Consultant: Alaska is an expensive place for oil, gas business

Posted: Tuesday, April 20, 2004

ANCHORAGE - Alaska is an expensive place to do business but the high costs of working in the Arctic and moving the oil to market by pipeline and tanker are no surprise, says an international oil and gas consultant.

"Most people involved in the business recognize it must be one of the most expensive places to do business," said London-based Graham Kellas, principal consultant on petroleum economics for Wood Mackenzie Ltd. The consulting firm released its "Global Oil & Gas Risks & Rewards" report in September 2002. It ranked 61 producing areas worldwide.

The Alaska Oil and Gas Association negotiated partial use of the private report and last month distributed a summary to all 60 Alaska legislators.

"We're not asking them to do anything about it. It's just a reminder," said Marilyn Crockett, the association's deputy director.

Industry officials referred to the report, and Alaska's ranking, at a House committee hearing last week on oil production taxes.

"This study is another indicator that Alaska is seriously challenged to be competitive for oil and gas investment dollars," said Judy Brady, the industry association's executive director, in a March 12 letter to legislators.

The report is not a comprehensive ranking of all oil-producing regions in the world. Alaska was the only state included in the study, and none of Canada's oil-producing provinces were included either.

Kellas said other oil-producing states and the Canadian provinces aren't "regarded as a comparable business (to Alaska)."

The report also didn't include the major producing nations of Saudi Arabia, Kuwait, Iraq and Mexico because of lack of activity during the study period. The report also did not include Russia.

The report looked at actual costs and government takes from the value of remaining production at existing developments, based on oil selling at $19.50 per barrel in 2002 and increasing 2.5 percent per year.

Alaska ranked 36th of 61 for total government take and last in cost of capital, operating and transportation expenses (including pipeline and tankers).

The cost ranking covers only those North Slope fields that started production after 1995, Wood Mackenzie said. Those would include smaller developments, possibly producing oil at higher per-barrel costs than giants Prudhoe Bay and Kuparuk.

Wood Mackenzie put total capital, operating and transportation costs for a barrel of post-1995 developed North Slope crude at $12.52, averaging the expenses out to the end of production from existing fields. That is close to Alaska Department of Revenue numbers that put the cost of Fiscal Year 2005 production and transportation at $11.71 per barrel.

Qatar had the lowest costs in the Wood Mackenzie study, at $1.38 per barrel, followed by Iran at $1.61. Canada's East Coast was next to Alaska at the other end at $10.56 per barrel, followed by North Sea production the United Kingdom shelf at $8.79 and Norway at $8.76.

Separate from the cost of finding, producing and moving the oil, the federal, state and municipal take consumes a large chunk of revenues in Alaska, the report said, putting the state's 36th place ranking in the lower half worldwide.

The total government take in Alaska is about 64 percent, the study said. That compares to the lowest government take of 10.86 percent in African nation of Cameroon and the highest at 93.26 percent in Iran, according to Wood Mackenzie.

In Alaska's case, federal taxes are about one-third of the total, with the federal share increasing at higher prices while the state's share decreases, according to the Alaska Department of Revenue.

At $20 a barrel, the department calculates the federal take at almost 21 percent of the income after production and transportation costs are deducted, with the state and municipal combined share at about the same 40 percent as the producers.

But the producers' share and the federal take increase at higher prices, while the state's share falls. At $30 oil, for example, the state's slice drops to about 29 percent, with 46 percent for the producers and 25 percent for the federal treasury.

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