A Citizen’s Guide

ON THE NORTH SLOPE — While the major oil companies promise to make a strong showing in the discussions of Gov. Sarah Palin’s proposed changes to tax oil and gas production in Alaska, a much smaller company could become the fulcrum for debates in the Legislature and advertising campaigns this fall.

The Irving, Texas-based Pioneer Natural Resources is nearly done building Oooguruk Island, a six-acre gravel drilling pad in the Beaufort Sea. The company plans to drill wells this fall and produce oil next spring.

As the first independent operator on the North Slope, Pioneer represents a new stage in oil and gas investment and exploration in Alaska, one where smaller companies develop smaller oil fields previously ignored by larger companies.

“The independents are a big part of our future for oil and gas development in the state,” said Pat Galvin, commissioner of the Alaska Department of Revenue.

The state and the oil industry agree on the importance new investments will play in offsetting declining production levels on the North Slope but disagree on whether the new bill, called Alaska’s Clear and Equitable Share, or ACES, will encourage or discourage those investments.

ACES increases the net profits tax on oil and gas production from 22.5 percent to 25 percent and adds a 10 percent gross-based floor tax on Prudhoe Bay and Kuparuk, the two oldest and largest fields in the state. But the bill also expands the tax credits a companies can earn for taking on expensive investments.

The oil industry believes the tax increase brings Alaska closer and closer to being unaffordable.

Kevin Mitchell, vice president of finance and administration for ConocoPhillips in Alaska, told Fairbanks members of the Alaska Support Industry Alliance on Oct. 3 that ACES would increase the “government take” — the mixture of leases, royalties and taxes that go to the state — around 4 percent, making the already expensive North Slope working environment hundreds of millions of dollars more expensive than it is now.

The Palin administration believes ACES strikes a balance between the needs of the state and the needs of the industry.

“The impact that the tax system would have on new exploration projects is a big part of the equation,” Galvin said. “While we increased the rate to increase the state’s share, it was with an eye toward … keeping economics positive for these other projects.”

The poster child for the industry

The arrival of smaller companies to an older oil field is common around the world, occurring 20 to 30 years ago in the Gulf of Mexico and starting recently in the North Sea.

“We believe that Alaska can have a similar renaissance,” Galvin said.

Pioneer executives have described creating a “step change,” where smaller, more agile companies can turn investments into profits within a much shorter time frame and with much smaller oil fields.

Oooguruk is expected to hold as much as 90 million barrels of oil. By comparison, Prudhoe Bay has already produced more than 11 billion barrels of oil.

While Pioneer is a multi-million-dollar publicly-traded corporation, it is much smaller than the multi-billion dollar, global operations run by ConocoPhillips, BP and Exxon Mobil.

As one of the largest independent oil companies in the United States, Pioneer explores and produces resources like the major oil companies but does not own refineries or other major pieces of infrastructure those companies own.

During a company sponsored press tour of the island in late September, Tim Dove, president and chief operating officer for Pioneer in Texas, called Oooguruk a “bellwether project in Alaska” and “an important one that independents will be watching.”

Pioneer believes the governor’s tax proposal will hit independents harder than major oil companies, because the relatively smaller companies operate on smaller margins and the tax increase will “drag down the total return,” according to Dove.

“[Oooguruk’s] such a large percentage of the money we spend as a company total,” Dove said.

The Alaska Oil and Gas Association believes Pioneer represents the concerns of the industry going into the special legislative session later this month to debate the bill.

The oil and gas advocacy group recently sponsored a television commercial featuring Ken Sheffield, the head of Pioneer’s Alaska operations based in Anchorage, saying that “the pipeline is only one-third full and production is falling requiring billions of dollars of new investment to keep Alaska’s oil and gas industry going. Changing tax policy year after year is the wrong path to keep Alaska competitive.”

AOGA executive director Marilyn Crockett said Pioneer is in an “unenviable position. Since the company arrived in Alaska in 2002, it has worked under two tax structures — the Economic Limit Factor and the Petroleum Production Tax — and is looking at a third without having produced a single drop of oil.

“Given the particular situation that Pioneer’s in, it made really good sense to have them be one of the companies that sends the message that a change in the tax structure affects all companies,” Crockett said.

Incentives for investments

Under the Petroleum Production Tax, or PPT, Pioneer earned $25 million in tax credits this past June, which Sheffield called “a modest incentive to invest more aggressively.” The company has not had much luck in its exploration ventures on leases it holds in the National Petroleum Reserve-Alaska and cannot collect its tax credits until Oooguruk starts producing oil.

Galvin said that the $25 million tax credit didn’t cover the expenses Pioneer incurred, though, because the PPT capped credits. Galvin believes the administration’s plan will help a company like Pioneer by removing the cap and expanding the credit program to include not only an exploration well, which tells if there is oil in an area, but also two delineation wells, which gauge the dimensions of a field.

Crockett called those changes “important tools in the toolbox” for getting new companies to explore the North Slope. But she estimated that the combination of new companies, production from satellite fields and work to develop “heavy oil” resources will account for roughly half of the future oil production in the state. The other half, she estimated, will come from squeezing the last drops out of existing fields, the largest of which are taxed more heavily under ACES.

Speaking to the board of directors of the Greater Fairbanks Chamber of Commerce the day before Palin released her plan, Crockett cited state figures estimating that new investments will account for nearly 26 percent of all oil produced in Alaska 2010 and nearly 50 percent by 2017.

“People need to focus on where production is going to come from in the future,” Crockett said in a phone interview on Friday.

The state plans to hold town hall meetings on ACES around the state in the coming weeks.

Contact staff writer Eric Lidji at 459-7504.