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BP: Picture just gets bleaker over time Company’s message on ACES didn’t change much between RDC in November, Alliance in January; a few more details now on table Kristen Nelson Petroleum News
BP is cutting back its investments in Alaska to reflect the short-term outlook of the state’s fiscal policy as reflected in ACES, Alaska’s Clear and Equitable Share, the production tax enacted in 2007.
That message, delivered Jan. 11 to the Alaska Support Industry Alliance’s “Meet Alaska” conference in Anchorage, was the same as the message the company delivered to the Resource Development Council’s annual conference last November.
The November messenger, John Minge, president of BP in Alaska, said BP had actually been slow to react to the policy direction the state took with ACES, hoping for a change.
But, Minge told RDC, since the state is focusing on short-term gains, rather than on the long-term health of the industry, BP also has to focus on the short-term, rather than on its previously stated focus of the next 50 years.
Phil Cochrane, BP Alaska’s vice president of external affairs, was the January messenger.
Same message: BP is changing its strategy in Alaska to reflect the state’s short-term tax policy.
Cochrane said that setting aside Liberty, which is not subject to state production taxes since it’s in federal waters, and Point Thomson, which is subject to a settlement with the state, BP has not sanctioned a single large project in Alaska since ACES was passed.
Worldwide BP’s upstream capital budget has grown 30 percent over the past five years, Cochrane said, but capital spending in Alaska has been relatively flat since ACES was passed, and is “barely half” what it was projected to be prior to ACES.
Going-out-of-business policy Both men characterized ACES as a “going-out-of-business” fiscal policy and said that in response BP was backing away from its 50-year plans and focusing instead on a 10-15 year strategy of extracting as much light oil as possible.
How is this different?
Cochrane said in the past BP has focused on both producing existing reservoirs and developing new projects.
The current focus, he said, is just on accelerating production of existing reserves.
He acknowledged that BP has two new rigs on the North Slope, but said the commitment to those rigs was made before ACES was passed. And those rigs will be used in legacy fields to help accelerate production from existing reserves, not to explore for or produce new sources of oil, Cochrane said.
The rigs reflect a short-term reaction to the state’s short-term fiscal strategy, he said: draining the easiest oil faster to offset decline and add near-term cash flow.
(BP said in a note that its rig count was 11 in 2006, and will increase to seven this year.)
Other steps BP is also evaluating its infrastructure in Alaska to determine what can be taken out of service rather than being maintained.
And the company has stopped investing in its heavy oil pilot, just letting the last well produce until it sands up, Cochrane said, and scaling back on viscous oil and Sak formation development.
And heavy and viscous oil represent more than half the remaining assets in BP’s legacy North Slope fields, Cochrane said.
But those projects are no longer competitive for capital under the state’s present fiscal system which dictates a short-term focus, he said.
BP is also working to improve the efficiency of its Alaska operations, which may result in fewer people working on the North Slope and in Anchorage, and some North Slope jobs moving to Anchorage, Cochrane said.
Contract changes BP has also made changes in its supply chain activities with an eye to operating more efficiently.Why? Cochrane said that while production is continuing to fall, the company’s operating and overhead costs in Alaska have grown more than 50 percent since 2006, driven by increasing costs of manpower as well as goods and services.
Over the past year BP has rebid contracts for North Slope operations and maintenance activities, replacing what Cochrane described as a pair of older, broadly defined contracts with a number of new contracts with more limited scope.
The goal is to reduce overall costs, enable BP to better manage performance and prioritize its supply chain activities while introducing more competition in the bidding process, he said.
Prize enormous, challenges daunting Cochrane, like Minge, said BP has not given up its vision of a 50-year future in Alaska.
But while the potential prize is enormous, the challenges are daunting, he said.
One potential prize is North Slope natural gas, but that requires a healthy oil business, because oil and gas come from the same reservoirs and are processed in the same facilities.
A gas project requires those facilities to keep operating — for at least another 50 years, Cochrane said. By that point some Prudhoe Bay facilities will be 90 years old, which means significant maintenance, replacements and repairs will be required, he said.
And cash flow from oil will be required for the gas project, he said.
Cochrane said the state’s job is to set policy and BP’s job as an investor is to react to that policy and establish its business strategy and investment based on that policy.
The state’s current policy discourages investment and BP is responding to that, Cochrane said, and if the state adopts a competitive policy that encourages investment, BP will respond to that.
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