North Slope oil producing companies painted a grim picture for the industry's future in Alaska unless the state revamps an aggressive oil and gas production tax that keeps 80 percent or more of the profit from new investments to the government, several companies told state legislators in hearings.
Gov. Sean Parnell has introduced legislation that would modify the state tax law, called Alaska's Clear and Equitable Share, or ACES. Hearings have been under way in the Resources Committee of the state House over several days.
The governor's bill is facing skepticism in some quarters, particularly in the state Senate.
"Alaska is not winning the competition for investment. There is just insufficient upside potential," for profit under the current tax, Claire Fitzpatrick, BP's chief financial officer for Alaska, told the Resources Committee Feb. 16.
The effect of the tax change has been to basically triple the production tax on producers since it was passed, several companies said.
The state's ACES tax, "has limited the commercial viability of new projects. Since the tax law was passed in 2007, our taxes have increased to levels that I believe are unsustainable," Fitzpatrick said.
ConocoPhillips Vice President Wendy King voiced similar concerns. "If we find oil and get it on line, our upside is gone," she told legislators.
Fitzpatrick, King and others pointed to broad declines in industry activity since the tax was passed. Unless the situation is turned around, King said production will decline to about 500,000 barrels per day in 2015, levels at which the Trans-Alaska Pipeline System will experience operating problems.
Fitzpatrick said footage drilled for new development wells by BP in fields it operates has dropped by a third, from about 500,000 feet in 2006 to about 400,000 feet in 2010.
BP's investment in activities that result in new oil being produced has similarly dropped, from about $300 million per in 2007 to about $200 million in 2010, Fitzpatrick said.
Fitzpatrick said there was an uptick in footage drilled in 2010, but this was related to more multi-lateral well drilling, where several new producing legs are drilled from older well bores. Increased drilling does not readily correspond to increased production, she said.
Passage of the ACES tax in 2007 has caused Alaska to slip almost to the bottom in rankings of oil and gas fiscal terms in producing regions, Fitzpatrick told the legislators. A 2010 study by Woodward Clyde, a consulting firm, puts Alaska at 117 of 120 producing regions surveyed in terms of fiscal terms and investment attractiveness, Fitzpatrick said in her presentation.
ConocoPhillips' King said the state tax caused Alaska to miss out on a U.S. drilling and development surge caused by high oil prices. Continental U.S. onshore oil production has increased but Alaska has decreased, she said.
If current trends continue the U.S. Energy Information Agency has forecast that continental U.S. onshore production, excluding Alaska, will increase by 26 percent by 2020. Alaska, however, will decline 30 percent to 40 percent over the same period to about 400,000 barrels per day.
The U.S. rig count on drilling for oil is up, but the Alaska rig count is flat, and a flat rig count with decreasing production means that drilling that is being done is developing less and less new oil, King said.
It will be several years before any production from Arctic OCS is possible, or commercial gas sales can begin, but in the meantime Alaska needs to keep a healthy base of oil production from the existing fields and to keep TAPS operating, King said.
"If that base oil production isn't healthy, the economic thresholds for OCS production and North Slope gas will go up," she said.
North Slope production has been declining at rates of 5 percent to 6 percent yearly, but the decline rate steepened to 7 percent in 2009 and 2010. The state of Alaska is forecasting a softening of the decline to 4 percent in 2011 and 2012 but the estimate is optimistic because it assumes production from BP's Liberty project, which has now been delayed, Marilyn Crockett, executive director of the Alaska Oil and Gas Association told the committee.
Taking as assumption that Liberty would add 5,000 barrels per day in 2012 out of the totals, the state's estimate for 622,000 barrels per day in average 2012 production drops to a 617,000 barrel average and given the decline rate even that may be unrealistic unless there is an improvement in the tax terms, she said.
The state estimates that North Slope production will average 616,000 barrels per day in 2011.
The companies did acknowledge the benefit of state capital investment tax credits that help pay some of the front-end cost of new development, but the financial effect of this is more than offset by the heavy state tax on production profits, they said.
Although Parnell's proposal to change the tax has the support of Republican House leaders, where House Speaker Mike Chenault, R-Kenai, and others have sponsored similar bills, the attitude in the state Senate is cool toward the idea.
Sen. Bert Stedman, R-Sitka, co-chair of the Senate Finance Committee, said he believes it unlikely the senate would approve a major oil tax change this year, although it could happen next year. Stedman said he is waiting on a study of Alaska's international competitiveness for oil investment that is being done by Pedro van Meurs, a consultant.
Tim Bradner can be reached at firstname.lastname@example.org.
Peninsula Clarion © 2015. All Rights Reserved. | Contact Us