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Companies argue for inlet credits
Four companies exploring, developing and/or producing in Alaska’s Cook Inlet described the value of tax credits to their operations - and to the state.
Officials from Apache, BlueCrest, Furie and Hilcorp told the Senate Oil and Gas Tax Credit Working Group Sept. 22 that credits are part of the financing which enables them to look for and find Cook Inlet natural gas and crude oil.
Tax credits are expected to come up for review by the Legislature next year, and the working group is listening to affected parties in advance of the 2016 session.
Spending money to make money John Barnes of Hilcorp told legislators the state’s investment tax credits demonstrate that you have to spend money before you get money. Since Jan. 1, 2012, when Hilcorp closed on Chevron’s Cook Inlet properties, the company has spent about a billion dollars in Cook Inlet and produced some 45 million barrels of oil equivalent, he said. The company closed on Marathon’s Cook Inlet properties in 2013, and in 2014 acquired three BP properties on the North Slope.
The investment Hilcorp has made in Cook Inlet has resulted in more activity and more wells on production, Barnes said. All Hilcorp crude oil is sold to the Tesoro refinery in Nikiski and used to produce products such as gasoline, jet fuel and diesel, he said.
When Hilcorp took over operations in Cook Inlet oil production from its properties was some 6,000 barrels per day; today that production is more than 12,000 bpd, Barnes said. When Hilcorp took over gas production the properties produced some 60 million cubic feet per day; today that production is about 140 million cubic feet per day.
Changed playing field Barnes said the investment credits changed the playing field in the inlet.
The inlet was dying, he said, with warnings we could run out of natural gas and have to import it to meet local needs. Companies had essentially stopped drilling, and Barnes said it was amazing how fast Cook Inlet production declined, once people stopped drilling. Major producers - Chevron and Marathon - were looking elsewhere, with Cook Inlet no longer deemed crucial to their business, and were in something of a caretaker mode, he said.
With investment credits, companies came into the inlet, acquired other companies and leases and drilled wells, Barnes said.
Hilcorp was attracted to Alaska because the company looks for places it can acquire legacy fields with potential at a reasonable price - and acquire those fields directly from major producers. That’s important, Barnes said, because if others had bought the fields from the majors they would have been worked hard before Hilcorp acquired them.
Since it came to Alaska, Hilcorp has drilled some 55 wells onshore, he said.
Asked if the state’s tax credits were more generous than they needed to be, Barnes said he really didn’t know. When Hilcorp looked at coming in there was a tax structure in place, he said, and the company looked at the value of the opportunity, which included good investment tax credits.
He said the cost of operations, product price and tax structure are linked, and cost of operations is the only area Hilcorp can control.
As for the suspension in payment of $200 million in tax credits, Barnes said that just puts uncertainty into the equation. Asked if a change in the credit system is a change to the overall tax system, Barnes said absolutely, that any change in the tax climate as you try to make long-term financial decisions has an impact.
The exploration side John Hendrix, general manager of Apache in Alaska, said Apache is exploring, which poses risks and requires investment patience, and the right timing, which means stability is important.
He referred to the credits passed for Cook Inlet in 2010 as rebates, because, he said, you have to spend money to get money back.
Apache purchased existing leases in 2010 and acquired significant acreage in 2011. The company has since been shooting seismic, with 1,100 miles of data acquired from 2011 through 2014. And yes, he said, the tax credits helped.
He also said the seismic Apache has shot is the state’s data and provides the state and Apache and its partners the ability to have a subsurface road to resources.
The nodal technology Apache brought to the inlet enabled the company to shoot seismic and tie in marine and onshore seismic. This is the first seismic shot in the inlet that ties onshore and offshore together, he said.
Work done so far has enabled Apache to generate a few prospects he said, adding that the company is waiting on permits right now.
Seismic work Hendrix said seismic doesn’t tell you there’s oil. You also have to look at correlations with existing wells and at outcrops, which Apache is doing.
He said predictive regional reservoir maps have been completed for the Hemlock and Tyonek formations and that Beluga and Sterling evaluations are in progress.
He said Apache still hasn’t received a permit it applied for last fall for a road and the oil price continues to drop. Hendrix warned legislators about doing a bait and switch, changing the rules from when the company did a large lease purchase.
He said the challenge now is cranking out an economic model, and since Apache isn’t solely an Alaska investor, the company will invest where there is a stable situation.
We need to have tax credits, he said, but also said he didn’t think it was right for someone to apply for tax credits if they haven’t paid invoices. People should be here to drill for oil, not to drill for tax credits, he said.
Hendrix said that if tax credits went away this year he thought Apache would be looking very hard at investing at all; a change over three years would give the company a chance to plan, he said.
He characterized exploration as building wealth for Alaskans by finding resources; production, he said, brings income but doesn’t add wealth.
BlueCrest: Time needed J. Benjamin Johnson of BlueCrest Energy said the Cook Inlet tax credit program has been effective, but it will take time to bring on more natural gas resources or there will be a crisis in the future.
Southcentral doesn’t have a way to bring natural gas in, he said, although there is an opportunity to get some gas out. The ability to handle excess gas supply is important because it can’t be turned off and on immediately, he said.
If tax credits were eliminated immediately there would be a problem for BlueCrest, which has committed a lot of money, and without credits there would be a shortfall in the company’s ability to pay, and would also result in the loss of the Spartan 151 jack-up drilling rig. Pending gas sales agreements would be delayed or abandoned, with resulting higher natural gas prices and a lower diversity of gas supply, he said.
Johnson said that discoveries do not guarantee production and noted that there have been some good discoveries in Cook Inlet, but not all have been developed.
Long time to breakeven
Johnson noted that there is a long cash-flow cycle for discoveries, with money pumped in for exploration and then for development. Cash flow is negative, he said, until production begins, but breakeven doesn’t occur until the company has recovered all of the money it’s spent.
The Cosmopolitan project BlueCrest is developing is about two-thirds finished with construction, he said, and the company is about to bring up a big drilling rig. First production is projected for April of next year. Crude oil from Cosmopolitan will go to Tesoro, which is importing about two-thirds of the crude oil it processes.
Johnson said without tax credits there would already be a significant natural gas shortage in Cook Inlet. And, he said, new gas needs to be developed now to prepare for the future.
Tax credits were crucial to BlueCrest, he said, and with the current uncertainty about credits development of the shallow natural gas at Cosmopolitan is on hold.
The Spartan 151 is the only jack-up rig in Cook Inlet and is in Seward, but if gas drilling at Cosmopolitan does not begin in 2016, the rig will leave the inlet, he said.
And BlueCrest can’t commit to natural gas development unless it has existing tax credits or a reasonable alternative, he said. Commitments were made by folks like BlueCrest based on tax credits; if there are changes, there should be reasonable time to allow ongoing projects like Cosmopolitan to adjust.
The company has no confidence in what will happen next year, he said, and has decisions it needs to make before the end of the year.
Asked about the possibility that existing credits could be continued and production taxes increased, Johnson said BlueCrest understands that production taxes may need to rise and has factored that into the company’s future plans. There is currently no production tax on Cook Inlet crude oil.
No Furie without tax credits Bruce Webb of Furie Operating Alaska told legislators that the company wouldn’t be here without the tax credit program; they were a selling point for European investors in the project, he said.
Furie couldn’t have raised the first 100 million euros without the tax credits because those credits meant investment was backed by the state.
It’s been a bumpy road for Furie, he said, which had raised initial capital and started to talk to utilities when Hilcorp swallowed the natural gas utility market in 2012, leaving the company with what Webb called a tough decision on whether to stay and hope that the gas utility market opened up.
He said Furie is now on the cusp: It has development, but it’s not completely paid for and its first natural gas contract doesn’t start until April.
The company had to take a $200 million loan, which was pretty expensive money, and requires sale of 10 million cubic feet a year just for debt service. The contract it has with Homer Electric Association is some 4.4 million cubic feet a year, so for the first few years the company will be operating at a deficit, he said.
Right now the company has committed tax credits for the next several years to help finance future wells, Webb said. The company was in discussion with financiers when the $200 million in credit payments was stalled, which impacted financing discussions.
Furie wouldn’t be here without the tax credits, he said. If those credits go away the company is stubborn enough to stay and work through it, but without credits future development would be decelerated and the company’s breakeven would move farther down the road.
- KRISTEN NELSON
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