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Safety, efficiency, lower costs BP goals Minge details what company is doing, what state should do for long-term light oil business, development of gas, heavy oil resource Kristen Nelson Petroleum News
Safety, efficiency and cost reduction are goals BP is pursuing for its Alaska business. But the company thinks the State of Alaska also needs to meet a goal if industry is to remain strong in the state — reduction of both its ACES tax rate and the progressivity built into the tax.
That was the message John Minge, president of BP Exploration (Alaska) delivered at the Alaska Support Alliance annual Meet Alaska conference Jan. 22.
“For the contractors in the room I think it’s really clear that the way to earn business with BP is to demonstrate you can work safely and efficiently,” he said. Contractors account for 80 percent of the hours worked, he said, and have a recordable incident rate about three times that of BP employees. But, Minge said, “We can learn from companies like Little Red Services: They worked last year without a single recordable incident.”
Light oil business The light oil business — production from existing North Slope fields — is the foundation of BP’s business in Alaska, and “the light oil business has suffered over the last few years due to declining production and rising costs,” he said.
“Costs have risen due to significant inflation and increased government take.”
The result is that BP’s cash breakeven point on the North Slope “is significantly higher today than it was five years ago and it’s a threat to our future,” Minge said.
When oil prices rose significantly in recent years, so did costs, but costs, he said, rose at four times the price of oil, “and at the same time North Slope production has declined 29 percent.”
BP’s focus Minge said BP is focused on three things it can do to improve its business in Alaska: prioritizing its work and focusing on the most efficient projects; “tackling inflation through competition to drive down unit costs”; and improving the “efficiency and productivity of every dollar we’re investing.”
BP is spending its dollars for “risk-reduction activities focused on the infrastructure”; on growth projects, like Liberty, that are in the execution stage; and on the base business.
Activities that have been slowed or stopped include the western region development expansion at Prudhoe Bay because it is not competitive, Minge said. Heavy oil development has been slowed by 50 percent. And the rig count has been reduced from 10 in January 2009 to seven this year.
Minge said he realized that when BP saves a dollar of cost it is a dollar of revenue to a contractor. “But to be sustainable we need to make sure that we pay market prices for goods and services,” and BP is looking for the most competitive suppliers.
This is not nickels and dimes, he said. “There are examples where we have saved, for the exact same activity, more than 50 percent from what we were paying” a couple of years ago.
On the efficiency side he cited Acuren for more than doubling the number of corrosion inspections over the last year while reducing its recordable incident rate by more than 90 percent; the CH2M Hill weld shop for increasing efficiency by more than 65 percent with less than a 1 percent rejection rate on more than 11,000 welds; and Nabors Drilling and the BP drilling and wells workover team for improving efficiency in the installation of electrical submersible pumps by more than 33 percent in less than a year, saving more than a million dollars.
“These are just a few examples, but what we find is that the most efficient teams are also becoming the safest teams,” Minge said.
Government policy BP’s investment decisions are not made entirely on tax policy — a host of market factors play into such decisions, he said, but “the tax structure plays a very significant part in the decision process.”
And among tax and royalty tax regimes, “Alaska has the least competitive tax structure anywhere BP works in the world.”
To compete, Alaska projects have to be more efficient, “to produce more barrels per dollar and (have) lower unit costs per barrel.”
The overall tax rate and the progressivity portion of ACES, Alaska’s Clear and Equitable Share, are the biggest issues BP has with Alaska’s tax system, Minge said, because the state takes so much of the upside potential.
The result has been a 15 percent reduction in BP’s capital spending this year, but, he said, “This 15 percent top-line reduction actually masks the real impact that ACES has had on our base business.”
A third of the money goes into infrastructure, investment which is not adding to production.
A third goes into growth projects — in this case Liberty and Denali, the BP-ConocoPhillips gas line project, and Liberty, in federal waters, is not subject to ACES.
The base business, “focused on offsetting decline and delivering increased production from in-field drilling,” accounts for the remaining third, but that activity has been reduced since ACES passed at the end of 2007, Minge said.
The footage drilled has dropped from more than a million feet prior to ACES passage to about 410,000 feet, more than 50 percent.
The reduction in investment in the base, 2007 compared to 2010, is 30 percent, he said.
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