New oil is costly
The Anchorage Daily News offers its opinion that Alpine satellite fields are good examples of the North Slope’s future: As Alaskans debate changes to the state’s oil production taxes, it’s worth looking at just how much it costs to bring new oil online at the North Slope. Good examples are the Alpine satellite fields — Nanuq and Fiord — scheduled to start producing oil late this year. The two fields will cost close to $600 million for partners Conoco Phillips (78 percent) and Anadarko (22 percent). That’s an estimated $550 million in development costs, added to the $20 million in exploration costs just to find the oil. The seismic work started six years ago, highlighting the long wait between spending the first dollars in expenses and collecting the first dollars in revenue. And what do the companies — and the state — get for that much money?
The Department of Revenue forecasts the two developments will hit their peak in 2009-10, at a combined 35,000 barrels a day. That would be about 4 percent of total North Slope production in those years. But production would start to decline the next year, and by 2015 the two fields would be down to just 12,000 barrels a day — or about 1.5 percent of total North Slope production.
Gushers, these are not.
But they’re still a good investment for the companies and the state. They’re the kind of smaller fields that companies hope to find to help feed North Slope production facilities that will have spare capacity as older reservoirs decline.
The flow from Nanuq and Fiord will run through the oil, gas and water production facilities at Alpine. As oil flow starts to decline next year at Alpine, it will have room to handle production from the satellite fields.
The satellites also are good for the state, which will earn public revenues from royalties, property taxes and corporate income taxes. Not to mention the 700 construction jobs the past two winters, as the companies spent heavily to build production facilities.
All of that is good for Alaska’s economy.
But what isn’t so good is that the state will receive zero dollars in production taxes at Nanuq and very little at Fiord — an estimated 0.00055 percent tax rate in its first full year of production instead of the full rate of 12.5 percent, according to the Department of Revenue. The nothing or next to nothing production tax is because the state’s antiquated tax formula hasn’t changed in 17 years. Designed to spur development of smaller fields, such as Nanuq and Fiord, the formula worked OK when oil was in the $10 to $20 range for each barrel, but it’s out of date at today’s price and long-term forecasts of $40 to $60 a barrel.
It’s time the state changed its production tax.
Alaska needs a better oil and gas tax structure, one that doesn’t let any barrels leave the ground at higher prices without collecting something in production taxes. One that recognizes the state owns the one-time resource and deserves healthy tax revenues for statewide public services.
And one that also recognizes the high cost of finding and developing new fields, like Nanuq and Fiord. Almost $600 million is a substantial investment, especially considering that the payback doesn’t begin until six years after companies start spending money.
The state estimates that by 2015 almost half of the oil flow from the North Slope will come from new fields, either currently under development or under evaluation. Those 340,000 barrels a day of new oil would represent 10 pairs of Nanuq and Fiord at their peak.
Legislators need to think about that as they craft a new production tax structure. Alaskans deserve higher tax revenues from today’s and tomorrow’s oil, and we also need billions of dollars of new investment for more oil production. The answer is a graduated tax rate linked to oil prices — but not so steep that we scare off investments or too high a base rate for when oil prices are in the low to middle range.
BOTTOM LINE: Finding the right oil tax policy is a balancing act between the governor’s proposal and legislative changes.
