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Industry outlook bleak without oil tax reform

Posted: November 28, 2011 - 9:40am  |  Updated: November 28, 2011 - 9:41am

Major Alaska oil producers presented a pessimistic picture of the North Slope production outlook during presentations to the Resource Development Council's annual conference in Anchorage earlier this month.

But other companies, mostly independents, were more upbeat and are planning a surge of exploration drilling this winter. However, the state of Alaska is funding much of the exploration through incentives that pay for more than half the costs of a well, the explorers acknowledged.

Most of the exploration is near existing fields and if discoveries are made, the expected reserve additions are modest.

"We don't expect to find any Prudhoe Bays," said Bill Hardham, Alaska operations manager for Repsol.

Repsol will be the most active explorer on the North Slope this winter.

The large producing companies were downbeat, however.

Claire Fitzpatrick, BP's chief financial officer for Alaska, said her company is expecting a 7 percent to 8 percent decline in annual production declines this year in the fields it operates, which amount to two-thirds of total Slope production, and warned that Trans-Alaska Pipeline System throughput could drop to the 550,000 barrels-per-day range this winter.

This is important because at that level, pipeline operating problems could occur, Fitzpatrick said. A study by Alyeska Pipeline Service Co. released earlier this year forecast increasing problems with water drop-out, wax build-up and freezing in cold weather when oil moving through the pipeline drops below 600,000 barrels per day.

Fitzpatrick's  message, and a similar one conveyed at the conference by Trond-Erik Johansen, ConocoPhillips' Alaska president, was partly aimed at getting business and community leaders at the conference to lobby the state Legislature for a change in state production taxes.

Fitzpatrick said BP's 2012 activity level in Alaska would be flat, with no growth in activities like drilling that add new production.

"We're making significant investments in infrastructure and pipeline upgrades, but capital spending on activities that produce more oil, on drilling, pad expansions, debottlenecking and others, is on hold or significantly limited. If the economics in Alaska don't improve they'll remain on hold," Fitzpatrick said.

There are potential projects that could add new Slope production, but a hefty state production tax pushes these projects below the economic threshold when added to problems of high costs on the North Slope, Fitzpatrick said.

"These are prospects that do not make economic sense in the current business climate in Alaska, prospects that will remain only possibilities unless Alaskans and the oil industry work together to make changes that will make these prospects commercially competitive," she said.

ConocoPhillips' Johansen said a perverse effect of the Alaska tax is that it depresses companies' incentive to invest as oil prices rise, resulting in stagnant or even declining investment by major operating companies at higher oil prices.

That happens because of a formula in the tax law that ratchets up the tax rate at steep rate as oil prices rise.
In contrast, industry investment in the Lower 48 and elsewhere is booming. Even in countries like Norway, with high rates of tax, there is enough profit left for industry that new investments are being made, Johansen said.

Johansen said ConocoPhillips' 2012 Alaska capital budget will be about the same as 2011 and 2010, in the range of $900 million.

Fitzpatrick said BP's 2012 capital investment will decline from about $800 million to $700 million.

The bulk of BP's spending will be on major facility and pipeline maintenance rather than activities that add new production, Fitzpatrick said. Johansen has said that 70 percent of his company's annual capital investment is going to maintenance.

Fitzpatrick said she forecasts Slope production declining 25 percent by 2020, from the current average of about 600,000 barrels a day, unless the investment environment for new projects improves.

"The Alaska Department of Revenue forecasts a 13 percent decline over the same period, but 52 percent of that (the production in 2010) is from projects not now producing and which are still under evaluation," Fitzpatrick said.

Given the reluctance of the major operators to make new development investments, a good share of the production the state assumes in its forecast will not appear, she said.

Gov. Sean Parnell has proposed adjustments to the tax law, but the governor's bill is bogged down in the Legislature.

Lawmakers opposing Parnell's bill point to an upsurge in planned North Slope exploration this winter as proof that the tax adjustment Parnell proposes isn't needed.

Marilyn Crockett, executive director of the Alaska Oil and Gas Association, said it typically takes eight to 10 years to get new discoveries into production in northern Alaska.

"The reality we face is that our best prospects for new production and adding throughput to TAPS are within existing fields, but these are the kinds of investments being discouraged by the state tax law," Crockett said.

Repsol's manager, Hardham, said its aggressive exploration this year is motivated mainly by lease expiration dates on many tracts in a 500,000-acre position it bought into with Denver-based independent Armstrong Oil and Gas.

"If we make a discovery, we'll want to have a conversation about the state tax rate," Hardham said.

Repsol plans to have four to five rigs working on exploration this winter on the Slope, testing prospects north and south of the producing Kuparuk and Alpine fields. The company's schedule has squeezed the supply of rigs available for exploration, which has created problems for other companies seeking to drill exploration wells.

Savant Resources, Brooks Range Petroleum and LincEnergy, all independents, have encountered difficulties getting rigs, according to industry sources.

Another explorer, Great Bear Petroleum, also encountered problems but its president, Ed Duncan, said the company has located a rig it can move to Alaska in time for testing a potential North Slope shale oil prospect in this upcoming winter season.

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