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Cook Inlet operators oppose tax changes Tell legislators credits have been good investment for state, July 1 effective date would impact contracts already set for this year KRISTEN NELSON Petroleum News
Cook Inlet operators and developers told the House Resources Committee March 1 that changes proposed in House Bill 247 would change the investment climate in Southcentral.
J. Benjamin Johnson, president and CEO of BlueCrest Energy, called tax credits for development of previously discovered proven reserves a solid, low-risk investment for Alaska.
BlueCrest took over the Cosmopolitan discovery off the lower Kenai Peninsula in 2012 and drilled the Cosmopolitan State No. 1 well in 2013. HB 247 proposes to eliminate capital and well lease expenditure credits for work in Cook Inlet, and Johnson said termination of those credits would result in a significant reduction of BlueCrest’s ability to continue drilling at Cosmopolitan.
The company has been building an onshore production and drilling facility for two years and plans to begin production from the 2013 well in a couple of months, Johnson said. The company will also be bringing in a new rig which will be used to drill the offshore oil prospect from onshore.
He said the prospect is on schedule and on budget for first oil production in April.
There is also a shallower gas discovery at Cosmopolitan, which would require drilling from platforms, and Johnson said they could start drilling for offshore gas this year and set one or two platforms, but without the benefit of the credits it is just too expensive. There is also another wrinkle in the gas development; there is a jack-up waiting in Seward, he said, but if BlueCrest is unable to drill, the rig owners would take it out of Alaska. It could be a long time, he said, before another jack-up that BlueCrest could use would be available in Cook Inlet.
Benefits to state Johnson said the credits benefit the state because it breaks even on credits at $35 oil and at $65 oil gets twice what it invested. He compared that to the state’s investment in the Permanent Fund, telling legislators that the credits are a better investment for the state than the Permanent Fund as long as oil averages $44 per barrel over the next 40 years.
The $25 million annual limit for credit refunds for the state is also a problem, he said, calling it arbitrary and telling legislators that limit is particularly disadvantageous for small companies like BlueCrest who have invested but do not yet have production.
And the proposed effective date of July 1 is too soon for implementation of substantial reductions in tax credits, Johnson said, as ongoing work has already been contracted for and is now underway.
Key drivers David Wilkins, senior vice president for Hilcorp Alaska, told legislators Alaska’s tax credit system and the Cook Inlet Recovery Act were key drivers in bringing Hilcorp to Alaska and in its investments to date. Hilcorp acquired Cook Inlet assets from Unocal and later Marathon and Wilkins said that over the past four years the company has invested $1 billion in projects and drilled more than 50 wells in the Cook Inlet area.
The commitment to Cook Inlet hasn’t been without challenges, he said, citing the very high cost of production and high decline rates in Cook Inlet, and said the company believes it is in both the state’s and Hilcorp’s best interests that the company continue spending dollars trying to produce more oil and gas.
Wilkins said that since 2012 Hilcorp has spent some $3.1 billion in capital and acquisition costs in Alaska, and since 2012 has increased organic (non-acquisition) production by some 40 percent in Cook Inlet, benefitting the state through increased royalty rates, property taxes and jobs.
Royalties to state Citing the Monopod platform, Wilkins said it was producing some 600 barrels of oil per day when Hilcorp took over, providing the state some $90,000 per month as a royalty owner, at an oil price of some $95 per barrel.
The Monopod initially qualified for royalty relief and Hilcorp has done more than 150 projects on the platform, increasing production to some 3,000 bpd. The royalty relief has ended, he said, the state’s share is back up to 12.5 percent, and even with oil prices at $35 per barrel, the state’s royalty take has increased to about half a million dollars a month.
Credits Hilcorp has earned have been reinvested in the state, Wilkins said, and the company is now above the 50,000 bpd threshold allowing credits to be cashed out through acquisitions - the company acquired 20 percent of BP’s North Slope assets in 2014 - and work on its properties.
He said Hilcorp was excited about opportunities is has, but in today’s price environment and with an uncertain state fiscal structure, it will be difficult to decide what projects to move forward and when.
Wilkins said the uncertainty the company faces threatens its ability to plan investments and told legislators the decisions they make will impact the economics of opportunities to increase production both in Cook Inlet and on the North Slope.
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