Q & A
How has the restructured oil tax law (SB 21) stimulated investments and projects in Alaska? Please cite specific examples?
It’s a good question, and one that many Alaskans wonder about. Let’s look at why tax reform is working for Alaska, and why voters made the choice in giving oil tax reform a chance to work.
First of all, Alaska is benefitting from exciting new investment in our oil patch since the tax law passed. Overall, the new projects that have been announced since SB 21 became law add up to more than $5 billion dollars. That is especially good news during a time of low oil prices when other oil provinces have seen large lay-offs and a significant slow-down in activity. You asked for specifics, so here is what SB 21 means to a new company in Alaska.
Caelus is in Alaska due in much part to the passage of SB 21. Historically an international exploration company, the move to a more stable and competitive fiscal system attracted the attention of our company and investors. We purchased the Oooguruk Unit in April of 2014. Since then, we’ve been very busy:
We sanctioned the Nuna project, a $1.5 billion new oil development and spent millions in installing the gravel road and initial drillsite pad in 2015. First oil is expected in 2017.
Caelus was one of the largest lease buyers during the fall 2014 lease sale, acquiring 323,000 new acres. This past winter we acquired new high resolution 3D seismic over both Nuna and our new leasehold in the east.
Lastly, Caelus acquired a 75 working interest ownership this summer in lease located in a highly prospective area known as Smith Bay in the shallow State waters outboard of NPRA. The company is fast at work preparing to drill up to 2 exploration wells this winter season.
As these projects move into the production phase, Alaskans will get the benefit of more oil moving down the Trans-Alaska Pipeline and will enjoy royalties and production taxes that flow from these ventures. More activity and production means more jobs and a better outlook for the funding of public services like education, healthcare, and public safety.
The activities on the Slope are reason enough to be optimistic about Alaska’s future, but when you add in the fact that State revenues also look better under SB 21 compared to the previous regime, voters look even wiser. The new tax law was designed to protect the State’s pocketbook at low oil prices. When prices drop, as they have in the last year, the State collects more in revenues that it otherwise would have due to the gross minimum tax floor. One estimate puts the additional revenues made possible by oil tax reform at almost $1 billion over the next two years! Prices are still low, and so Alaska’s revenue shortfall is still a challenge, but tax reform improved the situation markedly.
SB 21 is working for Caelus, and other companies new to Alaska, and it’s working for Alaskans.
Without further development? How long until the Trans Alaska Pipeline shuts down?
More than 2 million barrels per day (BPD) once surged through the Trans Alaska Pipeline System (TAPS). Since peak flow in the 1980s, throughput in the pipeline has dropped; in 2014 TAPS moved an average of 513,441 BPD.
The 48” pipeline wasn’t designed to move low volumes of oil, but regular maintenance and renewal combined with solid engineering allow Alyeska to address the technical challenges associated with low throughput. Alyeska’s studies and laboratory testing suggest the company can reliably operate TAPS down to about 300,000 BPD by investing in mitigation measures such as adding heat and increasing the use of cleaning pigs. The company is also pursuing technical and operating solutions that extend pipeline operations beyond (lower than) 300,000 barrels per day.
The solutions that extend the life of TAPS in a low throughput environment are costly. Though technical solutions may be available, at some point the cost of operating the pipeline will outweigh the benefit.
The best solution for TAPS and for Alaska is to increase the volume of oil flowing through the pipeline. TAPS has reliably moved more than 17 billion barrels of Alaska North Slope crude oil. Billions of barrels of proven reserves remain on the North Slope and Alaska’s offshore. With a favorable fiscal climate, access to resources and a reasonable regulatory climate, crude oil could be flowing through TAPS for years to come.
How do we know that there will be long-term investment in the state by the oil and gas industry to benefit the next generation of Alaskans?
In the oil business, or any business, outside factors play a large role. For example, if oil prices fall to $20 a barrel, then a new project that had been planned for the North Slope has to be reconsidered. The same way that families have to adjust if income suddenly drops, so do the oil companies. But there is one major factor that Alaska has going for it – we are rich in resources. We know that there is still a lot of recoverable oil and natural gas on the North Slope, in Cook Inlet, and in Alaska’s offshore. In fact, there is more oil in Alaska’s Chukchi Sea than there was in Prudhoe Bay when it was discovered.
Oil-producing regions or states like Alaska CAN control the policies and regulations that attract future investments. States and other governments put together what they think are the most attractive development policies, and then gauge how effective they are by the response from companies. That is where Alaska has good news to share. Since the State changed its oil tax policy in 2013, more companies have spent money here on new projects that have put hundreds of Alaskans to work and should result in more oil in the pipeline. The State set the policy, and investment dollars have followed. That is really the best way for Alaska to make sure that we stay in the global investment game for years to come to benefit all Alaskans.