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Vol. 19, No. 34 Week of August 24, 2014
Providing coverage of Alaska and northern Canada's oil and gas industry

It’s on the rise

DNR says development in the Cook Inlet is pushing up state oil royalties

Alan Bailey

Petroleum News

Total state royalties from the Cook Inlet oil fields have risen from $14 million in the first half of 2013 to $24.9 million in the first half of 2014, an increase of nearly 78 percent, the Alaska Department of Natural Resources announced on Aug. 14. Oil production increased from 13,087 barrels per day to 16,288 barrels per day during that same period, an increase of nearly 25 percent.

“Increased capital investment in the Cook inlet fields has yielded higher employment, longer-term natural gas security and increased oil royalty revenue to the Alaska Permanent Fund,” said Joe Balash, the department’s commissioner.

Rising royalty rates

The increase in royalties has been particularly striking, in part because the production increases in the various fields have kicked the royalty rates for the fields up to their full amount of 12.5 percent of the wellhead value of the oil. The Monopod and Osprey platforms saw their royalty rates rise to 12.5 percent for the first time since 2007 and 2002 respectively, while the Granite Point field has seen an increase from 10 percent to 12.5 percent, DNR said.

Balash explained to Petroleum News that more than 10 years ago, faced with the specter of dwindling oil production from the Cook Inlet fields, the Alaska Legislature enacted royalty relief tied to production thresholds on certain Cook Inlet platforms. The idea was to prevent royalty liabilities swamping the economics of the platforms, potentially putting the platforms out of business as oil production dropped, with meager oil production increasingly swamped by the production of water from field reservoirs.

“Purely from a DNR royalty perspective we think it’s worked out great,” Balash said. “Rather than having those wells shut in or those platforms light-housed, the Legislature saw fit to reduce the royalty rates, in order to prolong their life.”

A rise in oil prices in recent years has also helped keep the oil fields in business, he commented.

No production tax

The fact that the Cook Inlet oil fields pay no production tax has also presumably encouraged new field development - royalties are the big drivers of state revenues from the basin. Because of tax confidentiality laws it is difficult for DNR to provide detailed public information about royalties and taxes, and it is difficult also for the department to figure out what payments the state is making to oil companies for state tax credits, Balash said. People see the tax credits as another factor in encouraging Cook Inlet oil and gas activity.

The zero production tax rate results from the fact that, in recognition of the challenging economics of the Cook Inlet, the Cook Inlet tax system has remained unchanged over the years, despite a series of major changes to the production taxes for North Slope oil. And the Cook Inlet tax arrangements include something called the economic limit factor, or ELF, a factor that reduces the tax take for fields with low production levels.

The application of the ELF system has resulted in the Cook Inlet’s zero tax take, Balash said, adding that, in addition to royalties, some revenues come from property tax and corporate income tax. In addition, the continuity of operations on the platforms has helped retain the critical mass of industrial activity, necessary to support the service industries and, in turn, help maintain gas production.

And energy security and the maintenance of adequate gas deliverability has been a major focus for the Cook Inlet industry in recent years.

“We seem to have turned a corner there,” Balash said.

Will need review

Balash pointed out that, with the tax ceiling associated with ELF going away at the end of 2021, it will be necessary to revisit the Cook Inlet tax laws before then. But it is unlikely that the kind of tax regime that has been enacted for the North Slope will work in the mature assets of the Cook Inlet, he said. One of the duties of the Oil and Gas Competitiveness Review Board that the state legislature established this year will be to make recommendations on how to tax production from the Cook Inlet in the future, Balash said.

In considering the revival of the Cook Inlet oil industry, Balash particularly praised the efforts of Hilcorp Alaska, the newcomer to the Cook Inlet that has led the drive to turn around the fortunes of the oil and gas fields. Cook Inlet Energy has also been plowing a great deal of capital into its Cook Inlet assets and, as a consequence, achieving positive results, he said.



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