Producers celebrate Slope as House takes up another tax hike

  • BP Alaska President Janet Weiss speaks at the Alliance Support Industry Alliance Meet Alaska conference on Jan. 19 in Anchorage. Weiss celebrated three years of no field decline at Prudhoe Bay and had her head shaved the next day after losing a bet over the production output. (Photo/Michael Dinneen/For the Journal)
  • BP Alaska President Janet Weiss celebrated three years of no field decline at Prudhoe Bay by having her head shaved Jan. 20 after losing a bet over the production output. Weiss donated the hair to Pantene for its program to craft wigs for cancer patients. (Photo/Courtesy/BP)
  • BP Alaska President Janet Weiss celebrated three years of no field decline at Prudhoe Bay by having her head shaved Jan. 20 after losing a bet over the production output. Weiss donated the hair to Pantene for its program to craft wigs for cancer patients. (Photo/Courtesy/BP)
  • BP Alaska President Janet Weiss celebrated three years of no field decline at Prudhoe Bay by having her head shaved Jan. 20 after losing a bet over the production output. Weiss donated the hair to Pantene for its program to craft wigs for cancer patients. (Photo/Courtesy/BP)

Alaska leaders of the largest oil producers in the state are pointing to the recently-reversed production decline curve as proof the state’s oil tax system is working, but House Majority leaders contend Senate Republicans have forced them to again propose an oil tax increase to ease the state’s projected $2.7 billion budget deficit.

BP Alaska President Janet Weiss, speaking at the Alaska Support Industry Alliance’s Meet Alaska Conference Jan. 19 in Anchorage, highlighted the fact that oil production at Prudhoe Bay has ostensibly been flat for three years despite the field’s age and low oil prices since then.

“It was an amazing year to see no decline. In 2015, production was 281,700 barrels per day, in 2016 it was 280,700 barrels per day and déjà vu, 2017 it was 280,040, and in my book that’s no decline in a 40-year field that was supposed to have a life of only 30,” said Weiss, who had her head shaved the next day after losing a bet on the Prudhoe production output for 2017.

Two days later, Weiss mailed her long black locks to Pantene, which has a program that makes wigs for cancer patients.

At the operational level, she said the company improved the field’s plant reliability and did more than 500 non-rig well work jobs along with adding another previously drilled 100 wells to the active Prudhoe count.

“It was like 100 wells coming online, so it’s the focus on the basics that enable extraordinary performance,” Weiss said.

ConocoPhillips Alaska President Joe Marushack highlighted in a separate talk that several large and numerous smaller prospects and oil projects in development on the Slope could add more than 400,000 barrels per day of production at their peak over the next six years.

Those projects include ConocoPhillips’ two Greater Mooses Tooth developments, at up to 30,000 barrels per day each; its Willow prospect with an estimated production capability of up to 100,000 barrels per day; Armstrong Energy’s Nanushuk project — to be taken over by Australian-based Oil Search in June — at 120,000 barrels; and Hilcorp’s offshore Liberty development at roughly 70,000 barrels per day of peak production.

“We’ve got a lot of promise. We’ve got a lot of really good things (going),” Marushack said.

He added that ConocoPhillips is working to add to that promise by drilling five exploration and appraisal wells this winter, its largest exploration program on the North Slope since 2002. It’s also the largest exploration program for ConocoPhillips this year across all the basins it operates, according to Marushack.

“All eyes are on Alaska,” he said.

Additionally, the company is preparing to shoot a seismic program across the roughly 250 square miles of state acreage south of the Alpine field along the east edge of the National Petroleum Reserve-Alaska that the company acquired last year.

Weiss also noted that the coastal plain of the Arctic National Wildlife Refuge, just opened to industry by Congress and the Trump administration, is a greenfield area that could hold enormous potential and lead to longer term prospects.

The U.S. Geological Survey estimates the coastal plain could hold upwards of 7 billion barrels of recoverable oil. She said BP would evaluate ANWR in light of the company’s global portfolio.

The prospectivity is on top of two years of increased North Slope oil production already, with a third expected for the current state fiscal year 2018 that ends June 30.

Production bottomed out in state fiscal year 2015 at 501,500 barrels per day but rebounded with two years of growth to 526,700 barrels per day in 2017. The Department of Natural Resources expects production to hit 533,000 barrels per day this year, according to the state Revenue Sources Book published this past December.

Both Weiss and Marushack said keeping the existing but oft-debated state oil severance tax in place is critical to continuing growth on the Slope and seeing the prospects to production.

Large producing companies on the Slope, such as BP and ConocoPhillips, were not eligible for the refundable exploration and development tax credit program that the Legislature ended last year, so they were not impacted by that change.

The tax, passed by the state in 2013, was the primary driver behind the current production increases, Weiss said, reiterating a point hammered home by industry and most Republican lawmakers in the state.

“We might be enjoying prices today that are over $70 per barrel but when you look at the fundamental — at BP anyway — we still think lower for even longer and staying competitive is very important,” she said.

“It’s the lowest cost basins that will get produced,” Weiss continued. “Not all the barrels in Alaska are going to be produced if we don’t make them competitive.”

Marushack said he is often competing within ConocoPhillips for investment dollars for Alaska projects, particularly against Lower 48 shale prospects, while his colleagues don’t continually have to worry about tax changes skewing project economics like he does.

“We have to have stable, competitive fiscal policies,” Marushack said.

House takes up tax hike

Meanwhile, in Juneau, the House Resources Committee took up House Bill 288 for the first time Jan. 22.

HB 228, introduced by Resources Committee co-chair Rep. Geran Tarr, D-Anchorage, would raise the minimum gross production tax on North Slope oil from 4 percent to 7 percent as a means of raising between about $220 million to $250 million of additional state revenue per year.

Tarr said that while the broader criticism of the Legislature consistently changing oil tax policy is generally fair, she is proposing the oil tax change primarily because Senate Republicans have stonewalled attempts by Gov. Bill Walker and the Democrat-led House Majority coalition to pass an income or payroll tax that would diversify the state’s revenue streams and play a role in dissolving the multibillion-dollar budget deficits.

Instead, the Republican-dominated Senate Majority has insisted on maximizing a draw from the Permanent Fund Earnings Reserve and relying on future budget cuts and increasing oil prices and production to balance the budget over several years.

However, the prospect of achieving the further cuts of $400 million to $500 million — roughly 10 percent of the current Unrestricted General Fund budget — necessary to meet the Senate’s plan is unclear at best. Deeper cuts to education, community assistance and social programs proposed over the past few years have been withdrawn after being met with stiff resistance and public backlash.

Tarr said House leaders feel “a little backed into a corner” in fighting for their constituents who do not want the reduced Permanent Fund dividends that come with utilizing the Earnings Reserve for government to be the only way out of the budget problems.

She noted she represents the poorest part of Anchorage and her constituents often rely on the PFD to pay for essential items.

“I could see some members of the industry thinking now’s the time to diversify and find some other sources (of revenue) so the finger’s not always pointed in their direction,” Tarr commented while outlining the bill.

She stressed that it does not change the underlying production tax structure, but it would shift the oil price-sensitive “crossover point” where the tax switches from a gross to a profit-based tax to a higher price band.

At its core, Alaska’s oil tax is a 35 percent net profits tax. On top of that is a sliding scale per-barrel credit that is $8 at prices less than $80 per barrel and fades out at prices greater than $150 per barrel. By applying the per-barrel credit, companies can achieve a lower tax rate at lower, less profitable prices.

The last primary layer is the gross minimum tax, also known as the tax floor. It is applied at lower prices — the crossover is usually between $60 and $70 per barrel, according to the Revenue Department — when the amount 4 percent gross value calculation exceeds the amount of the profits tax calculation.

For example, at $60 per barrel, the profits tax, with the per-barrel credit and deductible expenses applied, becomes a negative value. The 4 percent gross tax at $60 — minus oil transport costs that are never taxed — is approximately $2 per barrel and thus the oil is taxed on its gross value at that price.

Anchorage Republican Rep. Chris Birch said the tax debate often omits discussion about the royalty revenue of 12.5 percent to 16.6 percent that the state receives on each barrel produced and he can’t see how increasing taxes will spur production and by extension more royalty revenue.

“I’m almost struck by the old adage of ‘the beatings will continue until morale improves,’” Birch quipped.

Tarr said she shares his concerns about keeping production up but characterized the proposal as being part of the state’s larger “math problem” when it comes to balancing the budget. She also contended the 7 percent gross tax would be among the lowest in the country for states with a gross severance tax on oil.

The Resources Committee is expected to hear testimony from industry and Revenue Department officials starting Jan. 26.

Elwood Brehmer can be reached at [email protected].

01/25/2018 - 11:40am