Providing coverage of Alaska and northern Canada's oil and gas industry
June 2023

Vol. 28, No.23 Week of June 04, 2023

Thomson valuation issue

State Assessment Review Board partially approves Point Thomson valuation

Kristen Nelson

Petroleum News

The Alaska State Assessment Review Board has partially supported the Alaska Department of Revenues 2023 property tax assessment for the Point Thomson unit while requiring adjustments in two areas.

Revenues assessment of $1.25 billion was appealed by the North Slope Borough, which argued for an assessment of $3.24 billion.

In a May 22 decision, the board ordered two adjustments to Revenues assessment based on the departments use of depreciation based on reservoir underperformance and too broad an application of superadequacy.

The board said it found "the Assessment is excessive and improper to the extent it depreciated based on reservoir underperformance and to the extent it depreciated based on superadequacy of property other than the airstrip, camps, and dock."

Infrastructure installed for what is called the initial production system, IPS, includes:

*Gravel pads, roads, camps, airstrip;

*Production facilities, including those to separate condensate from gas, process waste, compress gas for reinjection; and

*Four wells: a production well, two reinjection wells for gas and one for waste disposal.

The board said that while some of the infrastructure was designed for a potential full-field development, "most of the property assessed here is scaled for and supports the IPS, which was designed to produce approximately 10,000 barrels per day."

NSB challenges

The board said production property is assessed by determining the replacement cost less depreciation based on economic life of proven reserves. It said NSB is challenging three aspects of the departments depreciation of the Point Thomson unit property: "applying the depreciation for a reservoir in production decline, applying depreciation for an immediately underperforming reservoir, and applying depreciation for non-reservoir circumstances that significantly alter production."

The board said Revenue "applied depreciation for a field with one or more reservoirs in production decline," based on production being 90% or less of the historic production peak.

NSB argued based on total annual volume, which was highest in 2021 and for 2022 had decreased by less than 2%.

Revenue and Hilcorp, Point Thomsons current operator, argued that "compressor issues masked what would otherwise have been the annual production and that by removing days when one or both compressors were not operating, peak production actually occurred from 2017 through 2019 with annual production of around 10,000 bbl per day on those fully operational days," the board said.

Revenue compared that 10,000 barrel per day rate with 2022 average daily production of 8,724 bpd and determined the field is in production decline.

The board said it "finds that DORs consideration of fully operational days to determine peak production is not contrary to the regulatory definition of production decline" and agreed with Revenues determination that 2022 production was at least 10% less than peak production.

The board did not agree with Revenues finding that the Point Thomson reservoir immediately underperformed.

The NSB argued that difficulties the operator initially had at Point Thomson "were facility issues, not underperformance of the reservoir itself." The board said NSB noted numerous statements by the operator that the Point Thomson reservoir was performing as expected and the fact that when the facilities were fully operational the field produced at the 10,000 bpd for which the facilities were designed.

The board said Revenue looked at what production could have been under the expansion project describe in the 2012 settlement agreement under which the field was brought into production. The expansion envisioned adding a minimum of 10,000 bpd.

The board said Revenue noted a presentation to the Alaska Oil and Gas Conservation Commission by a reservoir engineer for Exxon, the fields original operator, that under a gas depletion plan, with seven new wells, there would be an initial peak of 57,000 bpd of condensate, a volume with Revenue averaged wit the 20,000 bpd in the settlement agreement to come up with 38,500 bpd. On that basis, the board said, Revenue found that the reservoir had underperformed because it had only ever produced up to 10,000 bpd.

The board said Revenues finding was unsupported by facts.

"There is no evidence in the record that the Point Thomson Reservoir immediately or significantly underperformed," the board said.

Reservoir underperformance refers to the reservoir being less productive than expected, not to facilities issues. The board said that in its most recent plan of development the Point Thomson operator told the state that reservoir performance was in line with expectations. Hilcorp has described the recent drop in production as possibly reservoir related, but this is a recent production decline, the board said, "not an underperformance that was immediate upon first production in 2016."

The working interest owners have not pursued an expanded or full field development, the board said, something they have had the option to do since the 1977 formation of the unit.

While expansion requirements of the 2012 settlement agreement were suspended in the 2018 amendment, the working interest owners have been free to expand at any time. They have not done so, the board said, but "That choice is not a reservoir underperformance."

The board found that the portion of the assessment based on depreciation for reservoir underperformance "is excessive and improper. The assessment should be adjusted to remove depreciation based on reservoir underperformance."

Some superadequacy

The board found there are some non-reservoir circumstances which have altered production, resulting in some superadequacy- where facilities were built in excess of what was needed.

NSB argued that there are no non-reservoir circumstances which significantly alter expected production, the board said. ExxonMobil has said some infrastructure at Point Thomson was sized in expectation of production being expanded. But the working interest owners have not chosen to expand beyond the initial production system.

"The fact that they have chosen not to after encountering significant operational difficulties with this unique, high-pressure field indicates that these non-reservoir circumstances significantly altered the anticipated production from an expanded production project," the board said, making it appropriate for Revenue to consider superadequacy of facilities. The board did disagree with Revenue and Hilcorp that the gravel pile was superadequate.

The board said Revenue "correctly depreciated for superadequacy of the airstrip, camps, and dock."

But it said Revenue also applied superadequacy to wells and processing facilities and said "the assessment should be adjusted to remove depreciation based on superadequacy other than for the airstrip, camps, and dock."

The board concluded that the assessment may not be based on reservoir underperformance and many only include superadequacy for the airstrip, camps and dock.

Parties have 30 days to file with the Alaska Superior Court for judicial review.

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