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SB21 adds drops, not gusher in first months

Experts: Too soon to tell if production decline will reverse

Posted: August 13, 2014 - 11:10pm

Editor’s note: This is the third in a series of articles that will run through Sunday, Aug. 17, on Senate Bill 21, which voters will decide whether to repeal during the Aug. 19 election.

The Alaska Department of Revenue called this year “a watershed moment for Alaska oil production.”

Production in Alaska oil fields has been dropping since 1988, decreasing an average of 6 percent each year. FY 2013 saw a decline of more than 8 percent from the year before. However, FY 2014 saw a break in the troubling trend: Production was 0.13 percent less than the previous year — essentially flat from one year to the next, something unseen since 2002.

Proponents of SB21, Alaska’s reformed oil tax law, are touting FY 2014’s oil production as a product of the new tax structure. Opponents say there’s no way the new structure could already be having an affect on oil production. After all, the 2014 fiscal year began in July 2013 — before the More Alaska Production Act became effective — and ended June 30, 2014.

But experts say it’s a not as simple as that — some of the success of 2014 can indeed be attributed to MAPA, but some can be pegged to the state’s previous tax structure, Alaska’s Clear and Equitable Share, or ACES.

The success of MAPA can’t be determined by six months of production — the state will have to wait years before it’s clear if MAPA is working to increase oil production, the new structure’s primary goal, said Dan Dickinson, a private oil and gas tax consultant and former tax director for DOR.

“I don’t think it is correct to point to the flattening out in one year is due 100 percent to the tax change,” he said. “The kind of investment issues folks are looking at are multiyear.”

Production flattening for one year doesn’t mean decline is over, he added. The Department of Revenue’s spring 2014 10-year forecast predicts declines each year, though at a lesser rate than predicted in fall 2013, before MAPA.

“What’s going to be important is the long term,” Dickinson said. “If next year there’s a 1 percent decline, that doesn’t mean SB21 has failed. The change in taxes will ultimately affect investment, but it’s not going to be an instantaneous effect, and it’s not going to be a straight line.”

That post-MAPA investment is already taking place. DOR has learned of billions in new oil-producing projects either pledged or already begun because of the passage of SB21, putting Alaska “back on the map as an investment destination,” DOR deputy commissioner Michael Pawlowski said in an email.

The DOR has “difficulty about speaking about company specifics, since any information we get from companies is taxpayer-confidential information,” he said, but ConocoPhillips brought two new drilling rigs to the North Slope’s Kuparuk oil field last year and promises another, Pawlowski said in an interview. BP has two more on the way, and has pledged to put more money into drilling rather than maintenance, he said.

The two new ConocoPhillips rigs were enough to make a difference in FY 2014 production, Pawlowski said.

“The math is not that absurd to think that it could have done something to stem the decline,” he said.

That’s proof that SB21 is already attracting increased investment and doing its job, Pawlowski said but added that the entirety of the flat production cannot be attributed to SB21.

“Some of the moderation in decline was already predicted,” he said. The department forecasted a drop from 531,639 average barrels produced per day in FY 2013 to about 525,600 in 2014, a “relatively modest decline” of about 1 percent, Pawlowski said.

“The shift from that to zero you would attribute to SB21,” he said. “Did you go from 8 (percent, the production decline between 2012 and 2013) to zero just because of SB21? No. But somewhere in there is something because of SB21.”

Some new oil production takes years to come online, said Bill VanDyke, a private petroleum engineer and former director of the Alaska Department of Natural Resources’ Oil and Gas Division.

“You wouldn’t see (a return on) that in six months’ time or five months’ time,” he said. On the other hand, other, simpler projects — like fixing broken wells — can yield new oil in three or six months’ time — a short enough period to link some of 2014’s production to SB21, VanDyke said.

“You can do that immediately, but you’re not going to bring on a whole new development project,” he said. “That’s going to take years to bring online.”

He said there’s no way to prove how much 2014 oil is linked to MAPA, and how much is linked to ACES.

“I think it’s a mix of both — some of the activity was probably planned last year or the year before,” VanDyke said. “But at the same time there is activity taking place now that wouldn’t be taking place without SB21.

“(Neither side) can claim the whole truth one way or the other.”

Mark Myers, a geologist and former state natural gas pipeline coordinator, said he doesn’t believe any production can yet be claimed a result of SB21. The flat production between 2013 and 2014 is nothing out of the ordinary, he said. Myers is vice chancellor of research at the University of Alaska Fairbanks, but did not speak as a representative of the university.

“What we’re seeing here is things that were expected to occur,” he said. “The projects they added ... were already on the books. They’re the same activities by and large. They’re all within the normal range with what you would have expected.”

ConocoPhillips added its two new rigs to Kuparuk because of SB21, Pawlowski said. One began working in May 2013, the other in January 2014.

“Has that happened with enough time for people to see the effects in full? Absolutely not,” he said. “You haven’t seen the benefits of that yet.”

Myers said Alaska’s focus should be exploration and finding more oil, not just on increasing production. As long as we’re still sucking oil from the same fields, any increases are just a result of us removing it faster — it’s not “new” oil, he said. Besides, new oil can take as long as 10 years to come online, Myers said.

“The natural decline in the fields is such that it’s going to be very hard to see an increase without new fields coming online,” he said. “You’re not creating new oil, you’re producing existing oil quicker ... You have to create a bigger pie and you can’t do that when you have a finite, nearly depleted resource.”

It’s fair to say Alaskans “don’t know enough yet” to determine if SB21 is working — not enough time has passed, Pawlowski said. But the framework is now there to “create the right alignment of incentives between the state and the industry for long-term success,” something he doesn’t believe ACES accomplished. Under the old structure, he said, the progressive tax was such that “more production makes the companies worse off.”

“Under SB21, it’s a consistent relationship between state and producer over money going to production and benefitting from production” because of the system’s flat tax, Pawlowski said.

“Within a short period of time, less than a year since the SB 21 provisions are in place, we already­­ see the results of what a tax system can do that isn’t viewed as punitive by the industry, but aligns our interests,” he said in an email. “We see new companies come in to the North Slope, like Repsol, Caelus and Hilcorp. Hilcorp has already shown their mettle, by turning around the production decline in Cook Inlet, through additional investment. These companies bring capital and expertise to develop discoveries to produce new oil and produce more oil in places we already know are productive. We are seeing companies like Brooks Range Petroleum finally gain access to the global financing they need to develop their North Slope discoveries; capital that eluded them under ACES.”

VanDyke said he believes MAPA will eventually lead to new oil discovery and production as companies’ investment in the state increases.

“At the same time, it’s true that the old reserve base may or may not be depleted quicker, faster,” he said.

No matter if you’re for or against repealing SB21 on Aug. 19, MAPA’s worth has yet to be proven, Dickinson said. It would take years to determine if any tax structure is doing its job, he said. New projects that have increased production recently don’t necessarily indicate success or failure in the long term.

“Those kinds of things are going to affect month-to-month changes and year-to-year changes,” he said. “I think what everyone is focusing on is the longer picture.”

• Contact reporter Katie Moritz at 523-2294 or at katherine.moritz@juneauempire.com. Follow her on Twitter @katecmoritz.

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Art Petersen
3628
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Art Petersen 08/14/14 - 06:59 am
4
0
Post Hoc Ergo Propter Hoc

is Latin for "after this, therefore because of this." This logical fallacy is taught in high school composition courses. Nevertheless, that old mistake remains common, and never more so than lately in the SB21 debate. Those in the oil industry tell us it takes up to ten years to bring "new oil" on line. But that reality doesn't stop SB21 advocates from claiming that the giveaway law is already showing increased production. In this article, one person for SB21 is restrained at least somewhat from claiming a cause/effect relationship between SB21 and the current small improvement in figures for oil production. He says, "But somewhere in there is something because of SB21." That's far from good enough to retain this bad law. Those who believe in offering up even higher profit to spur small income of long duration encourage retention of SB21. To those more grounded in reality and who remember high school logic, SB21 is a high stakes gamble with Alaska's resources and Alaska's financial future. Yes on Ballot Measure 1 will put a stop to the fallacious arguments and to gambling Alaska's future on a losing bet.

Karl Ashenbrenner
3082
Points
Karl Ashenbrenner 08/14/14 - 08:16 am
2
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New production

is supposedly because of 2 more rigs at Kuparuk? Supposedly those were exploration rigs not production so how has that affected the increase in production? Could it be the oil companies just pumped more oil in order to try to fool folks into voting no in the tax initiative?

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