Taking Credit for Gravity:
Claims That Long-Planned Oil Projects Are the "Sudden" Result of the April Oil Tax Rollback

May 1, 2013 Voice Your Opinions! Letters to the editor make a difference. You can send a 175-word letter to the Anchorage Daily News by e-mail (letters@adn.com); or by fax or mail (call them at 257-4300). Send letters to the Anchorage Press via e-mail editor@anchoragepress.com or by mail to 540 E. Fifth Ave, Anchorage, 99501. Feel free to call us if you need factual information to help you write a letter. Contact the Governor. The Governor can be reached at 269-7450; sean.parnell@alaska.gov; or www.alaska.gov. Contact us. My office can be reached at: 716 W. 4th Ave, Anchorage, AK 99501; by phone: 269-0106; visit my website at http://gara.akdemocrats.org; or email: Rep.Les.Gara@akleg.gov

Dear Neighbors,

It didn't take long for silly season to start after the Legislative Session ended April 14. Expect a few years of "abracadabra" claims that oil projects, already being developed under ACES (the oil tax law that has been in place since 2007) are now magically the result of the massive rollback of Alaska's share of oil revenue (an approximate $1.5 billion per year revenue reduction at $120 per barrel at a time when Alaska is already facing deficit spending). Senate Bill 21 is the oil tax bill that the oil companies, Governor, and his allies succeeded in pushing through the Legislature in April. The claims are, politely put, "flawed" in most cases.

In one case, the claim is a head-scratcher to those in the industry - according to two industry sources who don't want to go on the record yet (oil industry folks don't speak publicly against other oil industry folks if they are going to continue to get contracts). Folks in the industry have been told since the beginning of the year that ConocoPhillips was bringing a newly leased drilling rig to their large Kuparuk field. The Governor and ConocoPhillips touted this rig – three days after SB 21 passed - suggesting it was contracted for because of the newly passed bill.

Hmmm. I guess we'll have to wait for the facts to unfold on this one, as I can only tell you what industry folks in the know have relayed to me. Who knew I'd ever have "deep throats"? This rig seems part of ConocoPhillips's two-year-old expansion plan for Kuparuk, aimed at getting more oil out of this 20 plus year old field that was once the second largest field on the continent. It is still one of ConocoPhillips's most profitable, with major known reserves that the company does not plan to leave in the ground.

An analysis of these claims and projects follows – based on the documents we have so far.

Side note alert! Since everyone else has, you should ignore the inconsistency in claims that this year's oil bill by the Governor was promoted as the best thing ever for North Slope production, but was radically different from last year's Governor's bill which was promoted as the best thing ever for North Slope production, and was even more radically different than the best thing ever bill promoted by the Governor in 2011. The 2011 version, at a relatively minor revenue reduction of $250 million per year, increased existing field tax credits for Exxon, BP and ConocoPhillips. Those smartest ever tax credits, which the Governor wanted to increase in his 2011 and 2012 bills, are instead completely eliminated in the 2013 bill.

Hmmm. Do you think it's possible they just wanted to pass a bill, and not come up with the logically smartest approach?

Main Point Alert! Sorry for the digression.

Here's the unfortunate truth that will lead to unprecedented spin by oil companies, and their political allies, including some opinion writers like Tim Bradner who sometimes write oil company-sided opinions as "news". Those who supported SB 21 will want to show that it's working.

They'll claim vegetation on their Chia Pet grew, or the sun went down yesterday because of SB 21. A smart oil company will try to keep the new generous tax reductions by saying the new bill is responsible for all of its new investment. Politicians who supported the bill have the same incentive. It's time for some facts.

SB 21 Proponents Take Credit for Invention of the Chia Pet, and that the April Passage of SB 21 Led to Investment that Was Already Happening

Inconvenient Truths: For those of you who prefer a short summary, well, I can't do that this time. But you can skim the Section Titles Below!

I will discuss below projects that were in fact moving forward under ACES and before SB 21 was passed to address some oil company and SB 21 proponent and other spin. But as a preliminary matter, I need to quash the oil company and Administration "straw man" argument that those who opposed SB 21 supported the "status quo." The status quo is what ConocoPhillips says is a production decline of roughly 2-3% a year, but that the Administration exaggerated, to pass it's bill, as a 6-7% production decline.

So, let's get rid of spin effort # 1: I was not a proponent of just leaving the status quo in place. I helped write and sponsor legislation and amendments the past two years for changes to ACES that would work, but not cost the state its ability to fund basic services.

We could and should have passed production and investment incentives that mirrored what a sophisticated corporation would approve to protect its shareholders – before giving away $1 - $1.5 billion per year in your revenue. The bill and amendments I and others offered would have incentivized new oil production at an acceptable cost, not a radical one.

Our bill and amendments required new investment, in Alaska, in exchange for reasonable – and not fiscal cliff-creating – tax relief. We offered reasonable breaks on the production of new fields, and new pools of oil in existing fields (for 5-7 years so companies could recoup their up-front investments). Our version also offered a lower tax, and research and development credits on more difficult heavy oil of which Alaska has 1.8 billion barrels of producible reserves since more research is needed to put major amounts of heavy oil into production.

We also offered minor tax relief on Alaska's very profitable elephant fields (only at very high prices where ACES arguably taxed too high). ConocoPhillips has conceded major tax relief is not needed in these fields. They've told investors in conference calls these fields create "strong cash margins... [and] very good rates of return." ConocoPhillips earned $2.3 billion in profit in Alaska last year under ACES. And we kept the law no one talks about – allowing major reductions in company royalty payments if a company proves it needs that tax break to make a field economic. That is, prove you need a tax break, and you get one.

Unfortunately, the major part of the bill that passed does the opposite. It imposes a tax rate on profits at elephant fields that ranges, before the deduction of tax credits, from 25% - 35% and the elimination of Alaska's windfall profits share that, under ACES, modestly raised taxes at very high profit levels and high oil prices. The SB 21 tax rate would not reach the 35% maximum until unprecedented prices of $150 per barrel. See chart here. SB 21 allows $800 million - $2 billion per year in Alaska revenue (assuming $110 - $130 per barrel oil prices) to be given as oil tax rebates to ExxonMobil, British Petroleum and ConocoPhillips. See ADN article here. That portion of the law – eliminating Alaska's windfall profits share – contains no requirement that these companies spend the money from this break in Alaska.

Alaskans should share fairly in windfall profits when companies generate record and near record profits at high oil prices. That won't happen under SB 21, and that's why you're facing a fourth year of teacher and educational staff cuts across the state. That might become the norm – along with reduced construction and other jobs given the massive budget deficits SB 21 will cause.

Tax Rate On Oil Found In The Future Is Among The Lowest In The World: And under SB 21 any new investment in "new oil", if it comes, will come at an unrecoverable cost to Alaskans. ACES, at recent prices of $100 to $110 per barrel, taxed on average at around 37% after deductions and credits (it rose above its 25% base tax rate on profits only after companies earned in excess of $30 in profit on a barrel of oil). At higher prices the ACES rate, because of the windfall profits tax component, would be higher as would corporate profits. But it's been replaced by one that taxes any "new" oil that went into production starting in 2011 at a rate, before the deduction of tax credits, of roughly 12% to 21% assuming prices of $100 - $130 per barrel. That's one of the lowest tax rates in the world, and will, despite claims to the contrary by some SB 21 proponents, likely require an additional 70,000 - 90,000 new barrels per day, and another new 70,000 - 90,000 new barrels per day be added every year just to break even with the revenue that would be produced by ACES.

That's not likely to happen. Paid consultants supporting SB 21 used some fuzzy math to put this figure at an additional 55,000 new barrels per day every year by using false assumptions to minimize the money ACES will generate in the future, and therefore minimize the amount of oil that will be needed to reach ACES revenue levels. See ADN article here. An independent expert will be needed to give us a better estimate of the exact amount of new oil that will be required just to earn the revenue ACES would earn over the long term. Legislators didn't have those this session – we had paid consultants who worked with the Administration and their allies to push SB 21. Those consultants offered spin and rabid defenses of SB 21, instead of objective answers during hearings.

Those "New" Investments Oil Companies and Their Political Allies Are Touting

Here are the early projects oil companies, the Governor, and their allies are claiming result from the April 2013 tax change; projects that, with one maybe, maybe, maybe possible exception, were being developed under ACES. These projects involved leases purchased before SB 21 passed, and major investments made before SB 21, and major plans that were announced before SB 21 passed. It's hard to claim you invested tens or hundreds of millions of dollars in projects under ACES with no intention of developing them, or with some hope that after you invested tens or hundreds of millions of dollars, tax laws would change. Companies don't do that. But that's what you're being told.

• Mustang - A Cool Car and Fake "New Investment" Claim # 1: Brooks Range Petroleum has been developing the "Mustang" field west of Kuparuk since before 2011. This week opinion writer Tim Bradner claimed it's moving ahead because of SB 21 - and you can expect more oil company allies and Governor's spin on that one. But here's the truth. Brooks Range Petroleum, a new player attracted to Alaska under ACES, "drilled its first well in March 2011 resulting in a discovery." A 2012 Petroleum News and North of 60 Mining News report noted they were planning to "sanction this project" in 2012 with "first oil expected in 2014." See article here. That was all reported in 2012, while ACES was in effect.

• Mooses and Bear Tooth - Not Anchorage Brew Pubs, But Fake "New Investment" Claim # 2. ConocoPhillips and the Governor claimed on April 17, three days after SB 21 passed, that ConocoPhillips was moving ahead with two projects in NPR-A, and tried to suggest those projects were moving forward because of the three day old tax bill. They got an Associated Press article out of that claim, which was a little short on facts.
  
  Fortunately, there's a record of development in print that undermines these claims. ConocoPhillips promised to move ahead with the Mooses Tooth and Bear Tooth units in NPR-A in 2009, under ACES. They did this in part under the threat that they would lose these North Slope leases for not developing them (companies have a duty to develop or lose oil leases). According to the Petroleum News, they began work in 2008 and again in 2012 (yes, under ACES) to avoid losing these fields. See article here. They expanded the Mooses Tooth Unit in 2008, promised to drill in both areas, and in early 2012 "staked nine potential well locations in the NPR-A, two in its Mooses Tooth unit and seven in the Bear Tooth unit." See article here. Companies don't do that when they don't plan on developing a field if oil is found. Another example of real life not imitating real slick PR.

• Repsol's 2011 Plans (and the Existence of Gravity?) Credited To 2013 Oil Bill Too? In April the Spanish oil giant Repsol announced it found oil in three wells. Sound fishy? Repsol had written in a March 2011 press release that it was moving ahead with developing these prospects. But just nine days after SB 21 passed the Governor issued a press release suggesting any oil from this discovery should be credited to SB 21. Expectedly, Repsol, as their shareholders who benefit from lower tax rates would want, called the lucrative tax giveaway in SB 21 "critical" to this development. Hmmm. How about a few facts?
  
  In March 2011 when Repsol came to Alaska under ACES it issued a press release delineating an aggressive Alaska oil development plan, and saying nothing about the need for oil tax reductions. It stated: "The estimated minimum exposure for this investment [in leases and development]... amounts to $768 million. The start of exploratory work is scheduled for next winter.... The North Slope of Alaska is an especially promising area for Repsol as it has already shown to be oil rich and carries low exploratory risk." They selected "2,000 square kilometers" of leases "located close to large producing fields...." Still the Governor's press release claimed SB 21 was responsible despite these facts: that SB 21 was enacted two years after these leases were purchased, two years after the "minimum" $768 million investment plan was announced (with the natural implication that more would be invested if oil were found); and two years after Repsol announced it was exploring the areas where the oil was found, in an area Repsol touted as being attractive under ACES because it brought "low exploratory risk."

• Oh, And That New Drilling Rig... Which is A Lot Like The Ones BP Ordered in 2011. The Associated Press and Tim Bradner repeated ConocoPhillips's claims that a new drilling rig was being brought to Kuparuk because of SB 21. See article here. But some facts should have been mentioned and it would have been helpful to have a perspective other than ConocoPhillip's.
  
  Here's what we know, though we'll have to get more facts on this one to be sure how to evaluate this "new" investment. That might be hard given that those facts are possessed by ConocoPhillips, a company that wants to tout any new investment as one prompted by the new oil law it pushed. First, as noted above, two industry sources so far have said - but won't yet speak publicly - that this rig has been promised by ConocoPhillips since the beginning of the year - hardly a product of the April bill passage. But let's put that aside and consider a few more facts.
  
  According to the Petroleum News ConocoPhillips has been, as it should, expanding its development in Kuparuk, its aging field that was the second largest in North America when found more than twenty years ago. ConocoPhillips commissioned a 2012 appraisal on expanding production in Kuparuk. The appraisal - commissioned under ACES - was positive.
  
  ConocoPhillips then announced, again under ACES, plans to build "pipelines" to carry this newly found oil. According to a February 2013 Petroleum News article, this oil was found in the relatively unexplored "southwest corner" of Kuparuk. And it was stated that this part was too remote to be produced from "existing drill sites," and that ConocoPhillips needed new drill pad(s) "to extend far enough to adequately develop this area of the reservoir." See article here.
  
  So a few questions remain. First, ConocoPhillips was doing what BP did in 2011 - bringing up a drilling rig that can likely reach further, vertically and horizontally, to expand its ability to tap into oil at one of its legacy fields it needs to maximize production from. Do you really think it wasn't going to do this, as part of its plans to expand production in Kuparuk, anyway?
  
  ConocoPhillips, ExxonMobil and BP have every incentive to develop as much oil as possible in a field in which they have invested billions for infrastructure. They won't likely leave large amounts of producible oil in the ground there, regardless of the tax laws. And, remember, if it is low profit oil, ACES only charged a 25% tax on profits (until a company earned more than $30 per barrel, when the windfall profits charge kicked in) - an incentive for companies to drill higher cost oil.
  
  Also, though we can't prove it, here's something worth noting. Just as BP suddenly called off its heavy oil project (which it had been working on for years) while SB 21 was being debated to arguably pressure the passage of that bill, many suspect ConocoPhillips and others have been delaying some investment announcements (in this case for a full three days after SB 21 passed) so they could pressure the Legislature into passing SB 21, and so they could claim the new bill was leading to "new" investments it was likely planning anyway.
  
  It's hard to believe that a multinational company can come up with major investment plans it wasn't considering in three days. But that's what they say. They decided on a multi-million dollar investment three days after SB 21 passed. Not likely. The full answer to this one lies in ConocoPhillips's records, which we'll likely never get to see.

• Umiat - The Next Claim? Then there's the Umiat prospect, which has been under exploratory development for a few years. Seismic work was done in 2008, and spudding has occurred. Current owner Linc Energy has announced plans for continued exploration work and drilling. It's been a promising enough prospect that the state's been pushing a road to that field since 2009. It's too early to tell, but money has been put into this field, under ACES, because it is expected to produce upwards of 50,000 barrels a day if proven up and put into production. See article here. No doubt when this happens SB 21, and not the law under which investments began, will be credited by SB 21's proponents.

I'd like some time to see corporate minutes, and internal documents, to evaluate some of the "new investment" claims you'll constantly see to justify the passage of SB 21. But that's a wish. Though, I guess, maybe it wouldn't hurt to ask. Maybe I'll write. But, like SB 21's promises, that request might rest on a hope, wing and prayer.

My Best,