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Producers aligned, but not with Alaska BP’s Minge tells ‘Meet Alaska’ state makes money when companies invest; current tax policy puts state in going-out-of-business mode Kristen Nelson Petroleum News
Alaska’s major North Slope producers are aligned, BP Exploration (Alaska) President John Minge told the Alaska Support Industry Alliance “Meet Alaska” conference in Anchorage Jan. 6.
BP, ConocoPhillips and ExxonMobil do compete globally, he said, “but we primarily compete for access, for where you’re going to play and strategically.”
But in Alaska, once the companies have leases and commercial agreements, “we’re partners. And we work together.”
He objected to characterizations that “there’s no love lost between these companies.”
“This is actually not true,” Minge said.
The companies have to be aligned going forward to develop the state’s resources.
And he said that in the three years he’s been in Alaska, he’s seen those “relationships get better and better every year.”
He said he wanted to commit, on BP’s behalf, “that we’re going to continue to work with our partners in a very constructive way to monetize resources in Alaska.”
That alignment and relationships are essential “because that’s what fuels investment.” He said where the companies “have misalignments, we sit down and tackle them. … and that’s actually what we’ve been doing around gas.”
Where there is misalignment, he said, is with the state.
Investment crucial Minge said the state makes money when the companies invest.
“We manage risk; we make big investments in projects. And we make our returns over many, many years.
“The investments do not happen if the producers are not on the same page in terms of how to progress a resource.”
He said the producers are on the same page, but “we’re not aligned with the state as a whole as a result of the ACES tax policy.”
The producers are on the same page because they all see the resource prize — light oil, viscous oil, heavy oil and gas.
It will take billions of dollars of investment, Minge said, and the companies will reap their returns over many years.
But the producers aren’t aligned with the state, “because the state really has a policy that’s very short term: It’s really about how much money can you rip out of the industry today and it’s not really encouraging … investment for the future.”
Minge said the state’s policy “has put Alaska really in a going-out-of-business mode. It’s saying the end is near, so we need to take as much cash out now while we can. We’ll worry about the future later.”
Governor’s goal Minge said BP welcomes Gov. Sean Parnell’s challenge to increase throughput in the trans-Alaska oil pipeline to 1 million barrels a day in 10 years.
“We believe the goal is achievable — even if it’s not achievable by 2012. We just don’t know,” Minge said.
With the current high price of oil, “We should be booming in Alaska,” he said.
Just how high is the price of oil? BP’s chief economist told Minge recently that, adjusting for inflation, the last time prices were this high, Abraham Lincoln was president. It was 1864.
So why is capital investment in Alaska declining? “It does not make sense,” Minge said.
In fact, in the summer of 2007, prior to the passage of the current production tax, Alaska’s Clear and Equitable Share or ACES, BP had planned a capital budget for Alaska of $1.2 billion for this year; the actual budget is about $650 million. And the current investment rate “will guarantee a 6 to 8 percent decline” per year in production.
To offset that decline, “we need billions more coming in.”
Only 35 percent of BP’s capital budget in Alaska is aimed at sustaining light oil production, Minge said. Forty percent is going into infrastructure maintenance and renewal and 25 percent into technologies for heavy and viscous oil and gas.
Operating up, production down In 2006, BP’s operating costs in Alaska were $1.2 billion and the company produced 82 million barrels of oil, Minge said. In 2011, the company spent $1.6 billion on operating costs and produced only 56 million barrels of oil, BP’s net share.
“BP is actually spending a third more money to produce a third less barrels,” he said.
The record high oil prices and the boom induced by those prices have driven up the costs of goods and services.
“We not only have to compete for a finite amount of investment capital, but also for a finite market for contractors, vendors and oilfield support,” he said.
And while there are many people working on the North Slope, the jobs they are doing aren’t geared toward putting new oil into the pipeline: Only one out of six of BP’s North Slope employees is working at jobs involved in finding more oil and in projects that sustain the business. The rest are “focused on operating, maintaining and repairing the facilities that are already there. And it would obviously be better and different under a better tax regime.”
Projects Minge said BP has projects that would be viable under a different fiscal structure.
The company’s heavy oil pilot at Milne Point was shut down after a single well produced oil for 117 days, reaching 650 barrels per day of Ugnu formation production at the end.
Minge said that’s three times the average heavy oil production in Canada, but the well cost 10 times more than they do in Canada.
“And that’s the challenge we face: Can we actually design a way to economically produce heavy oil on a commercial scale.”
If economic techniques were developed, that would open up production from the estimated 22 billion barrels of heavy oil in the Ugnu formation, and those techniques could also be used for viscous oil in the West Sak and Schrader Bluff reservoirs, another 11 billion barrels of oil.
But even if the technology issues were solved, Minge said, “we’re absolutely going to need improved fiscal terms and improved fiscal terms beyond what was proposed in House Bill 110” for heavy oil production.
Another source of more oil is the Sag River reservoir which overlies the main Prudhoe Bay reservoir. It’s only about 20 feet thick and it’s a tight reservoir, much less permeable than Prudhoe.
Minge said he’s approved a five-well program for this year on the periphery of the Sag formation for some technology testing, but “large-scale Sag River production cannot compete for investment capital today.”
Those, he said, are part of the $5 billion in investment opportunities that BP sees, but only with real tax reform.
He said BP stands behind those new projects if there is tax reform and said the company is doing preliminary work so that “when the investment climate improves and our projects are commercially viable, we’ll be able to move.”
Minge said again that the state is in the oil business — it makes money when industry invests and gets its returns as royalties, taxes, jobs and positive economic impacts.
“Under the current tax structure, the state is actually squeezing the life out of the industry by making investments in new oil unattractive; by taking its returns now, rather than over many years; by removing revenues at a rate which simply is not sustainable for our long-term future.”
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