Gov. Sean Parnell’s campaign has had it rough lately. Today, however, it got at least a little boost when lieutenant governor candidate Byron Mallott admitted during a lieutenant governor’s forum that although he voted to repeal the oil tax bill, “SB 21 is working.”
Here’s the audio of that that’s zipping through the tubes:
The Parnell campaign said it was “pleased.”
Also along those lines, Tim Bradner has a piece about the $20 per barrel drop in oil prices since July and that the state is better protected against such drops under SB 21 than it would be under ACES. “We are much better protected under MAPA than we would have been at these oil prices,” Commissioner of Department of Revenue Angela Rodell is quoted as saying.
Bradner explains:
MAPA has a fixed tax rate of 35 percent while the tax rate under ACES fluctuated with changes in oil values and as oil prices drop the ACES tax rate would have dropped quickly. At $90 per barrel, ACES would bring in about $3.08 billion. Under MAPA, revenues would be $3.22 billion, according to an analysis by the Revenue Department.
Garand,
While I support Walker, I certainly share your skepticism regarding this project especially now with Alaska as an equity partner. We are just beginning to expend the money for this. Can we afford the future demands on Unrestricted General Fund Revenues given our problems with deficit spending and probable falling oil prices? I don’t see how we can. Already some of the legislators, such as Eric Feige, who seemed to understand the complexity and risk of this project are gone so we have now lost some valuable institutional knowledge and you can be assured that when the actual contracts that will bind the state to performance as an equity partner are before the legislature for approval, many there will be experiencing their first exposure to this project. At that time, in a couple of years, the pressure to find more revenue will be almost unbearable to these politicians faced with eliminating/reducing the PFD and or returning to a State Income Tax. Watch for future legislative hearings on AKLNG to be even more restricted to testimony “by invitation only”.
Garand,
These are really good points. The quick answer is some of these discussions are happening. But a lot of this stuff isn’t going to happen until we get through pre-FEED – i.e., until we have a more refined cost estimate. This is, by the way, just another reason why Bill Walker is insane or a liar – you simply do not “end study hall” and start building a project of this scope without getting permits and without getting real, credible cost estimates. Once this happens, then the financing discussion begin in earnest.
As to other issues, the companies have made significant strides with a ton of vendors on many components of the project. Next time AK LNG hosts a community outreach meeting, I’d suggest you attend.
There are 4 components I would expect to see for a $100 billion (all-in, including ships) greenfield project if it was real. I see none of them. First, I would expect the customers to be advertising on television and in other media reaching Alaska voters for different parts of the customers’ agenda.
Second, I would expect the competition to already be here monkey-wrenching. An example is how Warren Buffet has been working to defeat the Keystone Pipeline to protect is BNSF Railroad. If this project was real then competing projects would have people here trying to screw it up. Also, in this category of litmus tests for project reality we could expect to already see environmental groups and private landowners making noises as to what they would try to gain by obstructing to project until ransom is paid. Remember, it was claims that threatened delay in TAPS construction that resulted in the Alaska Native Claims Settlement Act. For my money, the fact that no one is already trying to kill the project or collect ransom indicates that no one outside of state government thinks it’s real.
Third, I would expect financial interests worldwide to be here, especially during this huge election year, making sure the financing provisions and expectations met their individual desires. That is, financing syndicates would have already formed, at least informally, and those organizations would be very visible right now.
Finally, we would see private money being spent instead of only state money. Not only would the producers be spending real (instead of merely claimed) money but vendors such as one or more pipe manufacturers would be present in Alaska in some fashion. Nothing like that is happening in Alaska today; otherwise it would be reported in the Journal of Commerce if nowhere else, and we would see ads by these firms in that newspaper.
I wish it was otherwise. One more boom would be exactly right for me. But I just don’t see it. Despite war in the Middle East and sanctions directed toward Russia there is energy everywhere. Prices are soft and the outlook doesn’t favor making big bets on the long side.
Auroro, perhaps you could start by reading SB 21 yourself.
Garand,
Healthy skepticism is fine, but we also need to understand that (1) there is a huge demand for cleaner energy in Asia and this demand is not going away; (2) Asia markets aren’t thrilled about getting LNG from the middle east, east Africa, or Russia and would love to get North American LNG; and (3) every LNG project has huge challenges. The Canadian projects have reserve risk and first nations issues. Australia has massive inflation and high tempatures making liquefaction less efficient and the costs of Austrialian projects are over $50 billion. The Gulf of Mexico has distance and the Panama Canal to deal with and uncertainty regarding how much LNG the feds will allow to be exported.
And while Alaska has some massive challenges – costs, permitting, paranoid electorate – we also have some significant advantages: combining oil and gas production improves the economics for the producers, no reserve risk, cold climate, which makes liquefaction much more efficient, stable legal regime, proximity to Asia, long history of reliable deliveries, we’re not Russia, and a massive resource base worth hundreds of billions, if not trillions, that the producers would love to get on their balance sheets.
If the next Governor stays the course with this project, we will very likely start to see Asia customers coming to the table looking to get an equity stake in the project and I wouldn’t be surprised if they start acquiring reserves. The financing discussions are coming. Be patient.
Lynn,
The point is there isn’t much profit in the gas itself. We can tax it, but you aren’t going to get much for it because it doesn’t have much value. The best way to make money on these projects is by owning a share of the infrastructure. This entails risk of course, but unless global LNG is selling for north of $18, the gas itself won’t generate much revenue. You should check out the Black and Veatch royalty study that DNR commissioned in 2013. It provides a wealth of information related to how Alaska can maximize the value of the gas and get the biggest bang for our buck. This study was the basis for SB 138, which 52 legislators voted for in a hyper-partisan election year.
And yes there is a ton of competition out there. Some projects fail. Some succeed. The Canadian projects are having a hell of a time because of first nation’s issues -BC still hasn’t resolved its native land claims. Australia is experiencing huge inflation because several mega projects were sanctioned at the same time. You need to understand why some projects fail and other succeed. Just because there is competition doesn’t mean that no project will go forward.
If the Alaska LNG project is going to have any chance of sucess, Alaskans will need to understand how LNG projects come together and they will need to learn about this specific project’s challenges and opportunities and its costs and benefits, we will need drop the paranoia, and we should stop thinking that an antagonistic relationship with Exxon is going to move the ball forward. We can partner with the Big three and protect our interests. It’s not either / or.
What is the difference between investing in a gas line and investing in Tyson’s Corner shopping mall?
I am a fervent Parnell supporter; every time I hear Bill Walker speak I become more fervent. So that is full disclosure I suppose. Regardless of that, SB21 is bringing in more state revenues than ACES would have because ANS oil prices are lower than $105 to $110. If SB21 increases production then so much the better of course.
We may be in for $85 and even lower it seems. That is beyond control of anyone in Alaska, and if it has to happen then Parnell is the best person to have in charge during the storm. He made actual budget cuts (as opposed to the usual smoke and mirrors governments so often use) when he was in the Senate. I have never seen anyone do quite as well in understanding the budget – the politics, the numbers and the bureaucratic shell game – as he did during that time.
I continue to be extremely skeptical that an LNG deal can result in construction of a gas line and the attendant plants and ships. Some combination of balance sheets that easily exceede $100 billion need to be pledged to finance such a line (or train I guess). Right now everyone is willing to take state money to create a picture of that happening but real money is staying away, and I think the promoters could qualify for motion picture tax credits. Moreover, the climate is entirely wrong in my view; Alaska needs the world to appear to have almost run out of oil and to be desperate for natural gas but what we have right now is the opposite (as was the climate when TAPS was approved and financed). The world is chasing the same few Far East customers yet in Alaska we envision those customers making bankable pledges at prices substantially over the market price today (why would they do that?). With energy prices falling I cannot see how any informed, honest person can say Alaska can put together a project larger than any ever done and financed with a structure never before used.
What I fear most is that Alaskans will spend remaining state cash reserves right now using the coming gas line revenues as the rationale for the too high level of spending. How would you assess the likelihood of that happening?
FG,
If find it amazing that citizens who attempt to inform themselves and contribute to the debate would be described as “dangerous” if their opinion is not the same as yours. I know its that “damn 1st Ammendment”……
Jon,
We can make revenue as a sovereign should – by taxing the profits of the lease holders. Can we afford the highly probable cost overruns that will be associate with this project as an equity partner when facing our current fiscal problems. Enalytica (consultants to the legislature) provided a summary of current LNG projects. Of the 16 projects reviewed, 2 had insufficient data, 4 were within budget and the other 10 were costing more than projected. The average cost over run between the high of 120% for the Russian Sakhalin-2 and a low of 2.6% for Peru was 35%. I suggest we have no business acting as an equity partner . Another problem is the dynamic nature of the global energy business. Since the legislature adjourned the Kitimat B.C. project has stalled, the Australians are having to deal with providing affordable gas to residents who cannot afford to pay the international market value, and our legislature has changed. Are we to now hire another consultant then wait until January to address just these changes as an equity partner obligated to provide the maximum benefit for Alaskans?
According to data provided by Enalytica (consultants to the legislature) of the sixteen LNG projects listed 2 had no cost overrun date, 4 were on budget and the remaining 10 are experiencing cost overruns of 120% (Sakhalin-2), 45.9% (Australia Gorgon), 30% (Australia North West Shelf), 36.7%(Australia Queensland Curtis), 33% (Pluto), 26.7% (Papua New Guinea), 21.6% (Yemen), 21.5% (Norway Snohvit), 15.6% (Australia Gladstone LNG), and 2.6% in Peru. So assuming the 45 billion AKLNG estimates is wrong by just the overruns in Peru we now have a project costing 46 billion and with our 25% equity that represents a cool 250 million additional cost. Now I am sure you don’t want to go with the $65 billion AKLNG estimate and what happened to the Russians or maybe even what the Australians are facing. Are we going to be able to afford our associated costs as an equity partner? Also, the international energy business is much too dynamic for the State of Alaska to be involved in as an equity partner. For example, since the legislature adjourned, the Kitimat B.C. project has stalled, the Alaska legislature has changed, and Australia has to deal with the problem of their local populace not able to compete with the international markets for gas. What is the state’s mechanism to effectively deal with these kind of changes other than to wait until January or call a special session after hiring yet another consultant?
Jon,
Can we afford, as an equity partner, the significan probablity of project cost over runs?
According to data provided by Enalytica (consultants to the legislature) of the sixteen projects listed 2 had no cost overrun date, 4 were on budget and the remaining 10 are experiencing cost overruns of 120% (Sakhalin-2), 45.9% (Australia Gorgon), 30% (Australia North West Shelf), 36.7%(Australia Queensland Curtis), 33% (Pluto), 26.7% (Papua New Guinea), 21.6% (Yemen), 21.5% (Norway Snohvit), 15.6% (Australia Gladstone LNG), and 2.6% in Peru. So assuming the 45 billion AKLNG estimates is wrong by just the overruns in Peru we now have a project costing 46 billion and with our 25% equity that represents a cool 250 million additional cost. Now I am sure you don’t want to go with the $65 billion AKLNG estimate and what happened to the Russians or maybe even what the Australians are facing. Are we going to be able to afford our associated costs as an equity partner? Also, the international energy business is much too dynamic for the State of Alaska to be involved in as an equity partner. For example, since the legislature adjourned, the Kitimat B.C. project has stalled, the Alaska legislature has changed, and Australia has to deal with the problem of their local populace not able to compete with the international markets for gas. What is the state’s mechanism to effectively deal with these kind of changes other than to wait until January or call a special session after hiring yet another consultant?
Jon,
I understand Henry Hub is a commodity price and doesn’t include all the facets of production; however, that is a critical parameter. The commodity price is critical. Then again, what difference does it make if the gas is virtually free yet costs a disproportionate amount to get to market? Also, AKLNG depends on selling large volumes of gas. At some point you will have to recognize the total amount of future sales AKLNG will have to “corner” to be viable. That condition was mentioned during the testimony and should have been pursued.
Lastly, I see you show a variance in price range from 12 to 18 dollars. Is that variance attributable to just market demand or does take into account the possibility of significant cost overruns. According to data provided by Enalytica (consultants to the legislature) of the sixteen projects listed 2 had no cost overrun date, 4 were on budget and the remaining 10 are experiencing cost overruns of 120% (Sakhalin-2), 45.9% (Australia Gorgon), 30% (Australia North West Shelf), 36.7%(Australia Queensland Curtis), 33% (Pluto), 26.7% (Papua New Guinea), 21.6% (Yemen), 21.5% (Norway Snohvit), 15.6% (Australia Gladstone LNG), and 2.6% in Peru. So assuming the 45 billion AKLNG estimates is wrong by just the overruns in Peru we now have a project costing 46 billion and with our 25% equity that represents a cool 250 million additional cost. Now I am sure you don’t want to go with the $65 billion AKLNG estimate and what happened to the Russians or maybe even what the Australians are facing. Are we going to be able to afford our associated costs as an equity partner? Also, the international energy business is much too dynamic for the State of Alaska to be involved in as an equity partner. For example, since the legislature adjourned, the Kitimat B.C. project has stalled, the Alaska legislature has changed, and Australia has to deal with the problem of their local populace not able to compete with the international markets for gas. What is the state’s mechanism to effectively deal with these kind of changes other than to wait until January or call a special session after hiring yet another consultant?
How can SB-21 be working? Did anyone bother to read the legislation?
For the idiots who do not understand the legislation: The legislation has complicated factors that determine the actual rate paid. When all those factors are applied for the wells developed from 2003 forward, ALASKA GETS ZERO IN SEVERANCE.
If production increased under this voodoo legislation, ALASKA GETS NO SEVERANCE REVENUE. How could that ever work for Alaska? How is this constitutional?
DOR has not completed ANY audits. We are asked to believe only the representations made by the worst, most incompetent, dishonest administration in Alaska’s history. Before anyone can make INFORMED claims, they need to understand the legislation. Then we need independent audits completed- something that can not happen with a crook governor, Parnell.
How can SB-21 be working? Did anyone bother to read the legislation?
For the idiots who do not understand the legislation: The legislation has complicated factors that determine the actual rate paid. When all those factors are applied for the wells developed from 2003 forward, ALASKA GETS ZERO IN SEVERANCE.
If production increased under this voodoo legislation, ALASKA GETS NO SEVERANCE REVENUE. How could that ever work for Alaska? How is this constitutional?
DOR has not completed ANY audits. We are asked to believe only the representations made by the worst, most incompetent, dishonest administration in Alaska’s history. Before anyone can make INFORMED claims, they need to understand the legislation. Then we need independent audits completed- something that can not happen with a crook governor, Parnell.
Lynn Willis knows a lot. Enough to be dangerous for sure. Lynn Willis can learn a lot by reading Jon K closely.
What impresses me is the width of knowledge Lynn Willis expresses with articulation and clarity. I don’t know who Jon K is, however, I know that he knows his stuff when it comes to oil and gas matters. I suspect he is likely an attorney for an oil compnay.
Of course SB 21 is working. It has been working since it went into effect. Both Walker and Mallott wanted to repeal SB 21 – – how small minded. All they has to do is open their eyes. The employment halls were empty. Record amount of Alaskans were working in the oil fields. Thank you Mr. Mallott for finally getting your head out of your ass and recognizing such. Unfortunately, the clown you are running with still can’t see it. Democrats understand economic issues in Alaska about as much as I understand about microbiology. For the record, I have never taken a college level biology class.
Lynn, LNG prices are based on the cost of gas + liquefaction + transportation. Henry hub is the commodity price. That gas will be liquefied in the GOM and then transported to Asia. It will likely fetch somewhere between $12-18 dollars. It looks like we can get North Slope gas to Asia for about $12-13. This means the majority of the profits from this project will likely not be generated by the well head value of the gas – those that have an equity stake in the infrastructure will get a nice steady return. This is just another reason to give the Parnell team kudos – they recognized that the best way to maximize our value of the gas is by owning a piece of the infrastructure – which is how we ended up w Sb 138 – because the value of gas alone simply won’t generate much revenue for the state.
Good for Mallot. It is refreshing to see a politician make a statement based on facts especially when it is contrary to what his base thinks.
Perhaps opponents of Obamacare can admit that it has dramatically increaed access to health care and many millions now have health insurance?
The 35% tax rate is generating more revenue at this time and I appreciate Mr. Mallot recognizing that fact. That doesn’t mean we are out of the woods because despite increased production, lower prices can offset the benefit of that production.
Here is a link to the Alaska Department of Revenue showing ANS (Alaska North Slope) crude and Henry Hub gas prices: http://www.tax.alaska.gov/programs/oil/dailyoil/dailyoil.aspx
P.S. Don’t pay attention to that Henry Hub (Gulf of Mexico) gas price if you think our North Slope gas can make money at anywhere near that curremt low value.