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Vol. 12, No. 46 Week of November 18, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Investment at risk

Oil company execs says consequences dire if Alaska hikes taxes again

Kay Cashman

Petroleum News

Investment in Alaska is in jeopardy if the state’s oil production tax is overhauled in such a way that it significantly increases the State of Alaska’s take, oil company executives told attendees of the Resource Development Council for Alaska’s annual conference in Anchorage on Nov. 14.

The first casualty of a higher oil tax, ConocoPhillips Alaska President Jim Bowles said, would be the company’s $300 million ultra low sulfur diesel production facility, scheduled for construction in 2008 in the North Slope Kuparuk River unit. The new facility would produce diesel fuel for all of the industrial operations on the North Slope.

Taxes higher than profits already

Taxes under the current production profits tax, or PPT, were “considerably more than our profits” in 2006, BP Exploration (Alaska) President Doug Suttles told conference attendees. BP’s taxes to the state and federal governments on its Alaska assets totaled more than $2.7 billion for 2006. If Alaska Gov. Sarah Palin’s production tax bill is passed, he said, it would be a 400 percent tax increase in a two-year period for oil and gas companies doing business in the state. The governor’s proposed new tax is called Alaska’s Clear and Equitable Share, or ACES.

“Before all the tax stuff came up, we had a plan to increase our capital spending fairly significantly,” Suttles told Reuters at the conference. And it will take continued oil field investment to keep Alaska oil production steady; gas development isn’t enough to fill state coffers, he said.

BP has put its 2008 Alaska investment plans on hold “until the dust settles” over the oil-tax issue, he said, noting there are a lot of opportunities left on the North Slope, such as the 20 billion barrels of discovered heavy oil, that in today’s “higher priced environment” could be “realized,” especially with a tax structure that encourages investment.

But those opportunities will require “tremendous” amounts of investment and people, and “massive amounts of know-how.”

In 2007, Suttles said, BP is making investments in all three areas. The company will spend almost $1.9 billion in 2007 in Alaska, $685 million of which is capital investment and the balance is for operations.

In fact, since 2006, BP has increased its workforce in Alaska by more than 40 percent to almost 2,000 employees and its contractor workforce has increased from 2,500 employees to nearly 6,000, which has resulted in the highest number of people working on the North Slope since 1983, six years after the trans-Alaska oil pipeline went online.

Investment to date, Suttles said, has kept oil production declines to 6 percent a year at the maturing North Slope fields, which include significant chunks of the Prudhoe Bay and Kuparuk River units. Without that investment, production from the aging fields would fall by 16 percent a year, he said.

“We would be at half our current rate in just four years’ time.”

Alaska produces 650,000 barrels of crude per day; almost half of that comes from Prudhoe Bay.

Investment in Prudhoe Bay and Kuparuk generates almost 70,000 new barrels of oil each year, which is larger than any field that has been developed in over a decade on the North Slope, Suttles said.

Prudhoe Bay, still the largest field in North America, “is the biggest driver of new production in Alaska, the biggest generator of jobs, and generates more state revenue than any other field,” he said. But the infrastructure in the field, which just celebrated its 30-year anniversary in production, was built expecting a 25-year life, so it, too, needs investment.

Suttles also expressed concern about oil prices staying high, noting that oil companies make investments based on reasonable price forecasts.

“I hope the high prices of the last few years continue, but clearly this is not certain,” he said. “A 10-year average of Alaska crude, adjusted for inflation, for the last 10 years … (was) $33 a barrel.”

The average price per barrel for the last 30 years, since the startup of Prudhoe Bay, was $22 per barrel, he said.

Suttles also pointed out that unlike other governments around the world, the State of Alaska has no transition period for the taxpayer should the Alaska Legislature vote to increase production taxes. “This is like the government deciding to disallow a mortgage deduction on your home, but after you bought the home and … signed the mortgage.”

Bowles: Alaska has enough challenges

“Our business in Alaska already has enough challenges,” Bowles said, reminding attendees of the $60 million ConocoPhillips spent drilling two wildcat wells in the National Petroleum Reserve-Alaska last winter, one of which was a dry hole and the other deemed non-commercial because it was some 200 miles from the nearest oilfield infrastructure at Alpine.

“It’s no easy lunch for us on the North Slope. … it’s a very, very difficult place to work,” Bowles said, noting the company and its partners Anadarko Petroleum and Pioneer Natural Resources recently relinquished 300,000 exploration acres in NPR-A, and are preparing a second acreage drop in the near future.

Instead of drilling wildcat wells far from infrastructure where there is the potential of large oil discoveries, this year ConocoPhillips is drilling wells close to its Alpine field in the Colville River unit where the potential is more like 30-50 million barrels per prospect.

And even though the Alpine satellites are close to infrastructure and so less risky for ConocoPhillips, they are difficult to make economic, Bowles said.

He said Pioneer and Eni Petroleum are facing the same expensive technical challenges at Pioneer’s sanctioned Oooguruk development and Eni’s not-yet-sanctioned Nikaitchuq discovery.

Alpine satellites, Oooguruk and Nikaitchuq are all “very difficult to develop economically without having the added challenge of a very high oil tax rate,” Bowles said.

Another challenge on the North Slope that Bowles pointed out was the long lead time from discovery to production because of permitting hold-ups, using as an example ConocoPhillips’ Alpine West satellite. He said the company has been seeking a permit from the U.S. Corps of Engineers for a bridge to cross a channel for two years, and “we’re still no closer” to getting it.

“Even if the resource is there,” the “long cycle time” that can be the result of permitting delays damages the economics of Alaska projects.

Bowles also mentioned the challenge of developing the North Slope’s immense heavy oil resource, specifically the cost of the multilateral wells needed to effectively tap the crude, which cost $12 million to $15 million each as compared to about $5 million for a normal well.



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Get production back up

Oil company executives aren’t the only people who have been weighing in on Alaska’s oil tax debate. The oilfield service firms that provide Alaskans with a chunk of the state’s highest paying jobs have also been communicating with state legislators, cautioning them against another oil production tax hike.

James Gilbert, president of Alaska-based Udelhoven Oilfield Systems Service, summed up the concerns of many of the contractors in a Nov. 14 Anchorage Daily News guest editorial.

“We should not be considering raising taxes. We should be considering what it will take to get (oil) production back up to 2 million barrels per day,” Gilbert wrote, noting his company provides 538 jobs in Alaska.

If the Legislature passes Gov. Sarah Palin’s production tax plan in the special legislative session that ends the day after Petroleum News goes to press Nov. 15, “it proves that Alaska is an unstable place to operate and invest,” Gilbert said, noting that it has only been “14 months since the last tax increase was imposed.”

Before oil prices shot to new highs in recent years, Alaska had been a tough place for oil companies to make a profit, he said.

“Maybe that’s why, after 30 years of North Slope production, only one independent — Pioneer Natural Resources Co. — has developed a new field. Now we want to punish Pioneer by raising its taxes too.”

Now that Alaska oil producers “are finally getting some payback for all those years of investments, we seem to hear nothing but complaints, accusations and whining,” Gilbert said.

“No other industry — not fishing, not tourism, not mining, and certainly not the public sector — contributes what our employees, our clients or our clients’ employees do,” he said. “My clients (the oil companies) pay their ‘fair share,’ and they’ve been paying it for 30-plus years. Consider the Permanent Fund: a $40 billion nest egg built on the foundation of oil revenues. Consider more than $70 billion paid to the state in taxes and royalties.

“We need to be looking at how we can get the pipeline back to its operating capacity, not trying to tax the final 600,000 barrels per day into ultimate submission,” Gilbert said.

—Kay Cashman