Marathon: Oil tax would hurt Cook Inlet exploration

Posted: Thursday, May 04, 2006

The most talked-about reason for changing the petroleum production tax (PPT) is the possibility of a North Slope natural gas line to the Lower 48.

The $20-30 billion investment in the line would provide jobs, about 50 years of future sales for North Slope gas and the possibility of spur lines that could provide gas to many areas of Alaska.

Gov. Frank Murkowski has proposed updating the Economic Limit Factor (ELF), a tax based on an oil or gas field’s productivity, with a PPT taxing 20 percent of a company’s profits and a 20 percent credit on investments, under a negotiated deal meant to move the pipeline project forward.

The senate recently passed its own version of the PPT, one that sets the tax at 22.5 percent with credits at 25 percent, and sent it to the house finance committee.

The ELF is a culprit, PPT supporters say, because it keeps the state from collecting production taxes on as many as half of Alaska’s productive fields.

For Cook Inlet, however, the ELF is not a culprit. The ELF stimulates much-needed exploration, and helps provide gas for use in Southcentral Alaska.

That was one message Ben Schoffman, a spokesman for Marathon Oil’s Alaska operations, brought to the Kenai Chapter of the Support Industry Alliance on Tuesday.

Cook Inlet, he said, is not like the North Slope, in that Cook Inlet’s fields are mature.

“There are no world-class projects on the horizon for Cook Inlet,” Schoffman said. “The elephants have been found, and now we’re sort of shooting around the edges.”

There has been some success, he said, by Marathon and others drilling in and around Cook Inlet for natural gas, but the projects are expensive and the returns are relatively small.

The rig currently drilling on Bridge Access Road is a Marathon-operated rig that hasn’t drilled in over 15 years, and one that Schoffman pointed to as evidence that small-scale Cook Inlet exploration is an area of opportunity.

Still, there is a difference, he said. Levying a 20 percent production tax on a well like the Bridge Access project, which could bring somewhere between 5 to 12 million cubic feet of gas a day after a month of drilling, would keep a project from going forward at all.

“There’s nothing wrong with the ELF for Cook Inlet,” he said.

Regulatory hurdles, historically lower Alaska gas prices and the smaller amounts of gas available in Cook Inlet fields mean less pretax money can be made by investors here already. A profits tax slims the investment returns even further.

Investors in Cook Inlet fields can expect to see a pretax return of 1.5 to 2 times on investments under the current system, Schoffman ex-plained. Similar investments in Oklahoma, Texas, Wyo-ming or Louisiana fields bring returns of closer to four times the value of an initial investment.

“If you had no allegiance to Alaska and you saw the numbers, I don’t think it takes a rocket scientist to figure out where you’d put your money,” Schoffman said.

The loss of ELF, he said, nearly guarantees the abandonment of marginally-producing gas fields and the abandonment of any new exploration.

The solution, he said, should involve the inclusion of provisions for low-performing fields in subsequent versions of the legislature’s PPT proposals, such as a five percent profits tax instead of a 20 or 22.5 percent tax.

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