Friday, November 18, 2011

Budgets flat, down; BP, ConocoPhillips say tax change needed to make projects competitive

Kristen Nelson
Petroleum News

That was the message the Resource Development Council’s annual conference heard Nov. 16 from BP Exploration (Alaska) and ConocoPhillips Alaska, operators of the major fields on Alaska’s North Slope.

Trond-Erik Johansen, president of Conoco Phillips Alaska, and Claire Fitzpatrick, chief financial officer for the Alaska region and senior vice president of BP Exploration (Alaska), both said that if the state wants more oil in the pipeline, it needs to change its tax structure.

And both said that while high oil prices make investment attractive in other oil provinces, they don’t plan additional investments in Alaska in 2012.

Johansen said that while ConocoPhillips’ figures haven’t been finalized for 2012, he expects the company’s capital budget to be flat, about the same it was in 2010 and 2011. He didn’t give figures, but according to the graph he used in his presentation, 2011 spending was up slightly from 2010, both in the $800 million range.

Fitzpatrick said that a year ago BP said it would invest about $800 million in capital in Alaska in 2011, but she expects “our final capital budget will be $700 million” for 2012.

ConocoPhillips’ view

Johansen said throughput in the trans-Alaska oil pipeline has dropped another 7 to 8 percent since November of 2010, while production in the Lower 48 has continued to go up. While Alaska used to be the top producer in the United States, it is now number three after the Gulf of Mexico and Texas — and, he said, it looks as though Alaska will soon drop below California. With production in North Dakota is climbing. Alaska could soon be in fifth or sixth place, he said.

Why isn’t Alaska production increasing?

The “easy oil” has been drilled, Johansen said. The sweet spots were drilled when the fields were developed. In the early days it took a very short time and cost very little money to drill wells.
“And when you put them on, they produced a lot of oil and gas,” Johansen said.

There is a lot of light oil left on the North Slope, he said, but “it’s not easily accessible” as it was in the past.

For one thing, while initial water production was low, 3 million barrels a day of water are now being produced.

“We’re more a water production company than an oil production company,” he said, and that water has to be managed: It’s re-injected and used for waterflood.

The other big problem, Johansen said, is the current production tax system, Alaska’s Clear and Equitable Share or ACES. ACES takes away the incentive to invest at high oil prices, he said.

Cost of wells up

Johansen illustrated relative drilling costs at fields operated by ConocoPhillips — Kuparuk, Tarn, West Sak and Alpine — because ConocoPhillips has the data for those fields.
Using inflation-adjusted figures, he said the early wells in Kuparuk, West Sak and Tarn, cost about $2 million to $4 million a well and took about 10 to 15 days to drill.

“Today it costs four times as much and it takes four times as long,” because wells are no longer vertical or near vertical, but now are horizontal.

“And the bad news is that those wells produce less. So we need more of them.”

ConocoPhillips is still spending a lot of money drilling wells, “but we get less and less oil.”

With the same amount of money and the same number of rigs, there is less production out of each well bore, he said.

“My point is we need to drill more wells. We need to have more people working on more wells. That also means it needs to make commercial sense to us,” Johansen said.

State take an issue

With the progressivity in ACES, the higher the oil price the less incentive there is to drill for challenged oil, he said, compared to other places where taxes and royalties are flat. In North Dakota, he said, taxes and royalties are 55 percent. “Right now it’s about 85 percent in Alaska.”
Other places in the world also have high taxes, but when the price of oil goes up, taxes and earnings rise together.

“We take the risk; we want a fair share of that reward for taking that risk and that’s not happening” in Alaska right now.

Johansen said the question is when Alaska will benefit.

With reduced oil taxes, “If you look at it from a very, very short-term perspective standpoint, the state would see less revenue in the short term.”

But what about the long term, “What about the next generation?” he asked.

If there are “improvements in the fiscal regime here, you will see more action. … You will see more drilling; you will see more projects. … That’s just the way capitalism works.”

He said the question is whether the discussion will be “around short-term gains or are we going to talk about the long-term future?”

BP: prospects exist

Fitzpatrick said BP’s planned activity on the North Slope over the next couple of years “won’t begin to offset” the 7-8 percent decline the company sees in the fields it operates, fields which account for about two-thirds of current North Slope production.
What the company currently plans to spend, she said, represents “maintenance, repair work that needs to get done and also development work that currently makes economic sense.”

But the possibilities that exist include prospects “that represent billions of dollars in new investment and billions of barrels of new oil, billions of dollars of new revenue to the state and permanent fund and thousands of long-term, well paying jobs.”

“But these are prospects that do not make economic sense in the current business climate in Alaska,” Fitzpatrick said, and “will remain merely possibilities unless Alaskans and the oil industry work together to make changes to make these possibilities commercially viable and competitive.”

BP’s current plans include continuing the heavy oil pilot that’s on line, “but we’ll not be investing in any further heavy or viscous development beyond some studies over the next couple of years.”

There will be “significant investments in infrastructure and pipeline upgrades,” but capital spending on activities that produce more oil, such as drilling and pad expansion, are “limited or on hold.”

Production down

Production has dropped more than 140,000 barrels per day since ACES passed, Fitzpatrick said.

The Department of Revenue’s spring forecast predicts a 13 percent decline in statewide production between 2011 and 2020, she said, but the department “was also clear that 52 percent of the forecast volume in 2020 was from projects under development or evaluation, including projects in existing producing fields.”

She said she didn’t know what the next Revenue forecast will show, but BP is showing steeper declines over that period than it was a year ago.

“We’re looking at something like a 25 percent decline between now and 2020,” Fitzpatrick said.

BP’s focus is on sustaining infrastructure, improving the efficiency of its activities “and doing strictly preliminary work to keep things on line that might be economic then under a different fiscal regime.”

Only two things are keeping BP from sustained decline over the next nine years: Liberty, “which is on federal land and not subject to ACES,” and efforts to extract as much oil as possible from existing fields.

But it’s still a 25 percent decline, she said.

A lot of possibilities

“I have a lot of possibilities; I don’t need to go exploring for them,” Fitzpatrick said.

Some of those have had enough work done on them that they are ready for consideration when the investment climate becomes more competitive, she said. Among those are I Pad development at Prudhoe Bay; western region development at Prudhoe; S pad expansion with low salinity water flooding; and Sag River reservoir development at Milne Point.

Fitzpatrick said if those had moved forward over the past four years, “that 25 percent decline that I see would be essentially flat over that timeframe.”

“BP and our partners are poised to invest billions of dollars in new projects,” she said, but those projects can’t compete.

“Alaska’s got major reserves already discovered, but it’s running out of investors willing to spend the billions of dollars necessary to actually make those projects into investment,” Fitzpatrick said.

Two things are required, she said: “New projects have to compete for investment capital and existing activities must generate cash.”

“In this environment, new projects can’t compete for investment; and current activities don’t generate the cash required to actually fund them,” Fitzpatrick said.

“Make the economics less favorable, we do less,” she said. “Make the economics more favorable, like the governor proposed and House Bill 110 would do, we respond accordingly: More investment, more production.”