The Alaska Support Industry Alliance, whose membership consists of oil and gas contractors and suppliers, was still in shock the morning after Alaska Gov. Frank Murkowski’s Jan. 12 state of the state address to the Alaska Legislature.
The governor, citing legislative intent, said he was “taking administrative action” effective Feb. 1 to treat Prudhoe Bay satellites Borealis, Midnight Sun, Orion, Polaris, Point McIntyre, Aurora, and the original Prudhoe Bay participating area, “as one field for purposes of the economic limit factor.”
The effect of such action is to increase the ELF, and the production tax paid, for all of the fields. The governor said it “was never the intention of the Legislature which crafted revised ELF legislation in 1989 to have it reduce taxes close to zero in situations in which satellite fields are administered as one field with the Prudhoe Bay field.” ELF, he said “was designed to spur production of marginal fields requiring large investments for development.” The tax under discussion here is the production or severance tax; the state also receives royalties and income taxes from oil and gas production.
The governor said that if Prudhoe Bay and its satellites had been operated in 1989 as they are today, “they would have been treated then by the Legislature as one field for ELF purposes — just as we are proposing to do now.”
Action likened to an earthquake
One Alliance member noted that a stable tax policy has been a goal of the organization since its founding in the 1970s, and called the governor’s action an earthquake.
Larry Houle, general manager of The Alliance, told Petroleum News “there was only literally a couple of hours notice” before the governor made the announcement in his state of the state address and “there was no public process.” The change may not require a public process, he said, but “we work in an oil province that is the most expensive in the world and the governor with one fell swoop basically increased the cost of doing business in Alaska.”
Houle noted that the governor has called ‘jobs for Alaskans’ his administration’s No. 1 priority. The Alliance shares the concern with jobs, he said, and “satellite developments in Alaska’s declining oil fields provide the greatest opportunity to increase oil production and increase jobs for Alaskan contractors. A tax increase will inevitably put such developments at risk.”
Structural tax increase
ConocoPhillips Alaska spokeswoman Dawn Patience told Petroleum News the ELF change is “a structural tax increase by the state of Alaska.” The financial impact, Patience said, will be “an immediate $150 million negative annual effect on Prudhoe Bay.
“We will need to consider the increased costs and risks when assessing whether to go forward with future developments.”
ExxonMobil said the governor’s plan “to increase the oil severance tax on core Prudhoe Bay and satellite fields would severely impact the investment climate in Alaska.”
The company noted the change “significantly increases the taxes on fields where investments have already been made.”
ExxonMobil cited Orion, a western Prudhoe Bay satellite currently under development, as an example. “Changing the oil severance tax will make portions of this project uneconomic, jeopardizing development of millions of barrels.”
Then there is the gas pipeline. ExxonMobil said “the proposed action brings into question whether it would be possible for the state to ensure the predictability and durability necessary for such a huge project as the Alaska gas pipeline.”
Serious consequences predicted
“BP is surprised and disappointed that the administration has announced this decision,” said BP Exploration (Alaska) spokesman Daren Beaudo. “This change has landed on us with no notice and is counter to the spirit of collaboration and cooperation which we have been pursuing with the governor and the state of Alaska.
“A stable fiscal environment is vital considering the scale of investments being made in Alaska,” he said. “The governor’s actions create uncertainty for investors like BP, which had projected a capital spending budget of $700 million for 2005. While it’s too early to say what impact this change will have, we will need to reevaluate our investment program in Alaska to see how this could impact recent and future development.
“This action also makes it crystal clear why it will be critical to have a clear and durable fiscal contract for the gas pipeline project. A gas pipeline project can only happen if the oil business is healthy.”
Judy Brady, executive director of the Alaska Oil and Gas Association, told Petroleum News there are “going to be serious consequences for both the oil industry and the state, because it changes the tax rules in a way that leaves every field in the state open to an ad hoc decision by the Department of Revenue that it is subject to a higher ELF tax.”
Heavy oil not affected
The governor said the decision will not apply to heavy oil, but Orion and Polaris are heavy oil fields, with production from the Schrader Bluff formation, and they are included on the list of affected satellites.
Murkowski also said that the ELF decision will not change “the ELF concept” or the application of ELF to remaining fields, and named Kuparuk, Alpine, Northstar and Liberty as being unaffected by the change. Liberty, a BP prospect east of Prudhoe Bay, is a discovery which has yet to be developed.
“Whether ELF should be changed remains in the hands of the Legislature following legislative hearings — just as I have previously proposed,” the governor said.
The governor also said he believes that the state should acquire a portion of the trans-Alaska oil pipeline equivalent to the state’s royalty oil, 12.5 percent, and said he hopes soon to be able to deliver “one or more” stranded gas contracts to the Legislature for development of an Alaska gas pipeline.
“It is in the interests of the state to support the first economically viable (gas pipeline) project that can be built,” the governor said, “one that provides gas and gas liquids for Alaskans and access to new sources of gas for explorers. Proposals should provide gas to the Lower 48 and evaluate the economics of an LNG facility in Valdez and spur lines to Southcentral and the Kenai,” he said. In Cook Inlet, the governor said, there is a need to increase both onshore and offshore exploration, and he asked the Legislature to evaluate whether the state should pay a portion of the mobilization and demobilization costs to bring a jack-up drilling rig to Cook Inlet “to get exploration moving again.”
Exploration is needed in the Kenai National Wildlife Refuge, and the state also needs to work with the U.S. Department of the Interior to ensure the Swanson River field in the refuge is “available for summer gas storage.” It will be a big job, he said, to convince the U.S. Fish and Wildlife Service to grant those permits.
