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Producers: tax too high Companies support oil tax to get gas; say it will discourage investment By Kristen Nelson Petroleum News
The major North Slope producers showed up in Juneau to testify on the administration’s proposed production profits tax with a single message: The new tax will result in less, not more, investment on Alaska’s North Slope.
The proposed tax is too high and would make some North Slope development uneconomic, they said, telling legislators they reluctantly support it only as part of a package to move a North Slope gas project forward.
Ken Konrad, BP Exploration (Alaska)’s vice president for gas, gave legislators some background on discussions between the companies and the administration in testimony Feb. 28. He said last summer the administration told the producers that it did not see the present production severance tax, with its economic limit factor, as a viable long-term oil tax solution because the tax base of the system was declining. The administration proposed a production profits tax. Konrad said the producers told the state that “if populated with balanced numbers” a PPT could be a long-term solution.
There were mutually agreed upon goals, Konrad said: all barrels would be subject to taxation; the tax would provide the state a balanced and proportionate share of profit at high prices; and the tax would stimulate additional investment critical to reduce long-term oil production decline. 12.5% vs. 20% As reported by the administration, the producers recommended a 12.5 percent tax, while the state proposed 20 percent. Konrad said the producers estimated that a 12.5 percent tax would increase state revenues by hundreds of millions of dollars a year at current prices — tens of billions over the long term — while at the same time stimulating more investment, jobs and long-term production.
The gas portion of the fiscal contract was concluded with the state Feb. 18. On Feb. 19, he said, the producers made another PPT proposal to the state in advance of the planned executive meeting which included BP’s chief executive, Tony Hayward. Konrad said the Feb. 19 proposal made “a very substantial move toward the administration’s position while providing more support for investors at low to moderate prices where everyone agrees Alaskan investments are extremely challenged.”
Feb. 20 Gov. Frank Murkowski outlined his 20 percent tax, 20 percent credit proposal to executives. The state had rejected, Konrad said, the producers’ Feb. 19 proposal.
He said BP agreed with the governor that it would not oppose the rates and figures in the administration’s proposed PPT legislation. Hayward and others “made the extremely difficult decision” to accept the governor’s PPT terms as a means to finalize a fiscal contract for the gas pipeline. Konrad said BP believes the PPT as proposed “is at the far outer fringe of what should be seen as a reasonable or plausible range of outcomes.”
BP does not believe, he said, that the 20 percent tax rate will maximize investment or long-term production. Konrad said BP believes the PPT has “significant merit,” but also believes the size of the tax increase outweighs the other benefits “and goes well beyond optimum.” The 6% decline Angus Walker, BP Exploration (Alaska)’s commercial vice president, said Alaska North Slope production has declined at an average rate of 6 percent a year since production peaked in 1988. Without investment, he said, the natural rate of decline would have been about 15 percent; an industry investment of $1 billion to $1.5 billion a year over the last 10 years has sustained the 6 percent decline.
Much of the production that has stemmed the decline has come from smaller fields which benefited from ELF. Walker noted that while some of this production pays no production tax because of ELF, it all pays property tax, royalty and state income tax, as well as keeping the trans-Alaska oil pipeline operational.
Walker said the North Slope is not drawing enough investment: $2 billion to $3 billion a year is needed to reduce the decline rate from 6 percent to 3 percent.
Without investment, at the 15 percent per year decline rate, the oil business would be gone in 10 years, Walker said. Even with enough investment to sustain a 6 percent decline rate, the $1 billion to $1.5 billion a year rate (assuming the current tax regime), the oil business would last around 25 years, “nowhere near long enough to enable gas,” he said.
Walker said the $2 billion to $3 billion a year investment level would stem decline to 3 percent a year, and would keep the oil business viable for decades (2050 is as far as the BP chart goes). Additional barrels produced would be 1.3 billion at a 15 percent decline rate, 3.6 billion at a 6 percent decline rate and 7.5 billion at a 3 percent decline rate.
To achieve a 3 percent decline rate an investment of $20 billion to $30 billion over the next decade alone would be required. “Alaska must compete to attract these dollars,” Walker said.
Fifteen billion barrels have been produced, and 17.5 billion barrels remain — known barrels, Walker said, comparing that to an estimated 5 billion barrels which could be found through exploration. Exploration, he said, won’t stem the tide of decline on the North Slope; what will is more efficient recovery of the known 17.5 billion barrels, only 3.8 billion of which are under development.
Developing the remaining 14 billion barrels “would require well in excess of $100 billion,” the kind of investment that could come only from major oil companies.
Walker said it “mystifies us” why so much testimony has “focused on the impact of PPT on new entrants when the future of the North Slope is dependent on making Alaska attractive to major oil companies.”
BP loses money at $20 oil under the present system in Alaska, he said, and makes it up under higher prices so introduction of the PPT squeezes BP’s profits at higher prices. BP makes the investments and takes the risks and has to make a good profit at high prices for Alaska to be attractive, Walker said. ExxonMobil would oppose just a tax increase “If this measure was simply a tax increase, ExxonMobil would actively oppose it,” Richard Owen, vice president of ExxonMobil Alaska Production told legislators Feb. 28. He said ExxonMobil’s tax payments would increase by $50 million to $100 million a year under the production profit sharing tax.
Owen said ExxonMobil will support the measure because it will allow the gas pipeline project “to move forward to the next phase” and because the proposal balances revenues to state and producers over a broad range of prices, provides incentives for new investment and includes a transition provision for recent investments.
Owen said ExxonMobil’s assessment of remaining North Slope resources suggests growth opportunities will come from enhanced oil recovery, smaller and more marginal oil accumulations and viscous and heavy oil resources. These opportunities, he said, will require new technology and will have higher unit development costs and more complex operations. They are also lower in quality than Prudhoe Bay and Kuparuk resources.
ExxonMobil is concerned about “whether the high tax rate and resulting increase in taxes will hinder full development of the remaining oil resources on the North Slope,” he said.
Because the production tax is “a major step-change” in the state’s current production tax, the bill addresses the change “by including a transition plan so that recent investment decisions are not adversely impacted.” Owen said ExxonMobil believes this is appropriate because benefits from recent investments have not been fully received. Satellite and tertiary recovery investment decisions made over the last five years were made anticipating the tax rate under ELF, which is lower than that proposed under the PPT.
The state’s higher take at higher prices may make it difficult “to progress the remaining future development opportunities.” Given Exxon Mobil’s view of remaining resources, Owen said the company “would not support a higher tax rate or lower credits than proposed in the bill.” PPT at 13% would match today’s tax ConocoPhillips Alaska began the testimony of the majors Feb. 27.
Brian Wenzel, the company’s vice president, finance and administration, told legislators ConocoPhillips believes the proposed production profits tax bill sets an “aggressive” level of state take, and that the balance of the bill is in favor of the state at the expense of established investors.
He said ConocoPhillips supports passage of the bill “reluctantly,” and believes it will negatively impact long-term investment. The bill “punishes” companies that have made long-term investments in the state, Wenzel said.
“We would, in fact, oppose this bill except for the fact that it has enabled all parties to come together in support of a contract under the Stranded Gas Development Act that will move the gas pipeline project to the next phase of development.”
Wenzel said a PPT rate at 13 percent would collect the same amount of taxes today as the present system but legislators have been discussing rates higher than the 20 percent tax the governor proposed. Wenzel said ConocoPhillips believes higher rates would not be in the best interests of the state because new field sizes in the state are small and arctic operating and development costs are high.
ConocoPhillips is willing to “reluctantly” accept the tax in the proposed bill, but even small changes would “impact this balance and will cause investors to re-evaluate potential investments.” And even at 20 percent, he said, the state needs to ask if it is going to get the level of long-term investment it wants.
Wenzel said the proposed tax more than doubles the effective tax rate under the current system, and in isolation ConocoPhillips “would not view this change as reasonable, fair or appropriate, particularly given the state’s current budget surplus.”
He said ConocoPhillips will “reluctantly support” the tax change as a foundation for oil and gas fiscal stability.
Because the proposed tax rate pushes Alaska into a “high cost/high tax bracket” as compared to other regimes, he said legislators should “be comfortable with the potential risks to future investment that such a high rate imposes.” The transition provision Wenzel discussed development of the Fiord satellite at Alpine as an example of why ConocoPhillips believes companies should be able to recover a portion of capital expenditures over the last five years under the transition provision, what Pedro van Meurs and legislators have termed the clawback.
He said Fiord was discovered in 1992 but was not economic until Alpine facilities were expanded in 2004. The project kicked off in 2003 and was threatened by ELF aggregation. The Department of Revenue provided ConocoPhillips with a letter ruling in 2005 that Fiord would be treated as a standalone and would not be aggregated with Alpine for severance tax purposes.
As a small satellite, he said, Fiord would have a low ELF and pay little severance tax. ConocoPhillips sanctioned the project after receiving the letter ruling.
Total capital costs are expected to be around $300 million, and although oil prices are high, labor and material costs have increased “dramatically” and Fiord is expected to cost $30 million more than originally sanctioned.
The majority of costs for Fiord will have been incurred before the bill becomes effective, and Wenzel said that without the transitional investment expenditure plan only costs associated with 2007 and 2008 winter drilling would be eligible for PPT deductions and credits.
The project was sanctioned with the assumption that the field would pay state corporate income tax, royalty and property tax, “but little or no severance tax,” he said. Under the new bill production from Fiord would be subject to a 20 percent PPT rate, and without the transition plan the increase would result in a reduction of more than $100 million in gross value and a 6 percent reduction in internal rate of return at a $40 ANS West Coast price.
Note: Views of independents and explorers will be covered in the March 12 issue of Petroleum News.
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