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Proposed versus passed
In late March 2012 Senate Finance was working on revisions to ACES, Alaska’s Clear and Equitable Share, the production tax enacted in 2007.
Bert Stedman, R-Sitka, co-chair of Senate Finance, said the committee would zero in on the progressivity aspect of ACES.
What follows is a reprint of a portion of an article from the April 1, 2012, issue of Petroleum News.
Then and now Legislators have questioned why ACES isn’t incentivizing new investment, based on analyses run of the proposed bill in 2007 which indicated the bill would not make the investment climate worse.
An October 2007 presentation to legislators by consulting firm EconOne included a slide entitled: “ACES Preserves Investment Climate.”
Stedman said March 22 that he asked PFC Energy, which is currently consulting for the Legislature on oil tax issues, to take a look at some of the old analysis and do comparative updates. He said the cost structure and the price range are different today than they were a few years ago, and wanted the committee to be able to see the differences.
Janak Mayer, manager in the upstream and gas practice of PFC Energy and project manager for the firm’s work with the Alaska Legislature, said a lot of the analysis done during ACES came to the conclusion that ACES preserved the investment climate.
But Mayer said there are a lot of voices today saying “ACES has not preserved the investment climate or at least has not, in the current day, enabled an investment climate as significant as might be ideal.”
He said that to understand those differences it was important to look at the analysis that was performed during the ACES debate, to look at what has changed since then, “and why therefore might we draw some different conclusions looking at this data pool today as opposed to the ones that were drawn back in 2007.”
The 2007 analysis looked at seven hypothetical field developments with “a stylized production profile and particular capital and operating costs,” Mayer said. The basic differences between 2007 and 2012 hold true across all the examples, he said, noting the sample field he selected from the 2007 analysis was “not dissimilar in its characteristics to the sort of hypothetical new development” that PFC Energy has used in some of its analysis.
ACES as proposed The first thing to note, Mayer said, is that the October 2007 analysis was done on the ACES tax bill as proposed by the Palin administration, not on ACES as enacted by the Legislature. The administration proposed a 0.2 percent progressivity rate; the Legislature passed a 0.4 percent progressivity rate. The administration proposed capping the production tax rate at 50 percent; the Legislature capped it at 75 percent.
Mayer said the second thing “is that cost assumptions are much lower than any recent experience would suggest” in the 2007 analysis, which was based on $10 a barrel capital expenditures and $9 a barrel operating expenditures for a hypothetical new development, while the analysis PFC Energy presented for a similar development was based on $17 a barrel for both capex and opex.
Then there is the price of oil.
Analysis in 2007 was done on a minimum of $20 a barrel and a maximum of $100 a barrel “with a focus in particular on what the economics looked like at a $40 stress-test price and a $60 base case price for crude oil,” he said.
The production profile for the hypothetical new development in the 2007 analysis was one that would maximize returns for the producer, with “quite a high peak production rate and a relatively high decline rate, meaning that most production value occurs in the first 10 years,” Mayer said, estimating that for a 60 million barrel field the peak would probably be 20,000 barrels per day with a rapid decline. He said a peak at some 11,000 or 12,000 bpd and a slower decline “is at least a little more consistent with some of what we’ve actually seen in terms of historical production data from North Slope developments” and particularly from new fields in that size range — Oooguruk and Nikaitchuq.
Benchmarking data Both analyses benchmarked the government take in Alaska against other oil producing regimes. The 2007 analysis used a $60 a barrel reference case; PFC Energy has used $100 a barrel and $140 a barrel.
Where the 2007 benchmarking put Alaska under ACES as proposed at the high end of the median, the PFC Energy benchmarking at $100 a barrel put Alaska just under Norway, which has the highest government take of any developed country, and above Norway at the $140 a barrel level, Mayer said.
Looking at the hypothetical new development which was attractive under the 2007 assumptions, Mayer said that as the 2007 assumptions are changed to reflect 2012 prices and costs, with ACES as enacted rather than as proposed, “this goes from being an attractive field development under the previous cost assumptions to being suddenly one that really is very marginal.”
The flatter production curve (lower peak production, longer field life), gives the project “strongly negative value to a company” at the $40 to $60 a barrel range, with a breakeven point probably in the $80 to $90 a barrel range and one which only starts to have any positive economic value at $100 a barrel.
Stedman summed up the presentation by noting that by the time this proposed new development is taken “from the proposed ACES to the enacted ACES and then adjust it for cost and price, we have a substantial different outcome” than that in the 2007 analysis.
—Kristen Nelson
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