A chorus of independent oil companies says credits under Alaska’s new oil-tax law make development of their projects more likely than under the former tax but a top critic of Senate Bill 21 said those companies moved toward the production phase thanks to generous credits provided by Alaska’s Clear and Equitable Share.
Among the companies saying Senate Bill 21 better fits their plans is Great Bear Petroleum, where the man who helped lead the charge to implement former Gov. Sarah Palin’s tax law, known as ACES, now works.
Pat Galvin, Palin's former revenue commissioner, said Great Bear completed an economic modeling analysis that shows Senate Bill 21 will be better than ACES if the company finds a producible discovery in its hunt for oil off the Dalton Highway.
“The model is more favorable under Senate Bill 21 in terms of project economics,” said Galvin, Great Bear’s vice president of external affairs and deputy general counsel.
Support for Senate Bill 21
The fight over the two laws is heading into its final days -- the vote on the citizen referendum to repeal Senate Bill 21 and replace it with ACES is Tuesday. Meanwhile, advocates of ACES have argued that the new law favors the state’s large oil producers, BP, ExxonMobil Corp. and ConocoPhillips, over the small independents the state needs to discover new pools of oil.
The new law certainly benefits those big producers; a per-barrel tax credit is on track to pay the so-called Big Three at least $800 million this fiscal year. But key independents also like the new law, at least for now.
Those who have publicly said Senate Bill 21 encourages development that may be questionable under ACES include:
• Repsol, the Spanish oil giant that in recent years has been one of the most active North Slope explorers and is now evaluating development possibilities at oil discoveries it has made;
• Brooks Range Petroleum, which recently acquired financing to move into a $600 million production phase at its Mustang project; and
• Caelus Energy, which recently purchased the assets of Pioneer Natural Resources and has said it will begin construction on the Nuna project, an undeveloped oil pool near the producing Oooguruk prospect it owns.
About one dozen independent oil companies working throughout Alaska, including Cook Inlet and the North Slope, met with Gov. Sean Parnell on Monday to discuss the economic and regulatory climate in Alaska.
“The message was overwhelming that Senate Bill 21 has made a difference,” said Joe Balash, natural resources commissioner, who attended the meeting.
Bart Armfield, president of Brooks Range Petroleum, also attended and agreed with Balash’s interpretation of the companies’ views.
“Most definitely,” Armfield said, adding that he did not hear any negative comments about SB 21 and does not know of any independents who do not like it.
A double-dip deal?
Sen. Bill Wielechowski said it’s no surprise that an independent company at or approaching the production phase would like SB 21. Some of those companies, such as Great Bear or Repsol, came to Alaska under ACES and received huge state subsidies for exploration. Now, they are set to benefit from the huge new production subsidies allowed under the new law.
“It’s comparable to asking neighbors on my street if they’re happy with the property taxes they pay now, or would they be happy paying lower taxes,” said Wielechowski, a frequent critic of SB 21. "Everyone wants lower taxes."
ACES brought explorers to Alaska and helped them move forward with generous upfront subsidies that paid for such things as gravel pads and other infrastructure, he said. The number of oil company income tax returns jumped from 11 to 63 when ACES was in effect between 2007 and 2013, he said.
“It’s sort of like double-dipping,” he said. “They already took advantage of ACES tax credits, and now they’re getting rewarded a second time.”
ExxonMobil’s Point Thomson project may be the most notable example, he said. After an out-of-court settlement with the state compelled the company to move forward after sitting on its leases for decades, the company spent a huge amount of money for its project and received credits under ACES for Point Thomson. Once it enters production, it will benefit from SB 21’s generous production credits.
“It’s a screaming deal,” Wielechowski said.
SB 21 started out as a terrific bill for the Big Three, said Wielechowski. Then the independents said they needed to be fairly compensated, and huge benefits were added for them.
“Now we have a massive catchall and the Big Three get the bulk of the benefits,” he said.
SB 21 good for Brooks Range
Armfield said the change from ACES to Senate Bill 21 enabled the company to secure financing for its $600 million project as it heads into the development phase. He said it had been unable to do that under ACES, despite a broad search for investors.
The key difference was that Senate Bill 21’s predictability and stability provided income certainty to investors, Armfield said.
The key feature of ACES was its steeply rising tax rate, which kicked in after producers netted a profit of $30 a barrel. The tax rate rose -- and fluctuated monthly -- as oil prices rose. Investors didn't like that progressivity under ACES, he said.
Armfield said to imagine being a homeowner not knowing what your monthly mortgage payment will be.
“How can you plan a budget if you don’t know if you’ll pay $1,000 a month or $1,500 a month?” he said.
A fluctuating tax rate would hurt investment if “you’re in the oil business, the real estate business or the grocery store business,” he said.
As for ACES, Armfield said it had been a “workable model” for Brooks Range Petroleum, “but only because we were not subject to progressivity because we weren’t in production.”
Production at the Mustang field is set to begin in 2016, with peak production expected to reach 15,000 barrels per day.
Does that mean ACES is better for attracting explorers than SB 21? Armfield said not for the next year and a half at least, because during that period the state will help companies that aren’t producing oil at the same level it did before -- with up to a 45 percent tax credit.
But starting in 2016, the credit falls to 35 percent.
Even then, determining which law is better for a non-producing explorer would depend on the specific factors related to their project, Armfield said.
“That’s complex,” he said, but added, “The more defined and consistent a law is, the better.”
Great Bear’s plans
As for Great Bear, the company arrived in Alaska in 2010, leasing 500,000 acres and saying it could possibly drill up to 200 wells a year in old geologic formations considered the source rocks for Alaska’s massive oil pools such as Prudhoe Bay.
That level of drilling remains a possibility, said Galvin. Technical results from drilled wells and seismic data “have met or exceeded all our pre-drill expectations.”
“We came into Alaska with the target of going after the unconventional resource play where you’re basically looking to get oil from source rocks,” Galvin said. “In the process of drilling and seismic, we’ve confirmed the presence of those source rocks and we’ve discovered additional conventional plays as well.”
The confirmation of conventional pools of oil, in addition to oil contained in source rocks, has complicated the company’s plans, because the company must now evaluate two types of possible development, he said.
“We’re very excited and very committed to advancing our project,” he said.
Some had expected the company would start drilling those 200 wells this year. It won’t happen this year, Galvin said, adding that he’s not sure where that deadline came from. He said the number of wells came from past Great Bear presentations.
“In Texas, it’s 2,000 wells a year, so that was just a number put up there as to what an unconventional play could require or support,” he said.
He added that there have been other challenges, including acquiring a rig for drilling, but said the company is on schedule.
Great Bear and its partners, including Halliburton, have spent more than $100 million so far.
The small company has also contracted with a group at the University of Texas to evaluate tundra and wetlands in the area, acquiring environmental data that will be needed for permits before development can begin.
While Great Bear sees Senate Bill 21 as more favorable to its current plans, Galvin said he could not speculate on whether ACES or SB 21 would be better for other oil companies.
“Great Bear has not been involved in the public discussion,” he said. “It’s up to Alaskans to decide.”