Homer Alaska - Business

North Slope oil producers say they will have to invest $40 billion over the next 10 years to keep the large oil fields producing even at their current rate of decline of about 6 percent a year.

There are serious questions as to whether that investment can be made given the state of Alaska's high rate of tax on new projects in the big fields, Wendy King, a ConocoPhillips vice president, told state legislators in Juneau Feb. 23.

Legislators have been holding extensive hearings on the state oil production tax, listening mostly to the Department of Revenue and various consultants so far. King's comments to the Senate Finance Committee, along with those by Marilyn Crockett, executive director of the Alaska Oil and Gas Association, were the first giving industry's views to legislators.

If the investment isn't made in new wells and other projects to sustain production, the fields will decline at even faster rates, from 10 percent to 16 percent yearly, King said.

The problem is the heavy tax burden, King said. Total "government take" on Alaska oil production, including all taxes and royalties, has been pushed up by changes made to the state oil production tax in 2007. Government take now averages between 65 percent and 75 percent of net profits, King told the senate committee.

The state's production tax law imposes taxes as high as 80 percent to 90 percent of profits on some new projects, depending on crude oil prices.

In contrast, government take on projects in the outer continental shelf like the offshore Beaufort and Chukchi seas is about 50 percent at current oil prices, two-thirds of the government take of revenues from onshore oil production, where Alaska's taxes apply.

It's no coincidence that ConocoPhillips has dropped its onshore Alaska exploration and is now focused on prospects in the Chukchi Sea in federal offshore waters, King said.

"We're still exploring in Alaska, but we're exploring offshore," she said.

Meanwhile, the tax is taking a toll on onshore drilling and other projects on the North Slope, mainly in the big producing fields of Prudhoe Bay, Kuparuk and Alpine that provide 90 percent of production, and which are the most heavily taxed by the state, King said.

"Each of the indicators of industry activity gives us cause for concern," she said. "Production is declining. Well and exploration activity is down. Expenditures, project activity and jobs are down."

This is counter to what the state revenue department has been telling legislators. Revenue Commissioner Pat Galvin has said in previous briefings that industry spending has been increasing, while employment in the industry has been robust, at least until recently.

King said industry activity has been brisk on the Slope in recent years and "bed space" for contractor workers in camps has been at a premium, but no longer.

"Use of our camp in the Kuparuk field is down 20 percent," she said.

Drilling of new production wells, which are vital to sustaining production in the producing fields, has declined 14 percent since the state taxes were increased in 2007, King said.

Some $2 billion in new construction in the big producing fields also has been deferred since 2007. This includes "I pad" and a gas processing project in the Prudhoe Bay field, two new viscous oil production pads and an ultra-low sulfur topping plant in the Kuparuk field, she said.

Exploration drilling has plummeted to four new test wells planned on the Slope this winter, half the number drilled in 2009 and about a third of the exploration wells drilled in 2007.

The reducing drilling has led to rigs being laid down and workers being laid off.

"Each drilling rig represents a quarter of a million man-hours of work a year, or the full-time equivalent of about 119 jobs," said the Oil and Gas Association's Crockett.

Both Crockett and King said increased industry spending on maintenance over the last two to three years has masked a stagnant, and even declining, level of investment in new projects that will produce new oil.

In 2008, the North Slope producers spent about $2 billion on maintenance, repair and replacement projects in the large producing fields, but spent less, about $1.3 billion, on projects in the fields, like new wells, that add reserves and new production.

Industry spending estimates obtained by the state Department of Revenue, based on confidential data submitted to the department by the companies, do show increases in total spending, but King said that when these numbers are adjusted for inflation in oil field costs the adjusted dollar spending is essentially flat.

King and Crockett acknowledged that investment is affected by several factors including high costs on the North Slope, but the high tax rates have an effect.

In her presentation, Crockett raised another issue inhibiting industry investment: uncertainty over the regulations developed by the revenue department to administer the tax.

State statutes set out the general provisions of the tax, but the details on how the tax is to be administered are left to be worked out in regulations. It has been three years since the tax was enacted, but some regulations have yet to be written, which leaves industry taxpayers having to estimate taxes in returns they file without knowing how revenue auditors will interpret the tax.

Deputy Revenue Commissioner Marcia Davis said writing the regulations for the net profits tax has been complicated and has taken a long time, but that is partly because the department chose to use an unusual interactive process with industry through workshops in the development of proposed regulations.

This contrasts with the approach typical of government agencies, which is just to write regulations with minimal consultation with the people affected, Davis said.