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Vol. 10, No. 6 Week of February 06, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Wood Mackenzie: Alaska costly, but profitable

Lawmakers offer Alaska public glimpse of state’s ranking among world’s oil patches; 14 or 15 in profitability out of 49-53 regions

Rose Ragsdale

Petroleum News Contributing Writer

Though Alaska’s oil patch is one of the world’s costliest for doing business, the state is also among the most profitable oil regions around the globe, according to data released Feb. 1 by the Alaska Legislature’s Legislative Budget and Audit Committee.

The information is a sample of the data contained in Wood Mackenzie’s Global Oil and Gas — Risk and Rewards 2004,”a study that the committee is analyzing in hopes of better understanding how Alaska should value its oil and gas resources.

International consultant Wood Mackenzie Ltd. prepared the study, which the committee and the Murkowski administration jointly purchased the use of on a confidential basis for 25,000 pounds, or roughly $45,000 to $50,000.

The study measured 66 areas in 58 countries around the globe, including Alaska and three other regions in North America: Gulf of Mexico deepwater, Canada’s Arctic and East Coast offshore. It compared the regions in 150 different ways, including field development and operating costs, rate of return for producers, and governments’ relative tax rates from 1994 until 2003.

The study, which is two inches to two and one-half inches thick, contains a “massive” body of confidential data that the lawmakers must interpret, said Legislative Budget and Audit Committee Chairman Sen. Gene Therriault, R-North Pole.

Wood Mackenzie requires that the data be kept confidential for proprietary reasons. So far, six or seven Alaska legislators have signed confidentiality agreements in order to review the information, Therriault told reporters at a news conference Feb. 1 in Juneau.

“We want to make sure we understand what went into the report and why the numbers came out the way they did,” he said. “This may be one glimpse under the cover that the general public gets.”

Costly but profitable

According to the two pages of figures that Wood Mackenzie authorized for public disclosure, Alaska ranked 52 out of 58 in total costs, based on a capital costs ranking of 45 out of 58 and an operating costs ranking near the bottom of 56 out of 58. Alaska’s average capital cost was $3.75 per barrel of oil, compared with a global average of $2.55 per barrel and its average operating cost was $6.20 per barrel, compared with $3.34 per barrel worldwide. The state’s total average cost was $9.94 per barrel, compared with a $5.89 per barrel global average.

In government take, or taxes and royalties, throughout the life of its oil fields, Alaska ranked 33 out of 54 regions at an oil price of $16 per barrel; 24 out of 54 regions at $22 per barrel and 19 out of 55 regions at $35 per barrel. State and federal taxes and royalties averaged 71.7 percent of net cash flow on Alaska oil production at low prices; 63.63 percent on moderate prices and 58.4 percent at high prices. That compared with average global government take of 70.86 percent at low prices; 70.26 percent at moderate prices and 73.34 percent at high prices.

In rate of return, or overall profitability per barrel as compared to its competitors for investment, Alaska ranked 14 or 15 out of 49 to 53 regions (depending on whether oil prices are low, moderate or high). The average investment rate of return on Alaska oil production totaled 18.09 percent at $16 per barrel; 23.57 percent at $22 per barrel and 29.11 percent at $35 per barrel. By comparison, the global average investment rate of return was 15.20 percent at $16 per barrel; 18.94 percent at $22 per barrel and 23.07 percent at $35 per barrel.

The profitability of Alaska’s oil fields climbed even higher when evaluated based on net present value of investment at moderate and high oil prices, according to Wood Mackenzie’s figures. Alaska ranked 17 out of 58 at low prices with a net present value of 90 cents per barrel, compared with 65 cents per barrel globally. At moderate prices, the state’s net present value ranking climbed to 11 out of 58 and to eight out of 58 at high prices. At $22 per barrel, Alaska net present value was $2.14 per barrel ($1.33 global average); and at $35 per barrel, Alaska net present value was $4.43 per barrel ($2.35 global average).

Regressive system tells the story

The rankings fit within the Alaska Department of Revenue’s assessment of the risks and rewards for oil companies doing business in the state, according to Dan Dickinson, director of Revenue’s Division of Tax and Audit.

“We have a regressive system in the state. When oil prices are low, government takes a lot, but when prices are high, we’re one of the best places to do business in the world,” Dickinson said.

An earlier version of the Wood Mackenzie study published in 2002 was based on data from 1991 to 2000. It ranked Alaska dead last in the total cost of doing business and 36 out of 61 in terms of taxes and royalties, which put the state at 55 for overall profitability per barrel of oil.

The wide disparity between Alaska’s rankings in the two studies may reflect the low oil prices in the 1990s and the effect of higher prices in recent years, Dickinson said.

“We also should keep in mind that the international situation is dynamic. It could be that some dramatic changes occurred in the world,” he said.

“What I can’t figure out is whether Wood Mackenzie may have limited the study to more recent oil fields on the North Slope,” Dickinson said. “It’s our belief that Alpine and Northstar are very prolific fields. Everybody would love to have another Alpine.”

Dickinson said the net present value rankings show how much an investment over many years is worth today to the oil companies. In the 2004 study, Alaska compared very favorably to the other regions in this measure of profitability, climbing into the world’s top oil regions at moderate and high prices.

To evaluate the 2004 study and better understand how Alaska fits into the global picture, the Legislature has hired the state’s former chief petroleum economist Chuck Logsdon as a consultant.

Logsdon has been asked to evaluate the study’s cost assumptions, economic models for Alaska, assumed field sizes, transportation and location logistics for Alaska, and price projections as well as review Wood Mackenzie’s discussions of intangible risk factors and identify other regions that might be appropriate for comparison with the state.



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Want to know more?

If you’d like to read more about Wood Mackenzie’s “Global Oil and Gas — Risk and Rewards 2004,”go to Petroleum News’ Web site and search for the following Petroleum News’ articles that were published in the last year in which the report was featured or plays a significant part:

Web site: www.PetroleumNews.com

2005

• Jan. 30 Alaska tax hike in sync?

• Jan. 23 Wood Mackenzie report under scrutiny

2004

• Dec. 12 State of Alaska, AOGA differ on $60B estimate

• Dec. 12 Oil Patch Insider: Wood Mackenzie report in but nobody’s talking

• Dec. 5 Alaska needs $60B to bridge gap to gas pipeline

• June 27 Industry leaders: Alaska could cripple the goose

• June 6 Reserves continue to make Alaska attractive

• May 23 Oil tax committee plan dies on last night of Alaska legislative session

• April 18 Oil tax legislation gets hearing

• April 18 Alaska proves costly for oil industry