Compass: ConocoPhillips does fine under ACES regime

By RICHARD A. FINEBERGOctober 13, 2012 

Let's face it: If ACES really lived up to its promise of Clear and Equitable Shares of oil revenue, much of the rhetoric in current oil tax debates would vanish. Although I'm a big fan of detailed analysis, I will show you a single picture that counters the belief that cutting Alaska oil taxes might spur development: The attached chart shows the contrast between the steady, after-tax profits ConocoPhillips (CP) reports taking home from Alaska in the six years since the state switched to the profits-based production tax, compared to that company's erratic global net profit results.

These data were reported by CP - one of three companies which control 95 percent of North Slope production and are in the process of increasing TAPS ownership from 95 percent to 100 percent - in its annual Securities and Exchange Commission 10-K reports. The contrast between these two sets of data looks like the Parks Highway crossing at Hurricane Gulch, 170 miles north of Anchorage, where travelers cruise across a high bridge spanning a spectacular, steep-sided gorge. CP's Alaska profits resemble the highway gliding smoothly over the abyss beneath the Hurricane bridge. The steep slopes beneath that bridge form a dramatic "V" that matches CP's overall profit plunge in 2008.

Look at a few of the numbers in this picture:

• In the six years since the state shifted to a net profits tax, ConocoPhillips has reported $12.3 billion in after-tax profits from Alaska (the highway on the bridge).

• In 2011, CP raked in $1.983 billion - an average of nearly $4,000 per minute, day in and day out.

• In contrast to these excellent returns from Alaska, overall CP suffered a severe profit collapse in 2008 due to a loss attributed to natural gas investments in the Lower-48 that went sour as natural gas prices crashed. CP's Alaska net profits for 2008 and 2009 of $3.8 billion compares to the company's total net loss of $11.9 billion over the same two years, as shown in the chart.

• Over this six-year period, while CP's Alaska production declined by 34 percent, the company's reported Alaska net income for 2011 was only 16 percent below its 2006 Alaska earnings. These figures show that as oil prices rose under the Alaska tax regime, CP took in a greater per-barrel share.

Despite these facts indicating CP's superior Alaska performance under the present fiscal regime, misguided tax cut advocates argue that to reverse Alaska's declining production the state should give up an estimated $2 billion per year in oil taxes, in hopes (but without guarantees) that CP and its producing partners will spend that money on Alaska investments. Ignoring CP profitability data and other economic and geologic realities, they claim a progressive surcharge at speculatively high future oil prices now forces would-be investors to leave Alaska.

Another important data set in the CP SEC report challenges the industry demand for a big Alaskan oil tax cut: Looking forward, CP's estimates of future global returns, filed to meet SEC requirements, indicate the company's expectation that its Alaska investments will outperform its investments in other parts of the world - and will do so by significant margins.

Unlike CP, neither of the other two major North Slope producing companies - ExxonMobil and BP - are required to report the details of their Alaska operations. Moreover, state management systems such as the petroleum audit unit are notoriously incapable of producing reliable data, while the state has had to litigate to obtain large sums of money the industry has underpaid - a process that takes years.

In this troubled situation, I believe that state senators such as Hollis French and Bill Wielechowski deserve great credit for their efforts to provide the public with basic facts as they seek constructive solutions to North Slope petroleum development issues. Look for candidates with the brains to recognize the significance of the SEC 10-K data on ConocoPhillips and the guts to use this information.

Richard Fineberg is an independent Fairbanks-based analyst who has observed North Slope and trans-Alaska pipeline issues since 1975 as a reporter, a state policy analyst and a consultant to state, federal and non-government organizations.

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