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In May of this year Bud Fackrell, Denali Pipeline Project President announced that “Denali is ending its efforts (to continue the pipeline project) because of a lack of customer support.” This was not a surprising outcome. The pipeline project, without a more comprehensive strategy, will not proceed ahead. The price of gas in the lower-48, current oil and gas taxes and the uncertainty of those taxes in the future, and the lack of a long term plan to finance state government, all contribute to decisions by the shippers of the gas not to commit their gas to a pipeline.
Some will say that TransCanada’s Alaska Pipeline Project is still moving forward, but the only reason it is still moving forward is because the State of Alaska is financing 90% of the costs from the open season until the filing for the FERC certificate. TransCanada’s project will flounder as well once the FERC does not award a certificate due to the lack of shippers for the gas. Gas pipelines aren’t awarded certificates and pipelines don’t get built if they do not have gas to ship.
What is necessary for any gas pipeline to proceed is a comprehensive plan that changes the playing field, a plan that assures a reasonable tax, a plan that provides a modicum of certainty that the tax will not change every time the state needs additional revenue to balance its budget, a plan that shows the industry the state can manage its short-term capital and operating budgets in a way that shows restraint/discipline/understanding of their impact on the long term, a plan that includes a long-term fiscal plan that is not dependent on the oil and gas industry to balance its budget. What the state needs is a plan that changes the economics of the gas pipeline. It is time for a more comprehensive approach to Alaska’s future.
Some have advocated the state should build a large diameter gas pipeline through Canada. Some believe LNG will save Alaska through a large diameter line to Valdez. Some believe a large gas pipeline project will never get built and that Alaska should focus on a smaller diameter in-state gas pipeline. Some tout “Alaska’s gas for Alaskans” like it is some creed or motto that will automatically make whatever project they are supporting economic. The problem with all of these ideas is that without a more comprehensive picture, none of them will be economic, and none of them will ever get built.
There are at least eight issues that must be addressed in a comprehensive manner in order to move Alaska forward in bringing Alaska’s gas to market. Every proposal to bring Alaska’s gas to market should be required address all eight issues.
1) Fair oil and gas taxes
2) Long term fiscal plan
3) Short term annual capital and operating budgets
4) The permanent fund, its present and future use
5) Gas pipeline economics
6) Exploration and filling TAPS and the Gas Pipeline
7) Fiscal certainty/stable oil and gas tax environment
8) Point Thomson (hopefully this will be resolved soon by the State of Alaska and the Point Thomson owners)
Over the next several weeks I will propose alternatives that will address all eight issues. I have written previously about most of them, but I have a few additional ideas I would like to place on the table in advance of the October 18th Alaska Gas Pipeline Forum.
Showing posts with label ACES. Show all posts
Showing posts with label ACES. Show all posts
Tuesday, September 20, 2011
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.
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