'Faces of ACES' or 'Fleecing of Alaska?'

Posted: Monday, February 22, 2010

Fact: Every major oil producer in Alaska has bid for the right to take over production of Iraq's poorly maintained and under-producing oilfields in exchange for payment of less than $2 per barrel for their services. Even after a big tax increase, Alaska's largest producers still average about $20 per barrel for providing the same service.

BP partnered with a Chinese oil company to win the bid to redevelop Iraq's largest oilfield, the Rumaila field. BP will effectively be working under a service agreement that pays BP and its partner $2 per barrel for oil produced in excess of the Rumaila field's current 960,000 barrels per day. BP will be penalized if it does not hit its 2.85 million-barrel-per-day target within six years. On closer scrutiny, Wood Mackenzie, the same oil consulting firm Ralph Samuels hired to advise Alaska's Legislature in 2004, reviewed the contracts and estimated even lower returns for BP and partner. Wood Mackenzie suggests an ultimate net of approximately $3 billion for 16 billion barrels of production. (Source: Business Week, July 24, 2009)

Wood Mackenzie also told Business Week BP has admitted finalizing a similar contract in Abu Dhabi which would ultimately pay BP approximately $1 per barrel to produce their oil. (Source: Business Week, July 24, 2009)

John Mingé, President of BP Exploration, no doubt at least vaguely familiar with the above, when asked about proposals to roll back Alaska's new tax on oil, told The Anchorage Press; "it's a good start, but it's not enough to sustain Alaska's oil and gas industry."

Exxon and Shell have signed similar contracts with Iraq. According to The Wall Street Journal, Exxon and Shell signed a joint agreement to produce Iraq's West Qurna oilfield. Exxon and Shell's contract requires a $25 billion investment during the next seven years to ramp production up from 279,000 barrels to 2,250,000 barrels per day and another $25 billion for operating fees. They will be reimbursed for their pre-approved expenditures for the duration of their 20-year contract, not to exceed $50 billion. Exxon and Shell will operate the field on a break even (no profit) basis until the agreed increased production schedule of 2,250,000 barrels per day is reached. At that time, Exxon and Shell will be paid $1.90 for each barrel of daily production exceeding the original 279,000 barrels in production. (Source: Wall Street Journal, Jan. 18)

Shell won an additional contract on similar terms by partnering with Malaysia's Petronas Oil. Together they offered to redevelop Iraq's Majnoon oil field for $1.39 for each extra barrel they can extract above its current 45,000 barrels per day. (Source Wall Street Journal, Dec. 11, 2009)

In comparison, according to the Alaska's Royalty Accounting Department, ConocoPhillips paid severance taxes to Alaska on 99,581,335 barrels of Alaskan oil in 2008. According to ConocoPhillips stated net earnings on their Alaskan investments, ConocoPhillips profited in the amount of $2.3 billion. Dividing ConocoPhillips stated net profit by the same number of barrels reveals ConocoPhillips' net profit averaged $23.10 per barrel from its Alaskan interests in 2008.

By applying the same calculations to 2009, and averaging them in with 2008, we can calculate that ConocoPhillips has averaged about $19.62 per barrel in the two years following the Legislature's increase in Alaska's oil tax.

BP and Exxon refuse to disclose their profits from Alaska oil, but a reasonably accurate estimation of their profit margin can be extrapolated by applying the same North Slope per-barrel profit margin to the number of barrels on which BP and Exxon paid taxes in 2008. BP paid taxes on 79,496,721 barrels, placing their estimated profits for 2008 over $1.8 billion. Exxon paid taxes on 53,756,656 barrels, placing their estimated 2008 profits over $1.2 billion.

Alaska's oil makes Alaska's producers about ten times the per-barrel profit they're hoping to get from Iraq. Iraq doesn't beg them to spend for more production, they tell them to do it or get out. Alaska's oil fields have never been nationalized as Iraq's were when taken from BP in the 1970s, Alaska's oil is not in a war zone, and isn't likely to become the subject of a civil war between religious factions fighting over who owns the oil.

Alaska's three big oil producers spent between two and three billion dollars in 2008 and profited more than $5 billion. If Exxon and Shell reach Iraq's required production target, they will first spend and recover at least $25 billion for infrastructure and operating costs before receiving a dime of profit. Once their required production target is reached, they will be paid $1.90 per barrel on 1,971,000 barrels per day for a total annual payment $1.3 billion. If they don't meet their target, they may be sent packing.

Hardball works far better than caving to demands. Every company mentioned above was demanding Iraq pay two to three times as much for their service until Iraq said get moving or get out. Exxon is holding Point Thompson as a strategic reserve to develop if their refineries ran short of crude. When Alaska moved to take Point Thompson away Exxon finally started drilling.

Perhaps the biggest story here is in why Alaska's print media has never provided Alaska voters with coverage of any of the above referenced widely publicized stories. In light of the advertising campaign by the Alaska Support Industry Alliance, such information would seem crucial to the decision- making process of Alaska's voters. I hereby challenge Dan Fagan and the Industry Alliance sponsors of those "Faces of ACES" ads to debate the content of this article and their ads any time, any place, any audience.

• Ray Metcalfe is a former Republican state legislator from Anchorage.



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