Alaska highest in oil, gas production costs

Posted: Friday, May 28, 2004

Alaska is the most costly place on the planet to produce oil and gas.

The state ranked dead last out of 60 oil- and gas-producing regions in 50 countries across the globe, according to a study by Wood Mackenzie, an international energy consulting firm.

The implications of the study for future investment in the exploration and production of oil and gas in the state was the subject of a presentation Tuesday by Judy Brady, executive director of the Alaska Oil and Gas Association, at a meeting of the Kenai chapter of The Alliance.

Alaska's bottom-of-the-barrel ranking in the study is based on North Slope fields starting up production since 1995, although earlier studies found that production costs at Prudhoe Bay and the Kuparuk oil fields also are among the highest in the world.

While the study is not good news for those wishing to attract investment in Alaska's oil and gas industry, the news could be worse. It turns out, Alaska is not the least profitable region in the world, but it's close.

The state ranked slightly above average in "total government take" of both federal and state royalties, taxes and net profit shares of oil and gas production.

When both costs and "government take" are considered together, Alaska ranked 55 in "post-take value" per barrel of oil.

Brady translated the study's findings into English from an oil company's point of view.

"Of the places you could go (in the world), according to this study, there are five or six places you would make less than if you go to Alaska and there are 55 or 56 places you would make more," Brady said.

Oil and gas companies are looking to invest where they can get the best return and with so many other more profitable places to go in the world, it's difficult to make a boardroom pitch for investing in Alaska. The state's "saving grace," according to Brady, is that Alaska has relatively high reserves compared to other parts of the world.

"We're going to continue to be attractive if we have those reserves," she said.

Brady noted that the current high oil prices of about $40 per barrel make production more profitable, but do not make Alaska fields more attractive for investment compared to other oil-producing regions, since a producer will get that same price anywhere on the globe.

Oil companies still are interested in investing in Alaska, however, the size of the companies has changed.

"We're not getting the big players we used to get," said Brady.

The companies currently investing aren't the big global corporations, but medium-size regional companies.

To continue to attract investment in oil production, especially from larger companies, Brady said the state could do a couple of things: create a "steady" tax system and "streamline" the permitting process.

The state and federal "total government take" of 64 percent (the state share is 47 percent) of oil and gas revenue is not excessive compared to other areas around the globe.

"It's not that our taxes are terribly high here, they're in the middle," said Brady.

However, the tax rate combined with the high cost of doing business in the state "pushes us over the edge," she said.

The state also could encourage growth in other economic areas to reduce its dependence on oil and gas revenues. About 80 percent of Alaska's revenues have come from oil and gas over the past 30 years, Brady said.

Alaska's attractiveness for investment is not just in the hands of the state. It also depends on improvements in oil and gas exploration, production and transportation methods, which may make oil and gas operations in the state more profitable and, therefore, investment more desirable.

"The companies themselves have to continue investing in technology," she said.

The Wood MacKenzie "Alaska Benchmarking Study" Brady presented was conducted in 2002. The consulting firm is working on updating the study for 2004, which could change Alaska's numbers and rankings.

Alaska has some attributes that can't easily be quantified and the study didn't take into consideration, such as political stability as compared with some other areas of the globe. Such stability used to count for a lot, Brady said. However,the pressure on oil companies to produce "steady returns" on investments has ratcheted up to the point that they're willing to commit to regions with questionable stability they wouldn't have even considered exploring five years ago.

Still, like most everything else in the volatile world of oil and gas, that could change, she said.

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