Alaska's Oil & Gas Industry: Speaking French
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November 30, 2009: Private sector economics in Alaska's North Slope oil basin have been redefined as we know it, and by of all people, a politician.
On November 22 in an opinion piece published in the Anchorage Daily News, State Senator Hollis French (D-Anchorage) argued that higher taxes, higher labor costs and lower production proves that Alaska's tax regime enacted two years ago has equaled prosperous times in ye' old oil patch.
To quote the immortal Dr. Seuss, “Think left, think right, think low, think high. Oh, the things you can think up if only you try!”
In December 2007, former Governor Sarah Palin and Lt. Governor Sean Parnell (don't blame me all of the promotional pieces read "the Palin/Parnell ACES Plan") along with a cast of legislative characters including Sen. Hollis French jacked up taxes on Alaska's oil producers.
The tax increase known as ACES (Alaska's Clear & Equitable Share) was originally proposed to be roughly $750 million on a barrel of $80 oil but ended up being more than twice that after lawmakers piled on while Palin and Parnell looked the other way.
In December 2007 after adopting ACES, state revenue commissioner Pat Galvin was quoted as saying, "I don’t expect to see a reduction in investment, given the attractiveness of Alaska.”
Two years later, with the wheels of investment capital clearly coming off, Sen. French stands before us arguing that ACES has been good for the state, good for the industry and everything couldn't be better.
I apologize to my readers but I apparently made the mistake of taking Spanish instead of French so you'll have to stay with me as I translate my way through this analyse economique.
First, Sen. French argues that Conoco Philips' financial statements reveal that the company collected almost 29 percent of its total worldwide profits from its Alaska wells, which make only 12 percent of its total production.
Although he doesn't list any time frames for his numbers, it would seem to me that if his numbers were at all relevant, after Conoco Phillips just released their 2009 third quarter statement where revenues are off $1.5 billion, or 71 percent compared with the same period in 2008, the folks at CP would be rushing to pump more oil from the North Slope.
But in fact it is just the opposite.
Four days before French published his opinion on Conoco's profitability on the North Slope, a Conoco executive gave her facts on Conoco's profitability on the North Slope at the Resource Development Council's annual meeting.
Helene Harding, ConocoPhillips vice President of North Slope operations and development announced that for the first time in 45 years the company will not drill a new well in 2010. Harding went on to say that the company is shifting its focus to federal lands, which have a far more attractive tax structure than state land.
In fact, you don't need to speak French to understand that most all major activity on the North Slope is happening on federal land which means the state receives little or no new royalty or tax revenues.
BP's Liberty field is a perfect example and represents one of the most technically challenging oil field projects in the world. A massive project that hosts world record infrastructure including a $350 million drilling rig that will be capable of drilling a 6.5 mile horizontal well. To put this project into perspective, it would be like standing at the Sears Mall and putting a drill bit through the front doors of Carrs grocery store on Huffman.
When BP announced the Liberty project on July 14, 2008, former BP Alaska President Doug Suttles made it very clear; “If this were on state lands, it’s doubtful we’d have been able to move it forward, Alaska is a very high-cost environment for the industry."
The facts are clear; this kind of risk taking would not be possible under the current state tax regime. In fact, with oil averaging $75 per barrel and factoring the progressivity component of ACES, the rewards aren't worth getting out of bed for let alone drilling one of the most challenging wells in the world.
Second, Sen. French argues that a sure sign that the state's new oil field tax is working can be found in the number of jobs that have increased on the North Slope.
Recent numbers from the state labor department indicate that employment in the oil industry is at record levels. BP, for example, employed about 1,650 people in 2006 and now employs almost 2,000," French argues.
So what could be driving North Slope employment?
Perhaps maybe new developments on federal land that has nothing to do with the state's new tax structure as French assumes. Or maybe French answers the question himself later in his own column, when he writes "in 2006 production took a serious hit when much of Prudhoe Bay shut down after long-neglected corrosion problems caused major gathering lines to spring leaks."
The increase in employment for BP has been due to integrity work being conducted on the 35 year old pipeline. This as you can imagine, has nothing to do with the attractiveness of increased taxes and everything to do with general maintenance.
By simply rattling off higher employment numbers without researching the reason for the actual increase, French shows he doesn't understand that the numbers he touts don't translate into revenue producing jobs for the state as he'd like readers to believe.
Third, while Sen. French admits that North Slope production has declined, he argues ACES hasn't really hurt oil production and in fact has had a positive impact on on attracting exploration and development.
The fact is oil production continues to decline on state leases and will continue to do so as companies move their focus towards federal lands on the North Slope as well as redirecting their finite investment dollars elsewhere such as the Gulf Of Mexico.
In addition, a good portion of the small amount of capital expense increase that French touts has in fact been committed over the last two years to the Denali Project associated with studying the natural gas pipeline.
And please...don't get me started on the gas pipeline fiasco, which again came to you courtesy of Palin, Parnell, French and friends.
Meanwhile back in the real world, during the RDC annual meeting, John Minge, President of BP Alaska, told attendees his company faced three big challenges in Alaska: declining oil production, higher costs and increased taxes.
BP recently announced they were cutting capital spending on the North Slope by 15% in 2010 and Minge also added that development of Alaska's huge reserves of heavy oil is not economic to develop right now given current oil prices and the existing state tax structure.
BP isn't the only company who has either slashed capital spending or simply abandoned plans to drill wells on the North Slope in 2010.
At the end of the day you really don't have to be fluent in French to figure out what is really going on up at the North Slope with an industry that generates roughly .90 out of every dollar state government spends and is responsible for one out of every three jobs in Alaska.
In order to correctly gauge the investment climate on the North Slope, Alaskans just need to be proficient with the new business math as defined by Sen. Hollis French as presented in his recent opinion column in the Anchorage Daily News.
Henceforth, the new algebraic equation for operating profitably on the North Slope is as follows:
Declining production <shrinking revenue to the state> + higher state oil taxes <higher costs and smaller margins compared to other investment opportunities> + higher non revenue generating labor costs <more maintenance> + reduced capital expenditures <reduced exploration thus reduced future revenues for the state> = profits on the North Slope and it's all due to ACES and higher taxes.
What is the French phrase I'm looking for?
Oh yeah...
sacrebleu!
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