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Five bucks a barrel For every barrel of oil leaving state, $5 needs to be reinvested, says Revenue; state must encourage investment to develop existing oil, find new fields Kristen Nelson PNA Editor-in-Chief
The Alaska Department of Revenue estimates that it will take an investment of $5 for every barrel of crude oil leaving the North Slope to maintain ANS production at a million barrels per day.
In its fall revenue forecast, issued in late November, Revenue analyzed oil production as an economic opportunity, trying to answer the questions of where additional oil development might occur over the next decade, and what state government could do to help that development.
Production is currently below the 1-million-barrel-a-day mark, and Revenue said it believes that beginning in fiscal year 2008 new fields should boost production back above 1 million bpd through 2012. Beyond 2013, unless companies have “significant exploration success, which will require the commitment of substantial money to the exploration and development of new fields,” production will again drop below 1 million bpd.
What is the potential? Revenue estimates oil potential at 7.172 billion barrels of additional production from producing fields and 1.35 billion barrels from discovered but non-producing fields. The oil from discovered but non-producing fields includes 180 million barrels from Alpine satellites (“Nanuq, Fiord, etc.”), 150 million barrels from Liberty, 560 million barrels from Point Thomson and others (Sourdough, Yukon Gold), 60 million barrels from Sandpiper and 400 million barrels from the National Petroleum Reserve-Alaska (Rendezvous/Spark).
The heavy oil deposits at Ugnu, 7 billion barrels, and 1 billion barrels at Kuvlum and Hammerhead in the outer continental shelf are not included because there are not currently considered economic.
But, Revenue notes, to recover the 7.172 billion barrels in producing fields, investment is required. Only 3.752 million of those barrels can be recovered with what the department characterizes as modest additional investment. The remaining additional reserves, 3.42 million barrels, will require major additional investment.
And all of the discovered non-producing fields will require major additional investment.
Of the 8.5 billion barrels of additional production from currently discovered North Slope fields, “approximately 3.8 billion of those 8.5 billion barrels could be recovered with only those investments needed to preserve the integrity and safety of the facilities. … Production of the other 4.7 billion barrels would require significant additional investment.”
New discoveries Revenue uses U.S. Geological Survey and Minerals Management Survey estimates of economically recoverable reserves from North Slope and Beaufort Sea discoveries not yet made to define discovery opportunities.
The number here is 10.3 billion barrels of estimated economically recoverable reserves: NPR-A (excluding Rendezvous) 900 million barrels; central North Slope satellites 1.5 billion barrels; eastern thrust belt and Foothills 900 million barrels; the Arctic National Wildlife Refuge 4.4 billion barrels; and Beaufort shelf federal offshore 2.6 billion barrels.
The 10.3 billion barrels of “economically recoverable reserves” is based on $22 per barrel for Alaska North Slope crude, Revenue’s new long-term West Coast price estimate (see story in Dec. 8 issue of PNA).
Costs of production cost for new oil is about $1 a barrel on the slope, Revenue said, a weighted average of a cost of more than $1 a barrel for new fields and about 60 cents a barrel for new satellite accumulations.
To develop those discoveries, “to drill the necessary wells and provide the infrastructure to produce the additional 4.7 billion barrels of discovered North Slope oil requiring substantial investment,” the department said it is estimating it will cost $3 per barrel.
In addition, the companies also must spend $300 million a year in “license to operate” capital, money the companies must invest in addition to routine operating and maintenance expenses to keep facilities operable and safe. Revenue said that based on discussions with operators it estimates this at about 2 percent of “existing and planned total capital expense for the facility.”
“To maintain — and with luck increase — Alaska’s North Slope oil production at a million barrels per day, this analysis leads to the conclusion that for each barrel leaving the North Slope, $5 must come back to pay for new exploration and development,” Revenue said.
$22 a barrel oil What does this mean in relation to the price of ANS crude?
At prices of $22 a barrel, the department said, “free cash flows attributable to North Slope production for both the Integrated-Producer at Prudhoe Bay and the Explorer-Producer in NPR-A would be about $7.30 per barrel. We need to hope they will invest more than two-thirds of that amount in new exploration and production if we are to enjoy the benefits of million-barrels-per-day production after 2010.”
And at $22 a barrel, after money is set aside for reserve placement through exploration and development, that leaves producers roughly $2.25 to pay interest and dividends. The $22 barrel price for ANS crude oil sold on the West Coast is the department’s new estimated long-term average. At $17 a barrel, the department’s old long-term average price, investors essentially would get nothing after subtracting for reserve replacement.
What can the state do? Future production — and future state revenues — “depends in large part on the amount of money exploration and production companies spend to develop oil resources that have already been discovered on the North Slope and to discovery additional oil,” Revenue said. And those company decisions “depend — in great part — on world oil prices and government regulatory and fiscal policies.”
Some government policy makers will want to maximize public revenue while others will want to maximize private economic activity, including jobs, the department said.
“The balance, sought by the host government in every oil province of the world, is to take a healthy share of the profits derived from oil while remaining competitive in the world marketplace for oil and gas investment dollars.”
What changes could the state make in its fiscal policies? The state could require investment as a condition of leasing, but, Revenue said, “such lease terms would probably reduce both the price and marketability of future leases.”
The state could provide incentives through tax deductions or tax credits, lowering its take and essentially rewarding industry for investing. And it could provide a tax benefit for reinvestment in Alaska, something the state doesn’t currently do. The department said “Alaska is particularly alone among major oil producers in not treating oil dollars that are reinvested here more favorably than oil dollars invested elsewhere.”
Another thing the state could do is to make its fiscal system less regressive, thus sharing the risk of low oil prices and earning more when oil prices are high. Alaska’s 20-mill property tax, production tax and royalty provisions in state leases are regressive, Revenue said, because they are not based on profits. “Even when prices are so low that oil production operations are unprofitable, the state continues to receive a share from some or all of these sources.”
If the state’s fiscal system were modified to be less regressive, the department said, and if such modifications were properly structured, the state could receive more total revenue while at the same time it would become a less risky place to explore and produce oil.
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