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Tax credit stability critical at Cosmo BlueCrest executive says field economics assume current tax structure; credits form investments for future state revenues ALAN BAILEY Petroleum News
Arguing for stability in Alaska’s oil and gas tax system, Benjamin Johnson, president of BlueCrest Inc., told the Resource Development Council’s annual conference on Nov. 19 that funding assumptions for the development of the Cosmopolitan field in Cook Inlet are based on existing state tax laws, including the availability of tax credits for field development.
“If those tax credits don’t come in, that’s going to create a severe problem,” Johnson said, commenting that in the absence of the credits it would be necessary to cut back on activities at the field, stop drilling or obtain additional funding by some means.
Production in April BlueCrest is developing the Cosmopolitan field, about three miles offshore the southern Kenai Peninsula, as an oil field, using directional drilling from an onshore drill site near Anchor Point. The company plans to have the field go into production in April 2016. However, the additional development of a relatively shallow gas resource, above the oil, will require offshore drilling from a jack-up rig and the use of offshore production platforms - the company has yet to make a decision on whether to proceed with that option.
Johnson said that it will end up costing about $525 million to bring the Cosmopolitan oil field to a point where income from oil sales can render the field self-sustaining, rather than requiring external funding. However, field profitability would not arrive until sometime after that.
So far the company has put $200 million of its shareholders’ investments into the project and has received $25 million in state tax credits, Johnson said. The company has borrowed $30 million from the Alaska Industrial Development and Export Authority to cover part of the cost of the drilling rig needed for the field - the rig will be the largest in Alaska when it arrives in the state in early 2016, Johnson said. BlueCrest has also obtained another private loan for $150 million and has anticipated the receipt of $120 million in state tax credits over the next three years, he said.
Tax credits as investments But the state should view the tax credits as investments against future state revenues, Johnson said. For example, state oil royalties from Cosmopolitan should ultimately amount to $362 million at a $55 oil price, compared with $120 million in credits, a 300 percent benefit-to-cost ratio, he said.
And depending on the tax credit situation, BlueCrest will continue drilling at Cosmopolitan for another five to seven years, Johnson said.
When BlueCrest was evaluating the possibility of entering the Alaska oil industry, it determined that costs in Alaska were three to five times higher than those in the Lower 48, Johnson said. But state tax credits swung the economic balance in Alaska’s favor, enabling the company to drill offshore in Cook Inlet using the Endeavour jack-up rig that the company had available in the Inlet at the time.
“We proved up a lot more oil at Cosmopolitan than was previously known and discovered substantial new gas,” Johnson said.
Major factor Johnson commented that the state’s tax environment, including the tax credits, had been a major factor in turning around declining oil and gas production in the Cook Inlet basin. Hilcorp Alaska, in particular, has rectified the Southcentral Alaska natural gas supply situation, converting an impending gas shortfall into an adequate gas supply for several years into the future, he said.
And unlike in many other places in the world, the isolated Cook Inlet gas industry has no elasticity of supply in the event of a gas shortage. So, with BlueCrest’s proposed Cosmopolitan gas development likely to take at least three to five years to complete, development should start now, Johnson said.
But BlueCrest cannot make a development decision without some level of certainty about the nature of the future tax program, he said.
BlueCrest has established a joint venture with WesPac, a liquefied natural gas company, to develop the Cosmopolitan gas field separately from the oil field. The concept is to start drilling offshore wells in 2016, with first gas coming on line in 2018, Johnson said. He said that BlueCrest has several gas sales contracts lined up for Cosmopolitan gas but that the company cannot make any commitment on these contracts until the future of the state tax laws is clarified. Potential uses for the gas include utility gas sales, the restart of Agrium’s fertilizer plant on the Kenai Peninsula and gas distribution throughout the state.
Meantime, the Spartan 151 rig, the only jack-up rig now in the Cook Inlet region, has been released by Furie Operating Alaska, the company that has been using the rig for developing its offshore Kitchen Lights gas field. BlueCrest wants to use this rig for the Cosmopolitan gas development.
“It’s parked in Seward now, with the intention of drilling these Cosmo wells in 2016, 2017 and 2018,” Johnson said. Spartan Offshore Drilling is spending a considerable amount of money holding the rig in Seward and will not be willing to continue doing that if the rig is not going to be used. But, if the rig departs, it will be very difficult to bring another jack-up to the Cook Inlet, Johnson said.
No retro-active changes Johnson particularly warned against any retroactive change to state taxes, a move that he said “would be devastating.” Moreover, tax changes need to be phased in a manner that recognizes the fact that an oil company tends to make investment decisions that relate to activities scheduled to take place a couple of years in the future.
It is also very important to fully fund any credits, to ensure that companies can conduct their financial planning, confident that any promised credits will be forthcoming.
“If we’ve counted on and budgeted for that, and the money doesn’t come in, that’s devastating,” Johnson said.
If the state is short of the funds needed for credits, another approach such as the use of state loan guarantees might assist project economics. But, with clarity needed, taking years to discuss the various assistance possibilities is not a viable option, he commented.
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