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Vol. 25, No.37 Week of September 13, 2020
Providing coverage of Alaska and northern Canada's oil and gas industry

Oil patch insider: Not just ‘No’ but ‘Hell No’ on 1; well bonding levels remain high

Kay Cashman

Petroleum News

The two major challenges facing Alaska’s oil and natural gas industry from government are the proposed increase in oil taxes under Ballot Measure 1 and the surety well bonding increase by the Alaska Oil and Gas Conservation Commission.

If Ballot Measure 1 is approved by Alaskans in the Nov. 3 election the increase in oil taxes is expected to negatively impact Alaska jobs and the industry’s contributions to state coffers and the Alaska Permanent Fund. (In 2019 nearly 104,000 Alaska jobs were directly and indirectly attributable to oil and gas investment and activity and the industry had cumulatively contributed more than $150 billion to the state of Alaska through royalties and taxes, as well as provided the largest cash contribution to the permanent fund.)

While AOGCC’s new bonding levels are uncompetitive with those in Lower 48 oil states, they are seemingly a done deal without legislative or judicial intervention. However, a proposed bonding regulation amendment that would lengthen the amount of time a well operator has to pay the retroactive bonding increase MIGHT soon face a vote by AOGCC commissioners, offering the promise of some relief.

Expert analysis of BM 1

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 was headed by Irena Agalliu, IHS Markit vice president of upstream energy, and an expert in international energy law and economics.

IHS concluded that Alaska’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.

IHS Markit, headquartered in London, has more than 5,000 analysts, data scientists, financial experts and industry specialists. Its global information expertise spans numerous capital-intensive industries and markets, including finance, energy and transportation.

Agalliu’s major projects include a comparative analysis of fiscal systems for the U.S. Department of the Interior.

Her team’s Ballot Measure 1 analysis was done for the Washington, D.C.-based American Petroleum Institute, which supports public policy that engenders a strong, viable U.S. oil and gas industry.

According to IHS Markit the competitiveness of Alaska’s oil fields is poor at lower oil prices and deteriorates under Ballot Measure 1 as commodity prices rise.

The passage of Ballot Measure 1 would increase Alaskan government take by 18 percentage points in the low oil price environment, making it even less likely for new project sanction.

And while Ballot Measure 1 is likely to have a devastating impact to oil and gas investment in the state in the current low oil price environment, the measure is not sustainable even under a long-term base case scenario of $60 per barrel, IHS Markit reported, noting at prices above $60 the net present value of Alaska projects suffers a loss of $450-$700 million per project.

In fact, IHS concluded, Alaska’s current and proposed fiscal systems are the least competitive within its international and U.S. peer groups in terms of per barrel net present value.

Furthermore, the analysis indicated, Alaska has one of the most unstable oil and gas fiscal systems in the world.

Bonding hearing uncertain

The primary change in AOGCC’s proposed amendment of its well bonding regulation would increases the number of annual installments an operator can make from 4 years to 7 years. These payments are for amounts the commission billed operators for the retroactive bonding increases it enacted in spring 2019 - increases that particularly impacted small and mid-size companies.

The cutoff date for written public comments on the amendment is Sept. 10.

Asked when a hearing on bonding will be held, AOGCC Chair Jeremy Price told Petroleum News in a Sept. 9 email, “If we decide to take up (the) proposed bonding regulation amendment, we can do that at the public meeting on October 7th.”

Prior to the new bonding regulation enactment in April 2019, AOGCC generally required bonding at the statutory minimum level of $100,000 for a single well and $200,000 for blanket coverage of all an operator’s wells in Alaska. Under the new regulation the bonding is $400,000 per well for one to 10 wells; $6 million for 11 to 40 wells; $10 million for 41 to 100 wells; $20 million for 101 to 1,000 wells; and $30 million for more than 1,000 wells.

Current Alaska bonding requirements already parallel or exceed other states. For example, New Mexico’s counterpart to AOGCC has a law like Alaska’s which allows producers to provide a blanket plugging financial assurance not to exceed $250,000. Texas is also like Alaska. It has a three-tiered bonding schedule which is capped at $250,000 for producers with more than 100 wells. North Dakota requires a blanket bond for all wells of $100,000, a Department of Natural Resources official told Petroleum News last year.


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