Citing new projects, explorers urge preservation of tax credits

  • Tons of materials including drill pipe are seen at a staging area near the producing Oooguruk field offshore of Alaska’s North Slope. Caelus Energy, which acquired Oooguruk and the Nuna prospect from Pioneer Natural Resources last year, is urging the preservation of oil tax credits the company asserts are key to attracting smaller independents such as their company to Alaska. Photo/Courtesy/Caelus Energy LLC

State oil and gas tax credit incentives are a valuable investment in new oil production and in-state energy security and shouldn’t be trashed, independent explorers are telling state officials and legislators.

In the long run they more than repay the state treasury through new royalty and state taxes, too, several companies say.

Casey Sullivan, Caelus Energy’s external affairs manager, said his company’s planned $1.2 billion Nuna project on the North Slope will benefit from tax credits and royalty reductions in the near term but will ultimately pay the state treasury an estimated $1.23 billion to $1.32 billion in royalties and taxes.

Nuna is expected to begin production in October 2017 and will produce 20,000 barrels per day to 25,000 barrels per day, Sullivan told the Resource Development Council’s annual conference Nov. 19.

Caelus is an independent oil and gas company based in Dallas.

Benjamin Johnson, president of BlueCrest Energy, a Fort Worth, Texas-based independent, told the RDC conference that his company’s new Cosmopolitan oil project in Cook Inlet is expected to be in production next April and that new gas production could follow by 2018.

But those will depend on the state of Alaska not abruptly terminating its oil and gas incentives, particularly for projects now under development and in which investments have been made by companies.

Many legislators are looking at the incentive program as a cost and at $500 million a year in direct expenditures by the state in recent years it has weighed heavily on the state budget.

“We need to view this as an investment in the future, but we should manage it well,” Johnson told the RDC conference.

Sullivan said, “This isn’t free money. We spend money in the economy, and no industry has a greater job-multiplier effect than oil and gas — about 9 to 1,” meaning for every one job in the industry nine other jobs are created indirectly by the spending.

Caelus itself has invested massively in its ongoing development and new exploration, employing 900 workers in its North Slope program last winter, Sullivan said.

Recent publicity about the program, and some legislators’ calls for ending it, has created financing problems for small companies who are exploring and raising money, he said.

“When Alaskans sneeze about oil tax credits, the ripple effects are felt on Wall Street,” Sullivan said.

Johnson said the state incentive program may need changes and a range of alternatives are being discussed.

For projects in development, like BlueCrest’s Cosmopolitan and Caelus’ Nuna, a low-interest loan or loan guarantee by the state may be just as effective as a cash tax credit, and would have the benefit of not directly taking money from the treasury, Johnson told the RDC.

“Loans like this could be low-risk and high return (with a discovered oil and gas deposit) and wouldn’t be cash out of the pocket for the state,” he said.

The worst alternative is to end the program and make the termination retroactive, so that tax credits already applied for would be worthless, Johnson said.

“Stability of the tax system is vital, and we feel that commitments should be honored for projects (under development) that are low risk, and where benefits can be quantified,” he said.

“Changing the program would be fine, but do it in a way that doesn’t immediately affect projects now underway. I would recommend retaining the existing program for a couple of years and then phasing it out.”

A particular concern Johnson has is keeping the Spartan Drilling Co. Spartan 151 jack-up rig in Alaska so that it can be used to drill Cook Inlet offshore wells.

The rig has been under contract to Furie Operating Alaska for its Kitchen Lights gas project in Cook Inlet but Furie has released the rig now that it is producing.

Spartan currently has no customers but is storing the rig in Seward over the winter, hoping for more work next year.

BlueCrest hopes to use the Spartan 151 to drill gas production wells at Cosmopolitan in 2016 and 2017 but the gas project can’t proceed until there is more clarity on the state’s intentions on the incentive program.

Hilcorp Energy has done an admirable job in developing new Cook Inlet gas for Southcentral Alaska but gas from other new discoveries, like at Furie’s project and BlueCrest’s, is needed to supply regional energy needs until a North Slope gas pipeline can be built, Johnson told the RDC.

Gov. Bill Walker put a $500 million cap on current-year expenditures under the incentive program (it was to have cost $700 million) and instructed administration officials to come up with less-costly alternatives.

A proposal for a new system is expected to be presented to the Legislature next spring. Options under consideration include an annual cap on tax credit expenditures, a pre-approval process for eligible expenditures as well as some form of direct state financing, or even investment.

The state is already making limited investments in the industry through the Alaska Industrial Development and Export Authority, the state’s finance corporation, although these are so far restricted to infrastructure such as roads, pads and process plants, although a company’s acquisition of an offshore jack-up rig was also funded through an investment, which has since been repaid.

Updated: 
12/02/2015 - 2:27pm

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