BP to Conoco Seek Alaskan Oil Comeback as Palin Tax Dies: Energy

Jan 08, 2014 5:42 am ET

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Jan. 8 (Bloomberg) -- BP Plc and ConocoPhillips, looking to benefit from the repeal of an Alaska oil tax championed by Sarah Palin when she was governor, are chasing enough crude to end the state’s two-decade-long slump in production.

Governor Sean Parnell signed a bill in May that wipes out a system backed by Palin tying oil producers’ taxes to the price of crude. The end of the “progressivity” formula has triggered investments from companies including BP and Conoco that may boost the state’s output by at least 90,000 barrels a day within four years and renew exploration in the nation’s second-largest oil reserve, estimated at 3.82 billion barrels.

The increase would signal a resurgence for Alaska, which tied as the country’s largest oil supplier in the 1980s and has since fallen to fourth place. Lower taxes may further enhance the allure of drilling for Alaskan crude, which can be exported with fewer regulatory barriers than other domestic oils, giving it an edge over booming shale plays across the lower 48 states.

“First Texas and North Dakota were producing more than us, and then we were behind California, and no offense, but we were like, ‘How can this be?’” Kara Moriarty, president of the Alaska Oil & Gas Association, said. “Now there’s a whole suite of projects on the drawing board and there’s a general sense that we’re back in the ballgame.”

Growing Output

Alaska’s Department of Revenue increased on Dec. 4 its forecast for oil output by 1.6 percent in 2017 to 492,200 barrels a day and by 3.9 percent in 2018 to 468,300. The outlook, while still showing annual drops in output through 2022, are conservative because they’re used to estimate revenue and exclude projects in their early stages, Michael Pawlowski, oil and gas program manager at the agency, said by telephone.

“We’re actually much more optimistic than that because we see the investments and they give us confidence that this is actual production coming,” Pawlowski said. “We expect a pretty dramatic turnaround.”

Output should start creeping back up by 2018, he said.

Alaska North Slope crude production was already up 2 percent in December to 567,600 barrels a day, the most since February, according to the revenue department.

Annual output has steadily declined since peaking at 2.02 million barrels a day in 1988 as the yield from existing wells shrank, outpacing new production, according to the Energy Information Administration, the Energy Department’s statistical arm. Reserves were still second only to Texas in 2011, according to an EIA report published Aug. 1.

New Flat Tax

Parnell’s More Alaska Production Act, or SB 21, effectively repealed the system adopted by Palin in 2007, replacing it with a 35 percent flat tax. The Palin levy began at 25 percent and rose with climbing oil prices to as high as 75 percent.

In the fiscal year ended June 30, 2008, the first full year of the Palin tax, the state took in $6.81 billion, more than triple the revenue from a year earlier. In 2015, the first without progressivity, revenue will total $1.7 billion, about even with the previous system since oil prices are forecast to drop, state projections show.

Oil taxes and royalties made up 92 percent of Alaska’s unrestricted general fund revenue last year.

Palin signed her tax structure into law in 2007, aligning herself with Democrats who said the extra revenue would help Alaska invest in new jobs. She proposed the changes after a federal investigation revealed that state policy makers may have been bribed to put the previous system into place.

‘Drill, Baby, Drill’

Less than a year after changing the tax formula, Palin ran unsuccessfully as the Republican Party nominee for vice president. “Drill, baby, drill!” became her rallying cry as she stumped for more domestic oil exploration. She has since campaigned for the Tea Party, a movement to cut government spending and taxes. Her political action committee didn’t respond to multiple e-mailed requests for comment.

Capital spending on Alaska’s North Slope has fluctuated between $2 billion and $2.5 billion annually since 2008. Investments in other parts of the U.S. have surged by more than 50 percent, according to a Jan. 24 report by Washington-based Econ One Research Inc.

“Oil prices skyrocketed and so did investment in the U.S., except for in Alaska, where investment has just remained stagnant,” Moriarty, president of the state’s oil and gas association, said. “We should have been booming here. We have the oil. Instead, in 2012, we were the only state where production declined.”

Palin Levy

The removal of the Palin levy alone should boost Alaska’s crude output by anywhere from 60,000 to 90,000 barrels by 2018, according to Pawlowski at the state Department of Revenue.

That’s not including Conoco’s 16,000-barrel-a-day expansion of the Alpine field on the North Slope or the drilling spurred by an Exxon Mobil Corp. line that will link 70,000 barrels a day from Point Thomson on the North Slope to Alyeska Pipeline Service Co.’s Trans Alaska Pipeline System, he said.

California, home to two-thirds of the refining capacity on the U.S. West Coast, isn’t banking on a renaissance in Alaskan oil while production surges in states such as North Dakota, said Gordon Schremp, a fuels analyst at California’s Energy Commission in Sacramento.

The state relied on Alaska North Slope crude delivered by tanker for 46 percent of its refinery feedstock in 1990, California Energy Commission data show. That share has dropped to 12 percent as refiners have more than doubled the volume of oil they receive by rail from other places including North Dakota, New Mexico and Canada.

Rail Transport

“We see refineries in California building more rail projects, so in the long-term, their intentions are to bring in even more crude by rail,” Schremp said. “Alaska sounds like it has big plans for exploration and production, but we haven’t seen the data to back that up yet.”

Facing more competition, Alaska North Slope crude’s discount has almost doubled versus North Sea Brent, the international benchmark, in the past two years. It slumped on Oct. 22 to the biggest gap versus Brent in 28 months.

The oil trades versus Brent because it typically competes against other waterborne crudes. Former President Bill Clinton signed legislation in 1995 that lifted a ban on exports as long as it’s transported by American-flagged and -crewed tankers.

Conoco said in October that it would consider exporting North Slope oil to markets in Asia should it trade $5 a barrel below Brent. The oil averaged a discount of $5.02 the following month, according to data compiled by Bloomberg.

Asia Bound

“I would be thinking about Asia if I were” Alaskan producers, said Doug Terreson, head of energy research in Fairhope, Alabama, for New York-based investment research firm ISI Group LLC. “What’ll happen is they’ll rail even more Bakken to the West Coast and that’ll displace the Alaska. It’ll mean exports.”

Conoco, Alaska’s largest oil producer, brought a new rig into the Kuparuk River field on the North Slope in May, adding 1,600 barrels of oil a day, and planned to install another one this month, Natalie Lowman, a company spokeswoman in Anchorage, said. The Houston-based company is also pursuing an 8,000- barrel-a-day drill site at Kuparuk in 2015 and a project that may add 30,000 by 2018.

“I can’t predict what future production is going to look like, but I know it’s going to look better with tax reform,” Lowman said.

Prudhoe Bay

BP, Alaska’s second-largest oil producer, said in June that it will add two rigs in the Prudhoe Bay field, with the first arriving by 2015 and the second in 2016. The London-based company is also exploring $3 billion worth of projects in Prudhoe Bay that may add as much as 40,000 barrels a day, Dawn Patience, a company spokeswoman in Anchorage, Alaska, said by telephone Dec. 10.

In April, a group of companies led by Spanish energy producer Repsol SA said it made three oil discoveries at wells on the North Slope and planned to resume exploration this winter following the passage of the new tax law.

Drilling investments spurred by the tax changes, most of which became effective this year, may “arrest the decline” in Alaska North Slope crude production by 2015, Terreson said.

“It’s going to take a little while for the companies to get the new regulations, go into corporate planning and decide how much they want to allocate, but it’ll lead to higher production,” he said.

--Editors: Dan Stets, David Marino