Friday, April 26, 2013

A calamity averted; Pump station upgrades said to prevent long Alaska pipeline shutdown in 2011

Wesley Loy
For Petroleum News

The operator of the trans-Alaska oil pipeline has been working for years to modernize pump stations along the 800-mile route.

The chief objective of this “strategic reconfiguration” program is to save costs.

But it has yielded other important benefits, says operator Alyeska Pipeline Service Co.

After an oil leak forced a pipeline stoppage in January 2011, new pump station equipment helped avert a shutdown of unprecedented length, a top Alyeska manager said.

The problem facing Alyeska was the rapid chilling of idle oil inside the pipeline. New pumps and power units installed as part of strategic reconfiguration were able to restart the flow, something the old “legacy equipment” probably couldn’t have done, said John Baldridge, Alyeska’s senior director of pipeline operations.

“At best, we probably would not have achieved restart until ... summer, meaning North Slope production would have been shut down for months, and the pipeline and its associated equipment likely would have sustained significant damage,” Baldridge said.

Such a long shutdown of Alaska’s most important physical asset would have been a financial calamity for the state.

Behind schedule, over budget

Baldridge’s remarks, signed June 14, 2011, are among extensive filings in a huge tariff battle now pending before the Federal Energy Regulatory Commission and the Regulatory Commission of Alaska.

The issue is to what extent the pipeline owners may recoup their strategic reconfiguration costs from rate payers. Two companies that ship oil on the line, Anadarko and Tesoro, argue the project was poorly conceived and has been plagued by mismanagement and massive cost overruns.

The state likewise is arguing a substantial portion of strategic reconfiguration costs should be disallowed from carrier rate bases. Higher oil transportation costs have the effect of reducing state royalty and production tax revenue, and state lawyers told legislators in February that hundreds of millions of dollars are at stake in the tariff litigation.

Regulatory filings show that strategic reconfiguration is years behind schedule, and far over the original budget.

The pipeline owners sanctioned, or approved, the project in early 2004 at $242 million.

Work to modernize three of the pipeline’s main pump stations has been completed. These are stations 3, 4 and 9. Work continues on Pump Station 1 and, according to the state, isn’t expected to wrap up until the end of 2014.

The owners and the state agree that strategic reconfiguration costs have exceeded $700 million so far.

The 2011 drama

Alyeska is an Anchorage-based consortium that runs the pipeline on behalf of owners BP, ConocoPhillips, ExxonMobil and Chevron.

While Alyeska acknowledges strategic reconfiguration has experienced some bumps, managers say the new pumps, turbine generators, electric motors and other upgrades are working as designed and are proving to be wise and needed investments. The program is allowing Alyeska to automate its pump stations, save maintenance costs and reduce the risks associated with the line’s aging original equipment, they say.

The new equipment really showed its value in early 2011, said Baldridge, who started at Alyeska in 1977, the year the pipeline began operations.

On Jan. 8, 2011, an oil leak at Pump Station 1 forced a three-day pipeline shutdown as Alyeska looked for the source of the leak.

A shutdown in the frigid Interior Alaska winter is a big problem for Alyeska, bigger than it used to be. Because of declining production from North Slope fields, the pipeline is moving much less oil than it once did, and the oil takes longer to reach the Valdez tanker terminal. If the warm oil stops moving, it can chill rapidly, inviting very serious problems.

Thus, the January 2011 shutdown was extremely worrisome.

“We were concerned that by stopping pipeline flow to contain the leak, the cold weather would preclude us from restarting the pipeline until the summer because wax would have built up, water would have separated from the crude oil, and ice would have built up in the pipeline at low areas and on the mainline valves,” Baldridge said.

During the shutdown, he said, the oil temperature dropped at several locations to a point where slush and ice likely were forming in the pipeline.

Meantime, North Slope oil field operations, limited to only 8 percent of normal production, faced “even greater jeopardy” with the potential for wells and gathering and transit lines to freeze and fail, Baldridge said.

Federal and state regulators fully supported Alyeska’s scramble to fix the Pump Station 1 leak and restart the pipeline, he said.

Crucial to the restart was the ability of the newly reconfigured pump stations to recirculate oil. That is, to move oil through the pump stations multiple times. This adds frictional heat to the crude.

After the restart, the pipeline would be shut down for another 58 hours to finish the leak repairs. This led to oil in the pipeline cooling even further, to “dangerously low levels,” Baldridge said.

Alyeska again used the new pumps and recirculation lines at stations 3, 4 and 9 to heat oil. After the pipeline restarted, it took more than three weeks to clear the line of cold oil and achieve normal operations, he said.

Baldridge said he was “convinced that the legacy equipment would not have been able to generate enough heat to restart the pipeline in the winter after the 2011 repair shutdown.”

Lawyers for the state, however, are skeptical. They argue much of Alyeska’s strategic reconfiguration was unnecessary and “imprudent.”

Read more:

Thursday, April 25, 2013

LNG trucks tested for Interior delivery

Elwood Brehmer
Alaska Journal of Commerce

Fairbanks Natural Gas is working on a plan to truck liquified natural gas, or LNG, from the North Slope to Fairbanks. The LNG would likely be carried in LNG-powered semi trucks, something the utility tried this winter, rather than the conventional pick-ups it uses for other operations.

If semi trucks hauling liquefied natural gas from the North Slope are going to save the Interior from $4 a gallon diesel for space heat, why not save the trucks from it, too? That’s the question the parties interested in managing the gas, or LNG, trucking operation are asking.

Fairbanks Natural Gas LLC recently purchased two LNG-powered trucks to explore the option of using an expanded fleet of LNG trucks in the future, its President and CEO Dan Britton said. The alternative fuel trucks have been hauling LNG to Fairbanks since they were put into service in mid-February with promising results, Britton said. They are the only two such trucks in operation in Alaska.

The utility currently supplies about 1,100 customers in Fairbanks with Cook Inlet gas trucked north from its Point MacKenzie supply station.

Fairbanks Natural Gas is one of the groups interested in managing the LNG trucking operation from the North Slope, which Britton said will require about 75 dedicated truck and trailer rigs.

“We’re looking to make sure all of the trucks (for North Slope trucking) are LNG powered,” he said.

Fairbanks Natural Gas also operates a small fleet of local service pickup trucks that run on compressed natural gas.

One hurdle that must be jumped is the cost of an LNG-powered truck. The long-range outfitted models Fairbanks Natural Gas ordered cost about $240,000 each, Britton said, or about $80,000 more than a comparable diesel truck. He added that tanker trailers equipped to handle Dalton Highway conditions are another $330,000, making for a very expensive rig.

A full fleet of LNG rigs would cost more than $42 million.

Britton said a financing plan for an LNG fleet was included in the proposal his company submitted to the Alaska Industrial Development and Export Authority at the beginning of the year.

The Legislature recently passed Senate Bill 23, which approved AIDEA to finance up to $355 million toward a gas liquefaction plant on the North Slope and the subsequent trucking of gas south.

Between 20 and 25 trucks per day are expected to run the Dalton Highway each way at the start of the LNG operation. If gas output reaches the state’s 9 billion cubic feet per year goal, that number could increase to 40 trucks per day in both directions.

Britton said he has been in contact with some large transport companies in the state who have told him they also have the ability to finance the purchase of new LNG trucks. He described a scenario in which a trucking company owns the trucks and hauls tankers owned by Fairbanks Natural Gas.

Fairbanks-based Golden Valley Electric Association also submitted an alternative to AIDEA to execute a North Slope-to-Fairbanks LNG trucking operation. Golden Valley President and CEO Cory Borgeson echoed Britton’s idea of equipment ownership if Golden Valley’s proposal is chosen.

“Golden Valley’s fairly certain that we would finance our trailers,” Borgeson said.

Golden Valley is using Fairbanks Natural Gas’s trucks as a basis for its investigation into LNG-powered trucks. Borgeson said the benefits of the trucks appear to be worthy.

He added Golden Valley would work in cooperation with whatever entity controls or needs gas with the best interest of Interior residents in mind, regardless of which proposal AIDEA decides to finance.

AIDEA officials have said a financing decision can be expected sometime in May.

LNG trucks offer two distinct advantages over their diesel counterparts. They reduce emissions by roughly 25 percent — a fact that could be of particular benefit to Fairbanks when adding an entirely new fleet of trucks to an area where stagnant, heavy winter air often leads to air quality issues.

The trucks also use a fuel that is cheaper than diesel. Britton said Fairbanks Natural gas is still gathering data on its LNG trucks, but forecasted that a fleet of the trucks could provide a “significant cost benefit to the transportation cost of LNG” in the long run.

In areas of the Lower 48 where the natural gas infrastructure is already developed and LNG trucks are more common, vehicle available LNG is about 30 percent cheaper than diesel. Those cost savings may initially differ in Alaska because the fueling stations need to be constructed, but at the same time the gas will not be sold on a traditional retail market to begin with.

The LNG trucks’ fuel economy is comparable to that of a diesel truck, and drivers have reported more torque for pulling uphill, Britton said.

While Fairbanks Natural Gas owns the trucks, he said his company hired Carlile Transportation Systems, Inc. to drive them.

Carlile CEO Harry McDonald said his company has an interest in being a part of an LNG trucking operation, but he sees multiple companies being involved.

“There will be plenty of trucking to go around,” he said.

Britton said he hopes a network of LNG filling stations is developed across Alaska so the trucks can be used throughout the state.

In the event a gas pipeline from the North Slope is constructed and the LNG trucking operation is no longer necessary, Britton still sees value in the trucks and tanker trailers. He said growing interest in LNG for powering mining work as well as using the trucks to haul gas to communities outside of a pipeline corridor should keep the trucks busy.

“The last fail-safe that’s building more and more is a substantial market for these trailers in other areas of the world, so being able to monetize those assets, if that’s what it comes down to, is a high probability,” Britton said.

Haul road challenges

The LNG trucks Fairbanks Natural Gas owns were special ordered from Kenworth trucks. Ken Leaf of Kenworth Alaska said the trucks had to be outfitted with a second 120-gallon fuel tank so they could make the 350-mile trip between the Southcentral and Fairbanks LNG fueling stations.

LNG is less dense than diesel meaning more fuel storage is required on an LNG truck to gain the same travel range as a diesel truck.

McDonald said the LNG trucks’ limited range poses a challenge; the two currently running would need a third fuel tank to make the one-way 500-mile run from Fairbanks to Deadhorse. His company’s diesel trucks typically carry enough fuel to make the round-trip without refueling, McDonald said.

Britton said Fairbanks Natural Gas plans on building LNG fueling stations in Coldfoot — roughly halfway between Fairbanks and the North Slope — and at the end of the road in Deadhorse. The stations would be similar to the $1.25 million stations it built in Fairbanks and at Point MacKenzie to test the feasibility of LNG trucks in Alaska.

The trucks still run on about 5 percent diesel to start combustion. Leaf said engine manufacturers are working on all-LNG designs that should be available within two years — about the same time the LNG trucking operation from the North Slope is slated to begin.

Leaf was part of a panel discussion on alternative fuel commercial vehicles at the Alaska Trucking Association’s April 25 annual meeting. Britton presented Fairbanks Natural Gas’s ideas and findings about LNG-powered trucks at the meeting as well.

Britton said the fact that the trucks still burn some diesel means they still present the same cold weather challenges as a traditional truck, but nothing out of the ordinary so far in their two months of operation.

“It’d be nice to have another winter under our belt before we went out and bought 50 (LNG trucks), but by all appearances they’re going to work fine,” McDonald added.

Britton noted that concerns with overtaxing the Dalton Highway have been alleviated by the state Department of Transportation and Public Facilities.

“What we’ve been told is LNG trucking won’t be a major impact to the roadway,” Britton said.

DOT officials have said more than 250 vehicles use the road daily during the peak summer season already.

Both Fairbanks Natural Gas and Golden Valley incorporated large LNG storage facilities in the Fairbanks area in their plans to AIDEA. Britton said a road closure, even for an extended period of time, may disrupt truck traffic but it wouldn’t affect LNG supply.

Fairbanks Natural Gas is in the early stages of site preparation for a 5.25 million gallon LNG storage facility on the edge of the city that it announced plans for in May 2012.

Elwood Brehmer can be reached at

Read more:

Monday, April 22, 2013

SB 21: Alaska’s oil rebate

Michael  "Fish" Pawlowski
Deborah Brollini
Alaska Energy Dudes and Divas

I’ve been pretty quiet this past legislative session, and many including my friends want to know “what do you think about SB 21?” What I will tell you is that I am pleased, and excited for Alaska’s future.

Alaska has been my home for 37 years, and I have had the same friends since I was 10 years old. All I’ve ever wanted was for my children to have the same opportunities my friends and I were afforded growing up. Growing up in Alaska is something special, and Alaska and my children’s future was worth fighting for, and I am unapologetic to those who got in my way.

You are already hearing the rhetoric “the oil giveaway,” and folks have gone so far as to try and rile support to put the issue on the ballot to rescind SB 21, the Governor’s oil tax reform bill. I find this action cute mainly because we have been giving away money to oil exploration companies since ACES passed and these companies have not added one drop of oil into the Trans Alaska Pipeline (TAPS), nor added a cent to our state treasury. Talk about corporate welfare.

SB 21 is an oil rebate not a giveaway. Alaska’s oil producers will have to prove that their activity on the North Slope has resulted in increased oil production. Alaskans should not expect that the oil production decline curb to rise. What Alaskans should expect is the decline curb to remain steady much like it did in the latter 90s. Alaskans should only expect a full pipeline, and an increase to the decline curb when offshore oil comes online in 2025, and not before then.

I ask those who detest Alaska’s oil industry, how do you enjoy your quality of life? How do you enjoy your yearly PFD check? How do you enjoy not paying an income tax? Like it or not Alaska’s oil producers are marching into their boardrooms fighting for Alaska, and the Alaska projects they are fighting for benefit you, your family, and your businesses directly, or indirectly

On April 14, 2013,  I watched the final vote on SB 21 go down at the Peanut Farm with my children. Yup, Alaska politics is a blood sport. After the vote we left the Peanut Farm and I cried all the way home. My tears were of rejoice for Alaska and my children’s future.  Alaska your future is bright. 

Thank you "Fish" for educating Alaskans and shepherding SB 21.


A mother's love and SB 21, Deborah Brollini


Friday, April 19, 2013

ConocoPhillips moves Mooses Tooth, Kuparuk rig, drill site

—Kristen Nelson

ConocoPhillips Alaska will increase its investments in Alaska in response to approval of Senate Bill 21, the oil tax change, the company said in an April 17 press release.

Trond-Erik Johansen, president of ConocoPhillips Alaska, said the company has always believed — and communicated —“that Alaska’s North Slope is a resource-rich area.”

“But developing oil from the North Slope’s legacy fields and new satellite fields has become increasingly challenging, costly and technology-intensive,” Johansen said. “In addition, our ongoing efforts to renew aging facilities and pipeline infrastructure in order to ensure long-term safety and operational reliability will continue to require significant capital investment,” he said.

The company said that with the improvements to the state’s severance tax system, it is planning new work on the North Slope, including: bringing an additional rig into Kuparuk this spring; working with co-owners on funding a new drill site on the southwest flank of the Kuparuk River unit; and beginning regulatory/permitting activities and progressing engineering for the Greater Mooses Tooth unit in the National Petroleum Reserve-Alaska.

Johansen called those “some examples of the activities ConocoPhillips plans to kick off in the near future to help bring new investments and produce more oil from legacy and satellite fields.”

“ConocoPhillips is here for the long-term,” he said. “The new oil tax bill makes the North Slope a more attractive business environment and should lead to more investment in oil producing projects than we have seen in recent years.”

No dollar totals available

ConocoPhillips Alaska spokeswoman Natalie Lowman told Petroleum News that the total value of the additional investment wasn’t available. She said in an April 17 email that the company is “still developing the workover schedule and work plan” for the additional rig at Kuparuk, and won’t be able to “accurately estimate the costs” until those plans are complete.

Further planning and engineering work needs to be completed for Greater Mooses Tooth and Kuparuk drill site DS-2S and those projects need to be sanctioned before the company can discuss estimates “for cost, hiring or production.”

“But we are now on a path to bring these forward for approval,” Lowman said.

ConocoPhillips reported its 2012 Alaska spending at $828 million, up from $775 million in 2011, with work on the Alpine West or CD-5 development in NPR-A accounting for much of the increase in 2012.

In legislative testimony on SB 21 additional drilling rigs were mentioned as one of the quickest changes companies could make to increase North Slope production.

Petroleum News reported in February that ConocoPhillips had applied for a U.S. Army Corps of Engineers permit to build a drill site and access road for the DS-2S project, which would develop a discovery ARCO made with the KRU 21-10-08 well in the late 1980s. ConocoPhillips appraised the discovery with the Shark Tooth No. 1 well in 2012.

Mooses Tooth is based on exploration work ConocoPhillips has done in NPR-A. The federal Mooses Tooth unit was formed in 2008, the Bears Tooth unit in 2009.

Read more:

North Slope operators say oil tax change will now spur projects

Tim Bradner
Alaska Journal of Commerce

ConocoPhillips will increase its investments on Alaska’s North Slope following the state Legislature’s action to lower the state oil production tax, the president of the company’s Alaska subsidiary said Wednesday.

One immediate step is to bring an additional drill rig to the Kuparuk River field, which ConocoPhillips operates, said Trond-Erik Johansen, president of ConocoPhillips Alaska Inc.

The company will also work with its partners in the Kuparuk field, BP and ExxonMobil, to develop a new drillsite on the southwest flank of the field. An exploration well, “Sharktooth,” was drilled in this area last year.

Johansen also said ConocoPhillips would begin permitting and engineering on its Moose’s Tooth Unit in the National Petroleum Reserve.

Moose’s Tooth is in the northeast part of the NPR-A and west of the Alpine field on the Colville River Delta, which ConocoPhillips also operates.

The company has made a number of medium-sized oil and gas discoveries at Moose’s Tooth in recent years with its partner, Andadarko Petroleum Corp.

Passage of the change in the state’s petroleum tax by legislators April 14 was important in encouraging ConocoPhillips to proceed with the projects, Johansen said.

“We have always believed that Alaska’s North Slope is a resource-rich area. But developing oil from the legacy (producing) fields and new satellite fields has become increasingly challenging, costly and technology-intensive,” he said in a statement.

Alaska’s tax on oil production was among the highest among major oil-producing regions, Alaska Gov. Sean Parnell had said, and a reduction of the tax was needed to spur new industry investment. Production has been declining on the North Slope by about 6 percent a year mainly due to flat to declining investment in new oil projects, Parnell has said.

“The new oil tax law makes the North Slope a more attractive business environment and should lead to more investment in oil-producing projects than we have seen in recent years,” Johansen said.

BP did not identify specific projects the company would pursue, but was upbeat about the tax change.

"As a package, this is an important step forward and will help us compete for more investment. This puts Alaska back in the game," said Janet Weiss, BP’s Alaska region president.

"We will change our long-term plans accordingly, seeking appropriate sanctions for additional activity,” Weiss said.

ExxonMobil was also positive on the change.

“We believe Senate Bill 21 provides significant progress towards making Alaska’s investment environment more globally competitive and could lead to additional investment and production,” company spokesman Patrick McGinn said.

“ExxonMobil is committed to Alaska and will continue to actively pursue attractive investment opportunities,” he said.

Read more:

Tuesday, April 16, 2013

Pondering Liberty; BP Alaska pegs offshore unit at 150 million bbls, touts island-building skill

Wesley Loy
For Petroleum News

BP Exploration (Alaska) Inc. says its offshore Liberty unit contains “approximately 150 million barrels of recoverable, high-quality light oil.”

That’s considerably more than the 100 million barrels long cited for the field.

The question remains, however, how to develop the field, located on federal leases in the shallow waters of the Beaufort Sea about 15 miles east of Prudhoe Bay.

BP drilled and tested Liberty No. 1, the discovery well, in early 1997. On May 2 of that year the company announced a commercial discovery estimated at more than 100 million barrels of recoverable oil.

In a Nov. 20, 2012, letter to Interior Department officials, John Minge, then president of BP Alaska, referenced the 150-million-barrel estimate and said a bold plan to tap the reservoir using ultra-extended reach drilling from land was off.

The letter wasn’t available when Petroleum News, in its Feb. 24 issue, reported that the Interior Department’s Bureau of Safety and Environmental Enforcement, or BSEE, had allowed BP two years to submit a new development and production plan for Liberty.

Rig remains standing

BP originally had hoped to put Liberty into production in 2011.

The development stalled amid technical problems with a gigantic rig Parker Drilling Co. built for the project, as well as federal regulatory complications apparently stemming from the Deepwater Horizon disaster in the Gulf of Mexico in April 2010.

Today, the rig remains standing on a pad at BP’s Endicott field.

Parker evidently is out of the picture. BP is the 100 percent owner of the rig, BP spokeswoman Dawn Patience said in an April 10 email.

In its Nov. 20 letter, BP requested a five-year suspension of production for the two Liberty unit leases to allow time “to properly develop the leases in a safe and environmentally sound manner.”

The letter said repeatedly that the delay would be in the “national interest,” as BP could develop the unit at least five years sooner than any other party.

BP has spent in excess of $1 billion to date toward development of the Liberty unit, the letter said.

Production island?

BP had touted the idea of drilling ultra-extended reach wells as a way to avoid building an artificial production island in the Beaufort and a subsea pipeline to bring the Liberty oil ashore.

The wells, BP said, would be the longest extended-reach holes ever attempted, going down two miles and bending out horizontally for six to eight miles to tap the oil reservoir.

Now BP appears to have abandoned the superwell idea.

“Pursuant the U.S. National interest and BP’s safety and operational standards, BP no longer sees this development concept as the safest or most environmentally responsible course of development,” the letter said.

BP further said other development concepts could increase recovery from the Liberty leases by as much as 15 percent.

The letter went on to discuss BP’s 40-year track record in Alaska.

“In fact, BP is the only company to have constructed and operated stand-alone drilling and production processing islands on Alaska’s North Slope,” the letter said. “In support of those successful and producing leases, BP has overcome major technical and commercial hurdles not unlike the current challenges confronting the development of Liberty. Despite these challenges, BP remains undeterred and committed to developing the Liberty Unit.”

Those Beaufort Sea production islands include Endicott, which is connected to land with a causeway, and Northstar. Endicott has produced 462 million barrels so far, while Northstar has produced almost 156 million barrels.

Nothing decided

No decision has been made on exactly how to develop Liberty, whether an island or some other approach, Patience said.

BP will continue to work on plans, and have conversations with the federal regulators, she said.

BP, in its letter to BSEE, offered a plan of operations with several milestones. The final milestone would have the company commence production by December 2020.

In its Dec. 31, 2012, reply, BSEE approved a two-year suspension of production for the Liberty unit leases, giving BP until Dec. 31, 2014, to submit a new development and production plan.

That plan would undergo a regulatory review, the agency said. BP could then submit an application for a second suspension of production, along with a schedule to achieve production by the end of 2020.

Read more:

Legislature approves oil tax change, other energy issues in final days

Tim Bradner
Alaska Journal of Commerce

The Legislature approved a long-argued reduction of the state oil and gas production tax Sunday, on the final day of its 2013 session.

Two other energy-related bills passed in the last three days of the session. One was a bill authorizing $350 million in state financing for a project to truck liquefied natural gas from the North Slope to Fairbanks, where residents and businesses now depend on fuel oil for space heating. Senate Bill 23, authorizing the financing, passed the Legislature on Friday.

Another is a bill expediting an in-state gas pipeline project from the North Slope that is seen as a fallback plan in case a larger industry-sponsored gas and LNG project fails to proceed. House Bill 4, making changes in the enabling statute for in the in-state line, passed the Legislature Saturday.

The tax change, in Senate Bill 21, is a bid to attract new industry investment. The current tax is considered among the highest in the world among oil producing states, and it has made Alaska uncompetitive, Gov. Sean Parnell has said.

The result has been flat industry investment in new North Slope development while investment in other oil producing regions has boomed. Production from North Slope oil fields has meanwhile been declining at about 6 percent annually for several years.

Parnell complimented legislators on weeks of study and public hearings on the measure.

“We are signaling to the world that Alaska is back, ready to compete, and ready to supply more energy once again,” Parnell wrote in a statement.

Democrats in the Legislature criticized the bill mainly because there was no guarantee by industry of new investment and an impact on the state treasury of several hundred million dollars a year at a time when production, and state oil revenues, are declining.

“This bill is a no-strings-attached giveaway that sells Alaska short and asks Alaskans to give up our savings, but it doesn’t demand anything in return,” said Rep. Chris Tuck, D- Anchorage, who is the House Minority Whip.

The change would reduce “total government take” of industry production profits from an average of 74 percent to about 61 percent, said Roger Marks, a former state economist now working as a consultant to the Legislature.

Taxes on industry would be reduced by about $500 million a year beginning in 2015 and increasing to approximately $1 billion a year in 2018, according to a fiscal analysis by the Department of Revenue.

However, even a modest new investment response by industry, the addition of four rigs drilling new development wells in producing fields, would offset the loss to the state treasury within a few years, the analysis concluded.

Senate Bill 21, which makes the changes, eliminates a complex “progressivity” feature of the current tax system, which causes tax rates to climb sharply at higher oil prices, and replaces it with a 35 percent base tax rate on net profits and a per barrel tax credit tied to the production of oil.

The 35 percent base tax rate is higher than the current 25 percent base tax, before the progressivity formula drives up the rate, but the higher base rate is compensated for by the per-barrel tax credit on production, state revenue officials explained in legislative hearings.

In producing fields the production tax credit begins at $8 per barrel in lower oil price ranges and declines as prices rise.

There is an additional 30 percent tax reduction for new fields or new projects within existing fields, Mike Pawlowski, a special assistant on fiscal policy to the state revenue commissioner, told members of the Finance Committee in a briefing.

On the in-state gas pipeline, HB 4 makes technical changes in the enabling statute that governs the project including authorization to keep commercial information from potential gas shippers and partners confidential, gives the state-owned Alaska Gasline Development Corp. access to funds to do more engineering on its project, Dan Fauske, president of the AGDC, has said in briefings to legislators.

AGDC is working on a 737-mile, 36-inch pipeline from the North Slope to Southcentral Alaska that could be built if the larger industry-led project is delayed.

The legislation gives AGDC access to $200 million set aside two years ago for engineering.

The money would be used to complete engineering and design work for an open season that is now planned for 2015, Fauske said.

The current plan is for the pipeline to move 500 million cubic feet a day, which is sufficient to meet demand in Interior and Southcentral communities, but the volume could be increased if a separate 42-inch pipeline planned by North Slope producers BP, ConocoPhillips, ExxonMobil and TransCanada, is delayed.

That project, which includes a large LNG plant at a Southcentral Alaska port site not yet designated, would move 3 to 3.5 billion cubic feet of gas daily.

If the larger project does proceed the AGDC project could become a spur line to serve Alaska communities, Fauske said.

State Rep. Mike Hawker, a Republican from Anchorage and one of the sponsors of the legislation, said the bill is really a “toolbox” of resources to build several spur pipelines that might be needed.

“This is not just about one pipeline. It also gives us the ability to participate in the larger industry pipeline if that project moves forward,” Hawker said. AGDC would be the instrument through which the state could provide financing and be an equity partner in the large project, he said.

On the LNG trucking project approved Friday, the Alaska Industrial Development and Export Authority, the state’s development corporation that is leading the project, expects it to lower energy costs in Fairbanks by about half.

Fuel oil is now used as a primary fuel for space heating in Fairbanks, the state's largest Interior city, and the expense has imposed severel hardship on home and business owners there, said Sen. John Coghill, a Republican of Fairbanks, who is Senate Majority Leader.

"The Interior is finally going to see some short-term relief through trucking natural gas," Coghill said. "This is not a final solution but it is an important first step as we work toward long-term solutions," mainly a natural gas pipeline, Coghill said.

The financing plan includes a medium-sized LNG plant on the North Slope, a re-gasification facility in Fairbanks and funding for a municipal-owned regional gas distribution system in Fairbanks.

Read more:

Tuesday, April 9, 2013

House Finance Committee laboring through oil tax bill

Tim Bradner
Alaska Journal of Commerce

JUNEAU — The House Finance Committee has spent five days laboring through Gov. Sean Parnell’s proposal to revamp the state’s oil and gas production tax, and committee co-chair Rep. Bill Stoltze, R-Chugiak says he hoped to move Senate Bill 21 on its way soon.

Stoltze said Tuesday he wants to get the bill out of committee and the House to give the Senate time to review changes made in the bill. The Legislature adjourns next Monday, April 15.

Major oil producers said in hearings Monday that passage of the latest version of Senate Bill 21 would be a big step forward in making Alaska more competitive for investment.

The new version, developed by the House Resources Committee, has a 33 percent tax rate on company net revenues and two sets of per-barrel production tax credits, one a sliding-scale credit for producing, or “legacy” fields, and a flat $5-per-barrel credit plus a 20 percent tax reduction for new fields or clearly-defined new projects in existing fields.

Damian Bilbao, BP’s Alaska vice president for finance, said the bill could be a “game changer” for the industry.

For BP, a key part of the bill, is that it “balances a higher 33 base tax rate (the current tax is 25 percent) with credits for production,” Bilbao told the Finance committee.

“The 33 percent base rate and a per-barrel allowance (tax credit) on a sliding scale, which is higher at lower prices and nonexistent at higher prices of around $160, is important to legacy fields like Prudhoe Bay,” Bilbao said.

“This allowance only applies to fields that don't qualify for the gross value reduction credit,” an additional tax reduction that is for new fields, but not the large producing “legacy” fields, he said.

The key advantage of the per-barrel tax credit is that it “links (tax) credits to production, not to spend as the failed ACES tax credits,” which are linked to a company’s capital investment, he said.

“The (production tax) credits in the latest version of SB 21 are balanced with a high base (tax) rate and cannot be delinked, he said.

Last Friday, State Natural Resources Commissioner Dan Sullivan and Joe Balash, the deputy commissioner, warned the House committee that the decline of production from the North Slope is accelerating.

Citing U.S. Energy Information Administration data, Sullivan said Alaska production declined 7.1 percent between 2011 and 2012 and 6.8 percent between 2010 and 2011, while 13 other oil producing U.S. states in EIA’s survey showed gains, with North Dakota increasing by 55.7 percent in 2012.

“Comparing year-end 2011 and year-end 2012, there were about 40,000 fewer barrels of oil per day flowing through TAPs. That is approximately 14.6 million barrels a year, or $1.46 billion in lost economic activity and value,” Sullivan told the committee.

In a presentation Saturday, Mike Pawlowski, the Department of Revenue’s tax advisor, said the cost to the treasury of the latest version of SB 21 could range from $680 million to $730 million in state fiscal year 2015 to between $1.08 billion and $1.13 billion.

However, scenarios of possible new oil developments developed by the revenue department showed the gain from new production, and revenues, offsetting the cost of the tax change by 2018.

Econ One, a consulting firm, told lawmakers that the addition of 40,000 barrels per day of new production would offset the cost of the tax.

This article appears in the April Issue 1 2013 issue of Alaska Journal of Commerce

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Wednesday, April 3, 2013

Mary Ann Pease Testimony to House Resources: SB 21

Mary Ann's April 1, 2013 testimony

Thank you, Co-Chairs Rep. Feige, and Rep. Saddler for holding this important hearing and allowing public comment on tax reform. My name is Mary Ann Pease, owner of MAP Consulting and board member for Commonwealth North, CWN Energy Action Chair, the State Chamber, former President of the Anchorage Chamber, and Consumers Energy Alliance.

I am extremely concerned about the staggering decline in oil production – We are down from a peak of over 2 million barrels a day to a little over 500 thousand barrels today and this rate continues the downward spiral decline of 5 - 7% per year during times of increasing oil prices.

Last Thursday, I attended the Alliance breakfast meeting and heard from Lydon Ibele as he described “My Bakken Adventure.” What a wakeup Call to the public and policy makers here in Alaska. Here are a few takeaways from that speech:

  • The rapid growth and production of the Bakken is incredible
  • ND has the 4th lowest tax rate at 9.8% and they are on a path of unprecedented prosperity and economic growth and development.
We in Alaska need to once again become number 1 in terms of oil production! Texas, ND., California and Alaska is now in 4th place in terms of oil production. You, the Legislature, have that opportunity to reform taxes and enable our economy to grow and prosper.

High oil prices coupled with new technology have created a boom in the oil and gas industry across the country and world. Alaska, however, is missing out on this boom, and it is no secret why: Alaska’s oil taxes are too high, and companies are taking their investment dollars elsewhere.

We need more oil in the pipeline to maintain jobs and strengthen the economy. The Alaska State Legislature must take action now to correct the problem.

The rates and progressivity structure of Alaska’s current tax regime provide a disincentive to attracting risk capital to the state as evidenced by declining production during times of high oil prices.

Increased investment through increased global competitiveness will enhance Alaska’s ability to fulfill its constitutional mandate to develop natural resources for the maximum benefit of the people.

We certainly need to show the oil and gas industry that we are open for business and serious about keeping, growing and expanding that business by making meaningful Tax Reform happen Now!

Tuesday, April 2, 2013

Governor Welcomes ANCSA Regional's Support

March 28, 2013, Juneau, Alaska – Governor Sean Parnell today released the following statement regarding ANCSA Regional Association’s statement of support and call for state leaders to continue moving forward on oil tax reform.

“I appreciate ANCSA Regional Association’s statement of support on our oil tax reform legislation, which will increase North Slope production and grow opportunities for Alaskans,” Governor Parnell said. “I echo the comments made by ANCSA Regional Association’s Chair Jason Metrokin, that increased resource production in Alaska will have tangible results for all Alaskans.

“We are committed to reversing the decline of oil through the Trans Alaska Pipeline System, to fuel our private sector economy, protect the state treasury and ensure a prosperous future for all Alaskans.”

ANSCA’s press release is available at: