The Alaska State Legislature is dangerously considering enacting two pieces of legislation, each of which has the potential to destroy or transfer to others, tens of billions of dollars of wealth belonging to the residents of Alaska, that it doesn’t have to.
It is about to do so both because oil company interests, through those legislators they have supported, want it to do so and because the state of Alaska is behind the times and is woefully lacking the proper and standard business practice analysis tools and methods necessary to make sound and good investment decisions over the management of its natural resources. Good investment decisions require a solid assessment of what is at risk, or rather what could be lost in actual dollars or lost opportunity, and the likelihood of that happening, against the potential for gains, and the probably of garnering them.
House Bill 4 -- which, through an expensive plot of wishful thinking and prejudice is likely to destroy tens of billions of dollars of proven, natural gas reservoir under-the-ground value on the North Slope with an inefficient gas pipeline to the Kenai Peninsula if it were built -- and SB21 -- the repeal of Alaska's Clear and Equitable Share, which would give the oil industry billions and billions of dollars in price reductions for our oil, even on the old legacy fields that will be produced no matter what -- both have the potential of changing our future fiscal course in a very bad way. Please allow me to explain.
First though, how do we maximize Alaska’s resource wealth to the maximum benefit of the residents of Alaska? The answer is quite simple: To maximize the production or revenue value of our oil and gas fields at the well-head, over their reservoir production lives, delivered to markets at the lowest possible cost. And those costs include the costs of rewarding the oil companies to do our bidding for us. Well-head value is the value our oil or gas has delivered to the market place, like an energy hub, minus the cost of getting it there.
We have 30 trillion cubic feet of proven natural gas reserves on the North Slope alone. Some estimates go as high as predicting that 200-300 trillion cubic feet of gas will eventually be found and produced. But let’s stick with our original number, which is equal to 30 billion, thousand cubic feet of gas. That is important, because that means that every extra dollar that is spent in the delivery of our proven natural gas reserves that is avoidable, destroys $30 billion in the value of that resource under the ground at the well-head. Ten times the destruction of the World Trade Center on 9/11. Equal to more than half of our almost 40 years of oil savings. That is $300 million in reservoir wealth value destroyed for every single extra penny in delivery costs, per thousand feet of gas.
As a community, we will only be able to deliver lower cost energy to ourselves from North Slope natural gas reserves, if we design our distribution infrastructure toward exporting our gas outside of Alaska, south to Hawaii, and eastward, at the lowest possible cost. We'd share and benefit from those cost savings of lower tariffs or transportation costs, through the economies of scale generated from export volumes many times what we will consume ourselves. That distribution supply chain should also be sensitive to the likelihood that a major dam, if built, could eventually allow us to, in the not too distant future, dramatically reduce the need to consume our own natural gas. Thus making it more available for export.
HB4, if passed, would commit the state to spend hundreds of millions of dollars to advance a terribly inefficient gas pipeline that mostly likely would lock in very high tariffs, and therefore high energy costs to Alaskans, for decades to come. The Legislature has already committed tens of millions of dollars to this project, and wants to commit hundreds of millions more, prior to ANY proper due diligence being done on reasonable alternatives. We would be much better off importing some natural gas for several years, either waiting for the jack-up rigs in Cook Inlet to be successful, or developing an efficient export distribution infrastructure supply chain, than to recklessly destroy tens and tens of billions in reservoir value in a terribly short-sighted panic about potential gas shortages.
That due diligence would require that a 30-year cash-flow analysis of all the vibrant natural gas delivery options be conducted before making any advancement on any project. These are the first dollars one should spend before billions and billions of dollars of capital are put at risk, and our distribution future cast, not the last. Heretofore we have not spent one penny on this, for political reasons. When the Alaska Gasline Development Corporation’s Citibank Plan of Finance team was briefed on what proper due diligence constituted, their answer to the audience was that I was absolutely correct, but that they were not asked to do that. That was, and still is the case, because some leaders want to make regional political decisions, instead of rational statewide decisions.
Any proper due diligence cash-flow analysis would include the gas revenues the state of Alaska would receive over time, the enhanced oil revenues too, as oil production will be positively impacted with the right gas infrastructure in place, and also very importantly, the energy savings that Alaska residents and businesses will be able to enjoy by being able to piggyback on the lowest cost export-oriented distribution channel. That is not a state of Alaska balance sheet item, but it affects the balance sheet of most Alaskans in a very important way.
I was asked last week to prepare a memo to Senator Mike Dunleavy that would describe what proper due diligence would look like. This initial and critical due diligence effort could be accomplished in less than six months, and for less than a million dollars. Please click here for that memo: Proposed Alaska Energy Complex Due Diligence Project Analysis.
Secondly, SB21, the tax giveaway legislation speeding through the Legislature, is also being decided without the proper analysis tools.
A few weeks ago, I presented to 17 members of the Senate, or a staff member, and an official with the Department of Revenue, a graphical picture (below left) of the kind of decision analysis output that should be available to policy makers and residents, regarding the apportioning of profits from the North Slope to the state of Alaska, the oil industry, and the federal government. It would greatly illuminate the economic impacts to each party at different prices. And is sophisticated enough to identify when we are choking off oil industry profits too much, not allowing them to make more money at higher prices.
At this point, no such analysis tool is available to policy makers. It could be developed in just a few months, and for less than $100,000. No kidding. It is reckless to be making decisions affecting tens of billions of dollars without such a basic tool.
In a second memo to Sen. Dunleavy, regarding the development of a software and analysis tool I am calling the “Price Per Barrel Profit Share Analysis Workstation” I described how, for less $100,000, and in just a few months, we could be in a vastly better position to be able to answer the question as to how much is it best to charge the oil industry for our oil such that we properly incentivize and reward them to explore, drill and produce our oil, but not charge them too little that we are giving it away too cheaply?
We should encourage and applaud any senator or representative who stands up and requires that we slow down on making these potentially economic life threatening decisions until these two critically important decision tools are put in the capital budget and developed. And before we chart our course either over an economic cliff, or one with a bright future. It is up to Alaskans to let their legislators know what standard of investment care you expect from them. Otherwise they won’t know.
David Gottstein is president and chief investment officer of Dynamic Capital Management Inc. in Anchorage.
The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch, which welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.