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Oilwatch Alaska calls on state to track North Slope owner profits Report by Richard Fineberg for watchdog group uses public data to show profitability even at low oil prices; “How Much Is Enough?” says 1998 first year state take exceeds that of companies Kristen Nelson PNA News Editor
The North Slope is profitable for oil companies, even at low crude oil prices. That is the conclusion of a report, completed in December, which looks at North Slope oil and pipeline revenues, including revenues from the trans-Alaska pipeline system.
How profitable? Drawing on a model he developed for the current 1993-1998 report for Oilwatch Alaska Inc. and work of his own and others covering the period since North Slope production began, report author Richard Fineberg says North Slope oil production and pipeline transportation within the state have produced $73 billion in after-tax profits for the industry since production began, $54 billion from North Slope production and feeder line profits and $19 billion from trans-Alaska pipeline profits.
In the 1993-1998 period covered by this report, industry’s estimated profits from North Slope production and pipeline operations are $2.3 billion in 1993, $2.2 billion in 1994, $2.7 billion in 1995, $3.4 billion in 1996 and $2.8 billion in 1997. Fineberg model uses public data to estimate profits Because oil companies do not report profits by field, Fineberg developed a model which uses public data to estimate profits for each of the North Slope fields. The report demonstrates, Fineberg said Dec. 11, “that the industry is, through time, tremendously profitable — perhaps quite appropriately so — but still very profitable. And is today profitable, even at low prices.“
“We don’t look at North Slope profits as a general rule — we look at the revenue to the state,” Fineberg said. “And it’s somewhat like looking at the top half of one leg of a three-legged stool. It’s not even the whole leg. But the industry is here to make money. That is as it should be and that has worked very well for the state through time.”
“Profits,” he said, “is the missing ingredient in the public policy dialogue. That information is not generally publicly available and not treated in the news or in public policy discussions.”
“But the question of how you develop your resource, what the industry requires, requires an understanding of profitability. And we don’t have much public consideration,” Fineberg said. In general, he said, we “leave it to a small number of state managers and often political appointees to make decisions in these areas rather than having a public dialogue of how oil policy should be crafted.” Production costs extrapolated Production costs, Fineberg says in the report, are typically divided into operating or lifting costs and capital expenditures. “In the absence of better public information, we use the total field development costs that BP provides in its annual publication, ‘BP in Alaska,’ divided by the total barrels estimated for the particular field.”
“While these figures must be regarded as very rough estimating factors,” Fineberg says, “they are consistent with trade sources.”
For operating or lifting costs, the estimates developed by Arthur D. Little and John Gault in their 1995 “Review of International Competitiveness of Alaska’s Fiscal System,” a report to the Alaska Department of Revenue for the Governor’s Oil and Gas Policy Council, were used for fields of 500 million barrels or less. For larger fields, the Little/Gault assumption that lifting costs per barrel are reduced by approximately 20 percent every time a reservoir doubles in size was used to extrapolate lifting costs for the Kuparuk River and Prudhoe Bay fields, producing lifting cost estimates of $1 a barrel at Prudhoe and $1.45 a barrel at Kuparuk. Models by field The model was used to look at profitability over the 1993-1998 period at Alaska’s major North Slope oil fields: Prudhoe Bay, Kuparuk, Point McIntyre, Niakuk (beginning in 1994), Lisburne, Milne Point and Endicott. Fineberg also ran an all-field model for each year. Fields are not broken out by ownership, although ARCO Alaska Inc., BP Exploration (Alaska) Inc. and Exxon combined own more than 90 percent of the North Slope fields and pipelines.Break-even at $7.35 a barrel To estimate a break-even point, oil prices were lowered on the all-field model until the model indicated no producer profits — a point that was reached at $7.35 a barrel. Cash flow break-even would be lower, Fineberg said: “industry receivers a positive cash-flow at a lower price than the break-even point for profits. That is because profit excludes — but cash flow includes — revenue identified as repayment of previous investments.” Fineberg also notes that pipeline profits of approximately 89 cents a barrel are guaranteed by pipeline tariffs regardless of the price of oil, so profits from pipelines balance field losses of similar magnitude.
If there are better numbers available, Fineberg called on the state to make those numbers available.
“I believe,” he said, “that we can make available public data that will not infringe on … taxpayer confidentiality, and can serve the public by entering profit data into the public policy dialogue since in fact when we alter the tax and royalty regime, the reason we do so is a judgment of what is a fair share for the industry.”
“I don’t know that anyone in the state is intentionally dissembling,” Fineberg said. “I think they’re simply not focusing on the question.” By focusing on the profit issue, he said, the state would better serve the public policy dialogue. Report done for Oilwatch Alaska “How Much Is Enough? Estimated Industry Profits from Alaska North Slope Production and Associated Pipeline Operations, 1993-1998,” by Fineberg, who studies Alaska’s oil and gas industry, calls on the state to track oil and gas company profits, along with revenues to the state.
The report, funded by Oilwatch Alaska Inc., was completed in early December, as oil prices hit new lows.
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