Friday, March 29, 2013

State officials push for more engineering on large gas pipeline

Tim Bradner
Alaska Journal of Commerce

State officials are trying to prod North Slope producers and TransCanada to commit this summer to a more detailed design and engineering phase for a planned $45 billion to $65 billion Alaska gas pipeline and liquefied natural gas export project, Commissioner of Natural Resources Dan Sullivan told legislators in a briefing Wednesday.

Initiating the Pre-Front End Engineering and Design work will be the first major financial commitment by slope producers BP, ConocoPhillips and ExxonMobil, who are teaming with TransCanada Corp., a pipeline company.

“The governor has called on the companies to reach commercial terms among themselves to begin the Pre-FEED this summer,” Sullivan told the Senate Resources Committee in a briefing.

Deputy Commissioner Joe Balash, appearing with Sullivan before the committee in Juneau, said the pre-FEED will involve a substantial commitment.

“The budgets will begin to match the state’s own financial commitment to the project under the Alaska Gasline Inducement Act,” or about $500 million, Balash told the legislators. Alaska is contributing that amount under an agreement with TransCanada made in 2010.

“We’re now focused on ensuring that this summer’s field season is used” by the companies to gather data, which the companies regard as part of a Pre-FEED work. “If they don’t take advantage of the summer season we could lose a year on the project,” Balash said.

Much of the environmental data needed to support federal and state permit applications must be obtained in summer.

Sullivan said the companies are meanwhile making good progress in establishing alignment amongst themselves. At the governor’s request they reached a milestone in mid-February of making major decisions, he said, that include agreements to locate the gas conditioning plant at Prudhoe Bay in the same complex with an existing large field gas plant, that 42-inch pipe will be used on the 800-mile pipeline, and on an LNG production target of 17.5 million tons per year.

The south Alaska terminus of the pipeline and the port location for the LNG plant will be decided within several months, the companies told the governor in February.

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Sunday, March 24, 2013

The passage of SB 21; the legislative process

Deborah Brollni
Alaska Energy Dudes and Divas

I want to applaud the Senate for passage of SB 21, the Governor’s oil tax reform bill. I’ve sat and watched all the rhetoric over the Senate passage of SB 21, and have grown tired of the misinformation, and the temper tantrums by others who have not gotten their way. I’ve been on the front lines for oil and gas tax reform since March of 2009, and SB 21 Senate Finance Committee Substitute is a bill I can support, and I can look my children in the eye and be confident that they have a future in Alaska.

SB 21 is a bill that I have researched, and privately criticized throughout the process, and all Alaskans can thank our Senate for doing their due diligence in molding the Governor's bill into a better bill that this mother of two can live with. The legislative process in passage of SB 21 was transparent, and ALL Alaskans had and continue to have a voice. Any Alaskan could have called up any sitting Senate member on the Senate Special Committee on TAPS, Senate Resources, and Senate Finance and you would of found dedicated legislative staff available to answer your questions and concerns regardless of party. I personally did not care how long the Senate took in taking public testimony… testimony needed to be taken until. In addition, written public testimony taken throughout the process accompanies the bill as it has moved to the House.

I caution all Alaskans to avoid the noise of rhetoric as SB 21 works itself through the public process. You will continue to have a voice in the process, and I encourage you to contact those legislators who sit on House Resources, and House Finance and not be intimidated. House members work for all Alaskans and I promise you… you will find only helpful legislative staff ready and willing to help navigate you through SB 21, and answer your questions.

In working through the media slant, and the rhetoric the man you should be paying attention to is Tim Bradner with the Alaska Journal of Commerce. He is a long-time Alaskan who has reported on the Alaska Native Claims Settlement Act, first oil through TAPS, and ACES and the list goes on and on. He is not an emotional reporter, and he is balanced in his reporting. Also pay attention to Becky Bohrer with the Associated Press. I have watched her challenge legislators to get the answers, and her reporting this session has been non-emotional and spot on.

It is expected that SB 21 will pass out of House Resources this week. I encourage all Alaskans to testify, and don’t think for a second that your opinion does not matter. We are all Alaskans and we are all in this together in moving Alaska forward.

To my children. You have been so patient about your future. Alaska is your home, and I will continue to do whatever it takes to fight for it and give you hope

Friday, March 22, 2013

10M cubic feet per day possible at new Kenai gas field

Tim Bradner

The Endeavour jack-up rig is seen on a clear day in Homer on March 15. After months of delays and recent legal wranglings, the rig is set to move by March 26 either into temporary storage or to start drilling offshore near Anchor Point.

Buccaneer Energy says it expects to produce 9 to 10 million cubic feet of natural gas daily from two wells at its small Kenai Loop gas field and that permanent production facilities have now been completed.

While that’s not a huge amount of production, it is a welcome addition to tight natural gas supplies in Southcentral Alaska.

The company has been selling gas to Enstar Natural Gas Co. for $6.24 per thousand cubic feet, or mcf, at an annual average, under a contract that calls for Buccaneer to supply up to 5 million cubic feet per day, Buccaneer said in a March 15 press release.

Buccaneer said its production greater than 5 million cubic feet a day is being sold for high prices to other customers. Last November, the company contracted to sell half a million cubic feet of gas daily to an unidentified buyer who paid $15 per mcf.

“Gas prices in Southcentral (Alaska) reached $22 per mcf during the winter peaking demand period. This pricing underlines the critical shortage of gas in this region,” Buccaneer said March 15.

The Kenai Loop field, which is near the city of Kenai, was estimated by Buccaneer to hold 1.1 billion cubic feet of gas based on results of the first well drilled in 2012, Kenai Loop No. 1. The estimate is now being revised based on production data from the Kenai Loop No. 4 well last fall, the company said March 15.

Kenai Loop No. 3 was unsuccessful, while the well designated as Kenai Loop No. 2 has not yet been drilled.

Three wells drilled to date at Kenai Loop are from a single production pad at the surface but the bottom locations of the wells are far apart in the underground reservoir. The bottom of Kenai Loop No. 4 is about 1,800 feet from that of Kenai Loop No. 1.

Permits for Kenai Loop No. 2 well call for it to be drilled from a second pad, however. Drilling of another well is now being planned.

In other Alaska developments for Buccaneer, U.S. Coast Guard inspectors and officials of the Alaska Oil and Gas Conservation Commission are due to inspect the jack-up rig Endeavour, now at port in Homer, to complete the certifications needed for the rig to be moved either to a temporary storage site or to an offshore location near Anchor Point to drill for gas.

The rig is now scheduled to be moved March 26, according to Matt Clarke, deputy port manager for the City of Homer. The rig has already been given a certification from the American Bureau of Shipping.

The Endeavour is owned by Kenai Offshore Ventures, a joint-venture of Buccaneer, Singapore-based investment company Ezion Holdings, and the Alaska Industrial Development and Export Authority, the state development corporation.

Endeavour arrived in Homer last fall after being brought from Singapore on a specialized heavy-lift vessel, but its deployment to exploration sites in Upper Cook Inlet was delayed when it was discovered that work on the rig that was to be done in Singapore by Archer Drilling, the rig contractor, was not done.

Archer was terminated as rig contractor and subsequently sued Buccaneer claiming nonpayment. Buccaneer recently countersued.

Meanwhile, Spartan Drilling, which operates a second jack-up rig now in Cook Inlet, has been contracted to replace Archer on the Endeavour. Work continued through the winter to complete modifications on the rig so that it could obtain the ABS and Coast Guard certifications.

The Cosmopolitan prospect off Anchor Point is now the first drilling assignment for the Endeavour. Cosmopolitan is owned by Buccaneer and Bluecrest Energy, a partner, and is a known oil deposit with a shallower natural gas reservoir. The initial well will be to test the shallow gas deposit to determine if it can be commercially produced.

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Thursday, March 21, 2013

Senate passes oil tax reform

Tim Bradner
Alaska Journal of Commerce

State senators in Juneau narrowly approved a major rewrite of Alaska's oil tax law, passing Senate Bill 21 in a late-evening session Wednesday by a vote of 11-9.

The tax change will reduce state oil production tax payments by an estimated $4 billion-$6.3 billion over six years. Under the current law, known as Alaska’s Clear and Equitable Share, or ACES, the production tax payments would have been $22.3 billion over the six years.

Passed late Wednesday, the measure is aimed at stimulating new North Slope production and Trans Alaska Pipeline System throughput and still must be passed by the state House and signed by Gov. Sean Parnell.

Those approvals seem likely, although the House will likely add some changes. The House Resources Committee has scheduled SB 21 for its first hearing Friday, March 22.

Parnell proposed the tax change in January, although the Senate modified his plan. Parnell proposed a tax reduction more generous to industry in 2010, and while the House passed House Bill 110 the Senate did not accept it.

Parnell lauded the Senate passage of SB 21. “For three years, Alaskans have watched from the sidelines as competing jurisdictions eclipsed our state in terms of oil production and industry investment,” he said in a statement.

“The Senate has taken a bold action to increase production and fill the pipeline. I thank them for heeding the concerns of Alaskans, for understanding the urgent need for reform, and for acting in the interest of Alaska’s long-term prosperity,” Parnell said.

In a briefing following the vote, legislators acknowledged the risk they are taking.

“We’re taking a courageous step here, giving up benefits from tax revenues today to ensure we have revenues tomorrow to support public services, but we have to do this because we’re not competitive in the industry today,” state Sen. Anna Fairclough, Republican from Anchorage and one of the architects of SB 21, said in a briefing following the late-night vote.

“Alaska’s tax system is broken. It can be fixed but we all need to work together, and this is an important step along the way,” she said.

Sen. Cathy Giessel, another Anchorage Republican who helped develop the bill, said it includes a number of innovations. “We have something new, a Gross Revenue Exclusion that allows companies a 20 percent tax break on new oil they produce. They have to produce new oil to get the GRE,” Giessel said.

The Senate bill is being held one day on a procedural technicality, but committees in the House have scheduled hearings starting Friday on SB 21.

Parnell and Republican legislators have pushed for major changes in the Alaska oil tax for several years. Parnell argues the tax is too high and puts Alaska at a disadvantage in attracting industry investment. New oil development is booming in most parts of the world, but not Alaska, he has said.

Legislators are worried about the continued decline in production and falling TAPS throughput, which has been declining at 6 percent annually for several years and will average about 550,000 barrels per day this year.

The overall effect of the changes in the Senate-passed bill will be to reduce "total government take," or the share taken by government in taxes and royalties, to about 60 percent to 62 percent, according to modeling done by consultants to the Department of Revenue. The current tax law has total government take at about 74 percent.

The bill makes a number of changes from the existing law, mainly in jettisoning a controversial "progressivity" formula that hikes the tax rate, which is on industry net profits, as oil prices rise.

Major North Slope producers praised elimination of the progressivity formula. Dan Seckers, ExxonMobil's Alaska tax manager, told legislators in a Senate Finance Committee meeting late last week that the progressivity change alone was "a significant improvement."

However, Seckers and representatives of BP and ConocoPhillips told lawmakers they still thought the base tax rate in the new bill, 35% percent, was too high. "It still fails to move the bar," said Damian Bilbao, BP's vice president for finance for Alaska.

But Fairclough, listening to the producers, said the effective tax rate will be lower because of a new proposal in the bill: a $5/barrel production tax credit that will bring the actual tax rate down.

Barry Pullium, with Los Angeles-based EconOne, a consulting firm working for the Revenue Department, told the Senate Finance Committee before the bill passed that he estimated the production tax credit would lower the effective tax rate to 28 percent.

Pullium said he thought the major producers' remarks "are aimed mainly at trying to get a better deal."

Roger Marks, a retired state petroleum economist working for the Legislature, told the committee the tax changes put Alaska "in the middle of the pack instead of near the top" in comparisons of total tax take among major petroleum producing regions of the world.

Even a modest response from industry with new investment and production would more than offset the cost of the tax change to the state treasury over six years, Pullium told the senators.

Senators voting for the measure Wednesday night include Sens. Click Bishop, John Coghill, Mike Dunleavy, Fred Dyson, Anna Fairclough, Cathy Giessel, Charlie Huggins, Pete Kelly, Lesil McGuire and Peter Micciche.

Those voting against the bill include Senators Dennis Egan, Johnny Ellis, Hollis French, Berta Gardner, Lyman Hoffman, Donny Olson, Bert Stedman, Gary Stevens and Bill Wielechowski.

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Planning ahead; ConocoPhillips’ strategy for Chukchi Sea drilling in 2014 takes shape

Alan Bailey
Petroleum News

ConocoPhillips is moving ahead with plans for exploration drilling in Alaska’s Chukchi Sea in the summer of 2014, Mike Faust, the company’s Chukchi Sea exploration project manager, told the National Marine Fisheries Service’s annual Arctic Open Water Meeting on March 7.

“Our goal is to drill one well,” Faust said, adding that, although it might be possible to drill two wells during the summer open water season, the drilling of one well would meet the company’s expectations.

ConocoPhillips’ drilling target is its Devil’s Paw prospect, a 200,000-acre structure about 120 miles west of the coastal village of Wainwright. Devil’s Paw was previously penetrated by the Klondike well, drilled by Shell in 1989. And although that well did not encounter commercial quantities of oil and gas, ConocoPhillips clearly views the prospect as holding promise for a major oil find — the Devil’s Paw feature is similar in size to the huge Kuparuk River field in the central North Slope, Faust said.

Jack-up rig

Faust said that ConocoPhillips is contracting a brand-new, state-of-the-art jack-up rig from Noble Corp. for the drilling.

“They’re building six of them and we’re getting one of the rigs fresh out of the yard,” Faust said. “We’re not going to bring up a 30-year-old piece of equipment. We’re bringing up state-of-the art new stuff that is meant to work in the Arctic.”

The rig will have the latest features for safety and environmental protection, he said.

A jack-up rig is a floating structure that is towed into position at a drilling site, where tall legs are lowered into the water to the seafloor to lift the rig’s drilling platform above the sea surface, thus creating a rigid, fixed structure from which to drill. And because the bulk of the structure is above the water, the drilling operation transmits less sound into the sea than a similar operation in a floating drillship, Faust explained.

The new rig will be extremely strong; it is designed for use in the North Sea where wave heights can be significantly higher than anything seen in the Chukchi Sea, with the drilling platform typically 40 to 60 feet above the water, Faust said. And, while the rig is designed for use in water depths of 400 to 500 feet, the water at the Devil’s Paw drilling location will only be about 140 feet deep, he said.

One advantage of using a fixed jack-up platform for the drilling will be the ability to install a strong, heavy-duty steel riser pipe from the seafloor to the platform, rather than the more flexible type of pipe required for a floating drilling structure, Faust said. And that, in turn, enables the placement of the well’s blowout preventer on the platform, where it can be accessed easily, rather than in a mud-line well cellar on the seafloor.

As a further line of defense against a well blowout, should the surface blowout preventer fail, ConocoPhillips is placing a well capping device on the seafloor, to close off the well if necessary.

“That cap is in place before we start drilling the well and we drill through that,” Faust said.

Accommodating sea ice

The rig is not designed to operate in sea-ice conditions. But, although ConocoPhillips will use the rig at a time of year when sea at the drilling site should be clear of ice, there is the ever-present possibility of an unfavorable wind blowing ice floes into the area of the drilling operation.

To allow for the possibility of a threat from ice encroachment, ConocoPhillips has developed an ice alerts program, using satellite synthetic radar data showing sea-ice images that enable the plotting of sea-ice movements. This type of satellite technology can see through cloud, works in the darkness and images ice very effectively, Faust said.

Ice-alert circles

Essentially, the drilling team will plot three concentric ice-alert circles around the drilling location. Ice management vessels will investigate any ice that enters the outermost circle, about 50 kilometers from the drilling rig. If ice crosses the middle circle, no new drilling operations will start and the rig crew will begin preparations for a possible move from the drilling site. Once ice enters the inner circle, drilling operations will stop, the rig will jack down into the water and support vessels will tow the rig to safety, well away from the ice. If the jack-up rig has to move off site, the well would be comprehensively sealed at the sea floor and the riser pipe removed, Faust told Petroleum News.

The diameters of the ice-alert circles may vary from day-to-day, and even within a day, depending on the observed speed of ice movement and the nature of the drilling operation being conducted — the longer the anticipated time taken to finish an operation, jack the rig down and tow it from the site, the larger the circles become.

If uninterrupted, the complete drilling of a single well, from rig-up to rig-down, should take about 40 days, 30 days of which would involve the actual drilling operations, Faust said. So, with the Chukchi Sea open water season lasting on average 100 to 120 days, there should be more than enough time to drill one well, with the possibility of a second well, he said.

Heavy-lift vessel

ConocoPhillips will use a heavy-lift vessel to transport the drilling rig from Singapore, hopefully all the way to the Chukchi Sea drilling site, Faust said. However, given the vagaries of the ice conditions, it may be necessary to stage the rig near the coast to the south, with tugs towing the rig into position once the ice has cleared, he said. According to a Federal Register notice for an application for a marine mammal incidental harassment authorization that ConocoPhillips has submitted to the National Marine Fisheries Service vessels involved in the drilling operation will not arrive at the drill site until July 1 at the earliest, with drilling operations potentially taking place between July and October. A heavy-lift vessel will remove the jack-up rig from the drilling arena at the end of the drilling season, the notice says.

Staging location

The Federal Register notice also says that the location where ConocoPhillips may stage the drilling rig at the beginning of the drilling season, should ice conditions prevent the heavy-lift vessel delivering the rig all the way to the Chukchi Sea drilling site, is six miles offshore the Chukchi Sea coast, about 20 miles south of the village of Kivalina.

This choice of staging area location was based on proximity to infrastructure and the likelihood of ice-free conditions at the time when staging might be required, the notice says.

It became evident during the open water meeting that some Kivalina residents, presumably concerned about potential disturbance to subsistence hunting, are less than enthusiastic about the idea of having a jack-up rig parked near their village.

“We’re certainly listening to that and tying that into our plans as much as we can,” Faust said, commenting that, depending on ice conditions, one option might be to keep the rig on the heavy-lift vessel, rather than stage it.

Support fleet

ConocoPhillips anticipates needing nine vessels to support the drilling operation, with three vessels providing oil spill response support and the other vessels performing multiple roles, Faust said. Other than when used for shipping supplies, the support vessels will remain within five-an-a-half miles of the drilling rig, he said. Wainwright will act as a supply base for the operation, with personnel being transferred to and from the offshore by helicopter, and with a landing craft carrying perishable supplies to a supply vessel. After hearing worries about possible noise and disturbance in Wainwright, ConocoPhillips has built a road to an out-of-town helipad and is in discussion with people from the community about appropriate helicopter routes, Faust said. And, to minimize the number of crew changes required, the company is using a drilling rig with large crew quarters, he said.

Faust said that in working with local North Slope communities ConocoPhillips has been addressing concerns and taking advice based on traditional knowledge.

“Over the past four years the plan has changed pretty significantly, in many ways because of the feedback we’ve gotten in the communities and the kinds of observation that the hunters and whalers have told us about,” Faust said.

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Fairclough: tax bill process thorough

Steve Quinn
For Petroleum News

Sen. Anna Fairclough has never backed down from a heavy workload since joining the Alaska Legislature in 2007.

As a freshman member of the House, the Eagle River Republican served on seven committees.

Now as a newly elected Senator she is the only member to serve on the TAPS Throughput, Resources and Finance committees.

That places her on the front lines of the highest profile bill this session: Gov. Sean Parnell’s oil tax reform proposal.

Before the Senate Finance Committee approved of a committee substitute and forwarded the bill to the entire Senate, Fairclough sat down with Petroleum News to discuss oil and gas issues.

Petroleum News: Having sat on all three Senate committees hearing SB 21, how do you think the process went?

Fairclough: I think it’s been very fair. It’s been methodical. It’s been slow. The chairmen of the TAPS Throughput Committee as well as the Resource Committee has tried to make sure that all perspectives were allowed at the table and that methodologies could be changed. You could ask your chairman anything you wanted. Now if you’ve chosen to remain quiet until the very end, that creates, maybe in some people’s minds, the perception of not being inclusive. But both chairmen have been wanting to hear what the general public had to say about the proposed changes and secondary to the committee, what each committee member wants to talk about.

Petroleum News: What provisions of the bill right now do you think can help?

Fairclough: Well, the gross revenue exclusion is trying to provide that incentive and that connection between actual production and what Alaskans receive in a benefit in the form of a credit. So, I believe the governor’s proposal for gross revenue exclusions is trying to incorporate all that we’ve heard in the last two years, if not three years, on how we can tie production to credits.

Petroleum News: Now that’s still being worked out, the formula, and could be when it gets to the House as well.

Fairclough: Exactly. In the Senate Resource Committee, a concern was raised, would all oil eventually become gross revenue exclusion oil. In other words would all oil, production North Slope, or otherwise, start to receive that gross revenue exclusion and Alaskans would see a credit become a norm.

So again, there was conversation in the Resource Committee of whether there should be a time limit on that, and I support that. I assured the member who raised that issue that I would carry that forward in the Finance Committee. Again, when people drop amendments and don’t talk to people about those amendments, it’s hard to say yes, I support it or no I don’t until you have an opportunity to think about it for a little while.

It’s like the bill. In the TAPS Committee, I want to hear line-by-line, section-by-section and hear what the administration is proposing from their perspective. Sometimes the language doesn’t match the proposal. So when someone just lays an amendment on the table, whether it’s on the Senate floor or in a committee, and they haven’t had the courtesy to tell me why they are proposing it, versus just in the public forum, I don’t have a lot of opportunity to say that’s a good idea or no that’s not.

Petroleum News: Why did you set yourself up for TAPS, Resources and Finance; that’s quite a workload?

Fairclough: During organization, I wanted to be involved in TAPS because of the whole throughput issues, wanting to make sure that there was quality maintenance going on for the trans Alaska pipeline; wanting to make sure people took the time to understand the viscosity issue, the water issue in the line; pigging and why cleaning is important; the feeder lines; the agreements inside of who controls how much oil can be in there and who can put that oil in the pipeline. Those are all important things for Alaska. It’s our backbone. We need to ensure that backbone is functioning properly. That it allows appropriate access and that it’s maintained well.

Resources was an opportunity to learn and understand more about all different facets of our state, whether it’s fishing that might be important to medium size communities to rural communities that depends on our rivers and stream or the hunting aspects that are very controversial. As you know, when I served in the House for my first term, I replaced a member and was able to serve for one year on Resources. So this is a chance to expand that statewide perspective on issues really important to Alaskans.

House Finance works differently than Senate Finance, and I’ve always wanted to understand the economics of Alaska, to make sure Alaska has a vibrant economy so people can go to work, that there is quality education and one way to do that is make sure our fiscal picture looks healthy, so as you know for three years I’ve been trying to establish a fiscal plan. Finance would be my best opportunity to do that.

In the House, that’s the only committee you have. In the Senate, because there is a smaller group of people, you are a partner on a whole bunch of different committees. The time also affects what you can ask to serve on. Finance can meet mornings and afternoons, so I have to be careful on where those other committees position themselves. TAPS, Resources and Finance wound up that, for most of the time, I can manage all of them.

Petroleum News: Go back to TAPS for a second. You detailed a lot of what you want to be involved with and what you want to learn. What have you learned that maybe you didn’t in other hearings?

Fairclough: Well, people are saying there are more people at work on the North Slope than ever. That’s a true story, but what are they doing? People allude that it’s because of maintenance. That’s what seems to be true. There’s not a lot of well work in the form of new exploration. There is some exploration going that ACES contributed to. ACES is doing its work in some manner, in some functions. We have more, smaller explorers up on the North Slope, but they are not dropping those wells into the ground; they are not able, like the legacy fields, to produce oil in the short term. So Alaska’s best hope if we want to stem the decline, is to get that oil from the legacy fields.

So with TAPS I’m learning more. We’ve had presentations from Admiral (Tom) Barrett before on TAPS and talking about the waxing issues. In the last year, I know they thought a ball of wax was a pig coming at the station where it would have been discharged, so they have to go back and find it. That’s just new challenges that are happening because of the waxing situation. People may not know that Alyeska is currently exploring whether we can change this pipe to a cold line pipe in some way, and totally extract all water out of the oil and continue to move it without any freezing difficulties. It’s new technology to see if the trans Alaska pipeline can migrate toward new equipment, new technology. I believe they have Alaskans best interests at heart when it comes to the environment. They want to have a reliable line for the investment group, the producers who put oil into the pipeline. They are trying to be responsible to people who utilize the line and the people of Alaska.

Petroleum News: You mentioned a feature of ACES that’s working. What part of ACES is holding the state back?

Fairclough: The progressivity is a huge portion of that. I was OK with raising taxes on oil from 22.5 to 25 percent. But what was happening on the House floor and the Senate floor was what I consider a feeding frenzy. We just started turning knobs. We didn’t know what the unintended consequences were those last 24 hours. I went to the speaker (John Harris) being a freshman serving on the House and said, ‘I need a fiscal note. What happened here?’

We had just removed the ability for the legacy fields to monetize their expenses. Until they could get more information about what was qualifying as expenses, they wouldn’t allow them for a certain period. I had no idea what the fiscal consequence of those knobs that they were turning on the House floor. It turns out it was over a billion dollars more in take that was unanticipated that was coming in that we didn’t know we were going to get.

On progressivity, that was a concept the Palin administration had originally started at .2 percent, but in the end we took it to .4 above $92.50 a barrel. It was never modeled to the Legislature above $80 a barrel. So we had no idea of the consequences that night on the floor. So now the take is incredible. Alaskans are benefitting from that take, but industry is having a hard time from a global perspective competing for capital in those board rooms for Alaska, so there is less investment happening I think because of the progressivity take.

Petroleum News: Let’s switch to natural gas. HB 4 could be coming your way soon and pipeline discussions will replace oil taxes. What are your thoughts on the status of the state advancing a pipeline project?

Fairclough: It’s an incremental conversation in that Alaskans are most important to me. Whether you live in rural Alaska along the Kuskokwim or you live in Delta Junction or North Pole and the energy costs that are breaking economic opportunities for the people of Alaska. If we don’t have a resource that can keep people warm and keep the lights on, Alaska will eventually whither and different pieces of Alaska will die off. I hope in all scenarios that the fuel whether it’s propane or natural gas, that it can break off a backbone structure and make it to smaller communities so they can heat their families and keep their livelihoods whether its subsistence living or a refinery in North Pole that those economic opportunities are available at a reasonable cost. So with reasonable cost, another increment is what size should that pipeline be.

An argument and what I believe brought the bill (then HB 9) to its end last year was because the opposition was able to provide fear that the rates would be too high. We have to have that conversation, but coming from the Cook Inlet region, we had that conversation where the RCA told us the rates Marathon Oil were offering to Enstar were too high. RCA, in an attempt to protect the consumer, said no to those higher gas rates. Let me tell you, Marathon was right. RCA was wrong.

The consumers would have been better off today if we would have accepted those rates. Because it was something what we considered out of the norm, we said no, now we’ve invested huge dollars in a storage facility to try to keep the spikes down so we continue to supply Eagle River, East Anchorage and municipality of Anchorage.

So going back to the incremental, I don’t know if a 36-inch line is right or a 24 or something smaller. But I do know Alaskans are starving for those energy molecules. We need to quit arguing about how we get there and find the best way forward to accomplish the goal.

Another increment we need to look at is our window. Right now the Asian market is still looking for natural gas in the form of contracts. If Alaska isn’t on the board — now — this year, I think we miss our window for the long term. Then all we can look at is a state-funded, very small-diameter pipe to meet our needs, and I don’t know then what the cost is on the North Slope to those who hold the leases and whether it would be cost prohibitive to bring our gas online.

Petroleum News: So what do you think can be done to get on the board for the Asian markets?

Fairclough: I think we need to bring all Alaskans together. I understand why Valdez wants a gas pipeline to their terminus. I understand why Nikiski wants a terminus to their point. As an Alaskan, I don’t care. I want a cost-effective project that provides low transportation or at least reasonable transportation costs and puts those molecules into a market that Alaskans can benefit and I want a rate of return from somewhere outside of Alaska to help offset those prices for Alaskans. I don’t know where the right point is. I think the private sector needs to determine that. Nikiski has its pluses in that it has a plant established there. Can we retrofit it so that it can last? Can we extend the life of that facility? Creating a new whole one at two different points is going to be expensive. In the end, I don’t have a vested interest in whether it’s Valdez or whether it’s Nikiski. I have a vested interest that we just move forward.

For me, I would get it to North Pole, and then argue. We just need to get it across Alaska and coming. But we have to have the terminus point determined so we can actually establish the contracts. I would say to the naysayers, for those who don’t want Nikiski, I wish they would put Alaskans first and quit arguing for their own personal benefits; for those who want to naysay on the Valdez terminus point, put Alaskans first and stop it.

Let’s talk about a reasonable sized pipe that provides reasonable transportation. Alaskans in general have expectations that a 48-inch pipe is somehow normal. So anything lower than 48 inches may seem small. One of my questions to people who have been providing us information, is: is 24 inches standard for the rest of the world, or is it 36? I think it’s 24. We are comparing it to the Trans Alaska pipeline sometimes when we really need to think differently. Alaskans are used to elephant pools of oil and large construction. We need to make sure our glasses on right when looking at what a natural gas pipeline should look like.

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Tuesday, March 19, 2013

SB 21: Deborah's thoughts

Deborah Brolini
Alaska Energy Dudes and Divas

I cannot keep up with the emails, and phone calls over the past two days about my thoughts on oil tax legislation being decided in the Senate this week. So what are Deborah’s thoughts? I am supportive of SB 21 which is not what the Governor proposed in January. The Senate will vote tomorrow on a Senate Committee Substitute (CS) that all Alaskans can be proud of. The due diligence taken and the questions asked by Senators has molded the Governor’s bill into a better bill, and as a mother I can look my children in the eye. I do enjoy hearing the snide remarks, and comments about me that I am a shill for “big oil,” and let me tell you the oil industry and support companies are not beating down my door to help find me find a job, pay my mortgage or put my children through college. My energy blog, and advocacy for oil tax reform has always been about my children’s future.

Alaska’s oil tax system is broken and everyone can agree on that fact. However, the rub is how do we fix it? Currently, Alaska is writing checks to oil exploration companies that has not resulted in one drop of new oil into the Trans Alaska Pipeline (TAPS), or one penny into state coffers as a result of these tax credits.  There has been a lot of belly aching by some that the oil producers have not been exploring for oil. But, if you really sit down and think about it… the oil producers already know where the oil is.  So do we continue to write open-ended checks with no return on our investment?  As Alaskans do you write checks with nothing in return?  The answer is no.  Since 2007, the state has been giving away billions of dollars to explorers with no accountability, and SB 21 puts a stop to the madness.  SB 21 also offers solutions with a Competitive Review Board so that we are always on top of our global competitiveness without the politics and rhetoric of the day. 

SB 21 is legislation that I have watched closely, and I believe the process of moving this legislation has been transparent and fair. I am not on the Governor’s side, or the oil industry’s side. I’m on Alaska’s side, and giving my children the future they deserve. So, tonight I can go to bed knowing that the decisions made by Senators tomorrow will be whether they vote in favor of the Governor and Alaska failing, or will they vote to move Alaska forward. I pray they vote the latter.

Wednesday, March 13, 2013

New Oil Tax Proposal Lowers Base Rate

Senate Finance Committee bill still eliminates progressivity

Sending AK tech abroad; ConocoPhillips is using technology to increase production in Alaska, Outside

Eric Lidji
For Petroleum News

ConocoPhillips plans to spend some $2.5 billion in Alaska over the next five years using a collection of drilling technologies to mitigate declining production on the North Slope.

The largest producer in Alaska believes it can get some 35,000 barrels per day of incremental production from its three legacy North Slope oil fields by using 4-D seismic, coiled-tubing drilling and casing drilling to lower development costs and access additional resources, but as with any discussion of investments, the company insists it could do more if Alaska policymakers would make the fiscal regime more “competitive.”

The 35,000 barrels per day would stem production declines in Alaska to some 3 percent per year by 2017, ConocoPhillips’ Executive Vice President of Exploration and Production Matthew Fox said during the company’s annual analyst day on Feb. 28. And, Fox noted, if ConocoPhillips brings the Alpine West/CD-5 satellite into production as scheduled in the 2015-16 timeframe, the annual decline could drop to some 2 percent.

The goal of the $2.5 billion program is to use newly perfected techniques to suck additional oil out of Prudhoe Bay, Kuparuk River and Alpine, but with tax changes “we can see additional opportunities that we could take advantage of to grow production in Alaska and to grow production through the Trans-Alaska Pipeline System,” Fox said.

A pair of techniques

The program involves two techniques “honed” in Alaska.

The first brings down the cost of developing smaller oil pockets. In it, ConocoPhillips uses time-lapse 3-D seismic (or “4-D” seismic) to “illuminate pockets of oil that are in separate fault blocks or for whatever reason are not producing into an existing well bore,” according to Executive Vice President of Technology and Projects Alan Hirshberg. “We could access these pockets using conventional drilling, but it’s just not economic.”

With a small tool at the end of coiled tubing equipment, ConocoPhillips can “twist and turn through the rock.” This tool can turn more than 60 degrees over a 100-foot stretch of well, which “allows us to go right to these pockets that we found with the 4-D,” he said.

Using this technique, ConocoPhillips recently drilled an “octolateral” well at the Kuparuk River unit. The well is a vertical hole with eight horizontal wells snaking out in different directions to target bypassed deposits. “We’ve actually found eight different zones near this well bore that we could go and hook up using coil-tubing drilling. … That’s a very cost effective way to get at those zones that weren’t producing before,” Hirshberg said.

The second technique allows ConocoPhillips to access deposits once thought impossible to reach. Using “steerable drilling liners,” the company can drill through unstable reservoirs or low-pressure formations to reach deeper targets. “Normally when you have these well bore instabilities, if you try to drill and then come back and run casing, you can’t do it fast enough because the well bore collapses. So here, we’re actually using the casing to drill,” Hirshberg said. “And so the casings are already in place as we drill the hole. That gives us a mechanical method to be able to still access those resources.

Base development

It’s unclear whether the investment is any different than normal fieldwork.

Earlier this year, ConocoPhillips said it planned to spend “about $1 billion” in Alaska in 2013, a slight increase over its 2012 budget meant to accommodate CD-5 development.

“When you look at the base development speed and pace in the legacy fields, it’s the same (budget) as 2006,” ConocoPhillips Alaska President Trond-Erik Johansen said.

Between 2005 and 2011, ConocoPhillips spent $733 million per year in Alaska, on average, with a low of $666 million in 2007 and a high of $1.4 billion in 2008. At $2.5 billion, the new five-year announced plan would break down to $500 million per year, in addition to other activities in the portfolio, such as CD-5 and Chukchi Sea exploration.

ConocoPhillips believes legacy fields are the “key” to stemming declines, but has said it cannot make the necessary investments under the existing tax system and it believes the proposed revision — in Senate Bill 21 and House Bill 72 — “does not contain sufficient investment incentives for legacy fields to offset Alaska’s high cost environment.”

Made in Alaska

Meanwhile, ConocoPhillips is exporting its Alaska technology Outside.

The $2.5 billion Alaska program is part of a larger effort by ConocoPhillips to increase production across its portfolio by some 600,000 barrels of oil equivalent per day by 2017.

“Of the growth that we’re talking about, about half of it is going to come from oil production. … About 70 percent of that oil production comes from the Lower 48 and the rest of it is coming from Malaysia and projects in Europe,” Chief Financial Officer Jeffrey Sheets said during the meeting. “And so where it’s not coming from is places (where) we’ve had relatively higher tax rates, like Alaska.”

Wednesday, March 6, 2013

Enough for short term; Lalicker says Hilcorp expects to have sufficient Cook Inlet gas through to 2016

Alan Bailey
Petroleum News

Having completed the purchase of Marathon’s Cook Inlet assets at the beginning of February, Hilcorp is in the process of figuring out new gas supply arrangements with Southcentral Alaska utilities, with gas supplies in 2013 being the immediate concern, Hilcorp Energy President Greg Lalicker told the Alaska House Resources Committee “lunch and learn” meeting Feb. 26.

“We’ve gone out to ask all the domestic gas consumers what they need for gas and we’ve responded back to that already,” Lalicker said. “We should get those signed here fairly quickly, over the next two, three, four weeks.”

Hilcorp is also working on gas reserves certification for its new acquisitions, to be able to commit to gas supply contracts beyond 2013.

“I think over the next two to three months we’ll be contracting for the 2014, 2015, 2016 timeframe,” Lalicker said.

Re-activating wells

Marathon was primarily a gas producer in the Cook Inlet basin and the Marathon assets that Hilcorp has purchased include large gas fields such as the Kenai and Ninilchik fields. And, by reactivating some old gas wells, Hilcorp has already pushed up gas production from the old Marathon assets, Lalicker said.

Hilcorp’s immediate problem is that, with the gas production rate up a bit, the company has more gas than it needs to meet the immediate demand, he said.

In 2013 Hilcorp expects to deliver some 67 billion cubic feet of a total Cook Inlet gas demand that hovers around 92 to 94 bcf, with other gas producers in the basin needing to meet the balance of that demand, Lalicker said. Hilcorp also has the resources to cover that 67 bcf of demand for the next five years, he said. And, with total Cook Inlet gas production well below its peak of a few years ago, much of the region’s gas pipeline infrastructure has excess capacity to carry currently produced gas, he commented.

Not like the past

But Lalicker cautioned against expectations that somehow the Cook Inlet basin would return to a situation seen many years ago, with huge gas fields delivering an overabundance of gas.

“The gas business will never look like it did when the Cook Inlet was a new basin,” Lalicker said.

In fact, Hilcorp’s mode of operation is to seek small incremental production improvements in existing fields, adjusting its production to market conditions, rather than go seek big, undiscovered oil and gas pools for future development.

“We’re never going to go out there and say ‘let’s start drilling wells right now to produce gas five years from now or 10 years from now,” Lalicker said. “That’s just a waste of capital. We’re going to be proving up reserves just sitting out there waiting to be produced.”

Small projects

And rather than depending on one big development project, Hilcorp’s approach is to carry out many small projects, each project adding a little to production, but with the projects in total making a big difference in pushing up production and extending field life.

“As fields get old, they’re not dead. It just takes a kind of different mental approach, where you want to keep driving rate and reserves up,” Lalicker said. “That’s what we specialize in doing as a company: lots of little things.”

And, by using this approach, Lalicker said that he sees the possibility of anywhere from 15 to 25 years of life left in the existing Cook Inlet oil and gas fields.

Swanson River

As an example of Hilcorp’s “a bit at a time” approach to breathing new life into old assets, Lalicker described his company’s endeavors in the Swanson River field in the northern Kenai Peninsula, the first major oil field to start production in Alaska.

When Hilcorp took over that field from Chevron in early 2012 the field was producing 250 to 475 barrels of oil per day, Lalicker said. During 2012 Hilcorp sidetracked three wells and repaired eight wells, with field production climbing to 2,000 barrels per day by January 2013.

“This year we’re going to drill seven more wells and we have about 15 workover, recompletion projects,” Lalicker said. “It’s not inconceivable that you’ll see the rate climb another 2,000 to 3,000 barrels per day, by the time we’re all said and done.”

Lalicker said that Hilcorp plans to spend $300 million to $350 million on its Alaska assets in 2013, continuing the improvements in production that it has so far achieved in its Cook Inlet oil fields as well as taking the same incremental approach to boosting output from the gas fields it has acquired from Marathon.

“We are very optimistic from the acquisition of Marathon (assets) that over time we’ll be able to prove out more reserves and add more rate to those fields, just as we have from the other ones,” Lalicker said.

Lack of services

Lalicker commented that his biggest surprise since Hilcorp entered the Cook Inlet oil and gas industry has been the extent to which the oil and gas service sector in the region had declined, as activity in the basin has dropped over the past 10 years. In fact, the company had been unable to start ratcheting up oil production from its properties during the first six months of 2012 because of a lack of support services, he said.

As part of its Cook Inlet operations, Hilcorp is rebuilding that oil services base, Lalicker said.

There is also a lack of modern equipment, such as easy-to-move, high-spec drilling equipment — a whole new generation of rigs has emerged over the last 10 years, he said. Hilcorp has contracted two land-based drilling rigs to come up from the Lower 48 to work on the company’s Cook Inlet properties, and the company is also bringing up two specialized, purpose-built workover rigs for repairing offshore wells, Lalicker said.

North Slope gas?

Asked if he is concerned about possible future competition from North Slope gas if a gas line from the North Slope is built, Lalicker responded that he is in the Cook Inlet to make money.

“If someone else can produce gas in the Cook Inlet cheaper than what I can — I don’t care if it comes from the North Slope, I don’t care if it comes from imports, I don’t care if it comes from another discovery within the Cook Inlet — if they can put me out of business, I’m out of business. I just go and ply my trade somewhere else. … I shouldn’t be producing an inefficient resource at the expense of a more efficient source,” Lalicker said.

And, regardless of the gas situation, Hilcorp has plenty of oil opportunities in the Cook Inlet basin, he added.

Tax stability

And the tax situation for a Cook Inlet producer?

While the tax arrangements for the Cook Inlet have appeared to Hilcorp to be adequate, the company sees the quality of the field reservoirs as the most important factor in attracting it to the basin, Lalicker said. But, from a tax perspective, tax stability is crucial, he said.

“The main thing I need, care about and worry about is predictability,” Lalicker said. “What I can’t put up with is the notion that two, three, four years down the road the deal’s going to change, because then I’m going to stop investing because I can’t predict what’s going to happen.”

Read more: ___________________________________

Alaska Natural Resource Month

EDUCATORS: Request your FREE resource education kit from Alaska Resource Education. All the curriculum is included, and we are asking all educators to celebrate our natural resources not just during March but throughout the school year. Click here to request your kit.

Monday, March 4, 2013

Liquid Natural Gas Export License Announcement

Senator Cathy Giessel's March 4, 2013 Newsletter

Today, ConocoPhillips announced that they would not be applying for an extension of the Liquid Natural Gas (LNG) export license for the Nikiski LNG plant. The current export license expires on March 31. In the future, ConocoPhillips will consider reactivating the export license but only if local gas needs are met, leaving sufficient gas for export. Right now, that sufficient gas for export is not available. The LNG export plant is currently operational and will be held in “cold mode” which will allow a faster return to service should the availability of sufficient volumes of gas make that option viable.

The export license for the Nikiski LNG plant has been active for 42 years. It was the first, and only, LNG export plant operating in the U.S. Alaska’s export of natural gas was under contract with Japan, and the contract was faithfully met, without fail, for those 42 years. It is a sad day to see the Nikiski plant cease exporting. It is imperative that Alaska be not only competitive in the oil and gas development world but attractive as well. I am thankful for Hilcorp, Apache, Cook Inlet Energy and others who are working hard in Cook Inlet to develop our resources…for our citizens, businesses and the world.

Saturday, March 2, 2013

Joint Resolution No. 3 Endorsing ANWR Leasing unanimously passes the Senate

Urging the United States Congress to pass legislation to open the coastal plain of the Arctic National Wildlife Refuge to oil and gas exploration, development, and production; relating to oil and gas exploration, development, production, and royalties; and relating to renewable and alternative energy technologies.


WHEREAS, in 16 U.S.C. 3142 (sec. 1002 of the Alaska National Interest Lands Conservation Act), the United States Congress reserved the right to permit further oil and gas exploration, development, and production within the coastal plain of the Arctic National Wildlife Refuge; and

WHEREAS the oil industry, the state, and the United States Department of theInterior consider the coastal plain to have the highest potential for discovery of very large oil and gas accumulations on the continent of North America, estimated to be as much as 10,000,000,000 barrels of recoverable oil; and

WHEREAS the "1002 study area" is part of the coastal plain located within the North Slope Borough, and many of the residents of the North Slope Borough, who are predominantly Inupiat Eskimo, are supportive of development in the "1002 study area"; and

WHEREAS oil and gas exploration and development of the coastal plain of the refuge and adjacent land could result in major discoveries that would reduce our nation's dependency on oil produced by hostile foreign nations, help balance the nation's trade deficit, and significantly increase the nation's security; and

WHEREAS the state's and the nation's future energy independence would be enhanced with additional natural gas production from the North Slope of Alaska including what are expected to be significant gas reserves in the Arctic National Wildlife Refuge, and the development of those reserves would enhance the economic viability of the proposed Alaska Natural Gas Pipeline; and

WHEREAS domestic demand for energy continues to rise, and the United States continues to depend on imports of oil from foreign sources; and

WHEREAS development of oil at Prudhoe Bay, Kuparuk, Endicott, Lisburne, and Milne Point has resulted in thousands of jobs throughout the United States, and projected job creation as a result of coastal plain oil development will have a positive effect in all 50 states; and

WHEREAS North Slope production is declining; and

WHEREAS the Trans Alaska Pipeline System, a national asset that would cost billions of dollars to replace, would have its useful physical life extended for a substantial period if the additional reserves of recoverable oil from the coastal plain were produced; and

WHEREAS the Trans Alaska Pipeline System currently is being extended to leases at Point Thomson, an area bordering the Arctic National Wildlife Refuge, and oil produced in 23 the Arctic National Wildlife Refuge would only require the additional construction of a pipeline to Point Thomson to deliver oil to market; and

WHEREAS, while new oil field developments on the North Slope of Alaska may temporarily slow the decline in production, only allowing access to the state's coastal plain fields would enable the production volume of Alaska oil to increase to a significant degree; and

WHEREAS opening the coastal plain of the Arctic National Wildlife Refuge now 30 allows sufficient time for planning environmental safeguards, development, and national security review; and

WHEREAS the 1,500,000-acre coastal plain of the refuge makes up less than eight percent of the 19,000,000-acre refuge, and the development of the oil and gas reserves in the refuge's coastal plain would affect a limited area as defined by the United States Congress; and

WHEREAS 8,900,000 of the 19,000,000 acres of the refuge have already been set 06 aside as wilderness; and

WHEREAS the oil industry has shown at Prudhoe Bay, as well as at other locations along the Arctic coastal plain, that it is capable of conducting oil and gas activity without adversely affecting the environment or wildlife populations; and

WHEREAS the state will continue to strive to ensure the ongoing health and productivity of the Porcupine and Central Arctic caribou herds and the protection of land, water, and wildlife resources during the exploration and development of the coastal plain of the Arctic National Wildlife Refuge; and

WHEREAS the oil and gas industry has developed directional drilling technology that will allow horizontal drilling in a responsible manner by minimizing the development footprint within the Arctic National Wildlife Refuge, and this directional drilling technology may be capable of drilling from outside of the boundaries of the 1002 study area; and

WHEREAS the oil industry is using innovative technology and environmental practices in new field developments, and those techniques are directly applicable to operating on the coastal plain and would enhance environmental protection beyond traditionally high standards; and

WHEREAS the state recognizes that the economic prosperity of the state is dependent on available, reliable, and affordable energy; and

WHEREAS the state promotes the development of renewable and alternative energy resources and created the Alaska Energy Authority to assist the state in advancing new energy projects and technology; and

WHEREAS the Alaska State Legislature encourages the use of revenue from development in the Arctic National Wildlife Refuge for the development of renewable and alternative energy resources in the state;

BE IT RESOLVED that the Alaska State Legislature urges the United States Congress to pass legislation to open the coastal plain of the Arctic National Wildlife Refuge to oil and gas exploration, development, and production; and be it

FURTHER RESOLVED that the Alaska State Legislature urges that oil and gas exploration, development, and production activity be conducted in a manner that protects the environment and the naturally occurring population levels of the Porcupine caribou herd on which the Gwich'in and other local residents depend, that uses directional drilling and other advances in technology to minimize the development footprint in the 1002 study area, and that uses the state's work force to the maximum extent possible; and be it

FURTHER RESOLVED that the Alaska State Legislature urges the United States Congress to pass legislation opening the 1002 study area for oil and gas development while continuing to work on measures for increasing the development and use of renewable and alternative energy technologies; and be it

FURTHER RESOLVED that the Alaska State Legislature opposes any unilateral reduction in royalty revenue from exploration and development of the coastal plain of the Arctic National Wildlife Refuge and any attempt to coerce the State of Alaska into accepting less than the 90 percent of the oil, gas, and mineral royalties from the federal land in the state that was promised to the state at statehood.

COPIES of this resolution shall be sent to the Honorable Barack Obama, President of the United States; the Honorable Joseph R. Biden, Jr., Vice-President of the United States and President of the U.S. Senate; the Honorable Ken Salazar, United States Secretary of the Interior; the Honorable John Boehner, Speaker of the U.S. House of Representatives; the Honorable Nancy Pelosi, Minority Leader of the U.S. House of Representatives; the Honorable Harry Reid, Majority Leader of the U.S. Senate; the Honorable Mitch McConnell, Minority Leader of the U.S. Senate; the Honorable Ron Wyden, Chair of the Energy and Natural Resources Committee of the U.S. Senate; the Honorable Lisa Murkowski and the Honorable Mark Begich, U.S. Senators, and the Honorable Don Young, U.S. Representative, members of the Alaska delegation in Congress; and all other members of the 113th United States Congress.

The citizens of Alaska have spoken. Just in time for Energy Council.

Link to resolution


Alaska Contract Staffing

Friday, March 1, 2013

Senate Finance: SB 21 Oil and Gas Tax Reform (3/1/13)

9:00 AM Senate Finance briefing on the Senate Resource Committee Substitute

1:30 PM The Administration's consultant debriefs Senate Finance Committee regarding the Senate Resources Committee Substitute. Michael Pawlowski with the Department of Revenue debriefs the committee regarding the financial impacts to the state.

After the Wave: Rebuilding Japan's Energy Policy

Nearly 2 years after a massive 9.0 magnitude earthquake struck the northeastern shores of Japan causing a catastrophic tsunami and nuclear meltdown the country is rebuilding and redesigning their homes and energy systems.

Your Alaska Propane Energy Diva just returned from meetings with the Prime Minister of Japan regarding bringing Alaska's natural gas to Japan. Mary Ann is featured in this video special.

It’s time for Alaska to get back in the game on oil taxes

Bill Armstrong Guest Commentary

Gov. Sean Parnell has introduced new oil and gas tax legislation. The governor’s proposal is a huge improvement over the current law and is a major step in the right direction for Alaska — and Alaskans.

You may not have heard of Armstrong Oil & Gas, Inc., but we, and our affiliates, began extensive work exploring new oil and gas potential in Alaska in 2000. Since then, we have been responsible for the origination of three of the most recent stand alone developments in the state; two on the North Slope and one in Cook Inlet.

Our exploration efforts have provided significant revenues to the state, jobs for Alaskans, new oil production for the Trans-Alaska Pipeline, and new supplies of natural gas for Southcentral Alaska.

Armstrong is now one of the largest leaseholders in the state and one of the state’s largest investors. We are true believers in Alaska’s potential. But sadly, as we hear from so many of the companies that we try to encourage to invest in the state. Alaska is simply not competitive with other oil and gas provinces around the world.

There is a major energy boom happening in the United States, but Alaska is not benefitting from this boom. New drilling and completion technologies have been a godsend for the continental United States, and specifically to states where these technologies are being put to use. This energy boom, which is thriving in states like Texas, Oklahoma, North Dakota and Pennsylvania, has completely bypassed Alaska.

For the week of Jan. 7, Texas had 830 active rigs drilling, Oklahoma had 183, North Dakota had 174, and Pennsylvania had 80. Alaska had 8. Alaska’s constitution calls for maximum benefit from the development of natural resources, but how do Alaskans benefit if the state tax structure makes potential developers look elsewhere?

Oil production in Alaska is declining…steadily and relentlessly. And yet, the entire state economy is based on the income from this vast resource potential. It is a resource that created the Permanent Fund, returning hard dollars from production to every man, woman and child in the state. Alaskans must confront the fact that prohibitive regulations, onerous permitting and an unprecedented tax burden are scaring away the kind of investment necessary to maximize production potential that benefits all Alaskans.

This is bad news – but the good news is that these are man-made problems and therefore, they can be fixed. Gov. Parnell’s proposed tax law starts to do just that.

While not perfect, the governor’s changes are a major step toward increasing exploration activity and bringing substantial new investments to the state; investments that will increase production and generate new jobs for Alaskans.

The governor’s tax bill is certainly not a giveaway to “big oil.” It does not jeopardize the state’s balance sheet with tax credits, and it firmly makes the state’s fiscal regime competitive with the rest of the world. It is aimed at making Alaska provide maximum benefit from resource development to all Alaska shareholders — you and your family.

Alaska needs ConocoPhillips, BP and Exxon to aggressively conduct business in the state, but Alaska also needs new companies such as Pioneer, ENI, Repsol, Armstrong and others to compete and invest as well.

Gov. Parnell understands this, and he clearly has the state’s long-term best interest at heart. The choice for Alaskans is simple and clear. The current ACES tax burden has crushed development and new investments and will jeopardize Alaska’s economic health in the long-term. The governor’s proposed oil & gas tax changes will increase production, provide more high paying jobs, and increase revenues for the state.

Armstrong Oil & Gas is a true believer in Alaska’s energy potential, but we and the other new companies looking at playing a role in Alaska’s future need to see a stable tax structure we can confidently invest in.

It’s time for Alaska to get back in the game, bring drilling back to the state, and reap the economic benefits this will bring for all Alaskans. We look forward to being a part of an exciting new generation of development.

Bill Armstrong founded Armstrong Oil & Gas, Inc. in 1985 from the attic of his 100 year-old garage/barn in Denver. He can be reached at

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Revisions to oil taxes; CS moves from Senate Resources to Finance

—Kristen Nelson

A committee substitute for Alaska Gov. Sean Parnell’s oil tax bill has moved to Senate Finance, its third committee of referral. The bill underwent significant revisions in Senate Resources with major changes aimed at flattening the level of government take across different oil prices and focusing credits on production rather than spending.

The bill moved out of Senate Resources Feb. 27 on a party line 5-1 vote.

Resources Chair Cathy Giessel, R-Anchorage, said changes to Senate Bill 21 in the committee substitute were the result of concepts from the TAPS Throughput Committee’s letter of intent and from individual committee members, as well as testimony from stakeholders.

On the House side, where the Resources Committee has been hearing the bill, co-Chair Eric Feige, R-Chickaloon, said Feb. 22 the committee would set aside House Bill 72, that body’s version of the governor’s bill, pending action in the Senate.

The Senate TAPS Throughput Committee heard SB 21 and took testimony but did not amend it, instead sending suggestions for changes to the Resources Committee in a letter of intent.

In a Feb. 22 walkthrough of the committee substitute or CS, Giessel described the first change as the “35-five element,” which increases the base tax rate from 25 percent to 35 percent, offset by a $5 per taxable barrel credit for North Slope production.

Sen. Peter Micciche, R-Kenai, co-chair of the TAPS Throughput Committee, said the goal was to respond to complaints about the original SB 21 that the state’s take was too high at lower prices and to concerns that SB 21 was slightly regressive.

“Our concept was to create a slightly progressive system without using progressivity” while preserving “the simplicity of the governor’s proposal,” Micciche said.

The CS achieves those goals “by raising the base rate and then offsetting it with the per-barrel credit,” he said.

Micciche said the proposal in the CS improves “economics on the low end and the price where we hear companies evaluate projects. And I like the fact that it’s slightly progressive without using progressivity and a little bit more for Alaskans (than SB 21) but not in a way that puts us out of the ballpark on being competitive.”

Giessel said the committee “didn’t want to create a runaway schedule of credits which would incentivize spending and not production,” and said that is accomplished by raising the base rate and providing the $5 credit per taxable barrel. The $5 per barrel cannot be carried forward and must be used against the tax liability for the year in which the barrel was produced.

Progressivity introduced in 2006

The governor’s proposal eliminated progressivity, a major feature of the state’s current oil production tax, Alaska’s Clear and Equitable Share or ACES, enacted in 2007. Progressivity was introduced in 2006 when the state moved from a tax on the gross to a tax on the net under the Petroleum Profits Tax or PPT, and was increased in ACES.

Progressivity increases the tax rate as oil prices rise, making Alaska’s tax system more progressive than regressive. The other major portion of the state’s oil and gas taxes, its royalty, a fixed percentage of production, typically 12.5 percent, is a regressive feature, steadily dropping the percentage of the state’s share as oil prices increase.

Prior to PPT the state’s entire production tax system was regressive. A major objective of the changes introduced in PPT and ACES was to give the state a portion of the upside as oil prices increase.

Competitive issues

The Legislature’s consultant on the oil tax issue, Janak Mayer of PFC Energy, told the committee Feb. 22 that SB 21 as it stood was a tax decrease at higher oil prices, but because capital credits were removed, at lower oil prices it was essentially a tax increase. The crossover point, the point at which SB 21 becomes a tax increase over ACES, along with the regressive nature of SB 21, are what the CS tries to address, Mayer said.

With the CS you see “a much flatter level of government take” for base production for an existing producer at mature fields, but, he said, for new developments outside of existing fields, there is a slightly lower level of government take due to the gross revenue exclusion, a tax reduction for new barrels that is part of SB 21.

Overall, for base production, government take under the CS looks “very flat, very neutral and right on where I think a lot of people are looking to go in terms of overall levels of government take,” Mayer said.

But looking at the details of new developments, he said there appear to be “things one might want to look at further to see what can improve the way the overall picture works.”

Credit tied to production

Barry Pulliam of Econ One, the economist working with the administration, said the effect of the changes in the CS is to increase government take from the low 60 percent range to approaching 65 percent at oil prices above $80-$90 a barrel “and to reduce government take at prices below $80 a barrel down closer to what it was under ACES.”

He said the CS “bends the curve just a little bit and accomplishes at least what we’ve heard are the goals of providing some lower taxes at lower levels, getting closer to what ACES had, and a little bit higher at higher levels, closer to what you see on average throughout the world.”

Micciche asked if the change in the CS would help “in analyzing projects in the price range where companies evaluate projects?” Pulliam said it would by providing “additional support at the lower price range” without “getting into the messiness of a progressive net tax.”

Pulliam said one of the things he liked about the system under the CS is that “the allowance or the credit is tied to ... production. And the value of it increases at lower prices and fades away at higher prices where you don’t really need it.”

He said he looked at the impact on new developments. For a lower cost new development the government take “would be right about 60 percent ... a very competitive take” and while it isn’t as attractive for a higher-cost new development, “it’s more attractive under this proposal than it is under SB 21.”

“So I think it accomplishes a lot of what ... you’re looking to do and supports the producers’ economics in an important and meaningful way,” Pulliam said.

GRE expanded

Another change in the CS is the expansion of the gross revenue exclusion to include new oil in legacy fields. The gross revenue exclusion, or GRE, was a concept developed late in the last Legislature to provide tax relief for new oil.

It was included in the governor’s bill for oil from new fields at a 20 percent rate, and increased to 30 percent in the CS to balance with the increase in the base tax to 35 percent.

Joe Balash, deputy commissioner of the Department of Natural Resources, said the CS adds to ways in which a producer could qualify for GRE by adding new participating areas or expanded participating areas.

Leases are organized into units to manage multiple leases which contain an oil or gas reservoir, Balash said. Participating areas are the portions of the unit which are actually contributing to production — as determined through reservoir engineering and analysis.

New participating areas, he said, would be “parts of the unit that are not today contributing to production — and so by definition would be new production.” This would also be true of expanding existing participating areas, “again,” Balash said, “we’re talking about land that previously was not determined to have been contributing to production.”

Balash noted that the burden of demonstrating that barrels are new oil would lie with the company.

The CS also contains a wording change identified as an issue by Brooks Range Petroleum Corp., Balash said. A reference to new oil being from “land” that was not within a unit on Jan. 1, 2003, has been changed to read a “lease” that was not in a unit. Some of the leases Brooks Range holds today were formerly part of the Kuparuk River unit, but were contracted out of the unit and re-leased to Brooks Range, so “we had to be specific as to the lease, not the land,” Balash said.

Competitiveness review board

The CS also contains an element proposed by Sen. Lesil McGuire, R-Anchorage, creating a competitiveness review board.

McGuire said this is a proposal she’s made for a couple of years, based on her experience of 13 years in the Legislature and seeing how politicized oil and gas tax discussions become.

The board would include nine members: the commissioners of the departments of Natural Resources, Revenue and Environmental Conservation; the chair of the Alaska Oil and Gas Conservation Commission; and five public members appointed by the governor, including a petroleum engineer, a geologist, an economist, and two members, each nominated by different leading nonprofit trade associations representing the oil and gas industry in the state. The board would meet at least four times a year and “they would make recommendations to the Legislature about how to keep Alaska competitive,” McGuire said.

The Legislature would still be making the decisions, she said, but it would get a report from the board.

Exploration tax credit

Both Brooks Range and the Alaska Oil and Gas Association told the committee that they had concerns with the exploration tax credit, Giessel said, concerns addressed in the CS.

The current exploration incentive credits are set to expire in 2016 and the CS extends them to 2022. The CS also eliminates the requirement that an exploration well be three miles from any existing well.

Brooks Range told the committee that because they were working close to existing units, none of their exploration wells qualified for the exploration credit.

Balash told the committee that the CS eliminates the distance requirements for an exploration well to qualify for a credit.

Under the CS the commissioner of the Department of Natural Resources is required to determine that the well’s target is something new, actually a technical determination which would be made by the Division of Oil and Gas, he said.

That provides a frontend gate, Balash said, “to make sure that in fact something new is being looked at or looked for in order to qualify as an exploration credit.”

Then there is a backend gate, which requires accounting for the costs and sharing of information from the well with DNR to qualify for the credit and receive it.

“So there’s a check on the frontend and a check on the backend, making sure that we as a state get something” for what he noted had been described as a generous credit in which the state takes a certain amount of exploration risk along with the company.

Credit for Alaska manufacturing

Another element suggested by the TAPS Throughput Committee was a way to encourage Alaska hire and Alaska purchase, Giessel said, and is addressed in the CS with a corporate income tax break for Alaska manufacturing.

The CS includes a corporate income tax break for oil and gas sector goods made or modified in the state with a $10 million cap.

Deputy Revenue Commissioner Bruce Tangeman said this would be for “expenditures directly attributable to in-state manufacture or in-state modification of tangible personal property used in exploration, development and production of oil and gas.” He said it is “a very targeted tax credit” with a 10 percent corporate tax credit against expenditures going into the item.

Michael Pawlowski, advisor for petroleum fiscal systems to commissioner of Revenue, told the committee that one of the things heard consistently in the testimony on the bill has been “the impact of the high cost of doing business in Alaska on the oil industry,” and with the state’s net tax system there is a relationship between a “vibrant service industry and support industry” and a healthy oil industry. He said one of the attempts of this addition to the CS “is to increase the health of that sector and hopefully drive down costs.”

Pawlowski noted that the CS specifically excludes minor product modifications and inventory activities.

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