Thursday, October 13, 2011

ConocoPhillips maintenance spending up; new development down

Tim Bradner
Alaska Journal of Commerce

ConocoPhillips says it is spending a greater percentage of its budget to maintain aging North Slope oil fields this year and less on development of new oil.

Almost 70 percent of the company’s spending is going for maintenance, ConocoPhillips Alaska’s President Trond-Erik Johansen told the Anchorage Chamber of Commerce Oct. 10. That’s up from about 60 percent last year.

Ten years ago the percentages were almost reversed, with most of ConocoPhillips’ spending devoted to finding oil, he said.

Aging of the production and pipeline infrastructure on the Slope requires more upkeep but the diminished share of the budget devoted to finding new oil is of concern, and it’s mainly a result of the state’s current tax system that can take over 80 percent of any gain on a new oilfield investment, Johansen said.

Given the decline in oil moving through the Trans-Alaska Pipeline System, that’s a situation that should change. Oil moving through TAPS was down almost 7.5 percent compared to the year before, according to data from the state Department of Revenue.

Gov. Sean Parnell has proposed legislation that would change the state tax law, with House Bill 110. The governor’s bill has passed the state House and is pending in the state Senate.

“Our key problem is that oil production is dropping. We’re still spending a lot of money but it’s mostly on maintaining the steel. This doesn’t get us new oil,” Johansen said.

The urgency of this isn’t yet apparent to most Alaskans. Pipeline problems caused by the low amount of oil moving through TAPS are a worry too. During a shutdown of TAPS last January, “we were a day away from freezing up the pipeline,” when Alyeska Pipeline Service Co. workers got repairs made and the TAPS restarted, Johansen said.

Oil from any discoveries in the Chukchi Sea, which is where ConocoPhillips is now putting its new exploration dollars, will be 10 years or more in the future. There are good prospects for new oil within and near the existing producing fields, such as from viscous, or thick, oil deposits, or new satellite oil accumulations near the producing fields, but the state tax discourages this, Johansen said.

There will be an increase in new exploration on the Slope this winter, which is welcome news, but this won’t get new oil into the pipeline within five years, he said. By 2017 the TAPS flow may be so low that the pipeline will experience operating problems.

With a crude oil price of $115 per barrel ConocoPhillips’ return on new investment, what financial planners call the “marginal investment,” is only 10 percent to 15 percent.

Using this example, the state takes 75 percent to 80 percent of the profit on a new oil field investment, while the federal share is 5 percent to 10 percent, Johansen told the Anchorage Chamber.

At lower oil prices of $60 per barrel to $70 per barrel, the shares between the governments and industry is about 50-50, he said.

Norway, where Johansen is from, also has a high tax rate on oil, but not as high as Alaska under higher oil prices. At an oil price of $115 per barrel, Norway’s tax on profits from new oil investment is about 78 percent compared to about 90 percent in Alaska, he said.

Although Norway’s tax is high its fiscal system has been stable and unchanged, and the stability is something that companies can count on. In Alaska the tax system has been revamped several times in just a few years, Johansen said.

The main problem in the Alaska tax is a progressivity formula that escalates the tax rate as oil prices increase, he said. This formula has been in the tax law since Alaska switched to a net profits-type tax in 2006, but it was changed by the Legislature in 2007 so that the tax increased much faster as prices moved up.

This has created a situation where, “at high oil prices there is less profit to companies who are taking the risk,” on new investment. “This is counterproductive at a time when the companies need to be developing new, higher-cost and risky projects,” Johansen said.

This is one reason why the number of drilling rigs working to find new oil in existing fields, where the bulk of new oil is expected to be found in the near future, is remaining steady at about seven to eight working rigs, Johansen said. In North Dakota, in contrast, the number of rigs working has tripled with the higher oil prices.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.

This article appears in the October 2011 issue of Alaska Journal of Commerce