Independent explorers and the oil tax pendulum

How changes are affecting development on the Slope

The tune being heard from independents exploring on the North Slope has changed subtly but significantly over the past year.

A previous insistence throughout the winter and spring legislative sessions to keep the Alaska’s industry-favored oil production tax and credit system intact has dropped an octave to a message that hints the companies have accepted that change is coming — hopefully for the last time.

Pat Galvin, a former state Revenue commissioner and now chief commercial officer for Anchorage-based Great Bear Petroleum, said Nov. 17 at the Resources Development Council of Alaska conference that above all else Alaska’s oil tax “pendulum” needs to stop swinging.

“We have to find a way to reach an equilibrium, not just to avoid future changes, but also to avoid the perception that there’s going to be future changes,” Galvin asserted.

“It’s not enough to just create a new law or to say we were able to successfully defeat an attempt to change (existing law). We have to create something that we can positively point to and say ‘This is the end. This is the last of it,’ and have people on both sides of the argument accept it and state so publically so that those of us talking to the financial markets have something tangible to point to and say that Alaska is on a new track and Alaska is now stable.”

Galvin managed to reference most of the recent high points in the state’s almost perpetual oil tax fight in his plea.

There was the brief cease-fire in the philosophical fiscal battle after an August 2014 statewide referendum upheld the current More Alaska Production Act tax system, more commonly referred to by its legislative title, Senate Bill 21.

Then, after oil prices dropped by half Gov. Bill Walker in June 2015 vetoed $200 million from the state’s $700 million oil and gas tax credit payment to small producers and explorers.

The move not only reignited the tax debate, but also sent financial institutions that had made loans based on receipt of the credit funds scrambling.

Another $430 million veto this past June just made the situation worse, but Walker said he could not approve the spend while the state’s savings deteriorate rapidly.

Sustained low oil prices have helped put the state in continuous annual budget deficits exceeding $3 billion while the credit bill keeps rising.

According to state Tax Director Ken Alper, Alaska will owe credits to the tune of $1.1 billion at the end of fiscal year 2018.

On top of that, massive Slope oil finds by Caelus Energy and Armstrong Energy have the potential to add up to $4 billion to that bill over the next handful of years.

Without the revenue — oil prices in the $100 per barrel range were supposed to be the norm when SB 21 was passed and upheld — to offset the credit obligation, something has to give.

Galvin and Caelus Energy Vice President Pat Foley, who has worked in Alaska with other companies, both said the “give” must include a way to pay the current credits owed.

Great Bear is owed “tens of millions of dollars” in credits, according to Galvin, while Caelus expects its bill to the state to hit $200 million by next spring.

“It’s been made clear to us that the ongoing liability that’s created by the refundable tax credits is just not sustainable by the state, so I hope that the Legislature is able to come up with a plan that first finds a way to pay the companies the money that they’re owed for the tax credit certificates; and then if changes need to be made, let’s design a program that’s durable and sustainable,” Foley said at the RDC event. “We really need some kind of tax system that’s very broad.”

Galvin stressed the final debate needs to be resolved next year.

At a high level at least, the message seems to jive with what incoming House Resource Committee co-chairs Reps. Andy Josephson and Geran Tarr said in interviews with the Journal.

The Anchorage Democrats, part of the new bipartisan House majority caucus formed on to fix the deficit in the upcoming session, have been ardent opponents of SB 21, but said they recognize the value of some state assistance for project development on the high-cost North Slope and emphasized the need for a plan to pay off what the state already owes.

Great Bear prospects

Great Bear’s work in the field has shifted along with oil prices.

The company originally set out to produce oil from shale plays on the central North Slope that have been so prolific in the Lower 48, but the drop in prices and new data have pushed it towards conventional opportunities.

Great Bear holds about 570,000 acres of state leases immediately south Deadhorse and existing Slope production. The large swath of leases is bisected by the Dalton Highway and Trans-Alaska Pipeline corridor and roughly matches the east-west reach of the giant Kuparuk River and Prudhoe Bay fields to the north.

The conventional oil Great Bear is now targeting is “embedded” within the shale intervals the company was originally pursuing in the Brookian and Kuparuk formations that are currently producing elsewhere on the Slope, Galvin said.

“(Over geologic time) the oil has migrated from the south to the north. It’s likely gone through all of the layers that we’re interested in and the challenge for us is…can we produce it from either the traps along the route or by going back to the source itself and that’s really the concept that Great Bear is pursuing,” Galvin described. “We believe that we can with today’s technology.”

Australia-based 88 Energy, working with Burgundy Xploration on state leases immediately to the south of Great Bear, also announced in October that it has conventional plays indicated on seismic that could hold upwards of 750 million barrels of recoverable oil.

Similar to Great Bear, 88 and Burgundy, working jointly as the operating subsidiary Accumulate Energy, started with ideas of shale production that have since shifted.

In early 2015, Great Bear drilled one well on its central Slope leases near the highway-pipeline corridor, but record spring flooding on the nearby Sagavanirktok River cut well testing short.

Galvin said company officials are excited about the potential results from that well, on top of other prospects revealed in the 1,025 square miles of seismic data Great Bear has acquired over the past four years.

That seismic data covers all of the company’s contiguous lease holdings.

Smith Bay

Caelus Energy’s Foley also offered a little more detail on the company’s highly publicized Smith Bay prospect on a remote section of the western North Slope.

The company believes it could recover between 1.8 billion and 2.4 billion barrels of oil from the field that overall holds more than 6 billion barrels. That would equate to about 200,000 barrels per day at peak production.

However, doing so could also require upwards of $8 billion of investment, according to Caelus leadership.

Foley said Nov. 17 the investment would translate into $28 billion of revenue for the state over the life of the field, based on 2 billion barrels recovered at $70 per barrel.

Developing the field will also require an estimated 2,100 jobs during peak construction.

The infrastructure would include 400 wells on four drill pads and a 125-mile, $800 million pipeline just to get the oil to TAPS.

“For a little perspective, it’s going to be an oilfield that looks a lot like Kuparuk River Unit,” Foley said.

Caelus announced the discovery in early October based on results from two exploration wells it drilled. The company plans to drill an appraisal well in early 2018 to better delineate the find.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.

 

Updated: 
12/03/2016 - 6:52pm