‎2.5.2012 Perkins Coie’s Daily Alaska Oil & Gas Newsletter,  http://ow.ly/8TIzE (permalink). Today’s lead, “Oil taxes highlight busy week for lawmakers;” “Shell hopeful for Arctic drilling.” For more news, see the “Daily Articles & News” column (lower right side) at https://bgkeithley.com/. Daily headlines and links from Upstream Online, Oil & Gas Journal, Petroleum Economist, Platt’s, LNG World News, Fuel Fix, plus

An article posted this week in Natural Gas Asia  goes a long way toward explaining why any Alaska LNG project is challenged.

In a brief story headlined “Kogas, Cheniere Sign LNG Deal,” Natural Gas Asia reports that “South Korea’s Kogas and Cheniere Energy have signed a 20 year deal in which [Cheniere] will supply LNG from [its] Sabine Pass export plant in Louisiana.  Kogas has agreed to purchase approximately 3.5 million tonnes per annum of LNG [roughly 500 MMcf/d] upon the commencement of train three operations. Deliveries are expected to occur as early as 2017. ”

Why is it economic to export US Gulf Coast LNG to Korea?   A large part of the reason  is the projected 2014 completion of the $5.25 Billion Panama Canal expansion project. With the expansion, today’s modern LNG tankers will be able to use the Canal route to reach the Pacific Rim, significantly cutting transit costs, times and inefficiency which currently impeded the reach of such supplies (for a good discussion of that topic see “Panama opens Asia to US LNG exports,” Petroleum Economist (Nov. 2, 2011)).

What does that have to do with Alaska LNG?  By efficiently linking substantially lower priced L48 US gas supplies with the (currently) higher priced Pacific Rim markets, the Panama Canal expansion is anticipated to have a significant (downward) impact on Pacific Rim LNG prices.  Indeed, according to the Petroleum Economist analysis, the completion of the Panama Canal expansion project is expected to lower transit costs to the point that US Gulf Coast LNG poses a direct competitive threat even to already commenced Australian LNG projects, not to mention the much more distant (in time) Alaska LNG project.

The irony?  Having already undermined the economics of the proposed L48 Alaska gas pipeline, the L48 US shale gas revolution now appears well on its way  to undermining Alaska’s expansion also into the Pacific Rim LNG market.

The take away?  Alaska needs to concentrate even more on coming to grips with the current level of oil investment.  The “gas cavalry,” which some continue to hypothesize will yet save Alaska’s economy, is unlikely to be riding over the hill anytime soon.

‎1.29.2012 Perkins Coie’s Daily Alaska Oil & Gas Newsletter,   http://ow.ly/8L8yw (permalink). Today’s lead, “Alaska faces tough choices amid oil decline.” For more news, see the “Daily Articles & News” column (lower right side) at https://bgkeithley.com/. Daily headlines and links from Upstream Online, Oil & Gas Journal, Petroleum Economist, Platt’s, LNG World News, Fuel Fix, plus.

In an interview published in this week’s Petroleum News (“Wielechowski remains critical of HB 110“), Senator Bill Wielechowski argues that, under their state oil & gas leases, producers are required to undertake additional drilling when they can make a “reasonable profit.”  (“I think you need to look at the legal obligation the companies incur when they take out a lease. Their obligations require them to develop the lease when they can make a reasonable profit.”).

This repeats an argument I first heard the Senator make repeatedly at a debate earlier this month with Senator Cathy Giessel and which he then repeated in a subsequent, extended exchange on Facebook following that debate.  (“The leases … say they must produce, drill, develop when they can make a reasonable profit.”)

The problem?  The leases which cover the vast majority of the existing North Slope fields don’t say what Senator Wielechowski says they do. Continue reading →

In this week’s Petroleum News, Alan Bailey reports on the presentation on the Norway oil model last week before the Alaska World Affairs Council.  These pages previously have provided a copy of the slide deck accompanying the presentation.  Now, read Alan’s take on the discussion on the pages of the Petroleum News or here.

From the article:

Bradford Keithley, partner in the oil and gas practice of Perkins Coie LLP, attributed the decline in Alaska oil production to a parallel decline in Alaska oil investment.

“We’re shorting investment by roughly half of what we need to do in terms of getting production up,” he said.

Keithley said that, from his perspective, one of the biggest factors in encouraging oil industry investment in Norway is the Norwegian government’s own investment in the country’s oil and gas fields. Petoro, a company wholly owned by the Norwegian government, invests along with private industry as a working interest owner in every Norwegian field, with the government providing its share of development capital and subsequently earning its share of field profits. The extent of government financial participation in different fields varies, depending on the risks involved, but averages about 20 percent, Keithley said.

In Alaska, the government tries to drive the oil industry from the back seat through regulation, trying to push oil companies into doing what appears to be in the state’s interests, while sometimes pushing for actions that industry does not see as good investments, Keithley said. Under the Norwegian system, however, government and industry interests tend to be aligned, he said. …

The result [in Norway] is to generate more investment, both on the government side and on the side of private industry, Keithley said.

“It grows the pie, rather than what we do in Alaska, which is fight about what share everyone gets of the existing pie,” he said.

Read the remainder of the article on the pages of the Petroleum News or here.

Separately, there also will be presentations this coming week on the same subject before two legislative committees in Juneau.  House Economic Development, Trade & Tourism is holding a hearing Thursday at 10:15 am on HCR 19, “Acknowledging the lessons learned from the 2011 Norway Policy Tour and encouraging investment in the state’s oil and gas industry,” followed by a “Lunch & Learn” before House Resources at noon, Thursday, on “Lessons Learned from Norway.”

Last week I gave a speech to the Alaska Support Industry Alliance discussing Judge Gleason’s recent decision on TAPS.  The overheads I used for the speech are posted on these pages here.

In order to set the context for my remarks, at the outset I quoted a couple of pieces on the subject from Fairbanks Daily News-Miner columnist Dermot Cole’s column and blog.  In one column, published on January 1, 2012, Dermot argued that Judge Gleason’s decision was a “good news for Alaskans.”  (” … But the good news for Alaskans is that numerous oil company documents and expert testimony shows there is no reason to believe the pipeline will be shut down this decade or for a long time after.  To the contrary, the oil companies are booking reserves far into the future and making plans to run the pipeline at lower rates, which means more decades of operation for the pipeline.”)

In my comments to the Alliance, I took issue with Dermot’s conclusion and suggested that the decision was largely irrelevant to the issue of Alaska’s economic well being.  As I explained in the speech, the important factor in that regard is production rate — not reserve life — and Judge Gleason’s decision didn’t deal at all with current production rates.  The further explanation of that view is reflected in the slides. Continue reading →

From the Fairbanks Daily News-Miner, “Resources help Alaska weather recession but all is not ‘sunshine and lollipops’,” Jan. 17, 2010.

Quoting Jonathan King, principal and senior economist with Northern Economics Inc., in his presentation before the Greater Fairbanks Chamber of Commerce:

“We are truly, and have been, very lucky the last couple of years.” Nevertheless, oil production is down and the decline shows no signs of slowing or stopping, King said. To balance the state budget, Alaska had to sell it’s oil for at least $64 per barrel in 2010, $77 in 2011 and $94 in 2012, King said. A projected price of $97 per barrel is needed for 2013. “As you can see, we can no longer afford our state government on $50 a barrel oil. That’s just not possible for us,” King said.   “It’s pretty scary, and the window is closing.  … 2012, not so bad — 2013, we’ve got concerns about. Due to declining production in oil and reduced federal spending, we face strong headwinds,” King said.

Two speeches this week.  The first is Thursday morning (Jan. 12, 2012), as part of the Alaska Support Industry Alliance bi-weekly breakfast series.  The topic is “Judge Gleason’s TAPS Decision:   What does it Really Mean?”  The details are here.  The second is Friday (Jan. 13, 2012) as part of a panel before a luncheon meeting of the Alaska World Affairs Council.  The topic is “Can Alaska Learn from Norway’s Oil & Gas Success?”  The details for that presentation are here.

Senator Wagoner’s presentation is heavy on proposals to expand existing “tax credits” for additional exploration.  That raises questions for three reasons.

First, the revenues to provide the “tax credits” come in the first place from imposing higher taxes on production from existing fields.  The net result is to depress the ongoing development of new horizons in the existing fields.  That is troubling because those horizons contain known oil and gas (e.g., heavy and viscous) resources and are the most certain source for increasing production in the coming years.  In light of the current production decline, it seems appropriate to question whether it makes sense to continue to expand policies which impose penalties on developing known resources in order to fund what essentially are “Hail Mary’s” in new areas.

Second, the “credits” may not be the best use of state funds.  Essentially, they result in the state irrevocably paying up to 40% of the costs of drilling exploration wells, but without the state receiving any equity in return.  As a consequence, the only potential revenue the state ultimately may realize from its “investment” is the royalty and production tax which someday may be earned from any production which may result, if any.  It seems useful to question whether a potentially better use of the same funds going forward would be for the state to invest them as an owner — the approach successfully taken by Norway.

Third, at best, the credits only buy exploration drilling, they do not buy production.  The reason is that once the producer completes the upfront investment necessary to bring on the field and is ready to go into full production, the marginal production will be taxed at the same, high rates as currently apply to — and are depressing additional investment in — the existing fields.  Knowing that, the producer will stop short of making the investments necessary to develop the field for production.

As a result, all that the state’s existing (and proposed) credits are attracting now largely is the oil & gas equivalent of start up software companies — small producers hoping to identify a product (field) with some potential in hopes that once they do, a larger player will either buy them out or, at a minimum, make a significant payment for an ownership share.  At this point, it does not seem that the credit program has attracted larger producers with the financial capability to develop any significant resources they may find.  That, frankly, helps explain why the state’s December 2011 lease sale was less than a full success.  It seems useful to question whether that is an outcome worth expanding.

My suggestion — the Legislature should ask itself hard questions before it continues to expand a program that, to this point at least, seems to be doing more to depress, than expand, production.

Senator Gary Stevens on proposed oil tax cuts: “Inexcusable truthfulness’, Alaska Dispatch, Dec. 15, 2011.

Thank you for inviting me to speak. Frankly, you’ve got a lot of nerve. I stand before you as the recipient of an “F” from the Alaska Chamber of Commerce and the Resource Development Council. Legislators were given grades by these organizations — apparently based on our support or lack of it for the governor’s oil tax bill, HB 110.  So, the biggest issue facing the Legislature this year is state oil taxes. Big surprise, right?  This has been the biggest issue for many years running.

All Representatives who got A’s voted for the governor’s oil tax bill, while those of us who got D’s and F’s either voted against it in the House, or like myself, dared to question it in the Senate.

… and so the speech starts.  Whether you agree with Senator Stevens or not, this is an important piece that deserves respect and reflection. Personally, I think the Legislature needs to start thinking in new ways about these issues. But in preparing to think about them in new ways, we need to understand the old and this is a very clear articulation of the basis for one point of view.