Thursday, 17 November 2011 11:28
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| Illustration by Aaron Jansen. Alaska Dispatch. |
ConocoPhillips, the state's second-largest producer (and on track to pocket $2 billion in profits this year) said its spending would remain flat at no more than $900 million.
But both companies also reiterated their commitment to developing projects that could bring billions of dollars of new investment to Alaska, while increasing the flow of oil through the trans-Alaska pipeline, if only the Legislature will pass Alaska Governor Sean Parnell's proposed tax cut.
It's the same message Parnell heard earlier this month in London when he met with BP chief executive Bob Dudley, according to Claire Fitzpatrick, chief financial officer for BP's Alaska division.
"BP and our partners are poised to invest billions of dollars in new projects that will result in billions of barrels of new oil from known sources that will sustain throughput in the pipe, and generate billions of dollars in long-term state revenue -- when there's a competitive business climate," Fitzpatrick said, addressing the Resource Development Council's annual meeting in Anchorage.
The tax debate has raged in Alaska for decades, and the oil companies' message is sure to resonate as lawmakers discuss the proposed cut -- estimated to cost the state more than $1 billion in revenue by 2017 and possibly much more -- in the session that starts in January 2012.
But myriad questions linger about the necessity for a tax cut, particularly when oil companies seem to be banking huge profits from their Alaska production.
One problem is simply finding out how much those companies make.
And what about the tax credits that have lured smaller independent companies to Alaska for what looks to be one of the busiest exploration seasons in decades? Does all that new activity make spending by the three majors -- BP, ConocoPhillips and ExxonMobil Corp. -- less significant these days?
The oil majors are making a bundle
BP doesn't publicly report its Alaska profits, said Steve Rinehart, a spokesman for the company. He would not say what BP earns in Alaska, and questioned reports in the media that claimed to know the company's earnings here.
"We report only what we are required to report," he said. That includes filing an annual report with the Securities and Exchange Commission that shows earnings for BP Exploration Alaska. That report mixes in operations from outside Alaska and is not an accurate picture of BP's earnings here, he said.
ConocoPhillips does break out its Alaska earnings, which were just over $1 billion in the first half of this year, said Natalie Lowman, a spokesperson for the company's Alaska operations.
That's a lot of money. Assuming other companies are doing just as well -- North Slope crude has been selling for more than $100 a barrel -- why do the companies need a break?
The take is significant, said Lowman. ConocoPhillips paid almost $2.4 billion in state and federal taxes and royalties for that $1 billion it earned, she said.
"For every dollar we make, we pay twice that much in taxes and royalties," she said.
Global competition is the other issue, according to the producers. Alaska competes on a global scale for oil company investments. Simply put, it's more lucrative to invest in other countries or in the Lower 48, they say.
"We do make money, but we make more almost every place else," Lowman said.
Alaska's remote location, lack of infrastructure, challenging regulatory environment and brutal Arctic conditions present steep hurdles that make development extremely costly. The state can't do much about those factors.
But it can change the other big hurdle -- the sharply progressive tax that takes a larger bite out of profits as oil prices rise -- the company officials said.
The take is so high that extra profits from the rising price of oil are quickly consumed, said Fitzpatrick.
"Over the past three years, BP's production and property tax payments to the state have been 2 and a half times what my remaining cash has been," she said.
The flow of oil through the trans-Alaska pipeline continues to fall. At 600,000 barrels a day, it's about 30 percent of its peak of 2 million barrels a day.
And BP's planned investments in Alaska keep declining.
Five years ago, BP had expected to spend $1.2 billion in Alaska in 2012, Fitzpatrick said. That's now fallen by 40 percent to just $700 million. Meanwhile, the company is spending more in nearly every other oil province around the world, she said.
Changing the tax rate is the single most important thing the state can do to spark development, she said, adding that projects "on the shelf" but waiting to happen, include:
-- I Pad development at Greater Prudhoe Bay, with 50 new wells and 80 million barrels of additional oil production
-- M and S Pad expansions
-- Low salinity water flooding to improve oil recovery
-- Lisburne expansion
-- Development of the Sag reservoir and development of T Pad at Milne Point
-- Viscous and heavy oil development, which Fitzpatrick called a "huge and largely untapped resource base."
ACES isn't stopping exploration
Keep Alaska's current tax regime, known as ACES, and BP will continue investing in pipeline and infrastructure upgrades, but capital spending on many activities to produce more oil will remain on hold, she said. And as production declines, other states like North Dakota may soon overtake Alaska as the second-most productive oil state, behind Texas, in the U.S.
Oil companies can live with Parnell's tax proposal, said Trond-Erik Johansen, president of ConocoPhillips Alaska. He added that Conoco's spending next year in Alaska will be flat, but did not provide specific numbers. Conoco had $900 million to spend in Alaska in 2011.
Meanwhile, in the Lower 48, the company is doubling its spending, from about $1.5 billion to about $3 billion, according to a chart he presented.
Johansen also promised more activity if taxes are lowered. He reiterated commitments made last spring that if taxes came down, Conoco would:
-- Increase drilling activity
-- Pursue more satellite developments at Alpine and Kuparuk
-- Pursue other major projects in existing fields.
ConocoPhillips has committed to spending $5 billion over the next three to five years -- if taxes are lowered, Lowman said.
What about the fact that the state's high tax rate doesn't seem to be slowing down independent oil companies, who are taking advantage of tax exploration credits to seek new reserves?
Brooks Range, Great Bear, Lynx, Pioneer, Repsol and Ultrastar are on track to collectively drill several wells this winter, said Marilyn Crockett, executive director of the Alaska Oil and Gas Association.
That interest is driven by the state's generous exploration credits, Crockett said.
But taxes on the production side are another matter. Reforming the ACES production tax is the most critical issue facing Alaska, she said.
How come the oil majors aren't taking advantage of that exploration tax to develop those projects?
They're looking at the big picture, said Bruce Tangeman, deputy revenue commissioner. Yes, they'd have short-term relief in the exploration phase, but huge taxes on the production end.
"They're more concerned with what the production tax will look like the next 30 years coming out that field," he said.