Bradners'

Alaska Legislative Digest

October 23, 2007     

Oil and Gas Bulletin

Comments? E-mail: timbradner@pobox.alaska.net

Industry tells lawmakers what it takes to sustain slope production

After spending the weekend listening to the state administration the House Oil and Gas Committee began hearing from industry on Monday, Oct. 22. BP and ConocoPhillips made extensive presentations on the need for ongoing investments to slow production declines in the large Prudhoe Bay and Kuparuk River fields, and how higher state taxes could affect those investments.

Several points were made:

• BP believes 70 percent of the new oil yet to be developed on the slope will come from existing fields, mostly the large Prudhoe Bay and Kuparuk River fields, and only 30 percent from new exploration. The existing fields will also require the bulk of new investment.
• Legislators were surprised at how quickly production could be affected by changes in investment levels, particularly in the large fields. BP said 50 percent of today’s production is based on investments made over the last four years, mainly in drilling.
• Investments, which for Prudhoe Bay alone amount to about $1 billion yearly, are aimed at keeping the decline rate at an average of about 6 percent yearly. If the investment rate is slowed the decline rates could increase to about 15 percent yearly 'fairly quickly,' ConocoPhillips said.
• Assuming a 6 percent decline rate is sustained North Slope oil production will drop to about 350,000 barrels/day in 8 to 10 years, BP said. That’s down from about 700,000 barrels/day now. A 350,000 barrels/day rate would pose serious operational challenges for the trans-Alaska oil pipeline. Sustaining even a 6 percent decline will require huge investments, however.
• The state’s long-term production forecast is 3 percent yearly, which is very optimistic. Some of the 'new' oil in that forecast has yet to be discovered and some of it is in deposits that are not economic to develop at this time. The point being made was that higher taxes could make some of those projects more problematic, undercutting the state’s forecast.
• ConocoPhillips said the proposed new 10 percent tax on gross revenues on the large Prudhoe Bay and Kuparuk River fields would not just kick in at 'low' oil prices ($40 per barrel, the Department of Revenue says). Under certain circumstances the gross revenues tax could impair projects even at higher prices, such as $50/barrel and $60 per barrel.
• ConocoPhillips cited six Prudhoe-Kuparuk development projects that are either economic or marginally economic under the current PPT. Under Gov. Palin’s proposal, with the higher tax rates and additional gross revenues tax, three of the economic projects become marginal and three projects now marginal become uneconomic.
• BP described the types of projects it is doing to sustain production including new types of 'multi-lateral' development wells, new-technology enhanced oil recovery projects and heavy oil development. The company is working on a $2.1 billion Western Prudhoe Bay development project that could be approved early next year. The project would be in production by 2011, adding 250 million barrels of new reserves and 40,000 b/d to 60,000 b/d of new daily production.

Senate Resources: Consultants urge gross revenues tax be dropped

The Senate Resources Committee heard overviews of the administration’s tax bill from two of the Legislature’s consultants contracted by the Legislative Budget and Audit Committee. Steve Porter, who helped draft the Petroleum Profits Tax as deputy commissioner of revenue during the Murkowski administration, urged the committee to eliminate Palin’s proposal for a 'floor' tax of 10 percent of gross production. Producers are less concerned with higher taxes when prices are high than when prices are low, Porter said. The floor tax would also impose a 'big burden' on high cost field like West Sak.

Porter and Dan Dickson, a former state tax director, warned that the oil industry, among others, remains concerned with the lack of a long term fiscal plan. The Legislature’s recent history of substantially increasing state spending as oil revenues have grown is a more real indicator of Alaska's 'instability' than the tax debate of recent years, they said. Porter urged lawmakers to repay the funds borrowed from the Constitutional Budget Reserve and to develop a state fiscal policy. 'You do that and these companies won't worry. That's what they look at,' he said.

Consultant Van Meurs' gas pipeline views rejected

Porter also challenged Pedro Van Meurs’ suggestion that the natural gas pipeline is uneconomic. The project economics are merely 'indeterminate' and will remain so until after AGIA bids are submitted next month and long afterwards, he said. Unknowns include the future price of gas and costs. The specifics of project proposals are as important as tax rates, Porter said.

Consultants, administration differ on cost of tax payment schedule change

The change proposed in Palin’s tax bill from monthly to yearly calculation of the 'progressivity' tax surcharge can result in a 'potentially huge' difference in state revenues, Dickinson warned the Resources Committee. He said annual calculations could cut income from the tax by half. Earlier in the hearing Deputy Revenue Commissioner Marcia Davis said tracking the charge on a monthly payment was 'a lot of effort for small money' and the revenue loss was 'not sizeable.' Davis provided no dollar estimates, however.

Legislative Digest is a paid-for private subscription service. Our special session Bulletin is distributed free as a public service, and is supported by special grants from a group of subscribers. Editors: Mike and Tim Bradner. Contributing writer: Bob Tkacz.  Interested in getting the regular Legislative Digest and Alaska Economic Report? Contact: mbradner@GCI.net or fax at: (907) 522-1761.