Oil giants: Tax changes will lure investment

Kristen Nelson

BP Exploration (Alaska) Inc. and Conoco Phillips Alaska told the Senate Resources Committee there are projects the companies could do on Alaska's North Slope to increase oil production, but those projects will have trouble attracting capital investment because of high state taxes.

Damien Bilbao, head of finance, developments and resources for BP, discussed a proposed reduction in the "progressivity" of the state oil production tax from 0.35 from 0.40. He told the committee: "A change of five-hundredth of a percentage point will not sway our investment decisions in Alaska." (He was discussing an earlier version of Senate Bill 192 than the one the committee approved on March 2.)

Bilbao repeated statements the company had previously made that "only a meaningful tax change, starting with bracketing around progressivity, will draw the additional investment that Alaska needs to put more oil in the pipe."

He said only proposed amendments to Senate Bill 192, which provided bracketing around progressivity, "provided meaningful tax change that would lead to increased investment in Alaska."

Those amendments, offered by Sen. Lesil McGuire, R-Anchorage, were not included in the committee substitute introduced March 2; McGuire and Resources co-Chair Tom Wagoner, R-Kenai, voted against moving the bill.

Voting to move the bill were co-Chair Joe Paskvan, D-Fairbanks, and Sens. Hollis French, D-Anchorage, Bert Stedman, R-Sitka, Gary Stevens, R-Kodiak, and Bill Wielechowski, D-Anchorage.

Stedman asked Bilbao about a two-tiered approach, recommended by the Legislature's consultants, in which legacy fields would be taxed at one rate and incremental production at a lower rate.

Bilbao said it is overall fiscal policy that matters. When BP looks at the fiscal policy and how it affects projects, he said, it looks at the project and the base business on which the new project would sit.

Asked by Paskvan about a different taxing system for legacy fields and new production, Scott Jepsen, vice president of external affairs for Conoco Phillips Alaska, said he thought separating new and old oil would be "fraught with all kinds of technical problems," for example, allocating expenses between new and old.

Paskvan also asked about low-cost versus high-cost developments, which are mixed in the data available from the Department of Revenue. Jepsen said looking at data in a homogenized fashion probably makes sense because as soon as a project is executed it becomes part of the base business.

Stedman asked why there wasn't major capital spending when the decline curve began and oil taxes were much lower.

Jepsen said he researched what was going on in the late 1990s through the mid-2000s (before passage of the Petroleum Profits Tax in 2006 and ACES in 2007) and listed activity in that period for the committee.

At Kuparuk, the first viscous oil projects were brought on at drill sites 1C and 1D, he said. A number of smaller oil fields were brought online: Tabasco, Tarn and Meltwater. And the core West Sak area was developed at drill sites 1D, 1E and 1F.

At Prudhoe Bay, the Midnight Sun, Polaris, Aurora, Borealis and Orion fields were brought onstream. And on the western North Slope, Alpine and its satellites Fiord and Nanuq came on.

"So I guess my perspective is that we were on fire -- we were bringing on a lot of new fields in that same time frame," Jepsen said.

As for the effect on overall production decline, the producers were fighting decline at Prudhoe Bay. While the new fields were all significant, he said, it was pretty tough to offset a decline of 20 percent at Prudhoe Bay, which from 1 million barrels a day was a drop of 200,000 barrels a day.

While the main fields aren't declining at the same rate today, Jepsen said, "If we could have the kind of environment that brings back the kind of investment that we were seeing . . . there's a good chance we could help offset that decline, and hopefully turn that corner."

Paskvan asked if the $5 billion investment the companies have proposed in exchange for lower taxes would bring production to 1 million barrels a day.

Jepsen said 1 million bpd is "a great aspirational goal," and he hopes it's achievable, but thinks "it will probably take some other types of technology than we see in the state right now," such as success with shale oil development and production from the Beaufort and Chukchi seas.

Paskvan noted that seven to 10 years has been cited as the time it takes to bring a development online, which means today's throughput is the result of decisions made in the early 2000s, "at a period of time that we had essentially zero percent production tax rate." So why weren't decisions made back then to increase production, he asked?

Jepsen noted that he was around then, and asked if anyone remembered the "no decline after '99' mantra?"

"We didn't succeed, but it was every bit our intention to try and make the investments to try to flatten out the decline -- and that's still our intention. I mean, as an oil company, it is not our intention to ride production into ground if we think we have opportunities."

He said current taxes are a handicap in attracting investment capital to Alaska to ramp up production.

Bob Heinrich, vice president of finance for Conoco Phillips Alaska, said that last year they did some work comparing capital investments around 2000 and today.

"And what we found by trying to normalize those costs to today's dollars -- so you're comparing apples to apples -- is that we actually did spend significantly more on an average basis during that time frame than in the . . . last three or four years."

In response to an email from Petroleum News, BP and Conoco Phillips reviewed the projects they have talked about as part of the $5 billion in projects that could result from major tax reform.

BP Exploration (Alaska) spokesman Steve Rinehart said the company has identified 5 billion barrels of oil equivalent in conventional and heavy oil and natural gas on the North Slope, including 80 million barrels of recoverable oil from I Pad; an estimated 150-200 million barrels recoverable from the Sag reservoir, and has quoted a gross figure of $5 billion added capital expenditures.

Conoco Phillips spokeswoman Natalie Lowman said the company "has committed to spending $5 billion in the next 3 to 5 years jointly with our co-venturers if there is a tax change similar to what HB 110 proposed." She said that would be an increase over what the company would otherwise spend on projects at Prudhoe, Kuparuk and Alpine.

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