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Profitable ranking of Alaska oil patch may be misleading State’s competitive edge may be fleeting in face of recent tax hike, price decline says AOGA’s Judy Brady Rose Ragsdale Petroleum News Contributing Writer
It’s true that oil company profits rise with crude prices in Alaska. But the state is a long way from being super competitive in the global arena, say oil industry officials.
Moreover, any competitive edge that Alaska has may have been erased by Gov. Frank Murkowski’s recent order to increase oil taxes, they say.
“The problem is we’ve had low prices from 1986 until 2003,” Judy Brady, executive director of the Alaska Oil and Gas Association said Feb. 9. “Now if oil prices stay up, we could do well. But prices haven’t stayed up for very long.”
Brady’s assessment reflects the views of the oil industry, spokesmen for both BP Exploration (Alaska) Inc. and ConocoPhillips Alaska said Feb. 9.
AOGA is a trade association that represents the 18 oil and gas companies that do business in Alaska.
Brady said analysis of information released by the Alaska Legislature the first week of February from a study conducted by international consultant Wood Mackenzie last year confirms her belief that “the best indicator of how competitive the state is in the oil and gas arena is what you see when you look out your window.”
In its 2004 study, Wood Mackenzie said doing business in Alaska is very costly for oil companies, and ranked the state 52 among 58 oil regions in the world. But the consultant said the industry’s overall profitability per barrel in Alaska is 14 or 15 out of 49 to 53 oil and gas regions, depending on whether oil prices are low, moderate or high. The average investment rate of return on Alaska oil production totaled 18 percent at $16 per barrel, 24 percent at $22 per barrel and 29 percent at $35 per barrel. By comparison, the global average investment rate of return was 15 percent at $16 per barrel, 19 percent at $22 per barrel and 23 percent at $35 per barrel.
The findings seemed to contradict those of a 2002 study, also by Wood Mackenzie, that ranked Alaska near the bottom in overall profitability. A closer look Brady said she was surprised by the disparity between the two studies and immediately asked follow-up questions of Wood Mackenzie.
She found that the consulting firm used different time periods, different fields and different methods of calculation in preparing the two reports. The biggest difference resulted from the use of different oil fields, she said.
Wood Mackenzie included Point Thomson, Northstar, West Sak and the original Alpine oil field in the earlier study, she said. “This time, they used the Alpine satellites, Happy Valley and other satellite fields that have come on line since 2001.”
Most of the 2002 group of fields experienced significant delays coming on line, while the 2004 group produced first oil on time and almost under budget, according to Larry Houle, general manager of the Alaska Support Industry Alliance.
“Some fields are much more expensive because of delays,” Houle said.
In fact, a one-year delay in an Alaska oil field’s permitting and construction can cut its internal rate of return by 25 percent, he said.
Longer delays mean even bigger hits to a field’s profitability, Brady observed.
In its latest study, Wood Mackenzie used economic models instead of actual data to develop full-cycle calculations for new fields. This means the 2004 figures reflect estimates of what will happen in the future.
Risk is another important element missing in the Wood Mackenzie figures, Houle said.
“These studies don’t have a way of looking at the risk side of the equation,” he said. “It’s inherent that we are a higher risk province in Alaska.” Looks may be deceiving Still, higher oil prices have brought brighter days back to Alaska’s oil patch thanks to the state’s regressive tax system, say Brady and Houle.
“We were pleased that at higher prices, Alaska looks more competitive,” Brady said. “Before, companies wouldn’t even look at the state. Now, with the study, they may take a look.”
However, some of the fields that Wood Mackenzie assessed in its 2004 study are Prudhoe Bay satellites, oil deposits that Gov. Frank Murkowski recently ordered to pay higher taxes.
“Our governor may have taken away that competitive edge” by ordering Prudhoe Bay’s satellite owners to pay higher taxes, Houle said.
Brady did not mince words. “The fields are no longer competitive.” she said.
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