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Logsdon: Great time to pump investment Petroleum economist takes Alaska Senate committee on virtual tour of what growing North Slope production would mean to state By Kristen Nelson Petroleum News
One of the stated goals of the administration’s proposed production profits tax — along with increasing revenues to the state — is to encourage investment in the state, including investment in exploration.
Chuck Logsdon took Senate Resources on a theoretical tour of what that might mean Feb. 24. Logsdon, formerly the state’s chief petroleum economist and now a consultant in the governor’s office, used graphs to illustrate what increased investment might mean for the state long term.
He used the familiar graph of Alaska oil production by year: Production climbs steeply as Prudhoe Bay comes online in the late 1970s, peaks at more than 2 million barrels a day in the late 1980s and then begins to fall to today’s levels of less than a million barrels a day.
Logsdon also showed another type of curve, what the Norwegian Petroleum Directorate describes as a geological learning curve: cumulative production plotted against years.
The line on this graph is a rising curve during what the directorate calls the pioneering and growth phases. The curve rises less steeply during maturity and finally flattens out in post maturity, as the level of production falls off.
“As you go up the curve it means you’re along the road of producing the total geological potential” of the area, Logsdon said.
He said when he looked at the Norwegian cumulative production curve he became curious about what the curve would look like for Alaska’s North Slope.
“I’ve got good news,” he told the committee. “This curve looks to me like we’re pretty close to the early part of the maturity part of the learning curve.”
Plotted for ANS oil production, the curve is still rising.
Production begins during the pioneering phase and as you move along the curve into the growth phase “you begin to understand what your geologic potential is” and eventually you reach the maturity stage and then post maturity, he said.
Logsdon said he couldn’t think of a better time to encourage investment in the state: “One analogy might be a 56-year-old man who decides to lose a little weight and go to the health club. This is a great time to start spending time and money trying to provide some incentives to extend that curve as long as we can.” No gas in the curve Sen. Bert Stedman, R-Sitka, said the committee has “had previous testimony that the North Slope might be in its early stages.”
There are a couple of things that could help keep production rising, although one of them, technology, is something economists and engineers don’t have a handle on going forward, Logsdon said.
“We got a real boost from technology starting in the mid-80s,” he said, when “exploration and development costs were lowered dramatically by incredible innovations in the use of computers in evaluating geology,” combined with advances in drilling — “an exceptional ability to go in and target small accumulations of oil at relatively low costs.”
The state has a portfolio of projects that have been uneconomic even at higher oil prices, including such discoveries as Liberty and Kuvlum, he said. And there are basins like Nenana, Bristol Bay and Holitna that haven’t had much drilling.
Logsdon said he believes that over the next 10 years the state needs to get work done on those economically challenged areas. High prices aren’t enough because they are high everywhere. “If we can’t improve our relative competitiveness with other people that have geological prospects like we do, we’re really not that much better off,” he said.
And traditionally, large fields are found and developed first and then you go back and develop smaller, challenged fields.
“So one of the ways of trying to keep yourself closer to growth and maturity is to provide the kinds of incentives to go out and try to put these smaller pieces together,” Logsdon said.
If exploration were allowed in the Arctic National Wildlife Refuge and if explorers found a couple more Alpine-sized fields, those factors could also keep the North Slope in the early maturity phase of such a curve, he said. Gas not shown Senate President Ben Stevens, R-Anchorage, noted that the Norwegians have included gas on their graph, but it is not included on the North Slope production graph.
“And remember the ultimate goal is to extend the longevity of the life of the North Slope — or to reach its full maximum potential production of petroleum products,” Stevens said, and once gas comes into production, “you’re essentially starting at a pioneering moment” all over again.
“In fact the ultimate objective of what we’re trying to do is to create a new pioneering and growth and maturity — growth that lifts the existing oil production along,” Stevens said.
Logsdon said that with gas infrastructure in place, the pipeline as well as the wells, resource production over the next 50 to 100 years is going to be “easily as much as we got from the oil that’s already been produced, which has been substantial.” Taxes on net more economically efficient The production tax accounted for 24 percent of the state’s oil revenues last year, Logsdon said. Royalties were the largest piece of the pie, some $1.938 billion, followed by production tax at $863 million, corporate income tax at $524 million and property tax at $261 million. The administration’s proposed tax change affects only production tax.
While royalties are only paid on oil taken from state oil and gas leases, production tax is statewide, “levied on any production which occurs within our sovereign boundaries,” he said.
Logsdon noted that the committee had asked Pedro van Meurs what jurisdiction had a production tax most closely resembling the proposed PPT, van Meurs said Norway. The Norwegian government’s objective is to maximize government take, but also, Logsdon said, referring to information the Norwegian Petroleum Directorate has posted on the Web, to “create a win-win situation between the state and the oil companies,” a recognition that while the government has the goal of maximizing its revenues from resources, the companies have “a fairly different objective ... and that’s to maximize shareholders’ interests.”
It is in this context, Logsdon said, that government needs to recognize what its geology holds: if your geology has large, low-cost fields close to market, “you can probably take a huge government take and still get plenty of investors coming in, because there’s plenty of oil for everybody.”
The challenge of fiscal policy, Logsdon said, quoting from the Norwegian government, “is to ensure as high a share of value as possible to government while encouraging the exploration and exploitation of valuable resources.”
The governor’s proposed production profit tax is based on the net, rather than the gross which is the basis of the state’s present production tax with the economic limit factor.
“Taxes on net are more economically efficient because they allow investors to recover their investment and add a rate of return ... They guarantee that if you base them on net,” Logsdon said, ensuring “that you’re a competitive area to invest in.”
He said that virtually every consulting firm that has looked at Alaska’s tax system has said if the system were changed to introduce elements of risk sharing between the state and industry that it “could both increase government take and encourage investment.”
He cited examples beginning with a 1978 study by Walter Levy and Associates, through a study prepared in the 1990s by Arthur D. Little and John Gault. And while a Woods Mackenzie study that came out last year showed Alaska’s ranking internationally was pretty good, Logsdon said that contrasted with previous studies the firm had done where “their conclusions are quite a bit different.”
“The bottom line is on the international comparisons that I’ve seen over time Alaska tends to come in mid-pack. We’re not the worst; we’re not the best,” Logsdon said.
As for the most recent study, that by Pedro van Meurs, Logsdon said van Meurs found “we could take that 25 percent of the oil revenue picture and make the kind of change that we’re talking about in going to a net profit system with some tax credits and some allowances and actually encourage the kind of exploration that matches our geology — that is the smaller fields, the challenged fields.” Reluctance to change The state has been reluctant to change its system, he said, even with advice to do so and even when profit-oriented fiscal systems elsewhere in the world have been successful in both increasing state take and encouraging investment.
The problem, he said, has been budget concerns.
“Throughout the ‘90s we had concern about low prices,” concerns which culminated, Logsdon said, in 1999 when there was a $1.8 billion draw on the constitutional budget reserve due to low prices and declining production.
“Changing oil fiscal regimes is not taken lightly, especially in a declining production environment,” he said.
Logsdon said he believes changing to a production profit tax would be positive and would make the tax system more efficient.
“Remember, we’ll still have our royalty share calculated before any upstream cost deductions; we’ll still have a piece of the worldwide corporate income as long as the companies are here ... producing or shipping oil; and also property tax.”
In response to a question from Resources Chairman Sen. Tom Wagoner, R-Kenai, about what the bill would do to prior legislation, Logsdon said the change is in the imposition of the petroleum production tax. The state has had hard-fought battles with industry on how to get to wellhead value, and that will be retained.
“The critical element that we’re adding to the tax base is we’re going to allow them to deduct their upstream costs. We already allow them to deduct downstream costs from the sales price of the oil to determine what the wellhead is. And in the process we’re going to increase the tax rate ... and allow them credits.”
Sen. Kim Elton, D-Juneau, asked whether the Department of Revenue had done any studies about the impact of stacking incentives.
Robynn Wilson, director of Revenue’s Tax Division, said credits enacted under Senate Bill 185 would be alternate credits under the production profits tax. “So that if you spend a dollar you have to pick one or the other (of the credit programs); you don’t get both.”
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