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The flip side of the gas contract
     Are we looking at both sides now?
By Sen. Kim Elton


June 19, 2006

The greatest part of the recent special session was spent listening to the orderly arrangement of what, at the moment, appeared to be facts presented by the governor's folks and multi-national oil companies in support of the gas pipeline deal they struck.

Over the last two days, I listened to other experts deconstruct those facts. These experts, hired by the legislature, are not affiliated with any of the parties that negotiated the contract. These analysts, at a minimum, showed that special session 'facts' may be first cousins to Play-Doh.

One of the fact checkers was Dr. Jeffrey Leitzinger, president of Econ One and an economist who has 20 years experience in natural gas markets and regulatory practices. Among his suite of multi-national private and government clients, is experience in Alaska dating back to the 1980s. Dr. Anthony Finizza is also affiliated with Econ One. Dr. Finniza was chief economist for ARCO for 23 years and is the former president of the International Association for Energy Economics. Batting clean-up at this week's presentations was Daniel Johnston. He owns his own firm and does the same kind of energy work, in all parts of the world, as Pedro van Meurs, the governor's chief consultant.

Without embellishment, I've collected some of what these energy analysts said about the contract the governor wants to consummate with Exxon, BP, and Conoco.

On fiscal certainty--the euphemism for tax and other economic considerations granted by the state to the multi-nationals:

"The kind of certainty they [Exxon, BP, Conoco] want is absolutely unprecedented." Daniel Johnston

"I don't see evidence that [concessions] will speed up the project or whether the project will actually proceed." Jeffrey Leitzinger

"I don't see a compelling reason to give concessions for an option to proceed with a gas line." Jeffrey Leitzinger

"They're asking for the best deal on the planet and I say that's going too far." Daniel Johnston

"Imagine if Alaska provides the kind of certainty for oil and gas demanded by the oil corporations--30 and 40 years respectively. Here is how it will go down: in 25 years the oil companies will approach the State of Alaska and say: 'we cannot justify further investment at this time due to the uncertainty of what will happen to [oil] taxes in five years.'" Daniel Johnston

On whether our gas really is stranded and, therefore, in need of concessions:

This project adds huge reserves, has the best net value rate of return and there's "no reason to believe Alaska stands in the back of the line." Jeffrey Leitzinger

"It appears that the risk [20-30 percent chance] of an uneconomic project as presented in the state's Fiscal Interest Finding is overstated . . . The risk of having an uneconomic project under the various price and overrun distributions range from less than 1 percent to 5 percent." Anthony Finniza

"I fail to see the case that the gas line is challenged. It is economically viable on its own terms." Jeffrey Leitzinger

"There is no risk of catastrophic failure in Alaska like there is in Nigeria [or many other energy regimes]." Daniel Johnston

"If transportation costs hurt [gas line prospects], Alaska wouldn't have TAPS [the oil pipeline]." Jeffrey Leitzinger

"Paoli Scaroni, the chief executive of Eni, called it the paradox of plenty. International oil companies . . . are awash with enormous cash flows, but their opportunities to reinvest that cash are severely limited." New York Times article provided by Daniel Johnston

". . . more than 90 percent of the world's oil reserves are off limits to the likes of Shell, BP and Exxon, a fact that record profits are unable to mask. The signs are writ large on balance sheets from London to Texas. Despite paying out $2 billion a month to shareholders, Exxon has $32 billion in cash and nowhere to spend it . . ."  Financial Times article provided by Daniel Johnston

Data used to justify the contract

"This is embarrassing. I don't want to be associated with this." Daniel Johnston commenting on data the state used to calculate the internal rate of return comparisons that shows Alaska gas is disadvantaged in markets

"Internal rate of return (IRR) is not the best method of rating the Alaska project and shouldn't be used to evaluate where Alaska stands in relation to competing projects . . . this is the metric used in the Fiscal Interest Finding." Anthony Finniza

"75 percent of the billion dollar plus [energy] projects have less profitability." Anthony Finniza when he applies the profitability index he believes is better than the IRR metric

"This is a rip-off." Daniel Johnston on data used by the state to arrive at IRR comparisons used in Fiscal Interest Finding

Given the ordering of facts by the administration during the special session, and the re-ordering of facts over the past couple days, the challenge for Alaskans is to hold back until we find out who is right -- those working for parties that agreed to the governor's gas line contract, or those who didn't work for those who negotiated the contract. We can't afford to make mistakes.

Senator Kim Elton
Juneau, AK - USA

About: Sen. Kim Elton (D) is a member of the Alaska State Legislature representing District B - Juneau.


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Ketchikan, Alaska