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Oil company says it likely can’t continue to drill unless state pays tax credits

A company drilling extended-reach oil wells at a fracking operation in Cook Inlet says it likely cannot afford to drill additional wells, and expects to lay off more than 150 full-time workers, because the state has not paid the oil-tax credit cash it planned on receiving.

The drilling program that employs those workers is expected to be completed next month, said Benji Johnson, president of BlueCrest Energy, based in Fort Worth, Texas. The company isn't shutting down the field, which currently produces a small amount of oil.

"We're pausing drilling," he said.

BlueCrest is currently using a giant rig to drill its second, new long-distance well from shore, about 4 miles into the Inlet and more than a mile under the seabed, as part of an effort to tap oil from the Cosmopolitan Unit by fracturing the oil-bearing rock. The company began drilling an earlier, separate well in December, also into Cosmopolitan, at its site about 6 miles north of Anchor Point.

So far, little BlueCrest oil is flowing — just 200 barrels of oil daily, state records show. Most of that is coming from an older well originally drilled into Cosmopolitan by an earlier operator. BlueCrest bought that well after it formed as a business in Alaska in 2012.

The extended-reach drilling so far hasn't yielded much oil. Not everything has gone smoothly, technically speaking. The company's plans to produce oil were pushed back a "couple of months" after a piece of equipment failed, leading to "mechanical issues," Johnson said.

John Hendrix, oil and gas adviser to Gov. Bill Walker, said low oil prices are also adding to the problem. Hendrix said the state helps producers in a variety of ways.

He said a state corporation, the Alaska Industrial Development and Export Authority, provided a $30 million loan to help pay for the big drilling rig BlueCrest is using.

He said the state wants to see production from the field so it can receive royalty oil — one-eighth of each barrel produced. That production would also help fund new drilling efforts, he said.

"Delays cause increase in costs, and it delays production" that brings in cash, he said.

The state oil tax in the Inlet is $1 a barrel or less, depending on profit.

"We want them to have success and they've been working hard, but we need to see some production also," said Hendrix. "Drill for oil, not tax credits."

Johnson is hopeful the field will soon begin producing more than 1,000 barrels of oil daily, after the second long-reach well is completed next month and production begins there. Production might increase further if the company can afford to conduct additional testing and work needed at the first extended-reach well.

Information from the drilling confirms the oil is there as expected, he said. Seventy million barrels of recoverable oil is a conservative amount, he said. Johnson has said production, if several more wells can be drilled, could be up to 17,000 barrels of oil daily.

Getting to all that oil takes money, he said. Investors in the roughly $525 million project expected to receive about $125 million from the state under its cash oil-tax credit program, he said. So far, it has received $27 million, Johnson said.

"It's better than nothing but it's not what we were told at the beginning that we'd receive in the credits," he said.

Lawmakers last month ended the cash-credit program as the state faces a $2.5 billion deficit. The state in the last two years has also dramatically reduced the amount of money it's paying annually to oil companies under the program.

It's paying only the legally required minimum each year — leaving oil companies accumulating promises of eventual payment by the state.

Two other independent oil companies in recent months have also cited the delayed state payments as problems for continuing operations.

Caelus Energy Alaska, awaiting payment of at least $75 million in state oil-tax credits, said in June it won't be drilling an appraisal well this winter as originally planned at its discovery at Smith Bay on the North Slope.

In April, Cook Inlet Energy postponed drilling for a year at an exploration well at its Sabre prospect, citing uncertainty over the state's oil-tax policy as a problem in attracting investment.

The Walker administration is currently preparing a new fiscal plan for lawmakers to consider. It is expected to use earnings from the $61 billion Alaska Permanent Fund and taxes to fill the deficit. Lawmakers are expected to consider that plan before year's end.

Rep. Geran Tarr, D-Anchorage, said she understands the plight of companies like BlueCrest that relied on the credits but haven't been paid by the state as expected.

Companies used the expectation of the credits as collateral to secure financing from banks that are now refusing to grant more loans, she said. The state currently owes companies more than $700 million in cash credits.

Tarr said as part of the fiscal plan that might be passed, she supports paying more than the legal minimum, which is $77 million this year. She would like the state to pay the full amount owed in three to five years.

Johnson said BlueCrest officials decided on Tuesday to pause drilling after they realized they can't secure a loan fast enough to drill a third well.

"There's a limit on how quickly you can borrow tens of millions of dollars," he said. "It's not easy to do."

Tarr said until the state can decide on a fiscal plan to generate revenues to fill the deficit — which has been filled with dwindling savings — lawmakers will continue to pay minimum amounts of cash credits to the oil companies.

The Legislature's first priorities are funding constitutional obligations for public safety, health and education, she said.

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