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Vol. 22, No. 48 Week of November 26, 2017
Providing coverage of Alaska and northern Canada's oil and gas industry

Industry capex important

Wells Fargo exec notes role of oil investment in driving oil production, economy

Alan Bailey

Petroleum News

Capital expenditure by oil companies on the North Slope is the most important factor in growing the Alaska economy, Sam Mazzeo, senior vice president and Alaska commercial bank manager for Wells Fargo, told the Resource Development Council’s annual conference on Nov. 16.

“It’s the most important number that we should be focused on on the North Slope in this economy,” Mazzeo said.

Capital expenditure, or capex, pays for the exploration, infrastructure construction and oil field development that fuel increased oil production. Moreover, the injection of capex into the economy creates a heightened boost because of what economists refer to as the multiplier effect, the manner in which the injection of money into the economy creates economic activity through a cascade of services and associated jobs.

Recent capex levels

Mazzeo used the profile of industry capex and associated oil production levels in the period from 2013 to the present to illustrate his point. During the period of high oil prices between 2013 and 2015, annual capex for the North Slope averaged $3.6 billion, growing steadily from $3 billion and peaking at $4 billion in 2015. This high level of expenditure led to the increase in North Slope oil production observed in 2016 and projected to continue through this year, Mazzeo said.

“We’re increasing oil production because we increased investment in new production and replacing past (oil) reserves,” he said.

Moreover, with an estimated multiplier effect of nine times from that capex infusion, the total impact on the Alaska economy would have peaked at around $36 billion, he suggested.

Worrying trend

However, an anticipated plunge in North Slope capex to about $1.9 billion this year is worrying. That represents a drop in the Alaska economic impact to $18 billion and does not bode well for future oil production levels.

“We need higher capex on the Slope and we need to be competitive to do that,” Mazzeo said.

With total U.S. expenditure this year anticipated to be around $111 billion, Alaska’s projected spend of less than $2 billion represents just 1.7 percent of the national total, he said.

And, although the increase in North Slope oil production from an average of 501,000 barrels per day in 2015 to a projected 533,000 barrels per day in 2018 comes as welcome news, that increase is small compared with an overall production increase of 70 percent across the United States, Mazzeo said.

One key issue that Alaska needs to address is the lengthy time take to obtain permits for North Slope projects, Mazzeo said. He cited the example of ConocoPhillips’ CD-5 project, a project that has resulted in two of the North Slope’s highest producing wells but which took about five years to permit.

Tax system working

Mazzeo suggested that the steady climb in North Slope capex between 2013 and 2015, during a period when the price of oil hardly changed, suggests that the state’s new oil tax law, referred to as Senate Bill 21, has been working. He said that he was not suggesting any changes to the tax law as part of efforts to make the Alaska oil industry more competitive. With the state’s tax laws having been changed every three years, on average, over the past 60 years, tax stability is now needed, he said.

However, Alaska also needs to find a long-term solution to its fiscal situation, with uncertainty over future oil tax scenarios encouraging a shift in investment dollars from Alaska to other places.

“People need confidence in Alaska, to invest in Alaska,” Mazzeo said.

He suggested that obtaining state revenues from the Permanent Fund through some form of percentage of market value mechanism forms an essential component of any Alaska fiscal solution. It may also be necessary to consider some form of broad based tax, perhaps a sales tax that gathers revenue from Alaska residents.

State expenditure

On the other hand, there need to be limits on state expenditure - there cannot be an unlimited pool of money for the state government to spend, Mazzeo said. However, if the state is spending money, its most valuable use of state funds would be the construction of some strategic roads on the North Slope. A permanent road between the Kuparuk River and Alpine oil fields, for example, would open the area west of Kuparuk to year-round access while also eliminating the need to build annual ice roads.

Mazzeo also commented on the deferral of payments due from state production tax credits. It is necessary to restore investor confidence in the state by paying the money that people were expecting from the credits, he said.

With the trans-Alaska oil pipeline aging, time is of the essence in encouraging the investment needed to extract maximum value from the remaining oil resources on the North Slope. And even a modest increase in North Slope capex can pay significant dividends in boosting the Alaska economy. Alaska really needs to compete for a larger component of U.S. oil industry capex, Mazzeo said.

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