Fiscal certainty: Who needs it anyway?

OPINION: This week, Alaska lawmakers took testimony about the progress of Alaska's natural gas pipeline from the Palin administration, as well as the oil and gas companies that hold the leases to develop the North Slope's gas reserves.

As they have since the introduction of the Alaska Gasline Inducement Act (AGIA), the Palin administration testified that they view the economics of the pipeline project as profitable and the state doesn't need to make any concessions to attract investment.

Meanwhile, as they have since the introduction of AGIA, oil and gas companies reiterated their need for fiscal certainty before committing to pay for the largest and most expensive energy project in the world.

But with the Palin administration locked into AGIA, Revenue Commissioner Pat Galvin told lawmakers that those who will accept the risks don't need any more certainty other than what currently exists because the state's economic analysis shows the project is deep in the money.

This apparent disagreement demands a closer look.

The state's economic modeling that Galvin is touting has always been viewed by some as fuzzy math. During testimony last summer, producers offered a number of areas where the state's analysis failed to account for risk.

On July 11, 2008, Exxon's Marty Massey testified that the state's economic analysis was based on "simplifying assumptions." The analysis ignores the reality of the real risk that firm transportation commitments represent, by classifying them as normal operating expenses. Massey stated that under the proper analysis, the net-present value to his company isn't $13.5 billion, as stated in the state's analysis, but zero.

State Sen. Gene Terriault asked Massey if it was true that those FT's represented just a footnote on their balance sheet. Yes, Massey replied, but the entire footnote currently existing on Exxon's balance sheet today is $3 billion. With this project it would increase to almost $80 billion, which makes a dramatic difference.

John Zager, of Chevron, put the risk in perspective. The reliance on net present value as the state has done is only one way companies look at the economics of the project. Firm transportation commitments represent a real transfer of value that in this case would equal upwards of $125 billion. This is quickly approaching the market cap of both Chevron and Conoco, Zager stated.

And it's not just oil and gas companies that are pointing out flaws in the state's economic modeling.

In a paper to be published in the September 2009 edition of the Journal of Economic Issues, Roger Marks, a former Alaska Revenue Department petroleum economist, will lay out the case of how the administration's multi-million-dollar analysis "overstated the economic vitality of the project and hence understated the severity of the commercial issues."

Second, Galvin's defense of maintaining the status quo with regards to tax rates and certainty seem at odds with prior testimony and reality.

During testimony on AGIA in April 2007, Galvin was asked about the state's existing gas tax rate. He replied, "Our level of confidence in the current tax rate is relatively low".

A few days later in the House Resources Committee, lawmakers queried Galvin about why the state wouldn't make necessary adjustments to the tax rate before asking for competitive bids under AGIA.

With all the concerns about the lack of fiscal predictability in AGIA, why wouldn't you want to nail down something as critical as tax rates, asked one Representative. How do you expect someone to submit a complete bid if they don't know what their tax rates are going to be, asked another?

"You have moved from a question of whether the producers need to have this level of certainty that they keep talking about at the time they submit the application or whether it's at the time they commit their gas. What we have structured in the bill is that level of certainty we believe is appropriate at the time they commit their gas", Galvin answered.