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Vol. 11, No. 41 Week of October 08, 2006
Providing coverage of Alaska and northern Canada's oil and gas industry

Headed to court?

Proposed gas reserves tax incentivizes companies to violate conservation rules

Kay Cashman

Petroleum News

If Alaska voters approve the natural gas reserves tax on the state’s Nov. 7 ballot they could be providing a strong incentive for Prudhoe Bay’s owners to violate a conservation commission ruling.

The Alaska Oil and Gas Conservation Commission is the state agency tasked by law with preventing waste and ensuring the greatest ultimate recovery of hydrocarbons from Alaska’s oil and gas fields. Because Prudhoe Bay gas is used in enhanced oil recovery at Prudhoe and other North Slope fields, field operator BP will not be allowed to send Prudhoe gas down a pipeline to market until AOGCC says it can.

The last estimate the commission gave for possible Prudhoe gas sales was sometime between 2010 and 2020 because in Prudhoe Bay alone natural gas used in enhanced oil recovery has resulted in 3 billion more barrels of oil being produced.

AOGCC is currently doing a study to determine approximately when it will allow gas from the Prudhoe Bay reservoir to be shipped down a pipeline, but AOGCC Commissioner Cathy Foerster does not think it will be before 2010, and possibly much later.

If approved the gas tax would take effect Jan. 1, 2007.

To sell gas too soon from Prudhoe could result in a huge loss of oil — and hundreds of millions, perhaps billions, of dollars from the state treasury since oil is the more valuable of the two commodities.

“From the AOGCC’s perspective, we are not charged with considering economics,” Foerster told Petroleum News this past summer. “We are simply charged with preventing hydrocarbon waste and encouraging greater ultimate hydrocarbon recovery. Usually, these two charges result in best value to the state.”

Case in point: Gas flaring in Cook Inlet

But the commission does not always agree with other state agencies or the producers on what’s most important, Foerster said.

John Norman, the commission chairman, likes to use Cook Inlet basin gas flaring as an example of the importance of this different perspective.

According to Foerster, Norman points out that for years the Cook Inlet oil field operators flared the gas they produced rather than selling it or re-injecting it. They defended this action by saying there was no market for the gas and, thus, no sales value and that it cost too much to add the compression and other infrastructure needed to re-inject it. But when AOGCC was finally able to force Cook Inlet operators to quit flaring “a fertilizer plant and residential users began to buy the gas that wasn’t re-injected,” Foerster said.

“And here we are in 2006 forecasting that sometime in the next few years there won’t be enough gas left in Cook Inlet to meet demand. If the operators had re-injected all that gas they flared, our gas supply picture would look very different right now. The gas that was flared — i.e. wasted — would be available for sales and those sales would definitely have value to the state — in royalties and in cheap gas for Alaskans’ use. However, at the time, the operators argued loudly that there was no value to the gas and, thus, no waste. Their position was likely that they were maximizing value for themselves and the state by flaring.”

AOGCC’s concerns with North Slope gas sales are similar, Foerster said. “As long as the producers are re-injecting the gas for pressure maintenance and EOR, it’s making more oil and it’s still there to be gotten later. Thus, we’re meeting our two charges — we’re preventing waste and we’re encouraging greater ultimate hydrocarbon recovery. However, if we sell the gas before it has completed its job of getting oil out of the ground, then we may not be encouraging greater ultimate hydrocarbon recovery.”

Prudhoe Bay gas is also being shipped to “other North Slope fields and pools for use in enhanced oil recovery. … I don’t have a recovery estimate for the rest of the fields, but, as I said before, several pools are using the gas for EOR and there are even pilots testing if the gas can be used to unlock more of the elusive but huge viscous oil treasure. So there is a serious potential negative oil impact on essentially every oil pool on the North Slope when we begin gas sales,” Foerster said.

“As you know, we will not have answers until the (Prudhoe Bay) study is done (at the end of this year) — and even then it will simply be a forecast based on what we know right now. Having given you that disclaimer, it is unlikely that our studies will indicate that we should allow significant gas sales any earlier than 2010 and possibly many years later,” Foerster told Petroleum News Oct. 5.

If a reserves tax is approved, will the state be incentivizing North Slope gas owners for breaking AOGCC rules?

Yes, Foerster said.

Will a reserves tax likely force gas owners into court because it and the commission’s ruling would be in direct opposition?

Yes, Foerster said.

Either way, the state loses because the court will be forced to decide between a state agency and its legal obligations or a voter-approved state tax.

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