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Oil patch insider: Zsolt: If BM 1 passes there is real risk of oil company exodus
Kay Cashman Petroleum News
With BP leaving Alaska fresh in his mind, ASRC Energy Service’s director of technology Liam Zsolt asked himself if taxes really could incentivize development activities or drive oil company investment out of the state.
Since oil and gas investment yielded nearly 104,000 direct and indirect Alaska jobs in 2019, billions in state revenues and is the largest cash contributor to the Alaska Permanent Fund, losing oil company spending would be bad for the state and its citizens, who don’t have a second strong industry to fuel the economy and job - and support state government.
The “last time we thought about this was when our … tax regime (ACES) transitioned to the current SB 21 framework (More Alaska Production Act, or MAPA),” Zsolt said.
The people promoting Ballot Measure 1 (the Fair Share Act) claim the current tax regime, MAPA, has not had an impact on oil investment and production.
In the interest of cutting through their “noise and disinformation” Zsolt took production data from the Alaska and Gas Conservation Commission and charted a comparison of production and the tax regime in place at the time (see his chart in the pdf and print versions of this column).
Zsolt’s analysis clearly shows Alaska was losing 40,000 barrels per day of production each year under ACES, a trend that was almost immediately arrested under MAPA.
Today, we are hundreds of thousands of barrels per day (hundreds of millions in royalties) better off than we would be if the decline had continued under ACES.
“I think a similarly unfavorable tax regime like the Fair Share Act could cut our production in half within seven years. This will more than offset amounts gained in the very short term and cripple any growth in the industry that employs the most Alaskans and is fundamental to our economy,” Zsolt said.
If the Ballot 1 measure passes in November, “there is a real risk of oil companies leaving Alaska; at the very least I think many will drastically cut their spending here.”
IHS says BM 1 disincentive to investment IHS Markit recently released an expert analysis of Alaska’s competitiveness in oil and gas markets, including an assessment of the impact of the tax increase proposed in Ballot Measure 1.
The analysis team concluded that the state’s oil and gas fiscal system will become one of the least competitive in the United States under Ballot Measure 1, coming at a time when other states have either introduced or are considering actions to incentivize industry investment.
Furthermore, IHS said Alaska has one of the most unstable oil and gas fiscal systems in the world; a disincentive to invest.
BP heavily invested in L48 oil And for those who think BP is leaving Alaska because it’s only investing in green energy, think again. The London-based major is one of the largest oil producers in the deepwater Gulf of Mexico, aiming to produce some 400,000 barrels per day by the mid-2020s.
With more than three decades of experience in the deepwater Gulf, BP’s next wave of growth is underpinned by several new major projects already underway, including: a $1.3 billion expansion at the Atlantis field; a second major expansion at the Thunder Horse field, expected to boost production at its largest platform by 50,000 bpd; the $9 billion Mad Dog 2 development expected to start up in late 2021, including the new Argos floating production platform, which will produce up to 140,000 barrels of crude oil per day from as many as 14 production wells.
As one of the Gulf of Mexico’s largest leaseholders, BP said it also has significant exploration and appraisal opportunities to evaluate, including recent discoveries.
And then there are BP’s shale oil and gas assets, which currently produce 190,000 bpd of oil equivalent from the Permian-Delaware and Eagle Ford basins in Texas, and the Haynesville basin in Texas and Louisiana.
While BP is in the process of divesting legacy assets in Wyoming, Colorado, Oklahoma and New Mexico, it expects to more than double its annual capital spending to $2 billion-plus a year on its newly expanded onshore portfolio in Texas and Louisiana.
Back to Zsolt: people forget “Fundamentally, I think people forget that oil companies have a choice about where to invest their money. In recent years, we have watched the major companies gravitate towards the Permian basin. Texas is now at record production levels (a condition that Alaska has not enjoyed since the late ’80s). Oil companies make these decisions, in part, based on a predictable, business-friendly geopolitical environment,” Zsolt wrote in a recent opinion piece he submitted to several publications in the state.
The budget cuts that Alaskans are currently adjusting to “would be modest compared to cuts stemming from a significant reduction in petroleum activity,” he noted.
“A stable environment creates jobs. As our partners in development continue to invest in Alaska, confident in their future here, Alaskans are enriched, and our economy is built. Staying the course will put Alaskans back to work,” he said.
Gov. Sean Parnell’s Senate Bill 21, or SB 21, passed and signed into law in 2013, encouraged increased production.
Furthermore, “Alaskans made a commitment to host a responsible industry with a particular tax regime so we could maximize our benefit from developing our rich resources,” Zsolt said.
“Industry responded by placing Alaska high within the global portfolios of ConocoPhillips, Oil Search, Hilcorp, and many others,” despite tough operating conditions and stringent environmental standards.
“Staying the course is, beyond being a good financial decision, the right thing to do,” Zsolt said.
“Alaskans who want to see our beautiful state’s revenues increase should support the continued health of Alaska’s oil industry and vote no on the Fair Share Act. Do not move the goalposts for our children; vote no to keep Alaska’s future sustainable for our next generation,” he said.
- KAY CASHMAN
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