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The gubernatorial candidates have been debating alternatives for a natural gas pipeline and which alternative makes more sense. Berkowitz is a staunch supporter of the state building a natural gas pipeline, I assume to Valdez, while Parnell is a supporter of staying the course and supporting AGIA. This article will provide some clarification regarding the passage of AGIA and make some recommendations on the proper path forward, or at least which path not to follow.
First, AGIA was not about the administration getting rolled as Berkowitz says in his ad. Governor Palin, Lt. Governor Parnell at the time, and 59 out of 60 legislators did not get rolled by the pipeline companies, especially Exxon. At the time Exxon was arguing against AGIA. AGIA was about rolling Exxon and the other producers. It was about bribery to get a pipeline company to, as Commissioner Galvin put it, do things they would not otherwise do. The state, through AGIA, made a requirement that the pipeline company, regardless of the results of open season, push the project forward through filing a FERC certificate. As an incentive the state would reimburse the project for up to $500 million. The percent of reimbursement after open season would be 90%. The reason for the 90% was because no rational pipeline company would move forward past open season unless the open season was successful. I assume the AGIA proponents expected the open season to fail; so they made sure the pipeline company had the incentive to move the project forward anyway.
So even though Ethan Berkowitz attempted to rewrite history in his ad and failed, we should still ask if he has a valid point regarding the state building a pipeline to Valdez or other port?
Actually, if his proposal was the right answer, and the all-Alaska option is really a viable economic option, the shippers will have bid at the Trans-Canada open season. Trans-Canada provided all shippers with the option to bid their gas to Valdez. The Trans-Canada option would also have the added benefit of a private company or companies funding and taking the risk on the project.
The only way it makes sense for the state to build the pipeline is if Trans-Canada’s open season failed. Denali’s open season would also have to have failed as well. That means that the shippers of the gas believe the project to Valdez and the project through Canada are both uneconomic. Based on this assumption let's look at the state owned and funded all-Alaska project.
Does Ethan Berkowitz propose the state retrace the same ground the pipeline companies have gone over so far? Does he propose the state appropriate the funds to bring the project to open season? Since the economics of the pipeline project haven’t changed, the pipeline costs the same to build, the owners of the gas are the same, the risks of shipping are the same, wouldn’t Ethan Berkowitz expect the same result to occur at the open season? Only two years from now? Perhaps he proposes the state not hold an open season. Who needs shippers to commit to the pipeline anyway? Maybe the state will just build the $20 to $30 billion pipeline to Valdez. Surely the gas owners will ship their gas on an existing pipeline? And if they don’t, we will sue them and take away their gas. Sounds logical enough ---- except that it is short-sighted and extremely shallow thinking.
If the state does not hold an open season and builds the pipeline without contracts, the shippers will have no contractual obligation to ship the gas. They will only have the reasonably prudent operator standard/obligation under their leases.
A reasonably prudent operator will ship gas when it can make money selling the gas and a reasonably prudent operator will leave the gas in the ground when it is not profitable to ship it.
Lets assume it cost $4 to ship the gas to the point of delivery. It may cost much more if the state is the builder of the pipeline, but lets assume the state was an efficient designer and builder of the pipeline, tankers, and all facilities to get the gas to market. Any time the gas owner can ship the gas for more than $4, they may agree to ship their gas on the state’s pipeline. Any time the price of gas is less than $4, the shippers will leave their gas in the ground and no one will ship gas on Alaska’s pipeline. The state will have taken 100% of the risk of building the pipe and 100% of the shipping risk. Eventually this will backfire on the state because sometime in the future the price of gas will go below the cost of shipping the gas and the state will eat the cost of staffing and owning an empty pipe, not to mention the other facilities required to get the gas to market.
The problem with Ethan Berkowitz’s pipeline proposal is that it sounds good and may get the votes of those who haven’t done their research or seriously considered the ramifications of his idea, but the proposal is not well thought out. He has not considered the viability of his proposal or the risk he is forcing on the state. If you don’t agree with me then help me answer just a few of the questions I have proffered above. How does Ethan Berkowitz propose to fill the pipe? Does he plan to hold an open season? Does he plan to commit the state’s gas to the state’s pipeline? How about the other facilities required to get the gas to market? Who will take the risk of building those facilities without shipping contracts? How does he plan to fund such an expensive pipe? Please don’t tell me through PFD checks. I have already written another article about the viability of that proposal.
To answer the above questions you can’t guess. You must find the answers in the documentation Ethan Berkowitz has created or in a speech he has given. If you cannot find the answers, then Ethan Berkowitz’s proposal is shallow and not well thought out. If you find the answer, please provide them to me. I will be glad to analyze them and let you know if they are viable. Campaign soundbytes can only get you so far. Eventually someone is going to ask for meat on the bones of your proposal. I'll be waiting.
Showing posts with label Ethan Berkowitz. Show all posts
Showing posts with label Ethan Berkowitz. Show all posts
Friday, October 15, 2010
Thursday, October 7, 2010
Clarification on the MidAmerican Deal
A recent article stated that the Berkowitz campaign says that the MidAmerican deal looked like a project that was going forward, until the Murkowski administration changed the terms and it fell apart.
In reality the MidAmerican deal fell apart because MidAmerican demanded it be granted the exclusive right for five years to develop the pipeline without any commitment to move forward with the project. This would have stopped negotiations with all other parties proposing projects under the terms of the Stranded Gas Development Act. The state was not willing to accede to MidAmerican’s demands; so MidAmerican withdrew its proposal.
The information provided in this clarification was obtained from an article written by Gianna Trinca, KTUU-TV, Updated 12:00 a.m. ET March 26, 2004
In reality the MidAmerican deal fell apart because MidAmerican demanded it be granted the exclusive right for five years to develop the pipeline without any commitment to move forward with the project. This would have stopped negotiations with all other parties proposing projects under the terms of the Stranded Gas Development Act. The state was not willing to accede to MidAmerican’s demands; so MidAmerican withdrew its proposal.
The information provided in this clarification was obtained from an article written by Gianna Trinca, KTUU-TV, Updated 12:00 a.m. ET March 26, 2004
Thursday, September 23, 2010
Political Posturing
The Parnell and Berkowitz campaigns recently traded barbs regarding the plan Ethan Berkowitz put forward to allow individual Alaskans to own a piece of the pipe through a dividend check-off program. Although the debate was interesting from a political posturing standpoint, substantive debate on the issues was not advanced by their exchange.
The Proposal
Ethan Berkowitz advanced the idea that Alaskan’s should own a piece of the pipe through a dividend check-off program. The implication was that all Alaskans would have a right to participate and that 20% of them probably would elect to participate. The impression was also given that the 20% participation would be from a cross-section of Alaskans. Diane Benson, the lieutenant governor candidate, added weight to that impression by stating that she would have been excited to have had an opportunity like this when she was a young mother of limited means. The intent of the campaign was to appeal to all Alaskans. This may have been a good political sound-byte, but it had problems its application to reality.
The truth is the average Alaskan could not afford to give up their dividend to invest it in a pipeline. Only those Alaskans with surplus spendable income would be able to participate in the project and only a small percentage of them would participate after they found out how long it would take for them to begin to receive a return on their investment. An optimist might suggest that 20% of Alaskans could afford to participate in the program and maybe 20% of those eligible would elect to do so. That would mean an optimistic estimate of 5% of Alaskans would participate, and I am not an optimist; so I believe the number would be much smaller.
The Parnell Campaign Response
The Parnell campaign then decided to assume the Berkowitz plan was accurate, crunched the numbers using a report produced by Scott Goldsmith and argued that the own a piece of the pipe proposal would cost the state 2,000 jobs. The reasoning was that if investing the PFD in the economy created 10,000 jobs, taking 20% of that investment out of the economy would cost the economy 20% of the jobs created; thus the state would lose 2,000 jobs through the own a piece of the pipe proposal.
The Parnell campaign knew as well as anyone that a cross-section of Alaskans would not participate in the own a piece of the pipe dividend check-off. They knew that the average Alaskan could not afford to participate in the program and that the impact of the program would be much smaller that what they projected. But instead of arguing the truth, that the program would not be effective, they decided to “believe” what Berkowitz proposed and argue that the program was bad because it was going to cost Alaskans jobs. They went for the sound-byte instead of the truth. Then to add insult to injury, when they were caught at assuming bad numbers, their response was effectively, “that was my response and I am sticking to it.”
Berkwitz Response
Not to be outdone by the Parnell campaign’s poor judgment, the Berkowitz campaign accused the Parnell campaign of playing political games. The only thing that came to mind at this point is the old saying about the pot calling the kettle black. The Berkowitz campaign, apparently forgetting what they initially suggested in their initial rollout of the proposal, now argued that the Berkowitz campaign can’t control what people will do with their dividends and that they won’t control what people are doing under the plan, apparently supporting what Goldsmith had said about the impact of the plan not being the potential loss of 2,000 jobs. I assume they now believe that 20% of Alaskans won't participate in the dividend check-off proposal.
The Result
Both campaigns have soiled their reputations by their responses to each other. Hopefully this is not a sign of what is to come in this election.
Pipeline Ownership
The Berkowitz campaign has stated that individual ownership through the dividend check-off proposal will enhance the likelihood of success of getting a pipeline. The Parnell campaign believes that staying the course through AGIA provides the state with the greatest likelihood of getting a pipeline.
A substantial amout of research and analysis was done during the Murkowski administration regarding providing Alaskans the opportunity to own a piece of the pipe and regarding the importance and value of state ownership of the pipeline despite the Berkowitz campaign argument that they are the first.
In a future article I will discuss state ownership of the pipeline, what is required if the state wants to participate and the timing of that participation. I guarantee it won’t be what either campaign is recommending.
The Proposal
Ethan Berkowitz advanced the idea that Alaskan’s should own a piece of the pipe through a dividend check-off program. The implication was that all Alaskans would have a right to participate and that 20% of them probably would elect to participate. The impression was also given that the 20% participation would be from a cross-section of Alaskans. Diane Benson, the lieutenant governor candidate, added weight to that impression by stating that she would have been excited to have had an opportunity like this when she was a young mother of limited means. The intent of the campaign was to appeal to all Alaskans. This may have been a good political sound-byte, but it had problems its application to reality.
The truth is the average Alaskan could not afford to give up their dividend to invest it in a pipeline. Only those Alaskans with surplus spendable income would be able to participate in the project and only a small percentage of them would participate after they found out how long it would take for them to begin to receive a return on their investment. An optimist might suggest that 20% of Alaskans could afford to participate in the program and maybe 20% of those eligible would elect to do so. That would mean an optimistic estimate of 5% of Alaskans would participate, and I am not an optimist; so I believe the number would be much smaller.
The Parnell Campaign Response
The Parnell campaign then decided to assume the Berkowitz plan was accurate, crunched the numbers using a report produced by Scott Goldsmith and argued that the own a piece of the pipe proposal would cost the state 2,000 jobs. The reasoning was that if investing the PFD in the economy created 10,000 jobs, taking 20% of that investment out of the economy would cost the economy 20% of the jobs created; thus the state would lose 2,000 jobs through the own a piece of the pipe proposal.
The Parnell campaign knew as well as anyone that a cross-section of Alaskans would not participate in the own a piece of the pipe dividend check-off. They knew that the average Alaskan could not afford to participate in the program and that the impact of the program would be much smaller that what they projected. But instead of arguing the truth, that the program would not be effective, they decided to “believe” what Berkowitz proposed and argue that the program was bad because it was going to cost Alaskans jobs. They went for the sound-byte instead of the truth. Then to add insult to injury, when they were caught at assuming bad numbers, their response was effectively, “that was my response and I am sticking to it.”
Berkwitz Response
Not to be outdone by the Parnell campaign’s poor judgment, the Berkowitz campaign accused the Parnell campaign of playing political games. The only thing that came to mind at this point is the old saying about the pot calling the kettle black. The Berkowitz campaign, apparently forgetting what they initially suggested in their initial rollout of the proposal, now argued that the Berkowitz campaign can’t control what people will do with their dividends and that they won’t control what people are doing under the plan, apparently supporting what Goldsmith had said about the impact of the plan not being the potential loss of 2,000 jobs. I assume they now believe that 20% of Alaskans won't participate in the dividend check-off proposal.
The Result
Both campaigns have soiled their reputations by their responses to each other. Hopefully this is not a sign of what is to come in this election.
Pipeline Ownership
The Berkowitz campaign has stated that individual ownership through the dividend check-off proposal will enhance the likelihood of success of getting a pipeline. The Parnell campaign believes that staying the course through AGIA provides the state with the greatest likelihood of getting a pipeline.
A substantial amout of research and analysis was done during the Murkowski administration regarding providing Alaskans the opportunity to own a piece of the pipe and regarding the importance and value of state ownership of the pipeline despite the Berkowitz campaign argument that they are the first.
In a future article I will discuss state ownership of the pipeline, what is required if the state wants to participate and the timing of that participation. I guarantee it won’t be what either campaign is recommending.
Tuesday, September 21, 2010
Berkowitz Revenue Proposal Analysis
The 100% Royalty Solution
Ethan Berkowitz has proposed a new approach for the State of Alaska to use for collecting oil revenue through its two main sources: royalty and taxes. What follows is a quote from his web page.
“The debate about Alaska’s oil and gas revenues has been too much about short-term gain and not enough about long-term interests. The result is a system that fails to optimize outcomes for either the state or industry. Alaska can do better – we can have a system that reduces development risk, increases production and jobs, gives Alaska a fair share of the revenues, enforces budget discipline in Juneau, strengthens the Permanent Fund, and takes the politics out of the state's relationship with the oil industry. Doing better, however, requires a new approach.” – Ethan Berkowitz
I like the goals he has set for the new system, but how does his proposal stack up against reality?
Ethan Berkowitz states that a 100% royalty solution provides fiscal certainty for the oil and gas industry. The industry has been looking for a way to lock in the state’s share of production. This would lock in the state’s share for the term of the contract, as long as 40 to 50 years. This would seem to provide the oil and gas industry with what it is looking for.
But the first problem with a 40 to 50 year lock on the state’s share is that the state has not been able to predict a reasonable tax structure for more than about 15 years. After about 15 years, unforeseen problems with the tax structure begin to show up. The economic limit factor worked for about 15 years before the problems with disproportionate revenue sharing created a need to change the tax laws. ACES has only lasted a couple of years before signs of problems have begun to show up. Heavy oil development and exploration on state and federal lands where the state has the power to tax are both showing signs of being impacted by the tax. If the state agrees to a fixed royalty system for the life of the leases, which could be 40 to 50 years, the system is sure to fail. Oil and gas prices are too volitile. A fixed 100% royalty solution will only work for a narrow range of oil and gas prices. When oil prices are low, the industry will be paying too much revenue to the state and when oil prices are high, Alaskans will believe they are not getting their fair share. That is why progressivity was added to the tax so that the revenue paid to the state by the producers could more closely match the revenue stream: lower taxes during times of lower prices and higher taxes during times of higher prices.
There can be debates about the rate of progressivity, but the intent of progressivity was to more closely match a fair split of the revenue stream between the producers and the state at low and high oil and gas prices.
In addition the only way a 100% royalty solution would work is for the state to pass an amendment to the constitution prohibiting oil and gas production from being taxed. Otherwise there would be no certainty for the oil and gas industry. If a constitutional amendment was not passed, the royalty would be fixed as it is in the current leases and the state could still impose a tax on the revenue if the state determined some day in the future it was not getting its fair share. Thus the industry’s fiscal certainty that it got through signing the 100% royalty leases would be lost anytime the next legislature wanted to pass a tax.
Passing a constitutional amendment prohibiting the state from taxing the oil and gas revenue would create its own problems. The state gets royalty and tax revenue from state lands but it only gets tax revenue from NPRA; so a 100% royalty solution would mean that the state would give up any revenue it might receive from production in the NPRA. I don’t think this was Ethan Berkowitz’s intention. I think he probably didn’t understand that the state doesn’t have the right to negotiate a royalty share from NPRA. And the state has neither the power to receive royalty or to tax the federal OCS.
As far as I can determine from the proposal, the state would negotiate royalty leases on existing production, presumably giving up something to get the industry to agree to the new contracts. The producers will not negotiate fixed long-term contracts to put them in a worse position than they already are. These 100% royalty only leases would then give the industry the fiscal certainty to explore new oil and gas prospects. Once again this sounds good until the proposal is applied to the facts.
According to the NETL Report, existing units on state lands have approximately 6 billion barrels of reserves left to produce. So the state would give up a certain amount of revenue on the 6 billion barrels left to produce to incentivize the oil and gas industry to explore for the additional 3 billion barrels of oil yet to be found on state lands. Existing units on state lands have approximately 34 trillion cubic feet of natural gas to produce. The state will also fix the royalty on the 34 trillion cubic feet of natural gas for the life of the leases as an incentive for the oil and gas industry to explore for and additional 30+ trillion cubic feet of natural gas on state lands. If the additional gas is discovered, those leases will also have fixed royalty rates for the life of the leases and pay no tax. The deal sounds more like giving up two in the hand for one in the bush than getting Alaska its fair share of the revenues.
In addition, in the NPRA the state does not have the right to collect royalty from the leases and only has the power to tax. So the state would be giving up the ability to tax all future oil and gas revenue from NPRA. According to the NETL Report, that would be an additional 6.5 billion barrels of oil and an additional 31 tcf of gas that the state would give up the right to tax.
Ethan Berkowitz could argue that the State of Alaska would only give up the right to tax oil and gas revenue on state lands and continue to tax the revenue on federal lands. This may sound like a good idea but it wouldn’t stand up to a challenge in the courts. The law would not allow the state to discriminate against owners of lease rights on federal lands by taxing them and not the owners of lease rights on state lands.
Ethan Berkowitz has recognized the need for changing circumstances in his proposal. He has proposed that all contracts should have reopener clauses. This would reduce the effect a fixed royalty would have on a fluctuating oil or gas price. When prices were low the unit owners would request a contract reopener and ask for a lower royalty. If the state determined that the royalty should be reduced, a contract amendment could be negotiated reducing the royalty rate. When prices were high the state could ask for a reopener…… but the industry wouldn’t agree. There is no incentive for a Unit owner to agree to pay a higher royalty unless it is getting something additional in return. The only way for the state to get a rate increase under that circumstance would be the take the Unit owners to court and argue that the new price of oil or gas was not contemplated when the original 100% royalty lease was negotiated. The industry would argue that of course the higher price was within the contemplation of the parties since the historical price of oil has been well over $100.
Ultimately reopeners will not work for oil and gas leases in the United States because the State does not have the right to nationalize the oil if they cannot come to an agreement with the Unit owners. Reopeners require both parties to have something to gain and something to lose for a reopener to be successful.
Alternatives that make sense
There does seem to be a problem with the current ACES tax system. The bellweathers for problems with the tax system are heavy oil production and exploration. Heavy oil production should see declines in production before all other production because it is the most expensive to produce. And exploration will see impacts because higher taxes changes project economics and requires larger potential field sizes to be worth spending the money to explore. Both heavy oil and exploration have shown signs of declining investment.
Based on this, it is probably time to reexamine the ACES tax system. Are tax credits sufficient incentive to change industry economics? Does the progressivity factor need to be reexamined? What about the base tax? Does it need to be adjusted downward? Wholesale change is probably not necessary, but a methodical approach to the problem is essential. New ideas and innovation are good but they need to be tested before they are proposed as a final solution to our problems.
Ethan Berkowitz has proposed a new approach for the State of Alaska to use for collecting oil revenue through its two main sources: royalty and taxes. What follows is a quote from his web page.
“The debate about Alaska’s oil and gas revenues has been too much about short-term gain and not enough about long-term interests. The result is a system that fails to optimize outcomes for either the state or industry. Alaska can do better – we can have a system that reduces development risk, increases production and jobs, gives Alaska a fair share of the revenues, enforces budget discipline in Juneau, strengthens the Permanent Fund, and takes the politics out of the state's relationship with the oil industry. Doing better, however, requires a new approach.” – Ethan Berkowitz
I like the goals he has set for the new system, but how does his proposal stack up against reality?
Ethan Berkowitz states that a 100% royalty solution provides fiscal certainty for the oil and gas industry. The industry has been looking for a way to lock in the state’s share of production. This would lock in the state’s share for the term of the contract, as long as 40 to 50 years. This would seem to provide the oil and gas industry with what it is looking for.
But the first problem with a 40 to 50 year lock on the state’s share is that the state has not been able to predict a reasonable tax structure for more than about 15 years. After about 15 years, unforeseen problems with the tax structure begin to show up. The economic limit factor worked for about 15 years before the problems with disproportionate revenue sharing created a need to change the tax laws. ACES has only lasted a couple of years before signs of problems have begun to show up. Heavy oil development and exploration on state and federal lands where the state has the power to tax are both showing signs of being impacted by the tax. If the state agrees to a fixed royalty system for the life of the leases, which could be 40 to 50 years, the system is sure to fail. Oil and gas prices are too volitile. A fixed 100% royalty solution will only work for a narrow range of oil and gas prices. When oil prices are low, the industry will be paying too much revenue to the state and when oil prices are high, Alaskans will believe they are not getting their fair share. That is why progressivity was added to the tax so that the revenue paid to the state by the producers could more closely match the revenue stream: lower taxes during times of lower prices and higher taxes during times of higher prices.
There can be debates about the rate of progressivity, but the intent of progressivity was to more closely match a fair split of the revenue stream between the producers and the state at low and high oil and gas prices.
In addition the only way a 100% royalty solution would work is for the state to pass an amendment to the constitution prohibiting oil and gas production from being taxed. Otherwise there would be no certainty for the oil and gas industry. If a constitutional amendment was not passed, the royalty would be fixed as it is in the current leases and the state could still impose a tax on the revenue if the state determined some day in the future it was not getting its fair share. Thus the industry’s fiscal certainty that it got through signing the 100% royalty leases would be lost anytime the next legislature wanted to pass a tax.
Passing a constitutional amendment prohibiting the state from taxing the oil and gas revenue would create its own problems. The state gets royalty and tax revenue from state lands but it only gets tax revenue from NPRA; so a 100% royalty solution would mean that the state would give up any revenue it might receive from production in the NPRA. I don’t think this was Ethan Berkowitz’s intention. I think he probably didn’t understand that the state doesn’t have the right to negotiate a royalty share from NPRA. And the state has neither the power to receive royalty or to tax the federal OCS.
As far as I can determine from the proposal, the state would negotiate royalty leases on existing production, presumably giving up something to get the industry to agree to the new contracts. The producers will not negotiate fixed long-term contracts to put them in a worse position than they already are. These 100% royalty only leases would then give the industry the fiscal certainty to explore new oil and gas prospects. Once again this sounds good until the proposal is applied to the facts.
According to the NETL Report, existing units on state lands have approximately 6 billion barrels of reserves left to produce. So the state would give up a certain amount of revenue on the 6 billion barrels left to produce to incentivize the oil and gas industry to explore for the additional 3 billion barrels of oil yet to be found on state lands. Existing units on state lands have approximately 34 trillion cubic feet of natural gas to produce. The state will also fix the royalty on the 34 trillion cubic feet of natural gas for the life of the leases as an incentive for the oil and gas industry to explore for and additional 30+ trillion cubic feet of natural gas on state lands. If the additional gas is discovered, those leases will also have fixed royalty rates for the life of the leases and pay no tax. The deal sounds more like giving up two in the hand for one in the bush than getting Alaska its fair share of the revenues.
In addition, in the NPRA the state does not have the right to collect royalty from the leases and only has the power to tax. So the state would be giving up the ability to tax all future oil and gas revenue from NPRA. According to the NETL Report, that would be an additional 6.5 billion barrels of oil and an additional 31 tcf of gas that the state would give up the right to tax.
Ethan Berkowitz could argue that the State of Alaska would only give up the right to tax oil and gas revenue on state lands and continue to tax the revenue on federal lands. This may sound like a good idea but it wouldn’t stand up to a challenge in the courts. The law would not allow the state to discriminate against owners of lease rights on federal lands by taxing them and not the owners of lease rights on state lands.
Ethan Berkowitz has recognized the need for changing circumstances in his proposal. He has proposed that all contracts should have reopener clauses. This would reduce the effect a fixed royalty would have on a fluctuating oil or gas price. When prices were low the unit owners would request a contract reopener and ask for a lower royalty. If the state determined that the royalty should be reduced, a contract amendment could be negotiated reducing the royalty rate. When prices were high the state could ask for a reopener…… but the industry wouldn’t agree. There is no incentive for a Unit owner to agree to pay a higher royalty unless it is getting something additional in return. The only way for the state to get a rate increase under that circumstance would be the take the Unit owners to court and argue that the new price of oil or gas was not contemplated when the original 100% royalty lease was negotiated. The industry would argue that of course the higher price was within the contemplation of the parties since the historical price of oil has been well over $100.
Ultimately reopeners will not work for oil and gas leases in the United States because the State does not have the right to nationalize the oil if they cannot come to an agreement with the Unit owners. Reopeners require both parties to have something to gain and something to lose for a reopener to be successful.
Alternatives that make sense
There does seem to be a problem with the current ACES tax system. The bellweathers for problems with the tax system are heavy oil production and exploration. Heavy oil production should see declines in production before all other production because it is the most expensive to produce. And exploration will see impacts because higher taxes changes project economics and requires larger potential field sizes to be worth spending the money to explore. Both heavy oil and exploration have shown signs of declining investment.
Based on this, it is probably time to reexamine the ACES tax system. Are tax credits sufficient incentive to change industry economics? Does the progressivity factor need to be reexamined? What about the base tax? Does it need to be adjusted downward? Wholesale change is probably not necessary, but a methodical approach to the problem is essential. New ideas and innovation are good but they need to be tested before they are proposed as a final solution to our problems.
Thursday, September 16, 2010
Berkowitz Oil Revenue Proposal
Ethan Berkowitz has proposed a new approach for the State of Alaska to use for collecting oil revenue through its two main sources: royalty and taxes. What follows is a quote from his web page.
“The debate about Alaska’s oil and gas revenues has been too much about short-term gain and not enough about long-term interests. The result is a system that fails to optimize outcomes for either the state or industry. Alaska can do better – we can have a system that reduces development risk, increases production and jobs, gives Alaska a fair share of the revenues, enforces budget discipline in Juneau, strengthens the Permanent Fund, and takes the politics out of the state's relationship with the oil industry. Doing better, however, requires a new approach.” – Ethan Berkowitz
I like the goals he has set for the new system. My next article will address how effective his proposal is in accomplishing those goals.
“The debate about Alaska’s oil and gas revenues has been too much about short-term gain and not enough about long-term interests. The result is a system that fails to optimize outcomes for either the state or industry. Alaska can do better – we can have a system that reduces development risk, increases production and jobs, gives Alaska a fair share of the revenues, enforces budget discipline in Juneau, strengthens the Permanent Fund, and takes the politics out of the state's relationship with the oil industry. Doing better, however, requires a new approach.” – Ethan Berkowitz
I like the goals he has set for the new system. My next article will address how effective his proposal is in accomplishing those goals.
Thursday, September 9, 2010
Own a Piece of the Pipe - Part 2
A Greater Likelihood of Success
In my first article Own a Piece of the Pipe - Part 1, I evaluated the use of the Permanent Fund Dividend check-off as a vehicle to fund state ownership of the pipeline. In this article I will evaluate the argument that state ownership enhances the likelihood of success of a gas pipeline; I will evaluate the justification for that position; and I will propose some principles that should be considered when developing a plan or strategy for State participation in a gas pipeline.
"If we take advantage of this opportunity, we have a greater likelihood of seeing a pipe come true."- Ethan Berkowitz.
In the Frequently Asked Questions (FAQ) portion of his website Ethan Berkowitz, as support for his position that state participation increases the chance for success of the pipeline, refers to the Alaska Natural Gas Development Authority report in FAQ Q.1, the Alaska Natural Gas Development Corporation report in FAQ Q.13, and the Alaska Gasline Development Corporation report in FAQ Q.16. The report I assume he is referring to is the Alaska Gasline Development Corporation Project Progress Report titled “Alaska Stand Alone Gas Pipeline Project Update and FY 2010 Deliverables.” Page 28 of that report states that “All cost of service models run indicate the predicted cost to consumer will be higher than the current costs in the Cook Inlet.”
Dan Fauske, the CEO of the Alaska Housing Finance Corporation, in his presentation of the report update to a group of legislators, recognized the challenged economics of the gasline when he stated "There will need to be some type of equity infusion or some type of subsidy.”
I assume this was the basis of Ethan Berkowitz's position that equity invested in the pipeline through the PFD dividend checkoff will at least partially address the need for equity infusion and create "a greater chance making a pipeline become real."
There are two problems with this position. First, the equity infusion or some type of subsidy Dan Fauske was referring to needs to be of the type of infusion that would ultimately reduce the tariff. Mere ownership does not reduce the tariff. A State capital contribution reduces the tariff, and I am sure Ethan’s PFD owners are not interested in donating their dividends to the pipeline company.
And second, and most important, the report Ethan Berkowitz is using to support his position has nothing to do with a large diameter pipeline. It was drafted as an update on the in-state gasline! The Alaska Gasline Development Corporation was created “for the purpose of planning, constructing, and financing in-state natural gasline projects or for the purpose of aiding in the planning, construction, and financing of in-state natural gasline projects.” The Alaska Gasline Development Corporation and any reports it creates has nothing to do with a large diameter pipeline.
The economics of an in-state gasline and the large diameter gasline are entirely different. And the justification for state participation in a large diameter pipeline are entirely different that the justification for participation in an in-state gasline.
Major concerns of the large diameter pipeline are pipeline costs, cost overruns, tax stability, and the long-term price of gas in the lower-48. The major hurdle for an in-state line is economics of size. The in-state need for gas doesn't justify the cost of building a gasline from the north slope to southcentral Alaska.
This means that the primary justifications Ethan Berkowitz is using to support state participation in the pipeline has nothing to do with the large diameter pipeline he is proposing to own. But it is possible for state participation to enhance the likelihood of success of the pipeline, just not for the justification proposed by Ethan Berkowitz.
Participation in a Large Diameter Gasline
In order to draft a successful plan for state participation in a large diameter gasline, it is important to understand the view of state participation from a pipeline company standpoint.
The following are some principles that should be considered and followed if possible:
1) First, it must be remembered that the State does not have an automatic right to have an ownership share of the pipeline. It will only be invited to participate as an owner if it brings value or adds value to the pipeline entity.
2) A state entity would need to act like a corporation, not a regulator.
3) A state entity would need to keep information confidential that is normally kept confidential by a private corporation participating in the pipeline.
4) The State’s shareholders cannot have access to confidential information. Only information made available to the public in general will be provided to them. The State entity’s board of directors and staff will have access to confidential information, but only if they agree to keep the information confidential.
5) The State’s ownership interest cannot fluctuate throughout the time the pipeline is being built. Voting rights are based on ownership interest and cannot be changed just because more individuals want to invest their permanent fund dividends in the ownership of the state entity.
6) If there are cost overruns and all the other owners are required to pay their proportionate part of the overrun, the State will pay its proportionate share also.
7) The rights and responsibilities of the State entity that is participating in the pipeline cannot be subject to legislative changes that would violate their obligation under the participation contract they sign, commonly an LLC agreement.
8) Some pipeline companies would like to see the state own the same share of the pipeline as its royalty share of the gas. Other pipeline companies are not as concerned with this issue.
If a participation proposal is fashioned that meets the above criteria, it will have a greater chance of getting agreement from a pipeline company to allow the State an ownership position in the pipeline than if the criteria are ignored.
In my first article Own a Piece of the Pipe - Part 1, I evaluated the use of the Permanent Fund Dividend check-off as a vehicle to fund state ownership of the pipeline. In this article I will evaluate the argument that state ownership enhances the likelihood of success of a gas pipeline; I will evaluate the justification for that position; and I will propose some principles that should be considered when developing a plan or strategy for State participation in a gas pipeline.
"If we take advantage of this opportunity, we have a greater likelihood of seeing a pipe come true."- Ethan Berkowitz.
In the Frequently Asked Questions (FAQ) portion of his website Ethan Berkowitz, as support for his position that state participation increases the chance for success of the pipeline, refers to the Alaska Natural Gas Development Authority report in FAQ Q.1, the Alaska Natural Gas Development Corporation report in FAQ Q.13, and the Alaska Gasline Development Corporation report in FAQ Q.16. The report I assume he is referring to is the Alaska Gasline Development Corporation Project Progress Report titled “Alaska Stand Alone Gas Pipeline Project Update and FY 2010 Deliverables.” Page 28 of that report states that “All cost of service models run indicate the predicted cost to consumer will be higher than the current costs in the Cook Inlet.”
Dan Fauske, the CEO of the Alaska Housing Finance Corporation, in his presentation of the report update to a group of legislators, recognized the challenged economics of the gasline when he stated "There will need to be some type of equity infusion or some type of subsidy.”
I assume this was the basis of Ethan Berkowitz's position that equity invested in the pipeline through the PFD dividend checkoff will at least partially address the need for equity infusion and create "a greater chance making a pipeline become real."
There are two problems with this position. First, the equity infusion or some type of subsidy Dan Fauske was referring to needs to be of the type of infusion that would ultimately reduce the tariff. Mere ownership does not reduce the tariff. A State capital contribution reduces the tariff, and I am sure Ethan’s PFD owners are not interested in donating their dividends to the pipeline company.
And second, and most important, the report Ethan Berkowitz is using to support his position has nothing to do with a large diameter pipeline. It was drafted as an update on the in-state gasline! The Alaska Gasline Development Corporation was created “for the purpose of planning, constructing, and financing in-state natural gasline projects or for the purpose of aiding in the planning, construction, and financing of in-state natural gasline projects.” The Alaska Gasline Development Corporation and any reports it creates has nothing to do with a large diameter pipeline.
The economics of an in-state gasline and the large diameter gasline are entirely different. And the justification for state participation in a large diameter pipeline are entirely different that the justification for participation in an in-state gasline.
Major concerns of the large diameter pipeline are pipeline costs, cost overruns, tax stability, and the long-term price of gas in the lower-48. The major hurdle for an in-state line is economics of size. The in-state need for gas doesn't justify the cost of building a gasline from the north slope to southcentral Alaska.
This means that the primary justifications Ethan Berkowitz is using to support state participation in the pipeline has nothing to do with the large diameter pipeline he is proposing to own. But it is possible for state participation to enhance the likelihood of success of the pipeline, just not for the justification proposed by Ethan Berkowitz.
Participation in a Large Diameter Gasline
In order to draft a successful plan for state participation in a large diameter gasline, it is important to understand the view of state participation from a pipeline company standpoint.
The following are some principles that should be considered and followed if possible:
1) First, it must be remembered that the State does not have an automatic right to have an ownership share of the pipeline. It will only be invited to participate as an owner if it brings value or adds value to the pipeline entity.
2) A state entity would need to act like a corporation, not a regulator.
3) A state entity would need to keep information confidential that is normally kept confidential by a private corporation participating in the pipeline.
4) The State’s shareholders cannot have access to confidential information. Only information made available to the public in general will be provided to them. The State entity’s board of directors and staff will have access to confidential information, but only if they agree to keep the information confidential.
5) The State’s ownership interest cannot fluctuate throughout the time the pipeline is being built. Voting rights are based on ownership interest and cannot be changed just because more individuals want to invest their permanent fund dividends in the ownership of the state entity.
6) If there are cost overruns and all the other owners are required to pay their proportionate part of the overrun, the State will pay its proportionate share also.
7) The rights and responsibilities of the State entity that is participating in the pipeline cannot be subject to legislative changes that would violate their obligation under the participation contract they sign, commonly an LLC agreement.
8) Some pipeline companies would like to see the state own the same share of the pipeline as its royalty share of the gas. Other pipeline companies are not as concerned with this issue.
If a participation proposal is fashioned that meets the above criteria, it will have a greater chance of getting agreement from a pipeline company to allow the State an ownership position in the pipeline than if the criteria are ignored.
Wednesday, September 8, 2010
Own a Piece of the Pipe - Part 1
A Straight-forward Idea or a Complex Evaluation
At first blush, Ethan Berkowitz’s Owning a Piece of the Pipe idea seems fairly simple. In fact he stated, "To us and most Alaskans this is a pretty straight forward idea, the notion that Alaskans should also have the right, if they individually choose, to be able to own a piece of the pipe."
The idea may sound simple, but the implementation is decidedly more complex.
For example, Ethan Berkowitz has selected the Permanent Fund Dividend check-off as the appropriate vehicle to raise funds for participation in the pipeline project. But no analysis is provided regarding the impact on Alaska businesses if the program is as successful as he hopes.
A successful PFD check-off program will divert money from the Alaska economy and Alaska small businesses to a pipeline project that may or may not need the assistance of Alaska financial support to be viable.
"If we have about 20 percent of Alaskans participate in this proposal, which is what our projections would be, we'll see the cumulative effect of about $800 million in investment."
Ethan Berkowitz projects about 20 percent of Alaskans will participate in the opportunity to invest in the pipeline resulting in the cumulative effect of about $800 million in investment and perhaps close to $1 billion.
What will the impact be of diverting as much as $800 million to $1 billion away from the Alaska economy and into supporting a gas pipeline project? Many small Alaska businesses, in order to balance their budgets each year, depend on people spending their Alaska PFD’s and purchasing goods and services in Alaska. I think that Alaska small businesses would be very concerned about the impact on the viability of their businesses of such a large diversion of permanent fund dividends to the pipeline project.
An analysis should be done of the impacts of such a substantial loss of revenue to Alaska businesses prior to proceeding ahead with such a proposal.
Who will invest?
Diane Benson, the lieutenant governor candidate, says she would have been excited to have an opportunity like this when she was a young mother of limited means. Her statement suggests that she believes all Alaskans, regardless of their financial status, would seriously consider investing their PFD’s in the pipeline. Actually, reality is far different than the picture she projects. A young mother of limited means is barely able to balance her budget. The last thing she is going to consider is taking her PFD, investing it in a pipeline project, paying the taxes on the PFD income, and hoping some day that her investment will return a profit to her. She, and many others like her, will be using their dividends to catch up on paying bills, and possibly, they hope, have a little left over to do or spend on something special with the surplus.
The typical person that will be able to invest their PFD in the pipeline is a middle to upper income individual that does not need the PFD to pay for the basic necessities of life, a person that has sufficient surplus income that they can afford to lose it if the pipeline project fails to reap a profit.
So even though this program is touted as benefiting all Alaskans, as a practical matter, a much smaller cross-section of Alaskans will be able to avail themselves of the opportunity to participate. And if they participate, there has been no research, and apparently the question hasn’t even been asked, about the impact on the Alaska economy of these individuals diverting their PFD’s to the gas pipeline instead of investing them in their local community.
Ethan Berkowitz may want to reconsider using the Permanent Fund Dividend check-off as the vehicle for providing Alaskans with an opportunity to participate in the pipeline.
He may find that the negative impacts from the loss of revenue to the economy will exceed the benefit received by the pipeline. He might still want to consider some form of state ownership or participation in the pipeline and perhaps allow the public the opportunity to participate in the project through participating in the financing of the project. Perhaps the public could be provided the opportunity to purchase bonds in the project instead of acquiring an ownership interest. This would be a much safer, less risky venture for the Alaska public.
If Ethan Berkowitz continues to propose this idea, the next stage of his multi-part plan should begin to address this issue.
At first blush, Ethan Berkowitz’s Owning a Piece of the Pipe idea seems fairly simple. In fact he stated, "To us and most Alaskans this is a pretty straight forward idea, the notion that Alaskans should also have the right, if they individually choose, to be able to own a piece of the pipe."
The idea may sound simple, but the implementation is decidedly more complex.
For example, Ethan Berkowitz has selected the Permanent Fund Dividend check-off as the appropriate vehicle to raise funds for participation in the pipeline project. But no analysis is provided regarding the impact on Alaska businesses if the program is as successful as he hopes.
A successful PFD check-off program will divert money from the Alaska economy and Alaska small businesses to a pipeline project that may or may not need the assistance of Alaska financial support to be viable.
"If we have about 20 percent of Alaskans participate in this proposal, which is what our projections would be, we'll see the cumulative effect of about $800 million in investment."
Ethan Berkowitz projects about 20 percent of Alaskans will participate in the opportunity to invest in the pipeline resulting in the cumulative effect of about $800 million in investment and perhaps close to $1 billion.
What will the impact be of diverting as much as $800 million to $1 billion away from the Alaska economy and into supporting a gas pipeline project? Many small Alaska businesses, in order to balance their budgets each year, depend on people spending their Alaska PFD’s and purchasing goods and services in Alaska. I think that Alaska small businesses would be very concerned about the impact on the viability of their businesses of such a large diversion of permanent fund dividends to the pipeline project.
An analysis should be done of the impacts of such a substantial loss of revenue to Alaska businesses prior to proceeding ahead with such a proposal.
Who will invest?
Diane Benson, the lieutenant governor candidate, says she would have been excited to have an opportunity like this when she was a young mother of limited means. Her statement suggests that she believes all Alaskans, regardless of their financial status, would seriously consider investing their PFD’s in the pipeline. Actually, reality is far different than the picture she projects. A young mother of limited means is barely able to balance her budget. The last thing she is going to consider is taking her PFD, investing it in a pipeline project, paying the taxes on the PFD income, and hoping some day that her investment will return a profit to her. She, and many others like her, will be using their dividends to catch up on paying bills, and possibly, they hope, have a little left over to do or spend on something special with the surplus.
The typical person that will be able to invest their PFD in the pipeline is a middle to upper income individual that does not need the PFD to pay for the basic necessities of life, a person that has sufficient surplus income that they can afford to lose it if the pipeline project fails to reap a profit.
So even though this program is touted as benefiting all Alaskans, as a practical matter, a much smaller cross-section of Alaskans will be able to avail themselves of the opportunity to participate. And if they participate, there has been no research, and apparently the question hasn’t even been asked, about the impact on the Alaska economy of these individuals diverting their PFD’s to the gas pipeline instead of investing them in their local community.
Ethan Berkowitz may want to reconsider using the Permanent Fund Dividend check-off as the vehicle for providing Alaskans with an opportunity to participate in the pipeline.
He may find that the negative impacts from the loss of revenue to the economy will exceed the benefit received by the pipeline. He might still want to consider some form of state ownership or participation in the pipeline and perhaps allow the public the opportunity to participate in the project through participating in the financing of the project. Perhaps the public could be provided the opportunity to purchase bonds in the project instead of acquiring an ownership interest. This would be a much safer, less risky venture for the Alaska public.
If Ethan Berkowitz continues to propose this idea, the next stage of his multi-part plan should begin to address this issue.
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