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Alaska proves costly for oil industry High costs, regressive tax structure put state far down the list for companies at $20 oil, says Wood Mackenzie study Larry Persily Petroleum News Government Affairs Editor
Alaska is an expensive place to do business but the high costs of working in the arctic and moving the oil to market by pipeline and tanker are no surprise, says an international oil and gas consultant who helped prepare a report ranking 61 producing areas worldwide.
“Most people involved in the business recognize it must be one of the most expensive places to do business,” said London-based Graham Kellas, principal consultant on petroleum economics for Wood Mackenzie Ltd.
The consulting firm, with offices in seven countries, released its “Global Oil & Gas Risks & Rewards” report in September 2002. The Alaska Oil and Gas Association negotiated partial use of the private report and last month distributed a summary to all 60 Alaska legislators.
“We’re not asking them to do anything about it. It’s just a reminder,” said Marilyn Crockett, the association’s deputy director. Industry officials referred to the report, and Alaska’s ranking, at an April 14 House committee hearing on oil production taxes.
“This study is another indicator that Alaska is seriously challenged to be competitive for oil and gas investment dollars,” said Judy Brady, the industry association’s executive director, in a March 12 letter to legislators.
The report, however, is not a comprehensive ranking of all oil-producing regions in the world. Alaska was the only state included in the study, and none of Canada’s oil-producing provinces are included either.
Nor were the major producing nations of Saudi Arabia, Kuwait, Iraq and Mexico included in the report — there was no foreign oil company activity during the study period in those countries. The report also did not include Russia. Other states not comparable to Alaska Wood Mackenzie doesn’t have comparable databases for other states such as Texas and Louisiana, and it’s a different business in the Lower 48, Kellas said. The other states and Canadian provinces each have thousands of wells and leaseholders, he said. They just aren’t “regarded as a comparable business (to Alaska).”
The report looked at actual costs and government takes from the value of remaining production at existing developments, based on oil selling at $19.50 per barrel (Brent) in 2002 and increasing 2.5 percent per year.
Alaska ranked 36th of 61 for total government take and last in cost of capital, operating and transportation expenses (including pipeline and tankers).
The cost ranking covers only those North Slope fields that started production after 1995, Wood Mackenzie said. Those would include smaller developments, possibly producing oil at higher per-barrel costs than giants Prudhoe Bay and Kuparuk that are supplying almost 60 percent of North Slope production this year.
Wood Mackenzie put total capital, operating and transportation costs for a barrel of post-1995 developed North Slope crude at $12.52, averaging the expenses out to the end of production from existing fields. That is close to Alaska Department of Revenue numbers that put the cost of Fiscal Year 2005 production and transportation at $11.71 per barrel. Qatar, Iran with lowest costs Qatar had the lowest costs in the Wood Mackenzie study, at $1.38 per barrel, followed by Iran at $1.61. Canada’s East Coast was next to Alaska at the other end at $10.56 per barrel, followed by North Sea production — the United Kingdom shelf at $8.79 and Norway at $8.76.
Separate from the cost of finding, producing and moving the oil, the federal, state and municipal take consumes a large chunk of revenues in Alaska, the report said, putting the state’s 36th place ranking in the lower half worldwide. The total government take in Alaska is about 64 percent, the study said.
That compares to the lowest government take of 10.86 percent in the African nation of Cameroon and the highest at 93.26 percent in Iran, according to Wood Mackenzie. But Cameroon, at 72,000 barrels per day in 2002, is far from the world leaders in production. The more noticeable regions with low government takes are Canada’s East Coast at 35.17 percent (third), the United Kingdom shelf at 40.77 percent (fifth), and deepwater U.S. Gulf of Mexico at 42.1 percent (seventh).
The government-take percentages do not include any equity shares held by national oil companies, Kellas said. The numbers include everything else, including municipal, state, provincial and federal taxes and royalties, or profit-sharing or production-sharing payments in lieu of taxes. “It’s basically everything.”
In Alaska’s case, federal taxes are about one-third of the total, with the federal share increasing at higher prices while the state’s share decreases, according to the Alaska Department of Revenue. Alaska’s share decreases at higher prices At $20 a barrel, the department calculates the federal take at almost 21 percent of the income after production and transportation costs are deducted, with the state and municipal combined share at about the same 40 percent as the producers.
But the producers’ share and the federal take increase at higher prices, while the state’s share falls. At $30 oil, for example, the state’s slice drops to about 29 percent, with 46 percent for the producers and 25 percent for the federal treasury.
Alaska’s regressive tax structure protects state revenues at low prices, Kellas said. Some jurisdictions favor such an approach, he said, with the individual circumstances of their economy — “how dependent they are on oil revenues” — often the deciding the factor in whether to share in the risks of low prices and the rewards of high prices.
“As you look around the world there are a lot of governments that will retain regressive fiscal instruments,” he said, reflecting their heavy dependence on oil and gas revenues.
“However, the number of regimes linking the government’s profit share/tax rate to project profitability is growing in popularity, although these get a mixed reception within the industry,” Kellas said. “There are some pretty strong economic theories that justify such a move.” More governments link their take to profits Property and production taxes and royalties usually are revenue-based, not profit-based, Kellas said, and more governments are linking their take to profitability.
Countries that have adopted more progressive tax regimes include Ecuador, Australia, Malaysia, Angola, Peru and Caspian Sea nations, he said. “There is a growing tendency to say … we can reconstruct it so that if things go well we can really be in quids in,” using the British expression for getting more money than expected.
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