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Posted on 01/12/2012 12:19:03 PM PST by thackney
North Slope oil producers have laid out their vision of what’s possible with new oil development if the state Legislature makes changes in the state’s oil production tax. They’ve also highlighted the problems they face under the status quo.
BP Exploration (Alaska) Inc. President John Minge said he believes there is about $5 billion in projects the producers could tackle if lawmakers pass Gov. Sean Parnell’s House Bill 110 or something like it this year. Many of the projects are within the existing producing fields.
Minge also outlined one new project BP is testing this year, in a layer of tight oil-bearing rocks in the Prudhoe Bay field that could add up to 200 million barrels of new oil reserves. However, the project is economically challenged and needs the tax change to make it happen, he said.
Minge spoke Jan. 6 at the Alaska Support Industry Alliance’s Meet Alaska conference in Anchorage.
Mary Ann Kah, ConocoPhillips’ chief economist, told Meet Alaska that her company’s Alaska production is the highest-cost oil in its worldwide portfolio of producing assets.
On average, it costs ConocoPhillips $15.48 to produce a barrel of oil in Alaska compared to $12.32 per barrel in Canada, $10.24 per barrel in the Lower 48 and $10.15 per barrel in the North Sea. The company’s production in the Middle East costs $6.98 per barrel, Kah said.
The figures for operating costs come out of ConocoPhillips’ financial reports and do not include taxes, capital investments or transportation costs.
ConocoPhillips has lower costs than some other producers because it has the benefit of long-established infrastructure.
Kah said Alaska’s challenges include high costs and the probability of only modest-sized oil discoveries, which combined with the high state tax rate effectively puts a damper on investments in new oil.
Citing data from consulting firm Wood Mackenzie, Kah told Meet Alaska that from 2000 through 2009 the average size of new commercially viable new oil discoveries in Alaska was about 80 million barrels. In Venezuela — which has a marginal tax rate comparable to Alaska’s — it was about 380 million barrels, Kah said. In Kazakhstan, another producing country with comparable taxes, the average-size new discovery was substantially higher over the nine-year period.
“Kazakhstan has huge prospectivity. Investors there can afford the heavy tax,” Kah said.
In his talk, Minge laid out BP’s problems with declining production and rising costs. In 2006, BP spent about $1.2 billion in operating the North Slope fields it manages and produced 82 million barrels of oil that year. In 2012 the company will spend $1.6 billion for operations and produce 56 million barrels, he said.
“It is costing us one-third more to produce one-third fewer barrels, and not all operations costs are deductable from the state tax,” Minge said.
The figures cited are for operations only and do not include dollars spent in capital investments.
Ironically, the boom in industry activity outside Alaska has driven up costs for the companies here in terms of specialized materials, supplies and services.
“Engineers can work anywhere. Our costs are being set by the global economy,” Minge said.
Although it’s an encouraging development, the surge of exploration drilling on the Slope this winter, paid for partly by state of Alaska exploration tax credits and direct payments, has also added to the strain on drilling rigs and services, and is helping drive up costs for the existing field operators, he said.
As for the producing companies’ capital costs, a good share of those are for projects in the fields related to maintaining existing production, and not on finding new oil, Minge said.
“Only one in six of our North Slope employees work on projects related to developing more oil. The rests are in operations, maintenance and repair,” he said.
Despite those problems, there are bright prospects for the North Slope if the economic environment improves, Minge said.
The project to test production from the tight sandstone rock of the Sag River formation is an example of one possibility. BP has approved a five-well program to test production from the Sag River, a shallow layer of tight rock overlying the western part of the large producing Prudhoe Bay and Milne Point fields, Minge said.
If the results are positive, it could result in a 200-well program and 200 million barrels of new oil reserves, he said.
“We need to crack the technology problems first, but if there are also improvements in fiscal terms,” the Sag River could become profitable to develop, Minge said.
In a nearby project, BP also is testing methods of producing heavy oil from the Ugnu, a large potential resource with an estimated 22 billion barrels of oil in place. The company had encouraging results with the first test well, which produced at a sustained rate of 650 barrels per day for 117 days. Four more test wells are planned.
“What has encouraged us is that the (first) well is producing at three times the rate of heavy oil wells in Canada. The bad news is that costs are 10 times the cost of wells in Canada, so we have some work to do on cost reduction,” Minge said.
The first test production well is off-line now for technical work but is expected to be restarted soon.
Minge said new production techniques developed for heavy oil also can be applied to large viscous oil resources known on the Slope, some of which is being produced now. There are about 11 billion barrels of in-place viscous oil resources in formations like West Sak and Schrader Bluff in the Kuparuk and Milne Point fields.
“If we can get just 10 percent of this it would be wonderful,” Minge said.
The meeting in Anchorage Jan. 5 between the CEOs of the major North Slope producers and Gov. Sean Parnell that included Robert Dudley, BP’s chairman, was significant, Minge told Meet Alaska.
“It would not have happened if Alaska wasn’t very important to all three companies,” he said.
While a major focus of that meeting was on natural gas, “we must remember that gas is several years out. For the next 10 years what’s very important is sustaining our oil production,” Minge said.
But if the three companies and the state can find alignment, many things are possible. “Out of alignment comes investment,” he said.
My recommended energy plan is to approve the tax breaks and get busy producing more oil in Alaska. That was easy.
Don’t play poker with an oil company. I don’t see companies running to compete for the rights to drill up there.
Governments are always trying to bleed a resource, which you can appreciate to a point.
I am consistantly amazzed at people up here, even many supposed conservatives, who scream and harp about the oil companies not paying their fair share. It’s like they have blinders on that block them from reality. It costs too dang much to produce the oil here, and raping the companies to pay more will simply drive them away.
There are limits to who much you can squeeze the golden goose.
The fundamental problem is a cartel on mineral rights. Alaska’s populist scheme for taxpayer ownership is just government control of mineral rights. With a market for mineral rights, individual owners could negotiate with mineral developers and producers. I find it incomprehensible that many conservatives support the collectivist scheme in Alaska especially market champions like Sarah Palin. I understand that many Alaskans resent the undue control of their land by DC politicians. Collectivist control of mineral rights only exacerbates the problem of government control however.
For conservatives who support this collectivist scheme, would you support the same scheme for other resources? Would you support collectivist ownership of farm land and housing tracts? Do you think food production and housing construction would increase or decrease?
I’ve never been to Alaska, but the Independent reputation of it’s citizens has me wondering if the posts suggesting a socialist leaning is a little bit overblown.
If you want to see “conservatives” morph into screaming moonbat socialists just suggest to an Alaskan that their annual Permanent Fund Dividend payments are going to be taken away.
How long has this been going on? I thought that one of Sarah Palin’s biggest accomplishments was taming a corrupt oil industry. I admittedly know nothing of Alaska but had imagined it as a more conservative place. I know a lot of federal dollars are spent there, but considering the tremendous amount that must be spent to keep an infrastructure up and running in the arctic, I always figured it was money well spent, particularly with the communist bear sitting across the Bering Strait.
I guess once you get on that teat, its hard to get off!!!!
I lived in Alaska from 1976-2002. It is my understanding that the statehood movement in the 1960’s was under the control of several lawyers who would now be considered pretty liberal in their social outlook. That is why the state has no death penalty. Imagine Minnesota with mountains.
Southcentral Alaska and Fairbanks are pretty conservative. The rest of the state is annoyingly liberal, especially Southeast. Especially Juneau, the state capital.
The Permanent Fund was the brainchild of republican governor Jay Hammond. He was a populist who had wanted to create a savings account of the state goobermint’s earnings from oil extraction (but not mining or fishing). A portion of the earnings would be re-invested into the Fund and another portion would be divided among the citizens.
So now Alaska has a huge “savings account” and continues to suck more money per capita from the feral goobermint than any other state. The annual Permanent Fund Dividend Payments are both a blessing and a curse. Wise people use the money wisely and low-lifes blow it on booze and drugs. Low-lifes with children take the kids’ PFD’s and blow that on booze and drugs too. I have first-hand knowledge of domestic disasters in the forms of substance abuse, violence, and child abuse/neglect that occur for weeks after the PFD’s are distributed - at least until the money runs out.
Sarah’s claim to fame is that she busted out a group of corrupt pubbie state legislators that were in cahoots with a group of corrupt oilfield service company executives. The major oil players let the service companies do the dirty work and stayed above the fray. Princess Lisa Murkowski’s daddy Frank was one of the dirty pubbies but I don’t think he ever got charged with anything. Not that he wasn’t guilty, he was just too slimy to make anything stick. Same with Ted Stevens. Same with his dummiecrat replacement Mark Begich.
Goobermint employee and construction unions are prevalent in Alaska.
Some of the money is necessary and well-spent but the majority of it is wasted on prok-barrel projects that are used to buy votes. I personally know of an Arctic village of less than 100 people west of Prudhoe Bay where $25,000,000 was spent building a water and wastewater plant so that the residents could have running water. This was one of many villages for which Ted Stevens earmarked huge amounts of money for idiotic projects like this.
Now, in the Arctic you can’t just dig a trench and bury sewer pipes and water lines in the permafrost. All of the lines going to and from the water treatment plant had to be built in heated, insulated “utilidores” above ground. To run the plant and heat the utilidores you need a huge amount of electricity. You get that from BIG Diesel generators because there is no other way. Then you need fuel and certified operators and technicians to keep it all going. Where do you get these kinds of people in a tiny population of predominantly illiterate subsistence hunters with drinking problems? It just didn’t work out too well.
People around the world see Alaska as a vast wilderness wildlife park. It is a vast wilderness but most of it is barren swampland. The extremes of climate, winters of darkness, summers of endless light, and the promise of FREE Permanent Fund money attract some strange people. Did you know that Anchorage has serious drug and gang problems? Many of the bangers are Samoans. Yes, Samoans.
In my times there I learned that there are many beautiful places and great people in Alaska but there are a lot of dark passages that can suck you in if you are not careful.
I also lived in Alaska from 1995-2000. From what I saw, I agree with the vast majority of what you said, but I was scratching my head about “statehood movement in the 1960’s”. Typo?
If anything, that part makes it easier for production. There is only one owner to deal with for those areas, royalty rates tend to be fixed, reasonable and known to ail well in advance. The actual do a lot ti encourage lease and offer up large parcels with publicized public auctions.
The problem is the taxes on top of the royalties regardless if it is native, federal or state owned oil.
Sarah Pain did nothing to change the royalties or public sharing of the fund. Her administration only changed the taxes and those dollars only go to the state treasury.
Yeah. My head is so full of snot right now that I wasn’t thinking straight. Alaska became a state in the 1950’s.
Were you speaking of Nuiqsut?
I did some work at Alpine “nearby”.
As a matter of fact, I was speaking of Nuiqsut.
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