Slope producers: Decline will continue without tax reform

North Slope producer BP delivered a tough message Nov. 16 to several hundred business and community leaders at the Resource Development Council Conference in Anchorage.

Claire Fitzpatrick, BP’s chief financial officer for Alaska, said her company is expecting a 7 percent to 8 percent decline in annual production in the Alaskan fields it operates, which amounts to two-thirds of total Slope production.

She also warned that Trans Alaska Pipeline System throughput could drop to the 550,000 barrels-per-day range this winter.

At that level pipeline operating problems could occur, Fitzpatrick said. A study by Alyeska Pipeline Service Co. released earlier this year predicts increasing problems with water drop-out, wax build-up and freezing in cold weather as oil moving through the pipeline drops below 600,000 barrels per day, Fitzpatrick said.

There are projects that could add new production but a heavy state production tax  pushes these projects below the economic threshold when added to problems of high costs on the North Slope, Fitzpatrick said.

“These are prospects that do not make economic sense in the current business climate in Alaska, prospects that will remain only possibilities unless Alaskans and the oil industry work together to make changes that will make these prospects commercially competitive,” she said.

Fitzpatrick predicted that BP’s activities in 2012 would be flat, with no growth in activities like drilling that add oil.

“We’re making significant investments in infrastructure and pipeline upgrades, but capital spending on activities that produce more oil, on drilling, pad expansions, de-bottlenecking and others, is on hold or significantly limited. If the economics in Alaska don’t improve they’ll remain on hold,” Fitzpatrick said.

ConocoPhillips Alaska President Trond-Erik Johansen conveyed a similar message to the RDC conference and said a perverse effect of the Alaska tax is that it depresses companies’ incentive to invest as oil prices rise, resulting in stagnant or even declining investment by major operating companies at higher oil prices.

In contrast, industry investment in the Lower 48 is booming. Even in countries like Norway with high rates of tax there is enough profit for industry that investments are being made.

Johansen said ConocoPhillips’ 2012 Alaska capital budget will be about the same as 2011 and 2010, in the range of $900 million per year. Fitzpatrick said BP’s 2012 capital investment will decline from about $800 million to $700 million.

The bulk of BP’s spending will be on major facility and pipeline maintenance rather than activities that add new production, Fitzpatrick said.

Johansen said in a previous presentation that 70 percent of his company’s annual capital investment is going to maintenance.

Unless the investment environment for new projects improves Fitzpatrick said she forecasts Slope production declining 25 percent by 2020 from the current average of about 600,000 b/d.

“The state Department of Revenue forecasts a 13 percent decline over the same period, but 52 percent of that is from projects not now producing and which are still under evaluation,” Fitzpatrick said.

Given the reluctance of the major operators to make new development investments, a good share of the production the state assumes in its forecast will not appear, she said.

Gov. Sean Parnell has proposed adjustments to the tax law but the governor’s bill is bogged down in the Legislature.

Lawmakers opposing Parnell’s bill point to an upsurge in planned North Slope exploration this winter as proof that the tax adjustment Parnell proposes isn’t needed.

However, the bulk of this winter’s exploration drilling is by one company, Repsol. The company acquired a interest in a large lease position from an independent company, Armstrong Oil and Gas, and faces lease expirations on the acreage unless an aggressive drilling program is conducted, Repsol’s Alaska operations manager, Bill Hardham, told the RDC conference.

Hardham also told the conference that the prospects being tested are likely to be moderately-sized discoveries, if oil is found.

“We don’t expect any Prudhoe Bays,” he said. Repsol is also concerned about the state tax, he said.

State exploration incentives that pay for as much or more than half the cost of a new exploration well has also helped spur new drilling. However, exploration won’t help get new oil into the oil pipeline anytime soon.

Marilyn Crockett, executive director of the Alaska Oil and Gas Association, said it typically takes eight to 10 years to get new discoveries into production in northern Alaska.

“The reality we face is that our best prospects for new production and adding throughput to TAPS are within existing fields, but these are the kinds of investments being discouraged by the state tax law,” Crockett told the RDC conference.

Updated: 
11/07/2016 - 9:10pm