Monday, April 04, 2011
Alaska Journal of Commerce
by Tim Bradner
Major employers in the state, worried about the future and whether there will be enough oil to operate the Trans-Alaska Pipeline System, are pressing legislators to reduce Alaska's high petroleum taxes to encourage new investment and oil development.
In several days of hearings before the House Finance Committee the week of March 28, companies told of sharp reductions in work that has caused them to lay off workers.
Meanwhile, oil companies -- large firms and small independents -- have painted a bright future for the state's petroleum industry if the Legislature acts to approve Gov. Sean Parnell's bill to adjust the tax, or something like it.
"Let's change the sound bites. Instead of talking about giving up $2 billion, let's talk about stabilizing the decline in production," Ken Thompson, managing partner of an Alaska-based independent exploration company, told legislators.
Thompson's company, Alaska Venture Capital Group, one of the owners of Brooks Range Petroleum Co., is just the kind of independent company legislators want to encourage. Brooks Range Petroleum is drilling the lone exploration well being done this winter on the North Slope.
Thompson said the investment tax credit portion of the state production tax does help small exploration companies like his, but the overall tax rate, which goes higher as oil prices climb, is making it tough to raise capital from investors.
Thompson's group lost one big investor for its exploration program because other places are more attractive than Alaska, he told the House Finance Committee in hearings.
However, if the tax rate were lowered, independents could ramp up exploration. Brooks Range Petroleum could put a second drill rig to work, and perhaps a third, Thompson said.
Bart Armfield, operations vice president at Brooks Range, believes independent explorers, with the right tax environment, would find enough new oil deposits, even if small ones, to flatten the oil decline.
There are plenty of prospects for small companies, Thompson said. "For small independents discoveries of 10 million, 25 million or 50 million barrels are just fine," he said.
Armfield said Brooks Range's owners, a group of small, mostly family-owned independents as well as Alaska investors like Thompson, previously had their core areas in places like Kansas. A few years ago, growth prospects at home were small for these companies, Armfield said.
Alaska was attractive because there were larger prospects, even if these were too small to interest the larger companies. However, higher state taxes have dampened Alaska's assure. Had companies known ACES was coming, they probably wouldn't have invested, Armfield said.
"Now oil is at $100 a barrel and there are a lot of opportunities close to home in areas these people know and where they are comfortable," Armfield said. "HB 110 would make positive changes, however."
Great Bear Petroleum, an Austin, Texas-based independent that wants to experiment in drilling and producing from shale rocks on the North Slope, said it sees bright potential.
"We have an aggressive program that supports 250 wells per year for 20 years starting in 2013," the company's chief financial officer, Ryan Moynagh, told the finance committee.
If the idea pans out, about 150,000 barrels day, and perhaps more, could be produced from shale.
However, Great Bear must still test its concept that oil can be economically produced from shale rock on the Slope. The company has two exploration wells planned for next winter, and must still raise the investment capital needed for development. Improving the tax environment would help Great Bear, Moynagh told the finance committee.
"The easy conventional oil has been found. There is remaining large volume potential in unconventional plays, such as heavy oil, shale oil and gas," Moynagh said.
But costs rise on a per-barrel basis and the economic return will decline due to field sizes getting smaller, a challenging, high-cost operating environment, exploration becoming riskier and new exploration initiatives like heavy oil and oil and gas shale being expensive, he said.
"Discovery and development of Alaska's remaining potential would be significantly enhanced by improvements in Alaska's fiscal terms, such as those in House Bill 110," Moynagh said.
"We're seeing a lot of resistance to private investment to the point that even we are beginning to look for more investment opportunities outside Alaska. Capital moves to places with less risk, and I don't want to see that happen to Alaska," Brown told the House Finance Committee.
CIRI owns oil and gas producing properties in Southcentral Alaska and has a big stake in North Slope contractor companies.
"We've seen a dramatic decline in our Slope work. The magnitude of the decline is alarming," Brown said. "The status quo is not an option, and we're concerned about this talk of 'giving away' money to the oil companies. We do support the governor's efforts. His legislation is on the right track."
Ethan Schutt, CIRI's vice president for land and energy, said he was infuriated coming through Calgary recently and seeing the bustle of drilling and activity and the coming home to learn that the liquefied natural gas plant near Kenai is being shut down and the Agrium fertilizer plant next door, already closed, may be broken up and shipped to Nigeria.
Aaron Schutt, vice president for operations at Doyon, Ltd., echoed the comments by Thompson and Armfield. (Ethan and Aaron Schutt are brothers.) Schutt said his company, which is exploring Interior Alaska basins, lost an industry partner in exploring the Nenana Basin and has been unable to find a partners in the Yukon Flats basins, both areas with prospective geology but also high risks. Lacking an industry partner Doyon is leading these exploration efforts itself, so far.
"The exploration tax credits helps explorers at the front end, but these companies (the prospective partners) look at the life cycle of the project, which includes the tax," Schutt told legislators.
There have been small companies coming in to explore, but what's really needed are larger companies with the financial strength to put discoveries in production, and these are lacking, Schutt said.
Doyon is heavily invested in North Slope support work, with has three quarters of its corporate capital tied in a fleet of six drill rigs operated by subsidiary Doyon Drilling. About 1,400 people are employed in the Doyon's oil-related service companies, including 435 Doyon shareholders. A full 90 percent of Doyon's oil workers are Alaska residents, Schutt said.
Tara Sweeney, senior vice president of Arctic Slope Regional Corp., urged legislators to reform the state tax law.
"Oil and gas is the bedrock of our economy. It is directly one-third of the economy and it provides 90 percent of state revenues," Sweeney said.
The current tax is double and triple the petroleum tax rates of producing states like Wyoming and North Dakota, she said.
Arctic Slope employs 4,000 in Alaska, mostly in energy-related businesses, she said. ASRC Energy Services, an oil services subsidiary, is one of the state's largest employers. Petro Star, a refining subsidiary, markets fuel products.
ASRC also receives royalties from oil production from subsurface rights it owns in the Alpine field and has invested with other companies in exploration on the North Slope and in Interior Alaska. ASRC is now a partner with Savant Resources in the restarted Badami field, a small field east of Prudhoe Bay.
The corporation has been working to get investors interested in North Slope projects but has been unsuccessful so far, and the state tax is at least partly to blame, Sweeney said.
"The lost opportunities are just devastating. What we have now is not working," she said.
Major North Slope oil operators could not guarantee new investments would come if the tax is lowered but they said it is highly likely.
"My expectation is that if House Bill 110 passes, we will spend more money in production-enhancing activity, all aimed at getting more production into the pipeline," Claire Fitzpatrick, chief financial officer for BP Exploration Alaska, told the House committee. "We would be using our existing fleet of drill rigs to the maximum and perhaps bring on another rig. If we add another rig that's a hundred jobs."
Fitzpatrick said two major west Prudhoe Bay development projects that were stalled when the Legislature raised taxes in 2007, a gas partial-processing plant and a new drill pad, with 50 new wells, would very likely proceed if the tax were adjusted.
"This would add a significant amount of work. It would have a big effect on contractors," Fitzpatrick said.
Wendy King, ConocoPhillips' external affairs vice president, told legislators that Alaska has the highest oil production decline rate of any state in the nation, 36 percent since 2003.
In contrast, Texas has only declined about 1 percent and production is growing in many states. In North Dakota, Utah and Mississippi, production is up 30 percent, King said.
In several days of hearings before the House Finance Committee the week of March 28, companies told of sharp reductions in work that has caused them to lay off workers.
Meanwhile, oil companies -- large firms and small independents -- have painted a bright future for the state's petroleum industry if the Legislature acts to approve Gov. Sean Parnell's bill to adjust the tax, or something like it.
"Let's change the sound bites. Instead of talking about giving up $2 billion, let's talk about stabilizing the decline in production," Ken Thompson, managing partner of an Alaska-based independent exploration company, told legislators.
Thompson's company, Alaska Venture Capital Group, one of the owners of Brooks Range Petroleum Co., is just the kind of independent company legislators want to encourage. Brooks Range Petroleum is drilling the lone exploration well being done this winter on the North Slope.
Thompson said the investment tax credit portion of the state production tax does help small exploration companies like his, but the overall tax rate, which goes higher as oil prices climb, is making it tough to raise capital from investors.
Thompson's group lost one big investor for its exploration program because other places are more attractive than Alaska, he told the House Finance Committee in hearings.
However, if the tax rate were lowered, independents could ramp up exploration. Brooks Range Petroleum could put a second drill rig to work, and perhaps a third, Thompson said.
Bart Armfield, operations vice president at Brooks Range, believes independent explorers, with the right tax environment, would find enough new oil deposits, even if small ones, to flatten the oil decline.
There are plenty of prospects for small companies, Thompson said. "For small independents discoveries of 10 million, 25 million or 50 million barrels are just fine," he said.
Armfield said Brooks Range's owners, a group of small, mostly family-owned independents as well as Alaska investors like Thompson, previously had their core areas in places like Kansas. A few years ago, growth prospects at home were small for these companies, Armfield said.
Alaska was attractive because there were larger prospects, even if these were too small to interest the larger companies. However, higher state taxes have dampened Alaska's assure. Had companies known ACES was coming, they probably wouldn't have invested, Armfield said.
Independents priced out
High oil prices have hurt Alaska's competitiveness in the eyes of many potential independent investors."Now oil is at $100 a barrel and there are a lot of opportunities close to home in areas these people know and where they are comfortable," Armfield said. "HB 110 would make positive changes, however."
Great Bear Petroleum, an Austin, Texas-based independent that wants to experiment in drilling and producing from shale rocks on the North Slope, said it sees bright potential.
"We have an aggressive program that supports 250 wells per year for 20 years starting in 2013," the company's chief financial officer, Ryan Moynagh, told the finance committee.
If the idea pans out, about 150,000 barrels day, and perhaps more, could be produced from shale.
However, Great Bear must still test its concept that oil can be economically produced from shale rock on the Slope. The company has two exploration wells planned for next winter, and must still raise the investment capital needed for development. Improving the tax environment would help Great Bear, Moynagh told the finance committee.
"The easy conventional oil has been found. There is remaining large volume potential in unconventional plays, such as heavy oil, shale oil and gas," Moynagh said.
But costs rise on a per-barrel basis and the economic return will decline due to field sizes getting smaller, a challenging, high-cost operating environment, exploration becoming riskier and new exploration initiatives like heavy oil and oil and gas shale being expensive, he said.
"Discovery and development of Alaska's remaining potential would be significantly enhanced by improvements in Alaska's fiscal terms, such as those in House Bill 110," Moynagh said.
Support wanes
Alaska firms engaged in oil support work are more discouraged, however. Margie Brown, president of Cook Inlet Region Inc., told legislators she is worried about a political environment in Alaska that seems to chill private investment."We're seeing a lot of resistance to private investment to the point that even we are beginning to look for more investment opportunities outside Alaska. Capital moves to places with less risk, and I don't want to see that happen to Alaska," Brown told the House Finance Committee.
CIRI owns oil and gas producing properties in Southcentral Alaska and has a big stake in North Slope contractor companies.
"We've seen a dramatic decline in our Slope work. The magnitude of the decline is alarming," Brown said. "The status quo is not an option, and we're concerned about this talk of 'giving away' money to the oil companies. We do support the governor's efforts. His legislation is on the right track."
Ethan Schutt, CIRI's vice president for land and energy, said he was infuriated coming through Calgary recently and seeing the bustle of drilling and activity and the coming home to learn that the liquefied natural gas plant near Kenai is being shut down and the Agrium fertilizer plant next door, already closed, may be broken up and shipped to Nigeria.
Aaron Schutt, vice president for operations at Doyon, Ltd., echoed the comments by Thompson and Armfield. (Ethan and Aaron Schutt are brothers.) Schutt said his company, which is exploring Interior Alaska basins, lost an industry partner in exploring the Nenana Basin and has been unable to find a partners in the Yukon Flats basins, both areas with prospective geology but also high risks. Lacking an industry partner Doyon is leading these exploration efforts itself, so far.
"The exploration tax credits helps explorers at the front end, but these companies (the prospective partners) look at the life cycle of the project, which includes the tax," Schutt told legislators.
There have been small companies coming in to explore, but what's really needed are larger companies with the financial strength to put discoveries in production, and these are lacking, Schutt said.
Doyon is heavily invested in North Slope support work, with has three quarters of its corporate capital tied in a fleet of six drill rigs operated by subsidiary Doyon Drilling. About 1,400 people are employed in the Doyon's oil-related service companies, including 435 Doyon shareholders. A full 90 percent of Doyon's oil workers are Alaska residents, Schutt said.
Tara Sweeney, senior vice president of Arctic Slope Regional Corp., urged legislators to reform the state tax law.
"Oil and gas is the bedrock of our economy. It is directly one-third of the economy and it provides 90 percent of state revenues," Sweeney said.
The current tax is double and triple the petroleum tax rates of producing states like Wyoming and North Dakota, she said.
Arctic Slope employs 4,000 in Alaska, mostly in energy-related businesses, she said. ASRC Energy Services, an oil services subsidiary, is one of the state's largest employers. Petro Star, a refining subsidiary, markets fuel products.
ASRC also receives royalties from oil production from subsurface rights it owns in the Alpine field and has invested with other companies in exploration on the North Slope and in Interior Alaska. ASRC is now a partner with Savant Resources in the restarted Badami field, a small field east of Prudhoe Bay.
The corporation has been working to get investors interested in North Slope projects but has been unsuccessful so far, and the state tax is at least partly to blame, Sweeney said.
"The lost opportunities are just devastating. What we have now is not working," she said.
Major North Slope oil operators could not guarantee new investments would come if the tax is lowered but they said it is highly likely.
"My expectation is that if House Bill 110 passes, we will spend more money in production-enhancing activity, all aimed at getting more production into the pipeline," Claire Fitzpatrick, chief financial officer for BP Exploration Alaska, told the House committee. "We would be using our existing fleet of drill rigs to the maximum and perhaps bring on another rig. If we add another rig that's a hundred jobs."
Fitzpatrick said two major west Prudhoe Bay development projects that were stalled when the Legislature raised taxes in 2007, a gas partial-processing plant and a new drill pad, with 50 new wells, would very likely proceed if the tax were adjusted.
"This would add a significant amount of work. It would have a big effect on contractors," Fitzpatrick said.
Wendy King, ConocoPhillips' external affairs vice president, told legislators that Alaska has the highest oil production decline rate of any state in the nation, 36 percent since 2003.
In contrast, Texas has only declined about 1 percent and production is growing in many states. In North Dakota, Utah and Mississippi, production is up 30 percent, King said.
