Outside editorial: Praise governor for taking hard line with oil companies

The state's incentives prompt industry to do the work it promised

Posted: Thursday, December 04, 2008

The following editorial first appeared in the Anchorage Daily News:

The Palin Administration is taking some grief for taking a hard line with Exxon at the long-undeveloped Point Thomson oil and gas field.

The state won't let Exxon and its partners build an ice road to the field, needed for drilling this winter, because the companies no longer have valid drilling rights there. They have not done the drilling they promised, so the Palin administration is taking back the leases.

Point Thomson is not the only place the state has refused to let oil and gas leaseholders slide when they don't live up to their work commitments. The Palin administration has declared default on two oil and gas units in Cook Inlet, Kitchen and Corsair, because the leaseholders aren't making the progress they had promised.

For companies that do explore or drill as promised, the state offers generous financial rewards. Under the state's new tax structure, companies that invest in Alaska oil and gas fields get big credits, and possibly even cash refunds, on their severance tax bills.

The new severance tax is based on net profits. For every dollar spent on exploration and development, the company can deduct a dollar straight from profits. The state also gives back at least 20 percent of exploration and development costs through credits on the severance tax. Companies that don't owe severance taxes can collect a refund check or sell their unused credits to companies that do owe taxes.

With these tax incentives, the state is a major co-investor in Alaska's oil and gas exploration and development. At today's relatively low oil prices, the state underwrites about 45 cents of every dollar spent to get more oil and gas out of the ground. And when oil prices skyrocket, as they did earlier this year, the state's share can reach 70 percent.

Those financial incentives help explain why Alaska oil activity is holding up surprisingly well, despite the big tumble in oil prices.

BP recently sanctioned development at its Liberty field - a technically challenging, long-term commitment totaling about $1.5 billion. BP's capital spending on all projects in Alaska for 2009 will go up by a third, to $1.2 billion.

Pioneer Natural Resources and Eni have started production at Oooguruk, a 90 million barrel field offshore of the North Slope. Earlier this year, Eni committed to develop: Nikaitchuq, a $1.45 billion project that is expected to bring the 180 million barrel North Slope field on line next year.

Over the next five years, Chevron says it will spend $200 million on Cook Inlet oil and gas projects. Cook Inlet oil pays zero state severance tax because production from the aging fields is so small.

Anadarko will drill two and possibly three wells this winter, searching for gas in the foothills of the Brooks Range.

With the new tax structure and the decisions made by the Palin Administration, there's a common theme for Alaska's oil and gas industry. The state is saying, "You'll be rewarded if you explore and develop your leases in Alaska. And if you don't, we're not going to sit around waiting for the day you'll actually do the work you promised."

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