipeline forward.
The cost of this proposal would probably be up to $10 billion for a success scenario but less than $2 billion to see if it would be likely to succeed. The risk capital would be invested to develop a proposal and hold an open season. If the open season was successful, then the project could move forward to a FERC certificate. It is possible that up $3 billion would have to be expended to get to a project sanction decision, but this capital would only be expended after a successful open season and signed precedent agreements from the shippers.
One hundred percent of equity contribution should be invested in the Alaska portion of the pipeline only. That way Alaska gets the full benefit of the investment, and the tariff on the Alaska portion of the pipeline sees the greatest impact, thus providing cheaper gas for Alaskans.
If Alaska decides to make such a commitment to the pipeline, Alaska should approach the federal government to see what they can do to support Alaska’s commitment. The two things Alaska should ask for are 1) Alaska’s fair share of the revenue from federal offshore development, and 2) Alaska should ask for the chance to explore in ANWR.
Regarding AGIA and TransCanada, Alaska should get TransCanada to either agree that the current AGIA plan is uneconomic or get TransCanada to waive their rights to damages under AGIA in exchange for the opportunity to participate in the Canadian portion of the pipeline. I am fairly certain that TransCanada would not want to own a piece of the Alaskan portion of the pipeline under to above plan. I am also not worried about TransCanada threatening to sue under AGIA. It is clear that the present plan is uneconomic; so, there will be no liability under AGIA if TransCanada does not agree to waive their rights.
In addition, contrary to AGIA’s capital contribution, Alaska would get a return on its capital investment and future generations would receive the benefit. Consider the investment a savings account for the future when Alaska may need the return.
Canada Portion of the Pipeline
TransCanada has proposed a 70/30 debt equity ratio (with some modifications). They propose to invest 30% of the cost of the pipeline in equity. The equity rate of return on the pipeline will probably be greater than 12%. The cost of the debt, on the other hand is closer to 5% depending on who the borrower is and their credit rating. Clearly it is better to have more of the pipeline funded by debt and less by equity because the return on the equity is more than twice as expensive to the pipeline as the debt.
Alaska should try to get TransCanada to agree to an 80/20 debt equity ratio. This will lower the tariff by a certain amount and save the State of Alaska and the shippers over the life of the pipeline billions of dollars. In the alternative Alaska should argue to the Canadian government for an 80/20 debt equity ratio. Alaska should also argue for a return on equity of 12% or less on the Canadian portion of the pipeline. Once again this would lower the tariff and make the pipeline more economic. These two terms are not unreasonable. Both were given serious consideration during the initial pipeline negotiations with the producer group.
As a reminder, gas pipeline economics is a major element of achieving a successful gas pipeline, but there are many more elements that must be addressed to move the project forward.
The issues that need to be addressed are:
1) Fair oil and gas taxes
2) Long term fiscal plan
3) Short term annual capital and operating budgets
4) The permanent fund, its present and future use
5) Gas pipeline economics (discussed in this article)
6) Exploration and filling TAPS and the Gas Pipeline
7) Fiscal certainty/stable oil and gas tax environment
8) Point Thomson (hopefully this will be resolved soon by the State of Alaska and the Point Thomson owners)
Loan guarantees tend to reduce the cost of debt and consequently reduce the tariff. This is good, but it reduces the cost of debt only by a small margin making only a minor change to the tariff.
The loan guarantees are important to the pipeline builders, but they do little to create incentives for the shippers. The risk to the shippers is substantially unchanged. The State of Alaska needs to look for solutions that reduce the risk to the shippers and solutions that make a substantial reduction to the tariff and thus increase the economics of the pipeline.
I have two recommendations regarding how to change the economics of a large diameter pipeline: one for the Alaska portion of the pipeline and one for the Canada portion of the pipeline.
Alaska Portion of the Pipeline
Regarding the Alaska portion of the pipeline, I recommend the State of Alaska fund the equity portion of the pipeline, take a debt rate of return, and not start receiving payment on its investment until the original debt is paid off. This funding mechanism could take the form of a financial interest or an ownership interest. That could be determined by discussing the proposal with companies that might want to participate in the ownership of the pipeline.
The benefit of this proposal is that it would change the economics of the pipeline and reduce the tariff more than any other single proposal that has been put forth so far. Combined with other risk reduction actions, it may be sufficient to move the gas pipeline forward.
The cost of this proposal would probably be up to $10 billion for a success scenario but less than $2 billion to see if it would be likely to succeed. The risk capital would be invested to develop a proposal and hold an open season. If the open season was successful, then the project could move forward to a FERC certificate. It is possible that up $3 billion would have to be expended to get to a project sanction decision, but this capital would only be expended after a successful open season and signed precedent agreements from the shippers.
One hundred percent of equity contribution should be invested in the Alaska portion of the pipeline only. That way Alaska gets the full benefit of the investment, and the tariff on the Alaska portion of the pipeline sees the greatest impact, thus providing cheaper gas for Alaskans.
If Alaska decides to make such a commitment to the pipeline, Alaska should approach the federal government to see what they can do to support Alaska’s commitment. The two things Alaska should ask for are 1) Alaska’s fair share of the revenue from federal offshore development, and 2) Alaska should ask for the chance to explore in ANWR.
Regarding AGIA and TransCanada, Alaska should get TransCanada to either agree that the current AGIA plan is uneconomic or get TransCanada to waive their rights to damages under AGIA in exchange for the opportunity to participate in the Canadian portion of the pipeline. I am fairly certain that TransCanada would not want to own a piece of the Alaskan portion of the pipeline under to above plan. I am also not worried about TransCanada threatening to sue under AGIA. It is clear that the present plan is uneconomic; so, there will be no liability under AGIA if TransCanada does not agree to waive their rights.
In addition, contrary to AGIA’s capital contribution, Alaska would get a return on its capital investment and future generations would receive the benefit. Consider the investment a savings account for the future when Alaska may need the return.
Canada Portion of the Pipeline
TransCanada has proposed a 70/30 debt equity ratio (with some modifications). They propose to invest 30% of the cost of the pipeline in equity. The equity rate of return on the pipeline will probably be greater than 12%. The cost of the debt, on the other hand is closer to 5% depending on who the borrower is and their credit rating. Clearly it is better to have more of the pipeline funded by debt and less by equity because the return on the equity is more than twice as expensive to the pipeline as the debt.
Alaska should try to get TransCanada to agree to an 80/20 debt equity ratio. This will lower the tariff by a certain amount and save the State of Alaska and the shippers over the life of the pipeline billions of dollars. In the alternative Alaska should argue to the Canadian government for an 80/20 debt equity ratio. Alaska should also argue for a return on equity of 12% or less on the Canadian portion of the pipeline. Once again this would lower the tariff and make the pipeline more economic. These two terms are not unreasonable. Both were given serious consideration during the initial pipeline negotiations with the producer group.
As a reminder, gas pipeline economics is a major element of achieving a successful gas pipeline, but there are many more elements that must be addressed to move the project forward.
The issues that need to be addressed are:
1) Fair oil and gas taxes
2) Long term fiscal plan
3) Short term annual capital and operating budgets
4) The permanent fund, its present and future use
5) Gas pipeline economics (discussed in this article)
6) Exploration and filling TAPS and the Gas Pipeline
7) Fiscal certainty/stable oil and gas tax environment
8) Point Thomson (hopefully this will be resolved soon by the State of Alaska and the Point Thomson owners)
In summary if Alaskans really want an Alaskan Gas Pipeline, they need commit their resources to its success. They need to be disciplined fiscally. They need to lead instead of follow. They need to take charge of their future. The result is they will be better off by pursuing such a direction. If the pipeline is a success because of their efforts, they will reap the benefits. If the pipeline is not a success then they will be prepared for the new world they will find.
Tuesday, September 20, 2011
A Comprehensive Plan - What is Necessary
In May of this year Bud Fackrell, Denali Pipeline Project President announced that “Denali is ending its efforts (to continue the pipeline project) because of a lack of customer support.” This was not a surprising outcome. The pipeline project, without a more comprehensive strategy, will not proceed ahead. The price of gas in the lower-48, current oil and gas taxes and the uncertainty of those taxes in the future, and the lack of a long term plan to finance state government, all contribute to decisions by the shippers of the gas not to commit their gas to a pipeline.
Some will say that TransCanada’s Alaska Pipeline Project is still moving forward, but the only reason it is still moving forward is because the State of Alaska is financing 90% of the costs from the open season until the filing for the FERC certificate. TransCanada’s project will flounder as well once the FERC does not award a certificate due to the lack of shippers for the gas. Gas pipelines aren’t awarded certificates and pipelines don’t get built if they do not have gas to ship.
What is necessary for any gas pipeline to proceed is a comprehensive plan that changes the playing field, a plan that assures a reasonable tax, a plan that provides a modicum of certainty that the tax will not change every time the state needs additional revenue to balance its budget, a plan that shows the industry the state can manage its short-term capital and operating budgets in a way that shows restraint/discipline/understanding of their impact on the long term, a plan that includes a long-term fiscal plan that is not dependent on the oil and gas industry to balance its budget. What the state needs is a plan that changes the economics of the gas pipeline. It is time for a more comprehensive approach to Alaska’s future.
Some have advocated the state should build a large diameter gas pipeline through Canada. Some believe LNG will save Alaska through a large diameter line to Valdez. Some believe a large gas pipeline project will never get built and that Alaska should focus on a smaller diameter in-state gas pipeline. Some tout “Alaska’s gas for Alaskans” like it is some creed or motto that will automatically make whatever project they are supporting economic. The problem with all of these ideas is that without a more comprehensive picture, none of them will be economic, and none of them will ever get built.
There are at least eight issues that must be addressed in a comprehensive manner in order to move Alaska forward in bringing Alaska’s gas to market. Every proposal to bring Alaska’s gas to market should be required address all eight issues.
1) Fair oil and gas taxes
2) Long term fiscal plan
3) Short term annual capital and operating budgets
4) The permanent fund, its present and future use
5) Gas pipeline economics
6) Exploration and filling TAPS and the Gas Pipeline
7) Fiscal certainty/stable oil and gas tax environment
8) Point Thomson (hopefully this will be resolved soon by the State of Alaska and the Point Thomson owners)
Over the next several weeks I will propose alternatives that will address all eight issues. I have written previously about most of them, but I have a few additional ideas I would like to place on the table in advance of the October 18th Alaska Gas Pipeline Forum.
Some will say that TransCanada’s Alaska Pipeline Project is still moving forward, but the only reason it is still moving forward is because the State of Alaska is financing 90% of the costs from the open season until the filing for the FERC certificate. TransCanada’s project will flounder as well once the FERC does not award a certificate due to the lack of shippers for the gas. Gas pipelines aren’t awarded certificates and pipelines don’t get built if they do not have gas to ship.
What is necessary for any gas pipeline to proceed is a comprehensive plan that changes the playing field, a plan that assures a reasonable tax, a plan that provides a modicum of certainty that the tax will not change every time the state needs additional revenue to balance its budget, a plan that shows the industry the state can manage its short-term capital and operating budgets in a way that shows restraint/discipline/understanding of their impact on the long term, a plan that includes a long-term fiscal plan that is not dependent on the oil and gas industry to balance its budget. What the state needs is a plan that changes the economics of the gas pipeline. It is time for a more comprehensive approach to Alaska’s future.
Some have advocated the state should build a large diameter gas pipeline through Canada. Some believe LNG will save Alaska through a large diameter line to Valdez. Some believe a large gas pipeline project will never get built and that Alaska should focus on a smaller diameter in-state gas pipeline. Some tout “Alaska’s gas for Alaskans” like it is some creed or motto that will automatically make whatever project they are supporting economic. The problem with all of these ideas is that without a more comprehensive picture, none of them will be economic, and none of them will ever get built.
There are at least eight issues that must be addressed in a comprehensive manner in order to move Alaska forward in bringing Alaska’s gas to market. Every proposal to bring Alaska’s gas to market should be required address all eight issues.
1) Fair oil and gas taxes
2) Long term fiscal plan
3) Short term annual capital and operating budgets
4) The permanent fund, its present and future use
5) Gas pipeline economics
6) Exploration and filling TAPS and the Gas Pipeline
7) Fiscal certainty/stable oil and gas tax environment
8) Point Thomson (hopefully this will be resolved soon by the State of Alaska and the Point Thomson owners)
Over the next several weeks I will propose alternatives that will address all eight issues. I have written previously about most of them, but I have a few additional ideas I would like to place on the table in advance of the October 18th Alaska Gas Pipeline Forum.
Friday, March 25, 2011
Alaskan Advocate - Where to From Here?
Over the last year I have maintained a this blog as a commitment to Alaskans to provide them with a view that may be different than what they are hearing from the industry or government. My goal was to comment primarily on Alaska energy issues. The focus of the blog has been on oil and gas taxes, short and long-term fiscal responsibility, and gas pipeline issues. Because of personal obligations I may not be able to contine to comment on Alaskan issues, but I will attempt at least one additional article that will propose a more comprehensive plan on how to move the State of Alaska forward. It will include a discussion of a short and long-term fiscal plan, fiscal certainty, oil and gas taxes, a large diameter gas pipeline, in-state gas needs and Point Thomson. Some of the proposal will not be as specific as I would like because detailed information is lacking; other proposals will be quite specific. Regardless, I will recommend sufficient direction in each area to enable the state to move forward.
I am also not arrogant enough to assume my recommendations will be followed just because I made them. But I hope the article will at least move the debate forward in each of the areas I discuss.
Below is a list of the articles I have written over the last year. My next article will incorporate much of what I have already written below.
12/30/2009 - The Sovereign’s Responsibility
12/30/2009 - Fiscal Certainty and a Fair Gas Tax
12/30/2009 - Fiscal Certainty and a Stable Tax Environment
01/02/2010 - Timing of the Legislative Debate
01/02/2010 - Restructure Alaska’s Revenue System
01/05/2010 - Bob Swenson – Instate Gas Czar
01/06/2010 - PFD – To Enshrine or Not To Enshrine
01/13/2010 - Point Thomson – Where to From Here?
01/19/2010 - Do Oil Taxes Need Revision
01/27/2010 - Two Important Pipeline Variables
02/20/2010 - DNR Point Thomson Study Evaluated by Feds
02/21/2010 - Resource Potential of the Alaska North Slope
02/23/2010 - Geology is King
03/13/2010 - Which Pipeline Project is Best
03/14/2010 - Boring
03/21/2010 - In-State Gas Line
04/05/2010 - The Point Thomson Unit – The Next Step in the Process
04/28/2010 – A System Failure and An Idea
05/03/2010 – The Red Pen Challenge Update
05/27/2010 – Evaluation of Exploration in the Arctic OCS
06/14/2010 – BP Gulf Oil Spill Response Plan Review
07/30/2010 – Alaska Gasline Port Authority Proposal to Purchase Fairbanks Natural Gas LLC
09/06/2010 – Energy Issues in the Alaska Gubernatorial Race
09/08/2010 – Own a Piece of the Pipe – Part 1
09/09/2010 – Own a Piece of the Pipe – Part 2
09/11/2010 - Alaska Gasline Inducement Act (AGIA)
09/15/2010 - Analysis of the Twenty “Must Haves” of AGIA
09/16/2010 - Berkowitz Oil Revenue Proposal
09/21/2010 - Berkowitz Revenue Proposal Analysis
09/23/2010 - Political Posturing
09/26/2010 - State Ownership of the Pipeline
10/07/2010 - Clarification of the MidAmerican Deal
10/15/2010 - Natural Gas Pipeline Options
10/17/2010 - Equal Time for Parnell
10/19/2010 - Security Guards Need Education on Private Rights
10/26/2010 - Repost – Resource Potential of the Alaska North Slope
10/27/2010 - NPRA Oil and Gas Reserves History
11/01/2010 – Consider the Candidate
11/02/2010 – Legislative Agenda Proposal
11/15/2010 – Roadmap to a Fair Tax
01/26/2010 – The Real Cost of the Governor’s Proposed Oil Tax Change
02/10/2010 – An Either/Or World
03/14/2010 – The Specious Argument
03/17/2010 – Just the FACTS
03/24/2010 – Who to believe? Does it matter?
I am also not arrogant enough to assume my recommendations will be followed just because I made them. But I hope the article will at least move the debate forward in each of the areas I discuss.
Below is a list of the articles I have written over the last year. My next article will incorporate much of what I have already written below.
12/30/2009 - The Sovereign’s Responsibility
12/30/2009 - Fiscal Certainty and a Fair Gas Tax
12/30/2009 - Fiscal Certainty and a Stable Tax Environment
01/02/2010 - Timing of the Legislative Debate
01/02/2010 - Restructure Alaska’s Revenue System
01/05/2010 - Bob Swenson – Instate Gas Czar
01/06/2010 - PFD – To Enshrine or Not To Enshrine
01/13/2010 - Point Thomson – Where to From Here?
01/19/2010 - Do Oil Taxes Need Revision
01/27/2010 - Two Important Pipeline Variables
02/20/2010 - DNR Point Thomson Study Evaluated by Feds
02/21/2010 - Resource Potential of the Alaska North Slope
02/23/2010 - Geology is King
03/13/2010 - Which Pipeline Project is Best
03/14/2010 - Boring
03/21/2010 - In-State Gas Line
04/05/2010 - The Point Thomson Unit – The Next Step in the Process
04/28/2010 – A System Failure and An Idea
05/03/2010 – The Red Pen Challenge Update
05/27/2010 – Evaluation of Exploration in the Arctic OCS
06/14/2010 – BP Gulf Oil Spill Response Plan Review
07/30/2010 – Alaska Gasline Port Authority Proposal to Purchase Fairbanks Natural Gas LLC
09/06/2010 – Energy Issues in the Alaska Gubernatorial Race
09/08/2010 – Own a Piece of the Pipe – Part 1
09/09/2010 – Own a Piece of the Pipe – Part 2
09/11/2010 - Alaska Gasline Inducement Act (AGIA)
09/15/2010 - Analysis of the Twenty “Must Haves” of AGIA
09/16/2010 - Berkowitz Oil Revenue Proposal
09/21/2010 - Berkowitz Revenue Proposal Analysis
09/23/2010 - Political Posturing
09/26/2010 - State Ownership of the Pipeline
10/07/2010 - Clarification of the MidAmerican Deal
10/15/2010 - Natural Gas Pipeline Options
10/17/2010 - Equal Time for Parnell
10/19/2010 - Security Guards Need Education on Private Rights
10/26/2010 - Repost – Resource Potential of the Alaska North Slope
10/27/2010 - NPRA Oil and Gas Reserves History
11/01/2010 – Consider the Candidate
11/02/2010 – Legislative Agenda Proposal
11/15/2010 – Roadmap to a Fair Tax
01/26/2010 – The Real Cost of the Governor’s Proposed Oil Tax Change
02/10/2010 – An Either/Or World
03/14/2010 – The Specious Argument
03/17/2010 – Just the FACTS
03/24/2010 – Who to believe? Does it matter?
Thursday, March 24, 2011
Who to believe? Does it matter?
The Alaska State Legislature is currently engaged in a debate regarding changing ACES, the production tax on oil and gas, in hopes of encouraging new investment on the north slope and ultimately additional production to fill the TransAlaska Pipeline System (TAPS).
Many have entered into the debate regarding the tax. Some have argued that a change to the tax will increase jobs that have been lost due to the current production tax, known as Alaska’s Clear and Equitable Share (ACES); others have argued that the current tax system is working because jobs have increased on the north slope.
Some have argued that a change in the tax will multiply the revenue to the state many times over the cost of the change; others have argued that the tax change will cost the state billions of dollars over the next decade.
Some have argued that exploration drilling on the north slope has become almost nonexistent because of ACES. Others have argued that there were more wells drilled in 2010 than 2009. In fact the number of wells drilled in 2010 was the highest number of wells drilled since 2005.
Some have argued that the pipeline will be shut down if we don’t change the tax, but no one is arguing if we stay the present course that oil production will increase and the pipeline will once again be full.
Who to believe? Does it matter?
All who enter the debate seem to believe they need to justify their position based on either a positive or negative impact from the current production tax, ACES. But all are focused on the wrong question. It does not matter what has happened in the past, even what the actual impact of ACES has been. This is especially important since they will never agree on the results of that impact anyway.
What is clear is that production is falling on the north slope, and everyone agrees with this fact. What is also clear is that everyone would like to see production increase. The real question is how to go about encouraging industry decision-making so that more is invested on the north slope in hopes of increasing production to the benefit of both the industry and the state.
Where might the potential reserves be found and how many reserves can we expect or hope for?
Infield drilling and satellite fields - Small increases to production that will help stem the decline of production if produced, up to a few billion barrels here.
Heavy and viscous oil - Over 20 billion barrels of oil in place. If the technology could be conquered and the economics could be enhanced, perhaps several billion barrels of this heavy oil could be produced.
Exploration - Exploration could bring in several hundred thousand barrels of oil, so even though the amounts may be smaller, exploration should be encouraged.
NPRA - The State of Alaska receives half the bonus and royalty revenue from NPRA plus the state receives a production tax on all oil produced in NPRA. The federal government believes there are still hundreds of millions of barrels of oil to be found in NPRA. Even though this is not a large amount, it should be encouraged.
Federal OCS - Even though the state gets no revenue from the majority of offshore development, offshore production would provide jobs to Alaskans, increase the life of the pipeline, and perhaps someday the state could share in the OCS revenue if Congress changes the current law. Even though OCS development should be encouraged, it does not enter into the debate over changing the state's oil and gas tax.
What is the potential value of those reserves?
This is the estimation of the “golden egg” if the reserves can be found and produced. This estimation is the easiest to determine. Plug in the potential reserves from above, plug in a range of prices and the current tax and the potential value (or range of values) of those reserves can be determined. Any change in the tax can be compared against this range of values. Any change in the tax should be justified against the potential for the state to benefit through production of these additional potential reserves.
What are the options for encouraging industry to pursue those reserves?
The debate is not an either/or debate. It is not “reduce the tax on all production or don’t reduce the tax.” The decisions the legislature needs to make are more complex than that. There are several options or combination of options the legislature could pursue.
Credits - Credits gives the state one of the most measurable benefits of any alternative. One of the concerns is ensuring the state receives something in return for any reduction or benefit it provides to the industry. With a credit the state is guaranteed that the industry must invest in Alaska before it can apply for the benefit. Credits are a good option, but they may not supply sufficient benefit to entice the industry to produce all the reserves Alaska would like to see produced.
Focused reduction in tax - A tax that is focused on the reserves the legislature would like for the industry to pursue, i.e., additional reserves that could be produced through infield drilling, heavy and viscous oil additions, and exploration success.
Broad reduction in tax – this option is overinclusive, giving additional reduction in tax to reserves that would have been developed without the reduction, and it will be difficult to determine if the broad reduction was necessary or if a more strategic alternative would have worked just as well. But the legislature may determine it is the best means to obtain the results they are after.
Summary
The debate in the legislature often turns on looking backwards and using, or misusing, that data to justify a particular position the individual is advocating. The legislature should avoid getting into that debate. The key to moving forward is to recognize the current status of production on the north slope (decreasing production), what the state wants to happen (increased production), and where the potential production can come from (NPRA, infield drilling, heavy and viscous oil, and exploration) and most importantly how the state believes it can achieve its desired goal while obtaining the maximum return to the state for the benefit conveyed.
Many have entered into the debate regarding the tax. Some have argued that a change to the tax will increase jobs that have been lost due to the current production tax, known as Alaska’s Clear and Equitable Share (ACES); others have argued that the current tax system is working because jobs have increased on the north slope.
Some have argued that a change in the tax will multiply the revenue to the state many times over the cost of the change; others have argued that the tax change will cost the state billions of dollars over the next decade.
Some have argued that exploration drilling on the north slope has become almost nonexistent because of ACES. Others have argued that there were more wells drilled in 2010 than 2009. In fact the number of wells drilled in 2010 was the highest number of wells drilled since 2005.
Some have argued that the pipeline will be shut down if we don’t change the tax, but no one is arguing if we stay the present course that oil production will increase and the pipeline will once again be full.
Who to believe? Does it matter?
All who enter the debate seem to believe they need to justify their position based on either a positive or negative impact from the current production tax, ACES. But all are focused on the wrong question. It does not matter what has happened in the past, even what the actual impact of ACES has been. This is especially important since they will never agree on the results of that impact anyway.
What is clear is that production is falling on the north slope, and everyone agrees with this fact. What is also clear is that everyone would like to see production increase. The real question is how to go about encouraging industry decision-making so that more is invested on the north slope in hopes of increasing production to the benefit of both the industry and the state.
Where might the potential reserves be found and how many reserves can we expect or hope for?
Infield drilling and satellite fields - Small increases to production that will help stem the decline of production if produced, up to a few billion barrels here.
Heavy and viscous oil - Over 20 billion barrels of oil in place. If the technology could be conquered and the economics could be enhanced, perhaps several billion barrels of this heavy oil could be produced.
Exploration - Exploration could bring in several hundred thousand barrels of oil, so even though the amounts may be smaller, exploration should be encouraged.
NPRA - The State of Alaska receives half the bonus and royalty revenue from NPRA plus the state receives a production tax on all oil produced in NPRA. The federal government believes there are still hundreds of millions of barrels of oil to be found in NPRA. Even though this is not a large amount, it should be encouraged.
Federal OCS - Even though the state gets no revenue from the majority of offshore development, offshore production would provide jobs to Alaskans, increase the life of the pipeline, and perhaps someday the state could share in the OCS revenue if Congress changes the current law. Even though OCS development should be encouraged, it does not enter into the debate over changing the state's oil and gas tax.
What is the potential value of those reserves?
This is the estimation of the “golden egg” if the reserves can be found and produced. This estimation is the easiest to determine. Plug in the potential reserves from above, plug in a range of prices and the current tax and the potential value (or range of values) of those reserves can be determined. Any change in the tax can be compared against this range of values. Any change in the tax should be justified against the potential for the state to benefit through production of these additional potential reserves.
What are the options for encouraging industry to pursue those reserves?
The debate is not an either/or debate. It is not “reduce the tax on all production or don’t reduce the tax.” The decisions the legislature needs to make are more complex than that. There are several options or combination of options the legislature could pursue.
Credits - Credits gives the state one of the most measurable benefits of any alternative. One of the concerns is ensuring the state receives something in return for any reduction or benefit it provides to the industry. With a credit the state is guaranteed that the industry must invest in Alaska before it can apply for the benefit. Credits are a good option, but they may not supply sufficient benefit to entice the industry to produce all the reserves Alaska would like to see produced.
Focused reduction in tax - A tax that is focused on the reserves the legislature would like for the industry to pursue, i.e., additional reserves that could be produced through infield drilling, heavy and viscous oil additions, and exploration success.
Broad reduction in tax – this option is overinclusive, giving additional reduction in tax to reserves that would have been developed without the reduction, and it will be difficult to determine if the broad reduction was necessary or if a more strategic alternative would have worked just as well. But the legislature may determine it is the best means to obtain the results they are after.
Summary
The debate in the legislature often turns on looking backwards and using, or misusing, that data to justify a particular position the individual is advocating. The legislature should avoid getting into that debate. The key to moving forward is to recognize the current status of production on the north slope (decreasing production), what the state wants to happen (increased production), and where the potential production can come from (NPRA, infield drilling, heavy and viscous oil, and exploration) and most importantly how the state believes it can achieve its desired goal while obtaining the maximum return to the state for the benefit conveyed.
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