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Vol. 10, No. 1 Week of January 02, 2005
Providing coverage of Alaska and northern Canada's oil and gas industry

Heavy oil incentives down, but not out, for North Slope

Rose Ragsdale

Petroleum News Contributing Writer

Heavy oil incentives may be on the ropes, but tax credits designed to spur development of this difficult-to-produce crude are still in the ring, Alaska officials said in the closing days of 2004.

The provision, which would have allowed Alaska oil producers to take a couple of dollars in tax credits for every barrel of heavy oil produced on the North Slope, was included in President Bush’s energy bill last year. But it failed to survive Conference Committee negotiations in September and October.

It was dropped from the Conference Committee report on the Corporate Tax Bill, along with many other energy incentives, according to John Katz, special counsel for the officer of the governor.

“There were two principal reasons,” Katz said. “First, several members of the Conference Committee were concerned about the total cost of the Corporate Tax bill. So, most of the energy related provisions were deleted (but not accelerated depreciation for the gas pipeline and the tax credit for the conditioning plant).”

In addition, Rep. Bill Thomas, R-Calif., who chairs of the House Ways and Means Committee, opposed an expansion of the existing incentives for heavy oil because of how it might impact heavy oil producers in his home district of Bakersfield, Calif., who benefit from existing incentives.

Alaska will pursue issue in Congress

Sen. Lisa Murkowski, R-Alaska, said she will pursue the provision in the 109th Congress later this year because she believes it should be a part of the nation’s comprehensive energy policy, and it would benefit Alaska.

Murkowski, who will continue to serve as a member of the Senate Energy Committee, said the credits are aimed at encouraging the oil companies to produce Alaska’s vast quantities of heavy oil, which heretofore have remained in the ground because of the high cost of extraction.

Alaska Gov. Frank Murkowski also put heavy oil incentive on his list of priorities for 2005 because of its potential benefits for Alaska and the nation as a whole.

“We will pursue this incentive in the next Congress,” Katz said. “However, it is too early to know how energy incentives will be addressed, if at all, during Congressional consideration of future tax bills and comprehensive energy policy.”

Heavy oil may help stem decline

Though the thick, gritty and low API crude accounts for a relatively modest percentage of total Alaska North Slope output, heavy oil could play a key role in forestalling a freefall in Alaska oil production in the future, economists say.

BP and ConocoPhillips have stepped up efforts in recent years to produce crude from West Sak and Schrader Bluff, two giant heavy oil fields that overlie the Kuparuk and Milne Point fields on the North Slope. West Sak is estimated to have roughly 25 billion barrels of heavy oil in place and Schrader Bluff some 3 billion barrels in place.

Thanks to higher oil prices and new directional drilling techniques that result in lower-cost wells, development of heavy oil in the two fields has intensified despite the loss of the tax incentive, said Dan Dickinson, director of the Tax Division in the Alaska Department of Revenue.

“If you look at the state revenue forecast, you will see that heavy oil development plays a fairly robust part in it,” Dickinson said Dec. 27.

West Sak: A rising star

The state’s 2004 revenue forecast includes an upward revision in projections for heavy oil production from West Sak.

“We have accelerated and increased production from West Sak due to the successful application of drilling technology used to complete horizontal multilateral wells and the sanctioning of a new drill site at J Pad,” the forecast said.

West Sak is projected to produce close to 80,000 barrels of oil per day by 2010. Heavy oil could account for roughly 8 percent of total ANS output in 2010 and as much as 12 percent by 2015.

Dickinson told Petroleum News Dec. 27 that his division views West Sak heavy oil production as the “bright spot” at Kuparuk.

“It’s an interesting thing that the economic limit factor doesn’t recognize viscosity of oil or the new technology required to get it out of the ground,” he said. “As BP and ConocoPhillips invest in West Sak, the field could have a higher ELF in Kuparuk than the mother field.”

The ELF is a formula that the state uses to calculate effective tax rates on North Slope oil fields. It typically results in lower effective tax rates for smaller, low-production fields and higher tax rates for larger, highly productive fields.

Dickinson said heavy oil tax credits, by themselves, won’t make a big difference in encouraging the production of heavy oil. But in combination with high prices and new technology, the provisions could be significant at the margins.

“Higher prices are always going to be a bigger incentive than tax credits,” he added.



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