Vol. 20, No. 48 Week of November 29, 2015
Providing coverage of Alaska and northern Canada's oil and gas industry

Caelus credits tax system for Alaska involvement

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Says integrated tax policy under SB21 encouraged company to enter state, makes new exploration and development possible


Petroleum News

Jim Musselman, president and CEO of Caelus Energy, and his colleagues only decided to enter the Alaska oil industry after the passage of Senate Bill 21, the law reforming Alaska’s oil production tax system, Casey Sullivan, director of public affairs for Caelus Energy Alaska LLC, told the Resource Development Council’s annual conference on Nov. 19. And, since entering the state, the company has followed up on a commitment to move swiftly ahead with its Alaska program, Sullivan said.

Smith Bay exploration

Sullivan told the conference attendees that Caelus’ latest venture, a two-well exploration drilling project in Smith Bay, towards the western end of the North Slope, would not be happening without state tax credits.

“This project would not be possible without the partnership of the state of Alaska, through its oil tax credit program,” Sullivan said.

Having during the summer acquired a 75 percent interest in NordAq’s Smith Bay leases, known as the Tulimaniq leases, and having access to some modern 3-D seismic data for the lease area, Caelus has mobilized the Doyon Arctic Fox rig by barge for the drilling program.

“It’s regarded as a potential, true 1 billion barrel field. We’ll find out,” Sullivan said.

Caelus has barged the equipment needed to spud a well to Point Lonely, to the east of Smith Bay, for staging, in expectation of starting the first well in early February. According to the company’s plan of operation, drilling of the second well is planned for March. The wells are located nearshore, in the southern part of Smith Bay. Sullivan has told Petroleum News that a primary focus of both wells will be the collection of rock samples for better clarifying the geology of the area.

Smith Bay is an extremely remote location, far from the nearest support infrastructure, but is thought to have high potential for a major oil find.

A busy year

Meanwhile, 2015 has been a very busy year for Caelus in Alaska, Sullivan said. The company operates the Oooguruk oil field, in the nearshore waters of the Beaufort Sea, off the central North Slope. Oooguruk has achieved its all-time oil production record of 25,000 barrels per day. And Caelus has sanctioned the Nuna project, involving the development of a new relatively shallow reservoir horizon at the field. The company has now acquired more than 400,000 exploration acres in leases across the North Slope and has shot more than 200 square miles of 3-D seismic. The last year has been the busiest in the past seven years, with the hiring of nearly 900 contractors for seismic and other work, Sullivan said.

Alaska production taxes involve a net profits tax system and Caelus has yet to see a profit from its investments in Oooguruk, Sullivan said. But the company has paid the state of Alaska more than $125 million in royalties and property taxes, he said.

“We’ve invested over $2 billion to date and we’ve produced around 23 million barrels of oil,” he said. With about 100 million barrels of oil remaining in the field, Caelus anticipates an annual capital expenditure in the range of $200 million to $300 million, Sullivan said.

The Nuna development

Sullivan said that a royalty modification agreement with the state had enabled the Nuna project to move ahead. The Nuna reservoir has about 100 million barrels of oil in place. Caelus is hopeful to see first oil from the reservoir by October 2017. However, this is a very capital intensive project, with very tight reservoirs in Brookian turbidites, he commented.

“It will require us to put in some hydraulic fracturing, that will be some of the largest on the North Slope, in both the production and injection wells,” Sullivan said.

This use of hydraulic fracturing in injection wells, a first on the Slope, will provide technology experience that could be used across the region, he said. But, with this challenging project being impacted both by global oil prices and current instability regarding state tax credits, Caelus is working hard to reduce the projected development costs, Sullivan said.

The company has also spent $24 million conducting a seismic survey program in its 350,000 acres of leases in the eastern North Slope, adjacent the Point Thomson and Badami fields. Flooding of the Dalton Highway during last winter rendered this project particularly challenging, Sullivan said.

“This type of activity is significant and it wouldn’t happen without these tax credits, in particular the exploration tax credits,” he said, adding that the Alaska Department of Natural Resources gains access to “reams of data,” under the terms of the tax credit program.

A rebate, not a giveaway

Likening the state tax credit system to a store rebate, designed to attract customers, rather than a cash giveaway, Sullivan said that the credits are bringing economic benefits to Alaska in the form capital investments. The credits have to be earned, he said.

Caelus makes use of both types of credit currently available on the North Slope: loss carry forward credits and exploration credits. The exploration credits are due to sunset in mid-2016. Both types of credit form part of an integrated tax system - change the credits and you change the system, Sullivan said. And both types of credit involve exhaustive auditing by the Alaska Department of Revenue, in a process that takes 120 days after submittal of a tax return for the loss carry forward credit but that can take years to process for an exploration credit, he said.

With active exploration being critically important to future oil production, the exploration credits provide powerful incentives for the promotion of new oil development. And the loss carry forward credits are particularly important to small producers during the loss-inducing appraisal and development phases of an oil field project, Sullivan said.

“This particular credit works as a playing field leveler between the majors and the independents,” he said.

Sullivan also cautioned that, more than ever, financial lenders and evaluators are becoming involved in Alaska’s evolving oil industry.

“When our government sneezes about eliminating credits and making big changes to the taxes, that cold spreads all the way to Manhattan and beyond,” he said.

Sullivan particularly cautioned about the very high dangers of making retroactive changes to the tax system.

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