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BP likens ELF change to a computer virus Steve Marshall: uncertainty created around administration tax change for Prudhoe Bay satellites discourages future investments Kristen Nelson Petroleum News Editor-in-Chief
The Alaska Support Industry Alliance “Meet Alaska” conference provided the first public forum for discussion of the tax change Gov. Frank Murkowski announced Jan. 12, and BP Exploration (Alaska) President Steve Marshall announced the first result of the tax increase, which took effect Feb. 1.
He told the Jan. 27 gathering that “BP and our partners in Prudhoe Bay already have been forced to defer an appraisal well” that could have lead “to additional drilling and development work at Prudhoe. And we may be forced to shelve a $600 million-plus development project that would significantly increase production in western Prudhoe Bay over the next several years.”
Marshall said costs in Alaska for producing oil and gas are among the highest in the world, creating problems for Alaska projects competing for investment dollars with worldwide opportunities.
“We’re still reviewing our plans in Alaska in view of the ELF announcement, but already it’s having consequences on our investments,” he said.
Marshall told Petroleum News that BP is “still in the very early stages of doing the technical, commercial evaluations of these changes” and is looking at the impacts within BP and also in conjunction with other Prudhoe Bay owners.
“We want to sit down as soon as we can and make sure we’ve got a common understanding of what the impacts are and what looks to be sub-economic at this stage in light of the new proposals.”
BP also, Marshall said, wants “to take advantage of the governor’s offer to sit down and talk about many of the issues that involve these small fields inside Prudhoe Bay.”
The small fields at Prudhoe, he said, are typical of what the companies face on the North Slope: small fields; or larger fields with “difficult reservoirs” or “difficult oil.” The fields BP is looking at developing on the North Slope are “difficult to develop, they’re difficult to operate and they cause complexities, some of which we anticipate and some of which we don’t.”
The challenge of dealing with development costs are accepted, he said: “that’s part of what we do as a business.
“But it’s vitally important that with all these risks, that we know going in, before we commit tens and hundreds of millions of dollars to develop these, that we know what the rules are.”
However perfect or imperfect those rules are, he said, companies count on them: “that’s what we need to get the comfort and assurance that that investment” will have at least a chance of breaking even. What next? BP asks The governor’s “$150 million tax increase for the owners of Prudhoe Bay” undermines investor confidence, Marshall told the Alliance, “like a computer virus, infecting the business climate, eliminating jobs and business opportunities for Alaskans by creating uncertainty — by discouraging future investments and making the economy run slower and slower.”
By changing the economic limit factor, ELF, for Prudhoe Bay and its satellites the state has changed “the rules after agreements have been reached and after investments have been made.”
And the ELF change, he said, has the state’s “largest investors looking over their shoulders and wondering, ‘what’s next? What can we count on?’” There is a call by some legislators for “additional changes to ELF — read: additional tax increases.” The governor has encouraged ELF hearings, Marshall said, “on top of his administrative change. Yet another group is pushing a ballot initiative to repeal the ELF development incentive altogether. What else don’t we know about?” he asked. Administrative change not part of discussions Marshall said the business climate in Alaska “plays a crucial role in our ability to compete for investments.” With the governor’s announcement on the change in how ELF is administered at Prudhoe, “we’re forced to re-evaluate our investment decisions and strategies…”
He said BP is “deeply disappointed that the governor is taking this action, and we’re equally disappointed in how it was done.”
An administrative change to ELF “was not part of the discussions on ELF that we had with the administration late last year.” The companies had no opportunity to discuss their concerns with the administration, or “to discuss the broader implications of the change and no opportunity to discuss the complexities of the important role ELF plays in helping offset rising costs, thin margins and growing technical challenges facing our investments.” Would you pay more? Some have said, Marshall noted, that the industry can afford to pay more in taxes because oil prices are high.
He asked audience members: “Can you afford to pay a few thousand dollars more to buy a new car from one dealer than you would to buy the same car from another dealer on the next block?
“Maybe, maybe not — but the real question is: Why would you?”
Marshall said there are “a whole world of ‘dealerships’ competing with Alaska for capital, and if Alaskan projects don’t offer competitive returns, the money will go elsewhere.”
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