Morning Headlamp — Alaska’s lawmakers make “first steps” on budget

March 10, 2016 | Posted in : News

Baby steps. Yesterday, the House Finance Committee moved out its final version of the state operating budget and onto the House floor. According to numbers provided by Legislative Finance Division Director David Teal, the committee versions of House Bill 256 and House Bill 257 cut about $168 million more than the governor’s proposal, which had roughly $100 million in reductions. House Finance members moved the budget out of committee, acknowledging it as a “first step,” rather than a final budget. Finance Co-Chair Rep. Mark Neuman said there are still reductions to be made in areas like education, which will require changes to current laws. Neuman said the Legislature has reduced spending by 30 percent in the past three years. “We need to continue to demonstrate that we’re reducing more,” he said.  Headlamp cautions the public not to celebrate until it is clear that “cuts” means actual reductions in state operating expenses – not use of other state funds to offset general fund cuts.

Uncharted territories. Tim Bradner opined on the current discussion surrounding Governor Bill Walker’s proposed tax on Alaska’s oil and gas industry. Bradner described the current state of affairs as “uncharted territory for Alaska,” referring to the fact that basically, it costs $52 a barrel to produce the oil and get it to market alongside a $30-per-barrel price, equating to a loss of $22 a barrel. Bradner notes that lawmakers, “should take care to preserve parts of that work, such as the “frontier” incentives for exploring big, underexplored basins of Interior and Northwest Alaska, where risks are high and industry has been loath to drill. This seems like a logical place to put incentives to work.” Tim Bradner understands the tough position that Alaskan lawmakers are in, but also notes that it seems illogical to be proposing a tax on an industry already in the red.

According to a new report by industry expert firm Wood Mackenzie, 50% of US LNG is at risk of shut-in over the next five years. Factoring in macroeconomic trends and market outlooks, “US LNG export utilization will be influenced more by the price of other commodities: US gas, oil and, particularly coal.”

 

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First Reads

Alaska House makes first move on budget bill
KTVA, Liz Raines, March 9, 2016

Alaska can’t afford current oil tax credits but should think twice before raising taxes
Alaska Dispatch News, Tim Bradner, March 9, 2016

Wood Mackenzie says up to 50% of US LNG is at risk of shut-in over the next five years
LNG Industry, David Rowlands, March 9, 2016

Plan for Southeast alternative fuel revived with propane
Alaska Journal of Commerce, Elwood Brehmer, March 9, 2016

Senate Finance Committee hears from more Alaskans concerned with fiscal crisis
KTUU, Rebecca Palsha, March 9, 2016

 

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Reality Check: Private Sector vs. Government

March 10, 2016 | Posted in : News

It’s been a tough week for the contracting community, the economy, and the state of Alaska as a whole, with BP’s announcement of a reduction in drill rigs on the North Slope. Headlamp was thrilled to tune in to Gavel to Gavel on Tuesday to hear the committee talking about jobs.

With our Governor seemingly unconcerned about the job losses that have occurred in the private sector (thousands), and misleading the public with his “everyone pays” theme while laying the majority of tax increases at the feet of the industry that already pays more than its fair share, it was refreshing to see another branch of government worried about jobs.

Or was it? Headlamp tuned in just in time to hear legislators lament the potential loss of jobs at…the University?!?!

“Even with the Governor’s reduction, we’re looking at hundreds of jobs; Fairbanks 136 positions, Anchorage 150 it looks like, I’m sorry – 108. And then with an additional $10 million cut which would occur even if this amendment passes, there are additional positions that will be cut on top of the Governor’s cuts.” Headlamp would remind readers that “positions” and “jobs” often refers to funded, yet unfilled positions and doesn’t always mean an actual person loses their job.

Where is this same level of sympathy and concern for the private sector positions the support industry is losing weekly? In testimony and private discussions, including with the above quoted legislator, contractors are relaying the harsh reality they are facing with layoffs and canceled contracts. To our dismay their stories are met with blank stares and glazed over eyes.

It is becoming clear that the Administration and our Legislature are choosing government over the private sector as they try to fill the budget gap.

Private sector job loss needs to matter to the Legislature as much as public sector job loss does; both contribute to the economy, and both have a multiplier effect. But our elected officials would do well to remember that ALL of the public sector jobs are funded by money earned by the private sector. So please give our job loss the same respect you are so generous with for state employees.

Until the Legislature begins to understand the staggering impacts that thousands of layoffs in the support industry will have and until they start operating the state like a business, Headlamp sees little hope for the private sector in Alaska. Since early 2015, successful businesses have been finding efficiencies and cost savings, operating at tight or break-even margins and yes, in some cases laying off employees. Our elected officials could learn a thing or two from these businesses – but the inspiration to do so is absent, as they are spending other people’s money.

 

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Morning Headlamp — Blue skies ahead for global energy prices?

March 9, 2016 | Posted in : News

Blue skies ahead? Whether it will prove lasting or not remains to be seen, oil futures traded in New York rose 5.5 percent on Monday to $37.90 a barrel, after rising nearly 4 percent on Friday. Amid slowdowns and industry pullback, some experts are cautiously optimistic that macroeconomic forces could be taking hold and oil prices could stabilize more quickly than expected. According to industry experts, global drilling rigs have declined by 130—including the most recent 3 at Prudhoe Bay—to 1,761, the lowest since 2002.

Quite the “adjustment.” Gov. Bill Walker says BP’s decision to reduce the size of its Prudhoe Bay rig fleet from five to two is part of a global response to low oil prices. “We’ve seen this in the past with low oil prices. They do this because it’s what they have to do. They have to make adjustments and I certainly understand that,” Walker told KTUU. Sarah Erkmann, external affairs manager for the Alaska Oil and Gas Association, said BP’s announcement about “shutting down rigs is more evidence of how dire the situation is for the oil and gas industry in Alaska.” In reference to Gov. Walker’s proposed tax hike on Alaska’s oil and gas industry, Renee Limoge Reeve, Alaska Support Industry Alliance Deputy Director said “When you’re talking about taxing companies that are already cash-flow negative, that doesn’t make economic sense to me.” The laying down of three rigs is a desperate attempt to keep their heads above water in a low price environment, on top of challenging policies being proposed by the state. Raising taxes on the industry in this environment seems likely to only further accelerate the job losses Alaska’s core industry has already seen.

In a Fairbanks Daily News Miner commentary, professor emeritus at the University of Alaska Fairbanks Geophysical Institute, Carl Benson, opines that SB 21 is to blame for our state’s multibillion dollar deficit. Headlamp fundamentally disagrees with this assertion, as the facts simply don’t back up Benson’s claim. SB 21 has not caused two-thirds of Alaska’s income to disappear since 2014, record low oil prices and unsustainable state budgets are truly at fault. As a professor, who’s salary, premium benefits, and generous retirement package is paid for in large part by oil taxes and royalties collected by the state, Mr. Benson should know better than to throw around false information. At these low oil prices, SB 21 is bringing in more revenue to the state than would ACES (Alaska’s previous oil regime that failed to increase production). Instead of looking to the oil and gas industry, which is cash flow negative at these prices, to bail out the state’s budget as Mr. Benson suggests, policy makers should look at reducing the operating costs of state government, including the University, given the fact that our state’s budget has increased over 100 percent since 2006.  

 

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First Reads

Oil prices perk up, suggesting a rebound has taken hold
New York Times, Jad Mouawad, March 7, 2016

House budget proposal criticized as ‘shell game’
Alaska Dispatch News, Nathaniel Herz, March 8, 2016

Unintended tax loophole subsidizes more than 100 percent of oil loss
Alaska Dispatch News, Dermot Cole, March 8, 2016

Thoughts on fixing the Alaska budget
Fairbanks Daily News Miner, Carl Benson, March 9, 2016

Gov. Walker says BP decision to cut rigs underscores need for fiscal solution to state’s budget crisis
KTUU, Paula Boddyn, March 8, 2016

2 top drillers pull back in Alaska
Energy Wire, Margaret Kriz Hobson, March 9, 2016

(Full text reprinted from E&E Daily with permission from Environment & Energy Publishing, LLC www.eenews.net. 202-628-6500”)

Low oil prices are continuing to take their toll on Alaska’s oil industry, with two of the state’s top energy development companies announcing plans to significantly cut their operations in the coming months.

BP PLC is chopping three of the five rigs now drilling new wells and reworking existing wells at the state’s Prudhoe Bay oil fields, which are the largest oil resource in Alaska.

BP manages those operations and is a minority partner in a consortium that owns the facility. Exxon Mobil Corp. and ConocoPhillips Co., the majority owners in the operation, were also involved in the decision to scale back the rig count.

Meanwhile, Houston-based Apache Corp. is abandoning its ambitious oil exploration program in Alaska’s Cook Inlet and leaving the state. Apache, which first came to Alaska in 2010, had amassed the largest lease holdings in the inlet region.

Both companies said their business downgrades were part of a continuing effort to cut spending in response to low oil prices.

A BP representative also noted that the cuts would help the three Big Oil companies improve “the long-term viability of an Alaska LNG project,” the multibillion-dollar natural gas pipeline and export venture that the companies are partnering on with the state.

Representatives of BP, Exxon Mobil and ConocoPhillips have recently warned that depressed oil prices are causing economic headwinds that could force the companies to reconsider moving forward with the $45 billion to $65 billion mega-project (EnergyWire, Feb. 18).

News of the oil industry cutbacks is raising serious concerns about the health of the Alaska economy, which is deeply dependent on oil revenues and jobs.

The Alaska Support Industry Alliance predicted that BP’s rig cuts alone will result in the loss of 200 to 300 direct oil industry jobs. Apache had been downsizing its operations for some time, so the final decision to leave Alaska is not expected to result in significant job losses.

The reduction in oil industry jobs is likely to cause a ripple effect throughout the state, noted Kara Moriarty, head of the Alaska Oil and Gas Association.

“Less rigs means fewer Alaskans working, causing our economy to shrink,” Moriarty said. “With one-third of all Alaska’s jobs tied to the oil and gas industry, every job loss is felt across the state, from Barrow to Ketchikan.”

Alaska Gov. Bill Walker (I) said he was “disappointed to hear that BP is scaling back its operations in Alaska and worldwide, but it’s an unfortunate reality of low oil prices.”

His said his staff “will continue to work closely with BP and all producers, the federal government and industry representatives to limit those effects as much as possible.”

But the governor didn’t back down on his proposals to hike state oil and gas industry taxes and reduce the state’s exploration credits as part of his wide-ranging plan to balance the state budget. Low oil prices have caused oil revenues to plummet in Alaska, resulting in a $3.8 billion budget deficit.

Oil industry groups charge that the BP and Apache cutbacks are a clear signal that the state should not look to the oil industry to balance the budget.

“The hard truth is, oil is not the answer to the state’s budget shortfall, and raising taxes on an industry that is already bleeding cash will only make a bad situation worse,” Moriarty said.

“We hope that our legislators in Juneau and the governor recognize the severity of the situation and don’t implement policies that further impact the industry in a negative way,” said Renee Limoge Reeve, deputy director at the Alaska Support Industry Alliance, which represents contractors and businesses that work for the state’s top energy and mining companies.

“Increasing taxes on a cash-flow-negative industry will only exacerbate the situation and lead to more layoffs in our industry.”

 

‘Glass-half-full’ governor confronts oil-driven fiscal crisis
Energy Wire, Margaret Kriz Hobson, March 9, 2016

(Full text reprinted from E&E Daily with permission from Environment & Energy Publishing, LLC www.eenews.net. 202-628-6500)

ANCHORAGE, Alaska — Alaska Gov. Bill Walker (I) is an optimist with a “glass-half-full” perspective on life. And that might be exactly what Alaska needs right now as the nation’s most petroleum-dependent state copes with rock-bottom oil prices.

For years, Alaska has relied on revenues from its North Slope oil fields to underwrite up to 90 percent of the state’s operating budget. But with oil prices now stuck in the $30- to $40-per-barrel range, that near-total dependence on oil has resulted in a whopping $3.8 billion budget deficit for the state.

Despite the state’s fiscal crisis, Walker is convinced that Alaska is on the brink of bigger and better times. The 64-year-old Fairbanks native will tell anyone who will listen that Alaskans are strong, resilient people who can tackle this problem much as they’ve overcome other serious hardships, most dramatically the record magnitude-9.2 earthquake of 1964.

The governor insists that the key to Alaska’s future lies in overhauling the state’s financial structure and commercializing the abundant natural gas reserves on Alaska’s North Slope. But both signature initiatives are facing major financial and political barriers that could define his term as governor.

Walker’s lifelong mission has been to build a pipeline to carry gas to rural Alaska communities and foreign markets. For the last 30 years, he’s been involved in advancing some version of a gas pipeline project. The repeated failure of those ventures actually impelled him to run for governor.

“I worked with all of our former governors back to Gov. [Tony] Knowles in trying to progress the gas line,” Walker said in an interview with EnergyWire. “I’ve tried everything else. I’ve sat in every other seat you could sit in except this one. So that was a driving force for me” to become governor.

During the last two years, Alaska has made more progress than ever before on commercializing the 34 trillion cubic feet of natural gas reserves known to exist on the North Slope.

In early 2014, the state joined forces with Exxon Mobil Corp., BP Alaska and ConocoPhillips Co. on a plan to build a $45 billion to $65 billion gas pipeline and export mega-project. That alliance, known as the Alaska LNG Project, was created under Walker’s predecessor, Gov. Sean Parnell (R).

The partners have nearly completed preliminary engineering work and have acquired hundreds of acres of land in the Kenai Peninsula needed to build a liquefied natural gas export terminal to ship Alaska natural gas to Asian markets beginning in 2024-25.

But continuing low oil and gas prices are casting a deep shadow over the project. Seriously hit by declining oil revenues, the state’s industry partners are worried about advancing into the next stage of engineering and design on the venture, which would cost billions of dollars (EnergyWire, Feb. 18).

Those concerns are echoed by the U.S. Energy Information Administration, which wrote last week that “[p]roposed LNG terminals in the United States face not only increased competition from other domestic and foreign terminals that have been completed, but they also face uncertainty in global LNG demand.”

Walker is doggedly fighting any potential delays, though he has yet to explain how he would keep the gas line on track. “I’m working hard to make sure there’s no slowdown,” he said. “I don’t think there’s a reason to slow down.”

The governor insisted that potential buyers are looking well beyond today’s market conditions. “You don’t necessarily want to look at where we are today and say it’s going to be this way in 2024-2025,” he said. “The market makes that decision.”

But the governor’s continued optimism is becoming a tough sell to oil company executives as well as lawmakers in the Alaska capital city of Juneau.

“A growing number of legislators are starting to see the reality that this may not be the time for an Alaska LNG project,” said Larry Persily, former head of the White House Office of the Federal Coordinator for Alaska Natural Gas Transportation Projects and now special assistant for the Kenai Peninsula Borough.

“Not to say that they’ve given up on the project,” Persily said. “They’re just accepting that it may not happen on the schedule that we thought it was going to happen as recently as last year. There’s too much to gamble on a very crummy market at the moment.”

Son of pioneers

Walker is a tall, solidly built family man who’s been married to his wife, Donna, for 38 years. The couple has four children and four grandchildren.

A likable, slightly formal person with a quick smile, the governor wears his heritage as a badge of honor. Born in Alaska before the region became a state, Walker proudly describes his parents as Alaska pioneers.

Both parents came north during World War II, his father as an Alaskan Scout with Castner’s Cutthroats in the Aleutian Islands and his mother to work on the Alaska-Canadian Highway project.

Walker was deeply affected by the devastation of the 1964 Alaska earthquake and tsunami, which wiped out his family’s construction business in Valdez. Helping his family survive those dark days instilled in him a serious work ethic that continues today.

 

The governor recalls that it was ultimately the construction of the Trans-Alaska oil pipeline that “lifted us out of the depths of our despair and created incredible opportunities for Alaskans all across the state.”

He noted that at the time, he worked “as a carpenter, as a laborer, as a Teamster by day. At night, I built houses. It was a time when you just knew that you were going to better yourself if you applied yourself.”

As work on the pipeline was winding down in the late 1970s, Walker jumped into Valdez politics, serving on the City Council and later as mayor.

After attending law school, Walker rose to state prominence as an oil and gas attorney and became project manager and general counsel of the Alaska Gasline Port Authority.

That group, created by the city of Valdez, Fairbanks North Star Borough and North Slope Borough, championed construction of a natural gas pipeline project from northern Alaska to an export terminal in Valdez, with an off-take point at Fairbanks. Like most of the state’s other gas line projects, the venture never got beyond the planning stage.

Walker first ran for governor in 2010 but lost the Republican primary to Parnell. At the time, Parnell was completing the four-year term of former Gov. Sarah Palin (R), who resigned from the governor’s seat in 2009. In 2010, Parnell was elected Alaska governor in his own right.

In early 2013, Walker again filed to run in the Republican gubernatorial primary for a rematch with Parnell. But he later decided to skip the primary and run as an independent.

Then two months before the November 2014 general election, Walker and the state’s Democratic candidates joined forces in a new alliance that they calculated would have a better chance of defeating Parnell than either would individually.

At the urging of state union officials, the competitors formed the Alaska First Unity ticket, with Walker running for governor and the Democratic gubernatorial candidate, Alaska Native leader Byron Mallott, as lieutenant governor.

The new team ultimately beat Parnell by a little over 6,000 votes in the general election. At the time, Parnell was under attack for his administration’s role in a sex abuse scandal involving the Alaska National Guard.

New perspective after a year in office

Since taking office, Walker has taken a populist approach to politics, relying on town-hall-style meetings and a steady stream of speeches and news conferences to sell his message to Alaskans.

During his first year, the governor repeatedly clashed with state Republican leaders, who accused him of negotiating by press release. One Alaska political insider explained that “Bill makes the mistake of equating schmoozing and sucking up with corruption and bad government. But that’s how you get your initiatives passed.”

This year, Walker has taken steps to ease the tensions between the two sides, holding regular meetings with the state House and Senate leaders and inviting them to dinners and bowling matches.

Walker has a more cautious approach to working with the state’s oil and gas companies than the more industry-friendly Alaska Republican leadership or Parnell, who was a lobbyist for ConocoPhillips before becoming governor.

The governor’s perspective was shaped by his days as an oil and gas attorney. He represented the city of Valdez in lawsuits that charged the oil companies with lowballing the property tax valuation of the industry-owned Trans-Alaska pipeline system.

He took the state of Alaska to court for allowing Exxon Mobil to hold onto and develop its promising natural gas leases at Point Thomson in northern Alaska despite decades of industry delay.

In Walker’s view, oil industry executives make investment decisions based on company profit, not Alaska’s welfare. “There’s no question that it’s a major plus to have Exxon, BP and ConocoPhillips,” the governor acknowledged. “But they have their own internal limitations on where they do projects. They have to weigh one against the other.

“We don’t. We only have one. Because of that, I am fairly laser-focused on this [natural gas] project,” he said.

Walker is convinced that the state should take a more aggressive role in deciding how and when its North Slope natural gas and other resource are developed, rather than repeatedly beseeching the companies to invest in new projects.

“It should be a different model going forward where the sovereign is more of a participant than we’ve been in the past,” he argued. “For the last 38 years of trying to get a pipeline, the state was not acting like a sovereign. We were acting subservient to the leaseholders. And that’s not what I do.”

During his election campaign, Walker was critical of Parnell’s handling of the Alaska LNG project. He specifically attacked Parnell’s complicated agreement with TransCanada Corp., which allowed the pipeline company to pay some of the state’s expenses in return for a partial ownership stake in the project.

Once in office, Walker pushed the Republican-controlled Legislature to buy out TransCanada’s contract, a step that gave Alaska a full quarter share in the venture. Lawmakers agreed to the plan, however, only after TransCanada testified in favor of the buyout (EnergyWire, Nov. 6, 2015).

Circle of advisers

The governor relies heavily on a tight circle of advisers — sometimes to the exclusion of top state professionals, according to his critics.

Walker appointed his former law partner Craig Richards as Alaska attorney general. The governor’s chief of staff, Jim Whitaker, is a former Fairbanks North Star Borough mayor who worked closely with Walker on the Alaska Gasline Port Authority project. His deputy chief of staff, Marcia Davis, served in Palin’s administration and was a strong critic of state oil tax changes made by Parnell.

The governor has also become close with Lt. Gov. Mallott, who served as mayor of Juneau. In addition, Walker’s wife, Donna, who is an oil and gas attorney, is part of his core team and attends key business meetings with the governor.

Walker has been criticized for hiring a string of expensive outside consultants to help negotiate with industry and improve relations with Washington, D.C.

The governor’s political support comes from Alaska’s unions, Native groups and some Democrats, though many have challenged the governor’s more conservative political proposals. Industry officials say he’s also backed by roughly one-third of the state’s residents who have historically suspected that the oil industry is out to take the state’s resources and run.

Despite tensions with state Republican leaders, the governor maintained a high popularity rating during his first year in office. A November poll gave Walker a 64 percent approval rating with Alaska voters. The results, drawn from a survey of 303 state voters, was conducted by Morning Consult, an online politics and business company.

Kevin Harun, a former spokesman for the Alaska Democratic Party and now Arctic program director for Pacific Environment, described Walker as “more conservative than I am. But I trust him to act in the best interest of the Alaskan people.”

“I can’t say that about some of our past governors,” Harun said.

Changing the dividend

While Walker holds fast to his goal of completing a natural gas export project within the next nine years, he has also taken center stage in addressing the state’s looming fiscal crisis.

In December, the governor won widespread praise for developing a comprehensive fiscal package that would cut state programs, increase revenues and change the way Alaska’s oil money is used within the state (EnergyWire, Dec. 10, 2015).

Since the plan went to the Legislature, however, Alaska’s Republican leaders have focused on making deeper cuts to the state’s social programs and adopting fewer taxes on industry than Walker proposed.

The Legislature has not yet tackled the most radical piece of Walker’s plan that would replumb the state’s financial structure. The governor’s staff estimates that move would cut the state’s budget deficit by $2 billion.

Currently, Alaska underwrites state general fund programs by tapping its North Slope oil royalties and production tax revenues, as well as its gas industry’s property and corporate income taxes. A portion of the royalty revenues also go into the state Permanent Fund, created in 1976 to save oil money for future generations of Alaskans.

Over the years, the Permanent Fund has grown as oil funds were reinvested by an independent state corporation. Part of those investment earnings are distributed each year to Alaska residents through a Permanent Fund dividend check.

Funding state operations with oil revenue worked well as long as oil and gas prices remained high. But with prices now crashing, Walker is proposing a complex plan that would include using a portion of the Permanent Fund earnings to help pay for the budget. Under that plan, future annual dividends would be tied to the state’s annual oil revenues.

Meanwhile, two state Republican lawmakers have introduced alternative approaches for using the Permanent Fund to pay for state general programs. Those separate proposals are sponsored by state Sen. Lesil McGuire and state Rep. Mike Hawker, both of whom are not running for re-election.

Walker said he’s open to negotiations over details of the budget package. “The fact that we’re having this discussion is a very good thing,” he said. “We’re not wedded to one [plan] versus the other.”

“What we’re trying to do is take the volatility of oil [prices] out of our budget and put that volatility over into the permanent fund,” he said.

Credit ratings go negative

While the political debate heats up in Juneau, Alaska’s massive budget deficit is taking its toll on the state’s financial standing. Early this month, the nation’s top credit rating firms downgraded Alaska’s bond ratings from AAA to AA plus, or placed the state on a negative investment outlook.

Prior to those announcements, Walker and the state’s top financial officials flew to New York City in an unsuccessful attempt at persuading Moody’s, Standard & Poor’s and Fitch Ratings to retain a higher rating for the state.

Walker said the financial analysts were encouraged by his plan to restructure the state’s budget system and wipe out the deficit. But they “questioned whether or not it would be passed in its entirety by the Legislature. We said we believe it will be. And they said: Show us.”

With the Alaska Legislature’s 90-day session more than halfway over, pressure is increasing for lawmakers to provide funding for the state’s programs and to consider potential new revenue sources.

In the coming days, the state House and Senate are expected to adopt funding bills for fiscal 2017. The proposals will include more dramatic program cuts than Walker suggested. The next step will be considering new sources of revenue.

But as negotiations continue, the politically sensitive budget issues could be affected by Alaska’s November legislative elections. Many state lawmakers are up for re-election, which could give them second thoughts about supporting higher or new taxes.

 

As a result, some suggest that many of the governor’s proposed tax hikes, particularly his plan for a personal income tax, are not likely to be included in the final budget bill. They say examining all of Walker’s budget package could take several years.

“This is a multiyear process, I think everyone knows that,” state Sen. Mike Dunleavy (R) said at a news conference Monday. “If anyone thinks you can solve this issue in one year, in 90 days, they’re fooling themselves.”

The governor acknowledges that parts of his budget plan are “not politically comfortable. But it’s fiscally responsible.”

“I don’t like taxes,” Walker asserted. “There are pieces of the plan that I don’t particularly like. … [But] if we do nothing, the Permanent Fund program goes away entirely. It’s reached a time in Alaska’s history where we can no longer live exclusively off of our resources.”

 

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Questions for the Committee

March 8, 2016 | Posted in : News

Headlamp is a loyal watcher of the House Resources Committee hearings. In recent weeks, we’ve watched hours of testimony on HB 247 by the Administration, the producing and exploring companies, trade organizations and many others.  Many times we’ve wished we could have the privilege of the microphone.

During yesterday’s testimony by Tax Division Director Ken Alper this was truer than ever. Below are just a sample of the questions we would like to ask Director Alper:

  • The term “Government Take” has been used for years by different Administrations, the Legislature, consultants to the Legislature and Governors, the industry and the public. It is the term used worldwide to judge the competitiveness of tax regimes and describe exactly what the government is doing with their tax policy. Why have you suddenly started using “Share of Profit?” It seems like an attempt to gain support for a plan by misleading the public about what it actually does. Did the Governor direct you to make this change?
  • Am I reading this right? At $40 per barrel of oil government take is over 100%?
  • At $50 a barrel, the share of government take actually increases?
  • Is it fair to say your proposal worsens project economics even at $50 a barrel for small independent explorers and producers?
  • Does your proposal help increase production? Or will it cause a net decrease?
  • What affect will the $25 million credit cap have on new and existing projects/production?
  • Companies have testified to this committee that the $25 million cap on credits will cause projects to either come to a halt, or not come to fruition at all. How do your models account for that?
  • Have you run the economic impact to our treasury if one of these 50 million barrel fields is forced to defer development, even for a couple of years, because of this policy?
  • Isn’t it fair to say because of the regressive nature of our royalties, that credits are working as intended at low prices to keep projects economic?
  • Would economists use such a low discount rate when running their economics?
  • What would a 10% or 12% discount rate – a more standard variable – do to your impact analysis?

The implications of this legislation are far greater than they may appear. These are the types of questions we hope to hear as the bill progresses through the committee.

 

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Morning Headlamp —Prudhoe Bay slims down to two rigs

March 8, 2016 | Posted in : News

Prudhoe Bay cutbacks have arrived. Prudhoe Bay producers have announced pending production cuts, from five drilling rigs to just two. The decision was largely the result of low oil prices that are expected to impact more than 200 contracting jobs while sending negative waves across the state’s economy. With oil prices at their lowest since 2008, the news comes on the heels of several other announcements of job reductions and project delays as companies slash operations in Alaska. The decision will, in the next few months, lead to the idling of two rotary drilling rigs and a coil drilling rig. The rigs are operated by contractors Nordic-Calista Drilling, Parker Drilling and Doyon Drilling. “That’s a real bummer,” said Gunnar Knapp, director of the Institute of Social and Economic Research. “Every decision of this sort has a consequence for the economy, and the problem is that these are not only a lot of jobs, they are high-paying jobs.” The affected drilling companies are all members of the Alaska Support Industry Alliance  said Alliance general manager Rebecca Logan.  Since 2015, support industry companies have been modifying their behavior to adjust to a low oil price environment – reducing operating costs, reducing wages and benefits, and as a last resort, laying people off.  Headlamp believes the state of Alaska could and should learn from the private sector about managing its budget in these tough times. “Any further changes brought about by House Bill 247 will only exacerbate a bad situation and make it much worse for Alaskan companies and Alaskan workers,” she added.

Racing the clock. With 40 days left in the official session calendar, the Alaska Legislature is making quick work of this year’s budget, working at a pace not seen in recent times, with the House and Senate both set to take their first votes on spending plans by early next week. GOP leaders who set the Legislature’s agenda in both chambers say they’re trying to get the budget out of the way so that they can make room for debate on the revenue-producing legislation. “I now know there will be something — I can say that with certainty,” said Sen. Lesil McGuire. To cover the gap, Walker has proposed minor budget cuts combined with bills to restructure the $52 billion Permanent Fund; institute a personal income tax ($200M); and levy increased taxes on commercial fishing, mining, cruise ships, oil production, motor fuel, tobacco and alcohol (another $257M). Headlamp is anxious to see the final results of the legislature’s budget work – hopefully permanent changes to operating costs will have been made – and not a series of one-time cuts coupled with the use of funds from other state accounts to make it look like the budget has been reduced.  Alaskans won’t appreciate the time spent if real reform has not occurred. 

Another outside consultant couldn’t get Governor Walker to commit to Alaska’s oil and gas industry. A proposal to turn North Slope gas to gasoline and ship it through the trans-Alaska pipeline was abandoned following an analysis conducted by a consultant from Greengate LLC. The proposal, made on behalf of Saturn Ferrostaal Gas Chemicals LLC, was introduced in 2014 and its end is attributed to low oil prices.

 

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First Reads

Oil giants to sharply reduce rigs working at Prudhoe Bay, affecting scores of jobs
Alaska Dispatch News, Alex DeMarban, March 7, 2016

Job losses predicted in new study would rival Alaska’s worst ever
Alaska Dispatch News, Charles Wohlforth, March 7, 2016

Walker administration reviewed but didn’t pursue Slope gas-to-liquids pitch
Associated Press, Becky Bohrer, March 7, 2016

Lawmakers speed through budget work, but push off payment plan for later
Alaska Dispatch News, Nathaniel Herz, March 7, 2016

Senate Opens Week with Budget Cuts and Thinly Veiled Threats
Alaska Commons, Craig Tuten, March 7, 2016

 

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Morning Headlamp —Long week of budget talks ahead

March 7, 2016 | Posted in : News

House members are prepping for a long week of budget talks following the end of Senate budget subcommittee hearings on Friday. Senate Finance Co-chair Pete Kelly said the Senate should have the budget in conference committee by March 15. That conference committee will then reconcile the differences between the House and Senate budget versions. The House Finance Committee will consider budget amendments today. In a press conference, House Speaker Mike Chenault said the budget will see debate on the House floor Wednesday, Thursday, and potentially Friday. This is a crucial week for Alaska. Stick with Headlamp as we keep you up to date on any developments throughout the week.

Let’s think long-term. KEEP Alaska Competitive co-chairs Marc Langland and Jim Jansen opined on the future of Alaska’s fiscal policy in an Alaska Dispatch News commentary. The pair stresses the fact that taxing Alaska’s oil and gas industry, while tempting, is not in the best interest of the state going forward. According to the piece, Alaska’s oil and gas industry has been showing, “encouraging numbers, especially for an industry that has suffered record losses due to plummeting oil prices. North Slope oil now sells for less than it costs to produce, leading to huge losses and negative cash flows. In spite of these losses, the industry continues to invest heavily in Alaska. We must be very careful not to punish this investment behavior by raising taxes during these difficult times. The oil and gas industry still supports one-third of the entire state economy and has provided 88 percent of all state revenues since statehood.

Headlamp couldn’t agree more with the KEEP Alaska Competitive co-chairs. It would be foolish to believe that an aggressive tax on the industry that has been of the upmost importance since the state’s inception is a smart policy designed in the best interest of Alaska’s future.

“We’re committed.” AKLNG megaproject representatives said that although their leaders have spoken of possible delays, employees of the project remain set on smaller steps before them. “Our marching orders are to get through and complete pre-FEED,” AKLNG Community Stakeholder Advisor Josselyn O’Connor said. “We know there’s a lot of noise around the project right now,” O’Connor said. “But we’re committed to pre-FEED. I think the owners stood up and said they’re committed to pre-FEED. We’re also looking at optimization: how do we get the cost of this project closer to the lower end of that price ticket? The other big thing is the resource reports. Those have to line up.” Headlamp is happy to here, slowly but surely, the AKLNG megaproject is moving forward in a low price environment.

 

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First Reads

New partner selected for Interior Alaska natural gas project
Fairbanks Daily News Miner, Matt Buxton, March 5, 2016

AK LNG pre-FEED work continues with uncertain future
Alaska Journal of Commerce, Ben Boettger, March 2, 2016

Natural gas production growth leads to development of LNG export terminals
Energy Global, Rosalie Starling, March 4, 2016

Alaska shouldn’t turn to higher taxes on oil industry to square budget
Alaska Dispatch News, Marc Langland & Jim Jansen, March 4, 2016

EIA Report Sounds Somber Note For U.S. LNG
Forbes, Tim Daiss, March 4, 2016

House, Senate Poised to Spend Week on Operating Budget
Alaska Commons, Craig Tuten, March 6, 2016

 

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Morning Headlamp — Apache leaves AK & CP taps a nearly 100 year old reserve

March 4, 2016 | Posted in : News

Apache shuts its doors. Apache Corp., an independent oil company based in Houston, Texas, said in a statement on Thursday it was closing its office in Alaska. Crumbling oil prices over the last year and half have forced the oil and gas industry in Alaska and elsewhere to mothball projects and slash workforces. The company was one of the biggest leaseholders in the Cook Inlet region. The “negative” impact will hurt the Kenai area he represents, said Mike Chenault, R-Nikiski, the House speaker, who for years has had his own oil-field service company. “It’s just not good news,” he said. “If they’re not working, contractors aren’t working, suppliers aren’t working. It’s just a feeding frenzy,” he said. Apache did not provide information about the number of Alaska jobs lost in the shutdown. Headlamp is sorry to see yet another Alaskan energy producer forced out of the state.  Alaska can’t control oil prices – but it can control policies that incentivize companies to invest in Alaska. 

The Alaska Industrial Development and Export Authority announced Thursday it is negotiating solely with an Interior Energy Project partner to supply Cook Inlet natural gas to the Fairbanks area. IEP Manager Bob Shefchik said to the AIDEA board that the proposal by Salix Inc. to build a small natural gas liquefaction facility on Point MacKenzie in the Matanuska-Susitna Borough is the best option for the project as it faces viability challenges brought on by low oil prices. The ability for Cook Inlet producers to supply another market long-term was unclear when AIDEA first began the project in 2014, but the Inlet’s available gas reserves have grown since, as new companies have entered the market. Hilcorp Energy’s work on existing gas fields has also improved the situation. Detailed negotiations with Salix are ongoing, according to Shefchik, and an official recommendation from the AIDEA board to continue with Salix as a partner is expected at its March 31 meeting.

Headlamp is confused. In the same week that companies and utilities are testifying against the Governor’s new oil tax bill – citing its potential to kill exploration and development in Cook Inlet –a state entity announces its intention to help build a new gas liquefaction plant . . . that relies on exploration and development in the Cook Inlet. Left hand meet right hand – please consult each other before wasting any more state money and over taxing industry.  

Thank you, President Harding. Despite a low price environment, ConocoPhillips confirms that it will continue to invest in Alaskan energy. Tapping a reserve first set aside in 1923, ConocoPhillips is the first oil company to draw crude from the National Petroleum Reserve-Alaska, an area the size of Indiana established President Warren G. Harding. Headlamp salutes ConocoPhillips for reaching this magnificent milestone in spite of all the barriers that government erected to stop progress. 

 

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First Reads

Apache oil company to shut down Alaska operations
Alaska Dispatch News, Alex DeMarban, March 3, 2016

IEP moves ahead with Inlet gas plan
Alaska Journal of Commerce, Elwood Brehmer, March 3, 2016

First oil flows from Alaska reserve set aside in ’23
CNBC, March 3, 2016

ConocoPhillips Says Low Oil Prices Won’t Stop It From Drilling In The Alaskan Arctic
International Business Times, Maria Gallucci, March 3, 2016

House committee may quintuple Gov. Walker’s state budget cuts
KTOO, Andrew Kitchenman, March 3, 2016

Fireworks erupt at committee when chair drafts another GOP senator for vote
Alaska Dispatch News, Nathaniel Herz, March 3, 2016

Alaskan LNG firm seeks export permit from Canada’s energy regulator
Financial Post, Yadullah Hussain, March 3, 2016

 

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Friday’s Fast Five

March 4, 2016 | Posted in : News

Headlamp wants our followers to always be up to date with the developments in Alaska’s economy, politics, and industry. Check out this week’s rundown of the stories effecting you.

Top Story of the Week

Following last month’s downgrade by credit agency Standard and Poor’s, Alaska was rocked again by more negative news. Moody’s Investors Service downgraded the state from AAA to AA1, according to a recent report. The negative analysis was based on “unprecedented structural imbalance” in the face of budget discussions and a multi-billion dollar deficit. It was also reported that fellow ratings agency Fitch Ratings may also follow suit.

Top Reads of the Week

Apache oil company to shut down Alaska operations
Alaska Dispatch News, Alex DeMarban, March 3, 2016
A Cook Inlet oil explorer that arrived in Alaska with bold plans six years ago is leaving the state, another victim of collapsed oil prices.

Time for another approach on Alaska gas line fiscal certainty
Alaska Dispatch News, Frank Murkowski, March 2, 2016
Alaskans have just been told gas line contract negotiations have not progressed satisfactorily. Thus, there is no time left to get a constitutional amendment allowing a vote on fiscal certainty on the 2016 ballot.

Legislature’s Consultants Outline “Good, Bad, and Ugly” of Oil Tax Credit Plan
Alaska Commons, Craig Tuten, February 28, 2016
Janak Mayer of the firm enalytica, the legislature’s oil and gas consultants, outlined “the good, the bad, and the ugly” of Gov. Bill Walker’s proposed oil and gas tax credit reform Friday.

Quote of the Week

“During the warm standby, jobs will be at a minimum,” — Karsten Rodvik, AIDEA’s external affairs officer.

 

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The Alliance Weighs in on HB 247

March 4, 2016 | Posted in : News

“We’ve heard a lot of questions during testimony about compromise on this bill; there is no compromise, this is just plain bad policy. There is no compromise that doesn’t result in significant job losses for Alaskans. Any additional tax on the industry will result in serious consequences to our state economy,” said Bryan Clemenz, Alliance Government Relations Chair.

On Wednesday, March 2nd, Alaska Support Industry Alliance board members testified before the House Resources Committee and refuted the claim that HB 247, Governor Walker’s oil and gas tax legislation has to pass in some form in order to help address the state’s fiscal situation. Bryan Clemenz with Bristol Bay Industrial, Doug Smith with ASRC Construction Holding Company & LRS, and Tom Walsh with Petrotechnical Resources Alaska provided the testimony.

Key Messages:

  • Alaska is still an oil and gas economy
  • Increased production is the best answer to the state’s fiscal dilemma
  • A stable fiscal climate is necessary to attract the investment required to increase production
  • Alliance member Doyon is an excellent example of successful investment driven by tax credits
  • Alliance member Ahtna’s exploration efforts are benefiting from tax credits
  • Doyon and Ahtna’s projects have huge potential in terms of jobs and rural fuel supply
  • Cook Inlet tax credits have incentivized activity, increasing production from 7.5mb/d to 18mb/d
  • The support industry has lost more than 1000 jobs since December of 2015; this is the tip of the iceberg
  • In a low price environment, Alliance members have responded by reducing margins, reducing wages and benefits and laying people off
  • Oil production is the bridge to any LNG project in Alaska
  • The state can sink the ship by overtaxing

We expect a committee substitute for the bill next week and will provide our readers with an analysis of changes that are made and what the impacts would be. Stay tuned…

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Morning Headlamp — ASRC’s reaction to 9th circuit ruling & Gov. Murkowski weighs in

March 3, 2016 | Posted in : News

“Egregious” overreach. In a press release, the Arctic Slope Region Corporation (ASRC) said the recent decision by the ninth circuit court “could needlessly delay or cancel development projects in the state and make the cost of living in northern and western Alaska even higher.” The ruling, to set aside approximately 187,000 sq. miles of land for habitat reserves is, also described by ASRC president Rex A. Rock Sr., as an, “egregious example of federal overreach.” The area, larger than the size of Washington and Arizona combined, was designated a critical environment for polar bears. While everyone in Alaska wants to do what is sustainable and responsible for Alaska’s environment, using it as a cover for blatant federal overreach is wrong. The real victims of this decision will be Alaska’s native communities and businesses in those areas, whose economic future’s will be greatly diminished.

No time like the present. Former Governor Frank Murkowski weighed in on the fiscal problems facing the AKLNG megaproject in an Alaska Dispatch News commentary. In his piece, the former leader of the state stresses there is no time left to get a constitutional amendment, allowing a vote on fiscal certainty for the AKLNG project, on the 2016 ballot. Citing his proposed plan to move forward on the project, Murkowski says that the current trajectory of the Walker administration (to put off fiscal certainty until a vote on a constitutional amendment in the 2018 elections and the resulting delay in beginning FEED) is unacceptable. The former Governor wants the state only to be required to fund its portion of FEED if the project decides to move forward to construction – otherwise, that investment would have to be paid by industry. Though on paper the plan seems wise, it’s questionable whether this agreement would be possible under the current AKLNG project – and whether it’s at all realistic given the current price environment the industry and Alaska find themselves in. When Governor Murkowski was involved in a similar negotiation – he believed that a constitutional amendment was not required, and that fiscal terms could be handled in a contract. Governor Walker, in his recent press conference with the producers also said the constitutional amendment vote might not be required. 

Nat Herz writes that Alaskan lawmakers could be on their way toward an “end-of-session meltdown.” Facing a multi-billion-dollar deficit, “the further the budget goes along without any bipartisan compromise, the less likely it is there’s going to be a bipartisan budget,” Rep. Les Gara, said in an interview. “Once something passes that one party loves and the other party doesn’t really like, it’s hard to unwind it.” “I would not vote for this budget,” Rep. Andy Josephson said at a news conference Tuesday. “I understand that there are important cuts to make, but they must be surgical — and I think that approaching $300 million exceeds that fine surgery.” Are members of the minority party, who caused the melt down last year by demanding increases to the budget, predicting they will do the same thing again? Headlamp hopes that their previous statements to work together to reduce the budget were not just empty promises. 

Australia-based junior 88 Energy Ltd. announced Feb. 29 that positive results from its first well – Icewine No. 1 – now represent the North Slope’s newest developers. “As a consequence of these continued good results, we have tailored our seismic acquisition to focus on mitigating risk for the next well,” said 88 Energy Managing Director Dave Wall. The timing of this announcement, as the House Resources committee is looking at the Governor’s plan to remove incentives for new explorers on the North Slope, is not lost on Headlamp. We hope legislators and the Governor are aware of this exciting new activity. 

 

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First Reads

Time for another approach on Alaska gas line fiscal certainty
Alaska Dispatch News, Frank Murkowski, March 2, 2016

Bleeding cash, still exploring on the North Slope
Alaska Journal of Commerce, Elwood Brehmer, March 2, 2016

Are Alaska lawmakers heading toward another end-of-session meltdown?
Alaska Dispatch News, Nathaniel Herz, March 2, 2016

Young hits Interior Secretary with complaints over Alaska lands
Alaska Dispatch News, Erica Martinson, March 1, 2016

 

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