LNG project is linked to oil tax change, producers say

All three major North Slope producing companies say progress on a large natural gas pipeline and liquefied natural gas project is linked to reform of the state’s oil production tax, an issue that will be before the state Legislature again in its 2013 session.

The three companies made presentations at the Resource Development Council’s annual Alaska resources conference Nov. 14, and all three voiced the same message:

“It is essential to build a competitive fiscal regime for both oil and gas. Stability is essential,” said Randy Broiles, ExxonMobil Production Co.’s vice president/Americas. 

John Minge, president of BP’s Alaska production company, said gas and oil production tax issues are linked because the two are produced out of the same wells and supported by the same infrastructure.

Gas production won’t work economically unless there also oil production that supports the oil field infrastructure, but the present state tax, known as ACES, does not encourage long-term development of known oil resources in the existing fields that are needed to sustain the field infrastructure.

“We are serious about gas to LNG, but fiscal reform for oil and gas is essential to enable this massive investment to happen,” Minge said. “If the state has a short-term 10- to 15-year future mindset, ACES is the right approach. But if you want to take a long-term view and have a sustainable oil business and have a real shot at gas, change is needed. Within that view the legacy (producing) fields are essential.”

Nick Olds, ConocoPhillips’ vice president for North Slope operations and development, agreed: “North Slope gas production will depend on a healthy oil business,” to preserve the producing infrastructure for the big legacy field of the North Slope.

“Over the next four decades we see the potential for developing 4 billion barrels, but to produce those barrels we will need to invest substantially in renewal of the infrastructure, and to maintain it so we will have a platform for gas,” Olds told the RDC.

Gov. Sean Parnell had earlier planned to introduce a bill revamping the state gas production tax but subsequently decided to hold off to give the Legislature time to consider anew the oil production tax adjustment next spring.

A change in the gas tax, mainly establishing a mechanism for tax stability, is essentially unworkable unless the oil tax issue is addressed first, the North Slope companies have said previously.

Under Alaska’s net profits-type production tax, oil and gas production are taxed together because they are produced from the same wells. 

In his presentation to the RDC BP’s Minge criticized the ACES tax as short-sighted policy.

“ACES is clearly a short-term going out-of-business policy and it will deliver very predictable results. It is delivering very predictable short-term results and we have a 5-year track record to prove it,” Minge said. “The State of Alaska is doing very well taking mass amounts of the upside (of revenues) at today’s oil price. The long-term (industry) investment is down, especially capital going into production enhancement activities.”

Olds, of ConocoPhillips, said his company has increased its capital investment in Lower 48 producing properties from $1.6 billion in 2009 to $4.8 billion in 2012, mainly because of stronger oil prices.

In Alaska, however, ConocoPhillips’ annual investment remained essentially flat, at about $900 million per year, over the same period. That is mainly because the state tax captured most of the gain of higher prices, leaving the company with little incentive to increase investments.

To illustrate this, Olds said that in 2007 oil prices were at about $70 per barrel, the state earned about $27 in net revenues per barrel and ConocoPhillips earned about $22 per barrel.

In 2011, oil prices had increased to $106 per barrel and the state’s earnings per barrel increased to $51 per barrel, a gain of $23 per barrel. However, ConocoPhillips’ earnings per barrel increased only to $25 per barrel in 2011, a gain of only $3, he said.

Minge, at BP, painted a bleak picture unless something is done: “Decline continues at 6 to 8 percent per year and we can reasonably forecast that in 10 years the production in TAPS will be somewhere around 300,000 barrels per day.”

That is now considered the lowest economic operating limit for TAPS.

For critics of tax reform who question what Alaska “gets” for the tax adjustment, Minge said, “you get a future,” with an industry that could extend for decades.

There are also complaints that the proposals so far have contained no guarantee that the companies will actually invest and produce new oil, but Minge said there are many examples around the world where governments have reduced taxes to encourage new production, and the initiative has worked.

“I’m aware of no other place where people demand guarantees,” he told the RDC.

Alaska should step forward and make the change now, he said.

“You hold the keys, and you also hold the hammer,” Minge said, meaning the state can take the action to enable new investment but also holds the “hammer” to re-impose taxes if the industry does not perform.

Minge said BP is having to take steps now to adjust the company’s plans and strategy to fit within the ACES policy.

“We probably should have done that two or three years ago, but we can no longer wait,” he said. “Today our plans have really been mismatched against the state’s policy. It was built on the hope that a change (to ACES) will come. We’ve been focused on the more challenged resources and we need to take steps to invest in light (conventional) oil. We’re going to stop our heavy oil investment into the heavy pilot project within a few months,” Minge said. 

Minge encouraged Alaskans to work together to break the divide:

“Alaskans are very aligned about what they want: a sustainable oil business, a major gas project to go forward, and everyone wants affordable energy for in-state needs and everyone wants jobs,” Minge said. “However, the current policy does not deliver that outcome. Policy decisions are essential to the future. We need to find a way to come together.”

Broiles, of ExxonMobil, said there has been real progress on developing a large natural gas project and also in developing the Point Thomson gas and condensate field, which will involve the first commercial gas production on the Slope.

Broiles praised the state for stepping forward last March to settle long-standing litigation over Point Thomson, and said the settlement was essential to a large gas project going forward.

“The state was not quick or easy in their decision to settle this, but if we can build on this, to keep the momentum, the prize is huge,” he said.

The U.S. Army Corps of Engineers issued its final Record of Decision on the Point Thomson environmental impact statement in October and the company is now working to secure other needed permits, an ExxonMobil spokeswoman said.

Construction on the multi-billion-dollar project is expected to begin this winter. The project will produce gas, strip off liquid condensates, and inject the gas back underground. The liquid condensates will then be shipped to Prudhoe Bay by pipeline and mixed with crude oil in the Trans-Alaska Pipeline System.

11/11/2016 - 8:47pm