Posts
Over the last year I have maintained a this blog as a commitment to Alaskans to provide them with a view that may be different than what they are hearing from the industry or government. My goal was to comment primarily on Alaska energy issues. The focus of the blog has been on oil and gas taxes, short and long-term fiscal responsibility, and gas pipeline issues. Because of personal obligations I may not be able to contine to comment on Alaskan issues, but I will attempt at least one additional article that will propose a more comprehensive plan on how to move the State of Alaska forward. It will include a discussion of a short and long-term fiscal plan, fiscal certainty, oil and gas taxes, a large diameter gas pipeline, in-state gas needs and Point Thomson. Some of the proposal will not be as specific as I would like because detailed information is lacking; other proposals will be quite specific. Regardless, I will recommend sufficient direction in each area to enable the state to move forward.
I am also not arrogant enough to assume my recommendations will be followed just because I made them. But I hope the article will at least move the debate forward in each of the areas I discuss.
Below is a list of the articles I have written over the last year. My next article will incorporate much of what I have already written below.
12/30/2009 - The Sovereign’s Responsibility
12/30/2009 - Fiscal Certainty and a Fair Gas Tax
12/30/2009 - Fiscal Certainty and a Stable Tax Environment
01/02/2010 - Timing of the Legislative Debate
01/02/2010 - Restructure Alaska’s Revenue System
01/05/2010 - Bob Swenson – Instate Gas Czar
01/06/2010 - PFD – To Enshrine or Not To Enshrine
01/13/2010 - Point Thomson – Where to From Here?
01/19/2010 - Do Oil Taxes Need Revision
01/27/2010 - Two Important Pipeline Variables
02/20/2010 - DNR Point Thomson Study Evaluated by Feds
02/21/2010 - Resource Potential of the Alaska North Slope
02/23/2010 - Geology is King
03/13/2010 - Which Pipeline Project is Best
03/14/2010 - Boring
03/21/2010 - In-State Gas Line
04/05/2010 - The Point Thomson Unit – The Next Step in the Process
04/28/2010 – A System Failure and An Idea
05/03/2010 – The Red Pen Challenge Update
05/27/2010 – Evaluation of Exploration in the Arctic OCS
06/14/2010 – BP Gulf Oil Spill Response Plan Review
07/30/2010 – Alaska Gasline Port Authority Proposal to Purchase Fairbanks Natural Gas LLC
09/06/2010 – Energy Issues in the Alaska Gubernatorial Race
09/08/2010 – Own a Piece of the Pipe – Part 1
09/09/2010 – Own a Piece of the Pipe – Part 2
09/11/2010 - Alaska Gasline Inducement Act (AGIA)
09/15/2010 - Analysis of the Twenty “Must Haves” of AGIA
09/16/2010 - Berkowitz Oil Revenue Proposal
09/21/2010 - Berkowitz Revenue Proposal Analysis
09/23/2010 - Political Posturing
09/26/2010 - State Ownership of the Pipeline
10/07/2010 - Clarification of the MidAmerican Deal
10/15/2010 - Natural Gas Pipeline Options
10/17/2010 - Equal Time for Parnell
10/19/2010 - Security Guards Need Education on Private Rights
10/26/2010 - Repost – Resource Potential of the Alaska North Slope
10/27/2010 - NPRA Oil and Gas Reserves History
11/01/2010 – Consider the Candidate
11/02/2010 – Legislative Agenda Proposal
11/15/2010 – Roadmap to a Fair Tax
01/26/2010 – The Real Cost of the Governor’s Proposed Oil Tax Change
02/10/2010 – An Either/Or World
03/14/2010 – The Specious Argument
03/17/2010 – Just the FACTS
03/24/2010 – Who to believe? Does it matter?
Friday, March 25, 2011
Thursday, March 24, 2011
Who to believe? Does it matter?
The Alaska State Legislature is currently engaged in a debate regarding changing ACES, the production tax on oil and gas, in hopes of encouraging new investment on the north slope and ultimately additional production to fill the TransAlaska Pipeline System (TAPS).
Many have entered into the debate regarding the tax. Some have argued that a change to the tax will increase jobs that have been lost due to the current production tax, known as Alaska’s Clear and Equitable Share (ACES); others have argued that the current tax system is working because jobs have increased on the north slope.
Some have argued that a change in the tax will multiply the revenue to the state many times over the cost of the change; others have argued that the tax change will cost the state billions of dollars over the next decade.
Some have argued that exploration drilling on the north slope has become almost nonexistent because of ACES. Others have argued that there were more wells drilled in 2010 than 2009. In fact the number of wells drilled in 2010 was the highest number of wells drilled since 2005.
Some have argued that the pipeline will be shut down if we don’t change the tax, but no one is arguing if we stay the present course that oil production will increase and the pipeline will once again be full.
Who to believe? Does it matter?
All who enter the debate seem to believe they need to justify their position based on either a positive or negative impact from the current production tax, ACES. But all are focused on the wrong question. It does not matter what has happened in the past, even what the actual impact of ACES has been. This is especially important since they will never agree on the results of that impact anyway.
What is clear is that production is falling on the north slope, and everyone agrees with this fact. What is also clear is that everyone would like to see production increase. The real question is how to go about encouraging industry decision-making so that more is invested on the north slope in hopes of increasing production to the benefit of both the industry and the state.
Where might the potential reserves be found and how many reserves can we expect or hope for?
Infield drilling and satellite fields - Small increases to production that will help stem the decline of production if produced, up to a few billion barrels here.
Heavy and viscous oil - Over 20 billion barrels of oil in place. If the technology could be conquered and the economics could be enhanced, perhaps several billion barrels of this heavy oil could be produced.
Exploration - Exploration could bring in several hundred thousand barrels of oil, so even though the amounts may be smaller, exploration should be encouraged.
NPRA - The State of Alaska receives half the bonus and royalty revenue from NPRA plus the state receives a production tax on all oil produced in NPRA. The federal government believes there are still hundreds of millions of barrels of oil to be found in NPRA. Even though this is not a large amount, it should be encouraged.
Federal OCS - Even though the state gets no revenue from the majority of offshore development, offshore production would provide jobs to Alaskans, increase the life of the pipeline, and perhaps someday the state could share in the OCS revenue if Congress changes the current law. Even though OCS development should be encouraged, it does not enter into the debate over changing the state's oil and gas tax.
What is the potential value of those reserves?
This is the estimation of the “golden egg” if the reserves can be found and produced. This estimation is the easiest to determine. Plug in the potential reserves from above, plug in a range of prices and the current tax and the potential value (or range of values) of those reserves can be determined. Any change in the tax can be compared against this range of values. Any change in the tax should be justified against the potential for the state to benefit through production of these additional potential reserves.
What are the options for encouraging industry to pursue those reserves?
The debate is not an either/or debate. It is not “reduce the tax on all production or don’t reduce the tax.” The decisions the legislature needs to make are more complex than that. There are several options or combination of options the legislature could pursue.
Credits - Credits gives the state one of the most measurable benefits of any alternative. One of the concerns is ensuring the state receives something in return for any reduction or benefit it provides to the industry. With a credit the state is guaranteed that the industry must invest in Alaska before it can apply for the benefit. Credits are a good option, but they may not supply sufficient benefit to entice the industry to produce all the reserves Alaska would like to see produced.
Focused reduction in tax - A tax that is focused on the reserves the legislature would like for the industry to pursue, i.e., additional reserves that could be produced through infield drilling, heavy and viscous oil additions, and exploration success.
Broad reduction in tax – this option is overinclusive, giving additional reduction in tax to reserves that would have been developed without the reduction, and it will be difficult to determine if the broad reduction was necessary or if a more strategic alternative would have worked just as well. But the legislature may determine it is the best means to obtain the results they are after.
Summary
The debate in the legislature often turns on looking backwards and using, or misusing, that data to justify a particular position the individual is advocating. The legislature should avoid getting into that debate. The key to moving forward is to recognize the current status of production on the north slope (decreasing production), what the state wants to happen (increased production), and where the potential production can come from (NPRA, infield drilling, heavy and viscous oil, and exploration) and most importantly how the state believes it can achieve its desired goal while obtaining the maximum return to the state for the benefit conveyed.
Many have entered into the debate regarding the tax. Some have argued that a change to the tax will increase jobs that have been lost due to the current production tax, known as Alaska’s Clear and Equitable Share (ACES); others have argued that the current tax system is working because jobs have increased on the north slope.
Some have argued that a change in the tax will multiply the revenue to the state many times over the cost of the change; others have argued that the tax change will cost the state billions of dollars over the next decade.
Some have argued that exploration drilling on the north slope has become almost nonexistent because of ACES. Others have argued that there were more wells drilled in 2010 than 2009. In fact the number of wells drilled in 2010 was the highest number of wells drilled since 2005.
Some have argued that the pipeline will be shut down if we don’t change the tax, but no one is arguing if we stay the present course that oil production will increase and the pipeline will once again be full.
Who to believe? Does it matter?
All who enter the debate seem to believe they need to justify their position based on either a positive or negative impact from the current production tax, ACES. But all are focused on the wrong question. It does not matter what has happened in the past, even what the actual impact of ACES has been. This is especially important since they will never agree on the results of that impact anyway.
What is clear is that production is falling on the north slope, and everyone agrees with this fact. What is also clear is that everyone would like to see production increase. The real question is how to go about encouraging industry decision-making so that more is invested on the north slope in hopes of increasing production to the benefit of both the industry and the state.
Where might the potential reserves be found and how many reserves can we expect or hope for?
Infield drilling and satellite fields - Small increases to production that will help stem the decline of production if produced, up to a few billion barrels here.
Heavy and viscous oil - Over 20 billion barrels of oil in place. If the technology could be conquered and the economics could be enhanced, perhaps several billion barrels of this heavy oil could be produced.
Exploration - Exploration could bring in several hundred thousand barrels of oil, so even though the amounts may be smaller, exploration should be encouraged.
NPRA - The State of Alaska receives half the bonus and royalty revenue from NPRA plus the state receives a production tax on all oil produced in NPRA. The federal government believes there are still hundreds of millions of barrels of oil to be found in NPRA. Even though this is not a large amount, it should be encouraged.
Federal OCS - Even though the state gets no revenue from the majority of offshore development, offshore production would provide jobs to Alaskans, increase the life of the pipeline, and perhaps someday the state could share in the OCS revenue if Congress changes the current law. Even though OCS development should be encouraged, it does not enter into the debate over changing the state's oil and gas tax.
What is the potential value of those reserves?
This is the estimation of the “golden egg” if the reserves can be found and produced. This estimation is the easiest to determine. Plug in the potential reserves from above, plug in a range of prices and the current tax and the potential value (or range of values) of those reserves can be determined. Any change in the tax can be compared against this range of values. Any change in the tax should be justified against the potential for the state to benefit through production of these additional potential reserves.
What are the options for encouraging industry to pursue those reserves?
The debate is not an either/or debate. It is not “reduce the tax on all production or don’t reduce the tax.” The decisions the legislature needs to make are more complex than that. There are several options or combination of options the legislature could pursue.
Credits - Credits gives the state one of the most measurable benefits of any alternative. One of the concerns is ensuring the state receives something in return for any reduction or benefit it provides to the industry. With a credit the state is guaranteed that the industry must invest in Alaska before it can apply for the benefit. Credits are a good option, but they may not supply sufficient benefit to entice the industry to produce all the reserves Alaska would like to see produced.
Focused reduction in tax - A tax that is focused on the reserves the legislature would like for the industry to pursue, i.e., additional reserves that could be produced through infield drilling, heavy and viscous oil additions, and exploration success.
Broad reduction in tax – this option is overinclusive, giving additional reduction in tax to reserves that would have been developed without the reduction, and it will be difficult to determine if the broad reduction was necessary or if a more strategic alternative would have worked just as well. But the legislature may determine it is the best means to obtain the results they are after.
Summary
The debate in the legislature often turns on looking backwards and using, or misusing, that data to justify a particular position the individual is advocating. The legislature should avoid getting into that debate. The key to moving forward is to recognize the current status of production on the north slope (decreasing production), what the state wants to happen (increased production), and where the potential production can come from (NPRA, infield drilling, heavy and viscous oil, and exploration) and most importantly how the state believes it can achieve its desired goal while obtaining the maximum return to the state for the benefit conveyed.
Thursday, March 17, 2011
Just the FACTS
Recently, in an editorial in the Anchorage Daily News, Representative Mike Hawker recognized how important the decision regarding changing the oil tax is to the future of Alaska. He expressed the concern that all Alaskans feel, that oil production on the North Slope is declining. He also noted that the difference between what the Department of Natural Resources predicted a few years ago for 2011 production and current expectations is 200,000 barrels per day. He went on to state, “Between the two forecasts, 600 million total barrels have been lost for the years 2010 to 2020”, a stark statement of what is in Alaska’s future. He concluded his editorial by recommending a change to the progressivity tax and stated that “These changes will result in real improvements to Alaska’s economic prospects if we stick to the FACTS - - that is, a Fair and Competitive Tax System. Just the Facts.”
Representative Hawker’s advice is important to remember. We should all strive to understand all the facts regarding the oil tax issue before jumping to any conclusions. For example, let’s take a look at the facts Representative Hawker uses in his editorial. He states,
“Just three years ago, DNR predicted 816,000 barrels per day production in 2011. Now the expectation is only 616,000. That is 200,000 barrels a day less. Between the two forecasts, 600 million total barrels have been lost for the years 2010 to 2020.”
He goes on to say,“The facts are clear. Exploration has all but ceased and production has been lost as a result of ACES.”
According to the facts Representative Hawker has provided in his article the reader should come to the conclusion that a change to ACES is necessary because ACES caused the production decline in the last three years. But nothing could be farther from the truth. Let's take a look at the real facts.
First, DNR is not the state agency that predicts future production. That would be the Department of Revenue, in their annual Revenue Sources Book. The Crude Oil Production – Forecast can be found in Appendix C-2b of each year’s Revenue Sources Book. The following list is the Department of Revenue production forecast for the year 2011 for north slope oil from the years 2004 through 2010.
Fall 2004 forecast 975,000 bbls/day
Fall 2005 forecast 853,000 bbls/day
difference from 2004 – 122,000 bbls/day
Fall 2006 forecast 782,000 bbls/day
difference from 2005 – 71,000 bbls/day
Fall 2007 forecast 676,000 bbls/day
difference from 2006 – 106,000 bbls/day
Fall 2008 forecast 644,000 bbls/day
difference from 2007 – 32,000 bbls/day
Fall 2009 forecast 623,000 bbls/day
difference from 2008 – 21,000 bbls/day
Fall 2010 forecast 616,000 bbls/day
difference from 2009 – 7,000 bbls/day
So what does the above tell us. First that three years ago the revenue forecast predicted 676,000 bbls/day, not the 816,000 bbls that Rep. Hawker stated. The resulting difference would be 60,000 bbls/day instead of the 200,000 bbls/day the representative stated.
The reason the representative had to go back so many years is because in recent years the change in the production forecast has not been significant. To find a substantial difference between predictions the representative would have had to go back to the Fall 2006 forecast. Between the Fall 2006 forecast and the Fall 2007 forecast the state lost 106,000 bbls/day. Perhaps that can be attributed to the change in the tax from PPT to ACES.
The best place to look for the answer would be in the Fall 2007 Revenue Sources Book. There the Department of Revenue states at pp. 46-47:
“To account for unforeseen production interruptions slopewide, as well as anticipated scheduled interruptions attributed to renewal projects, we have increased our estimates of downtime at the Greater Prudhoe Bay Area, the Greater Kuparuk Area, Milne Point Unit and Endicott for the next 6-8 years, depending on the field. The impact of this deferred production is significant in the near term, ranging from 30,000 – 70,000 barrels of oil per day slopewide. This is in addition to the rate impacts attributed to reevaluating the scope and timing of projects under development and under evaluation.”
So even the significant change that occurred in the 2011 production projection from 2006 to 2007 had nothing to do with taxes. It had to do with attempting to incorporate downtime into future production scenarios.
In addition, if you graph the Revenue Sources Book production projections for each year from 2004 to 2010, what you will find is that the state is generally more optimistic in its production projection than what actually occurs. Production projections are based on what the Department of Revenue consultants can project will probably occur in the future based on what they know about the reservoir, decline curves and industry plans to bring a development online. Production predictions have nothing to do with tax changes.
So as you review the facts relating to impacts from a change in the oil tax, make sure you understand the FACTS, all of the FACTS, and nothing but the FACTS.
Representative Hawker’s advice is important to remember. We should all strive to understand all the facts regarding the oil tax issue before jumping to any conclusions. For example, let’s take a look at the facts Representative Hawker uses in his editorial. He states,
“Just three years ago, DNR predicted 816,000 barrels per day production in 2011. Now the expectation is only 616,000. That is 200,000 barrels a day less. Between the two forecasts, 600 million total barrels have been lost for the years 2010 to 2020.”
He goes on to say,“The facts are clear. Exploration has all but ceased and production has been lost as a result of ACES.”
According to the facts Representative Hawker has provided in his article the reader should come to the conclusion that a change to ACES is necessary because ACES caused the production decline in the last three years. But nothing could be farther from the truth. Let's take a look at the real facts.
First, DNR is not the state agency that predicts future production. That would be the Department of Revenue, in their annual Revenue Sources Book. The Crude Oil Production – Forecast can be found in Appendix C-2b of each year’s Revenue Sources Book. The following list is the Department of Revenue production forecast for the year 2011 for north slope oil from the years 2004 through 2010.
Fall 2004 forecast 975,000 bbls/day
Fall 2005 forecast 853,000 bbls/day
difference from 2004 – 122,000 bbls/day
Fall 2006 forecast 782,000 bbls/day
difference from 2005 – 71,000 bbls/day
Fall 2007 forecast 676,000 bbls/day
difference from 2006 – 106,000 bbls/day
Fall 2008 forecast 644,000 bbls/day
difference from 2007 – 32,000 bbls/day
Fall 2009 forecast 623,000 bbls/day
difference from 2008 – 21,000 bbls/day
Fall 2010 forecast 616,000 bbls/day
difference from 2009 – 7,000 bbls/day
So what does the above tell us. First that three years ago the revenue forecast predicted 676,000 bbls/day, not the 816,000 bbls that Rep. Hawker stated. The resulting difference would be 60,000 bbls/day instead of the 200,000 bbls/day the representative stated.
The reason the representative had to go back so many years is because in recent years the change in the production forecast has not been significant. To find a substantial difference between predictions the representative would have had to go back to the Fall 2006 forecast. Between the Fall 2006 forecast and the Fall 2007 forecast the state lost 106,000 bbls/day. Perhaps that can be attributed to the change in the tax from PPT to ACES.
The best place to look for the answer would be in the Fall 2007 Revenue Sources Book. There the Department of Revenue states at pp. 46-47:
“To account for unforeseen production interruptions slopewide, as well as anticipated scheduled interruptions attributed to renewal projects, we have increased our estimates of downtime at the Greater Prudhoe Bay Area, the Greater Kuparuk Area, Milne Point Unit and Endicott for the next 6-8 years, depending on the field. The impact of this deferred production is significant in the near term, ranging from 30,000 – 70,000 barrels of oil per day slopewide. This is in addition to the rate impacts attributed to reevaluating the scope and timing of projects under development and under evaluation.”
So even the significant change that occurred in the 2011 production projection from 2006 to 2007 had nothing to do with taxes. It had to do with attempting to incorporate downtime into future production scenarios.
In addition, if you graph the Revenue Sources Book production projections for each year from 2004 to 2010, what you will find is that the state is generally more optimistic in its production projection than what actually occurs. Production projections are based on what the Department of Revenue consultants can project will probably occur in the future based on what they know about the reservoir, decline curves and industry plans to bring a development online. Production predictions have nothing to do with tax changes.
So as you review the facts relating to impacts from a change in the oil tax, make sure you understand the FACTS, all of the FACTS, and nothing but the FACTS.
Monday, March 14, 2011
The Specious Argument
I recently finished watching the March 10, 2011 Governor’s Press Availability on Gavel to Gavel where the governor discussed his tax change legislation. He discussed the three areas of focus for the bill, 1) new units (tax reductions for areas not in production now), 2) infield drilling tax credits, and 3) progressivity changes. And he explained that his administration is “focused on creating more production here, more investment here, more jobs here.”
This is all well and good and I commend him for his energy and effort, but I question his response to those who have expressed concerns that his legislation could cost the state billions of dollars. In response to those stated concerns about the cost of the legislation he stated “Let’s talk about that specious argument before we go any further.” His comment was out of character for the governor and without a rational basis for the position taken. In the past the governor has not used such a pejorative comment in referring to those who oppose him. Normally he would merely have responded with his position, supported by facts and analysis without putting the opposition down. So why did he use such a strategy this time?
There are several possible reasons why he attacked the opposition with name calling instead of analysis.
Perhaps because he didn’t remember that it was his own staff who wrote the fiscal note that stated the financial impact of the change to the tax would be in the billions. Perhaps he was not around to listen to his Department of Revenue Commissioner and revenue staff explain that the impact would be in the billions. Perhaps he did not read his consultant’s report and did not listen to his consultant testify that the long term cost of the change could be approximately $20 billion.
Or perhaps he is just uncertain about the position he has taken and doesn’t know how to logically defend it; so he reverted to name calling and putting down the opposition.
Or perhaps he doesn’t understand cost/benefit analysis. In its most basic form cost/benefit analysis is first understanding the short and long term cost of the change as well as you can. Once you fully understand the costs of the change, you must determine what the proposed benefits will be and the chance of those benefits occurring. Then you calculate the difference. The result may be that there will be more jobs for Alaskans or the life of the pipeline will be extended, or the possibility that the state may never recoup the difference in tax it gave up in the legislation. Even with the potential negative impact of not recouping the cost of the change in tax, the state may determine the change is still a reasonable course of action. The state may determine it wants short and long-term jobs and an extended life of the pipeline more than it wants to fill its savings account. This would be an acceptable analysis.
But what is not acceptable is not counting the costs and arguing that those costs are not real, that they are “fantasy,” that concerns regarding the costs are “specious.” The costs are real. They can be determined within in a reasonable range, and they range in the billions of dollars. What is not real, what cannot be determined, and what can only be hoped for are the benefits from such a tax change. Those benefits may occur, but they cannot be calculated because a third party must make an independent decision sometime in the future based on present actions by the legislature. Maybe it will be worth it, but the state should count the cost and understand the risk before making such an important decision.
What the governor should have done is provide the analysis necessary to support his position, provide the analysis necessary for the Alaska public to support his legislation, provide the analysis necessary for the legislature to pass his proposed legislation.
What the governor should have done is provide the legislature with an analysis of possible decline curves.
The governor’s consultant used a 6% decline curve to define what might happen if the legislation was not passed; yet the governor’s Revenue Commissioner presented an estimation of future revenue based on a 3.2% decline curve under the current tax. What does the governor believe to be true? What are the ranges of possible decline and what are the bases for those assumptions?
What the governor should have done is explain to the legislature where the governor believes the new reserves are to be found.
A thorough understanding of reserves potential is essential for the legislature to understand so they can determine if there are sufficient potential reserves to compensate the state for the lost revenue from the change in the tax.
What follows are projections from the United States Geological Survey and the State of Alaska, Department of Natural Resources, Division of Oil and Gas of resource potential of exploration areas of the north slope.
NPRA: consists generally of lands west of the Colville River and north of the Brooks Range.
The National Petrolem Reserve-Alaska is not a good source for future oil revenue. The USGS has recently substantially reduced the reserves of technically recoverable conventional accumulations of oil it believes are located in NPRA to less than a billion barrels of oil, about 10 percent of what it previously projected to be in NPRA (See 2010 Updated Assessment of Undiscovered Oil and Gas Resources of the National Petroleum Reserve Alaska (NPRA) ).
Beaufort Sea: consists of all offshore state lands between Pt. Barrow and the U.S-Canadian border.
The Department of Natural Resources, Division of Oil and Gas has projected: “The petroleum potential in the area is considered moderate to high.” (See the January 2011 Five-year Program of Proposed Oil and Gas Leasing Program Report at page 22).
But concerns about oil spills in the offshore environment, concerns about the oil industry’s ability to clean up oil in broken ice, concerns about bowhead whales, polar bear habitat and two species of endangered seals may make it difficult to explore for or produce oil from offshore in the near-term.
North Slope Areawide Oil and Gas Lease Sale: the area consists of all state-owned lands between the National Petroleum Reserve-Alaska (NPRA) and the Arctic National Wildlife Refuge (ANWR), and from the Beaufort Sea to the north and the Umiat Meridian Baseline to the south (an east/west line drawn just north of Umiat, Alaska).
The Department of Natural Resources, Division of Oil and Gas has projected: “Petroleum Potential in this area is considered low to moderate with the potential generally increasing from south to north.” (See the January 2011 Five-year Program of Proposed Oil and Gas Leasing Program Report at page 27).
North Slope Foothills: the area consists of all state-owned lands between the National Petroleum Reserve-Alaska (NPRA) and the Arctic National Wildlife Refuge (ANWR) south of the Umiat Meridian Baseline and north of the Gates of the Arctic National Park and Preserve.
The North Slope foothills are not a good source future oil potential. The Department of Natural Resourses, Division of Oil and Gas has stated “Petroleum potential in the area is considered relatively high for gas, and relatively low for oil." (See the January 2011 Five-year Program of Proposed Oil and Gas Leasing Program Report at page 30).”
Even though the governor believes that these areas “have not been touched for thousands of years,” they have actually been evaluated and tested geologically. That is why the Division of Oil and Gas can project the potential for oil in this area as relatively low. The legislature should request a map of the north slope depicting all the wells that have been drilled. Then the legislature should ask one of the geologists at the Division of Oil and Gas to explain why they believe the oil potential in this area is low.
Federal OCS: the offshore area in the Chukchi and Beaufort Seas seaward of the state offshore.
Even though the governor referred to Shell’s exploration activities in the Chukchi Sea during his press availability, the governor’s tax legislation does not affect Shell’s offshore projects from an economic standpoint because the tax credits do not apply to the federal offshore and the state has no power to tax the federal offshore.
What the governor should have done is explain to the legislature when the new reserves are projected to be produced.
The state land with the greatest oil potential (high potential) is the state offshore, the most difficult area to permit and develop a field. Bringing production on from the state offshore will take at least 10 years and probably closer to 15 years if it can be done. In fact even permitting and developing a new onshore field (low to moderate potential) will take at least 10 years. Therefore we should not expect or depend on any revenue from new exploration in the short-term and little in the long-term.
What the governor should have done is explain the projected revenue and the timing of that revenue from the reserves he proposes will be found.
Even though we don’t expect much from new exploration, the credits have not cost the state much. But maybe someday, many years from now, any new production to be found will be a net positive from a revenue standpoint (after deducting the cost of the credits). In addition, what can be determined with reasonable certainty is that revenue from new exploration will not begin to balance the cost from the tax change for at least 10 years.
What the governor should have done is explain to the legislature the criteria the governor is using to determine if or when the tax change has failed.
In his Press Availability the governor suggested that the legislature would not sit idly by if the proposed tax change was not having the desired effect. What the governor needs to share with the legislature are his expectations for a successful outcome. What would he consider a success? What would the governor consider a failure? How long is the governor willing to wait to see positive impacts from the tax change?
Finally the governor in a final posture challenged the press to ask the “nay sayers” that say the governor’s proposal is going to cost so much what their plan would be. Well I’m not necessarily a nay sayer, and I am certainly not a legislator, but I do believe the governor and the legislature should count the cost before they make such broad sweeping changes to the oil tax. And as far as proposing a plan, I have written close to 40 articles in this blog proposing what the governor and legislature should do, but if the governor doesn’t understand what I am suggesting he is free to give me a call and I will be glad to help him out.
Additional Note
The governor made one comment regarding the large diameter pipeline that is worth clarifying. In referring to the position of the pipeline companies he stated that “Before we commit to buying pipe, we need fiscal certainty.” That would suggest he believes that TransCanada and Exxon or Denali pipeline company needs fiscal certainty before they can commit to buy pipe. Actually the pipeline company does not need fiscal certainty; the shippers need fiscal certainty and they need it before they are willing to commit their gas to the open season. Fiscal certainty has nothing to do with the pipeline companies buying pipe. Fiscal certainty is being requested by the shippers before they are willing to commit their gas at the open season. That is one of the reasons why the open season process has stalled. I am surprised at this basic misunderstanding of who needs fiscal certainty, when it is needed and the risks associated with moving a pipeline project forward.
This is all well and good and I commend him for his energy and effort, but I question his response to those who have expressed concerns that his legislation could cost the state billions of dollars. In response to those stated concerns about the cost of the legislation he stated “Let’s talk about that specious argument before we go any further.” His comment was out of character for the governor and without a rational basis for the position taken. In the past the governor has not used such a pejorative comment in referring to those who oppose him. Normally he would merely have responded with his position, supported by facts and analysis without putting the opposition down. So why did he use such a strategy this time?
There are several possible reasons why he attacked the opposition with name calling instead of analysis.
Perhaps because he didn’t remember that it was his own staff who wrote the fiscal note that stated the financial impact of the change to the tax would be in the billions. Perhaps he was not around to listen to his Department of Revenue Commissioner and revenue staff explain that the impact would be in the billions. Perhaps he did not read his consultant’s report and did not listen to his consultant testify that the long term cost of the change could be approximately $20 billion.
Or perhaps he is just uncertain about the position he has taken and doesn’t know how to logically defend it; so he reverted to name calling and putting down the opposition.
Or perhaps he doesn’t understand cost/benefit analysis. In its most basic form cost/benefit analysis is first understanding the short and long term cost of the change as well as you can. Once you fully understand the costs of the change, you must determine what the proposed benefits will be and the chance of those benefits occurring. Then you calculate the difference. The result may be that there will be more jobs for Alaskans or the life of the pipeline will be extended, or the possibility that the state may never recoup the difference in tax it gave up in the legislation. Even with the potential negative impact of not recouping the cost of the change in tax, the state may determine the change is still a reasonable course of action. The state may determine it wants short and long-term jobs and an extended life of the pipeline more than it wants to fill its savings account. This would be an acceptable analysis.
But what is not acceptable is not counting the costs and arguing that those costs are not real, that they are “fantasy,” that concerns regarding the costs are “specious.” The costs are real. They can be determined within in a reasonable range, and they range in the billions of dollars. What is not real, what cannot be determined, and what can only be hoped for are the benefits from such a tax change. Those benefits may occur, but they cannot be calculated because a third party must make an independent decision sometime in the future based on present actions by the legislature. Maybe it will be worth it, but the state should count the cost and understand the risk before making such an important decision.
What the governor should have done is provide the analysis necessary to support his position, provide the analysis necessary for the Alaska public to support his legislation, provide the analysis necessary for the legislature to pass his proposed legislation.
What the governor should have done is provide the legislature with an analysis of possible decline curves.
The governor’s consultant used a 6% decline curve to define what might happen if the legislation was not passed; yet the governor’s Revenue Commissioner presented an estimation of future revenue based on a 3.2% decline curve under the current tax. What does the governor believe to be true? What are the ranges of possible decline and what are the bases for those assumptions?
What the governor should have done is explain to the legislature where the governor believes the new reserves are to be found.
A thorough understanding of reserves potential is essential for the legislature to understand so they can determine if there are sufficient potential reserves to compensate the state for the lost revenue from the change in the tax.
What follows are projections from the United States Geological Survey and the State of Alaska, Department of Natural Resources, Division of Oil and Gas of resource potential of exploration areas of the north slope.
NPRA: consists generally of lands west of the Colville River and north of the Brooks Range.
The National Petrolem Reserve-Alaska is not a good source for future oil revenue. The USGS has recently substantially reduced the reserves of technically recoverable conventional accumulations of oil it believes are located in NPRA to less than a billion barrels of oil, about 10 percent of what it previously projected to be in NPRA (See 2010 Updated Assessment of Undiscovered Oil and Gas Resources of the National Petroleum Reserve Alaska (NPRA) ).
Beaufort Sea: consists of all offshore state lands between Pt. Barrow and the U.S-Canadian border.
The Department of Natural Resources, Division of Oil and Gas has projected: “The petroleum potential in the area is considered moderate to high.” (See the January 2011 Five-year Program of Proposed Oil and Gas Leasing Program Report at page 22).
But concerns about oil spills in the offshore environment, concerns about the oil industry’s ability to clean up oil in broken ice, concerns about bowhead whales, polar bear habitat and two species of endangered seals may make it difficult to explore for or produce oil from offshore in the near-term.
North Slope Areawide Oil and Gas Lease Sale: the area consists of all state-owned lands between the National Petroleum Reserve-Alaska (NPRA) and the Arctic National Wildlife Refuge (ANWR), and from the Beaufort Sea to the north and the Umiat Meridian Baseline to the south (an east/west line drawn just north of Umiat, Alaska).
The Department of Natural Resources, Division of Oil and Gas has projected: “Petroleum Potential in this area is considered low to moderate with the potential generally increasing from south to north.” (See the January 2011 Five-year Program of Proposed Oil and Gas Leasing Program Report at page 27).
North Slope Foothills: the area consists of all state-owned lands between the National Petroleum Reserve-Alaska (NPRA) and the Arctic National Wildlife Refuge (ANWR) south of the Umiat Meridian Baseline and north of the Gates of the Arctic National Park and Preserve.
The North Slope foothills are not a good source future oil potential. The Department of Natural Resourses, Division of Oil and Gas has stated “Petroleum potential in the area is considered relatively high for gas, and relatively low for oil." (See the January 2011 Five-year Program of Proposed Oil and Gas Leasing Program Report at page 30).”
Even though the governor believes that these areas “have not been touched for thousands of years,” they have actually been evaluated and tested geologically. That is why the Division of Oil and Gas can project the potential for oil in this area as relatively low. The legislature should request a map of the north slope depicting all the wells that have been drilled. Then the legislature should ask one of the geologists at the Division of Oil and Gas to explain why they believe the oil potential in this area is low.
Federal OCS: the offshore area in the Chukchi and Beaufort Seas seaward of the state offshore.
Even though the governor referred to Shell’s exploration activities in the Chukchi Sea during his press availability, the governor’s tax legislation does not affect Shell’s offshore projects from an economic standpoint because the tax credits do not apply to the federal offshore and the state has no power to tax the federal offshore.
What the governor should have done is explain to the legislature when the new reserves are projected to be produced.
The state land with the greatest oil potential (high potential) is the state offshore, the most difficult area to permit and develop a field. Bringing production on from the state offshore will take at least 10 years and probably closer to 15 years if it can be done. In fact even permitting and developing a new onshore field (low to moderate potential) will take at least 10 years. Therefore we should not expect or depend on any revenue from new exploration in the short-term and little in the long-term.
What the governor should have done is explain the projected revenue and the timing of that revenue from the reserves he proposes will be found.
Even though we don’t expect much from new exploration, the credits have not cost the state much. But maybe someday, many years from now, any new production to be found will be a net positive from a revenue standpoint (after deducting the cost of the credits). In addition, what can be determined with reasonable certainty is that revenue from new exploration will not begin to balance the cost from the tax change for at least 10 years.
What the governor should have done is explain to the legislature the criteria the governor is using to determine if or when the tax change has failed.
In his Press Availability the governor suggested that the legislature would not sit idly by if the proposed tax change was not having the desired effect. What the governor needs to share with the legislature are his expectations for a successful outcome. What would he consider a success? What would the governor consider a failure? How long is the governor willing to wait to see positive impacts from the tax change?
Finally the governor in a final posture challenged the press to ask the “nay sayers” that say the governor’s proposal is going to cost so much what their plan would be. Well I’m not necessarily a nay sayer, and I am certainly not a legislator, but I do believe the governor and the legislature should count the cost before they make such broad sweeping changes to the oil tax. And as far as proposing a plan, I have written close to 40 articles in this blog proposing what the governor and legislature should do, but if the governor doesn’t understand what I am suggesting he is free to give me a call and I will be glad to help him out.
Additional Note
The governor made one comment regarding the large diameter pipeline that is worth clarifying. In referring to the position of the pipeline companies he stated that “Before we commit to buying pipe, we need fiscal certainty.” That would suggest he believes that TransCanada and Exxon or Denali pipeline company needs fiscal certainty before they can commit to buy pipe. Actually the pipeline company does not need fiscal certainty; the shippers need fiscal certainty and they need it before they are willing to commit their gas to the open season. Fiscal certainty has nothing to do with the pipeline companies buying pipe. Fiscal certainty is being requested by the shippers before they are willing to commit their gas at the open season. That is one of the reasons why the open season process has stalled. I am surprised at this basic misunderstanding of who needs fiscal certainty, when it is needed and the risks associated with moving a pipeline project forward.
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