Alaska Energy Boom Starts Cranking Up

Chriss Street
In a flurry of Alaskan oil deals, London-based BP announced sale of interests to American-based Hilcorp in four North Slope oil fields and the use of the proceeds for a big growth of investments on the North Slope. The major reason for America’s energy crisis over the last two decades was the 72% decline of Alaska oil production. But passage of Bill 21’s exploration and development tax cuts is igniting a new American energy boom.

Alaska North Slope (ANS) oil production accounts for over 1/3 of the entire economy of the state and contributes 90% of the state government budget.  But since oil production in 1992, production has fallen by 1.3 million barrels a day (mpd)from 1.8 mpd to .5 mpd. The Trans-Alaska Pipeline System that was built to carry over 2 mpd of ANS oil is now 3/4 empty. More importantly, ANS lower volumes combined with distance to markets has made the Alaskan oil relatively more expensive than fracked shale oil in North Dakota (Bakken) and Texas (Eagle Ford), oil from resurgent drilling on older existing fields in the Permian basin and new oil sands production in Canada.

To try to resuscitate oil production and stay solvent, last year Alaska’s Legislature passed Bill 21, which became law on January 1, 2014. The legislation has a number of oil and gas tax incentive items, but the biggest stimulus is “Gross Revenue Exclusion” (GRE) that on new fields or new projects within existing fields allows 20% of “new oil” to be tax free. It also extends for small to medium-sized independent companies, loss carry forward tax credits from 2016 to 2022. This works out to a highly lucrative 45% tax credit for smaller drillers on the North Slope until 2016, and then 35% after that.

Although ANWAR and numerous other colossal oil exploration and development projects in Alaska were halted by the Obama Administration’s federal moratorium on offshore drilling, all the ANS projects are on State of Alaska lands. Furthermore, the administration’s new delay on the Keystone XL Pipeline Project gives ANS an advantage of guaranteed transport from existing capacity in the Trans-Alaska Pipeline. 

London-based oil giant BP announced that because of the tax cut, the company would sell interests in 4 existing fields for about $10 billion, so that Hilcorp, a smaller, more aggressive company based in Houston, can benefit from the independent company incentives to extract more oil out of existing fields.  

BP Exploration president Janet Weiss said, “Our plan is to reinvest 90 cents on every dollar we make back into Alaska,” she said. “That’s a 60 percent increase over the levels” before taxes were cut. 

Prior to the incentives passage, BP only planned to add a drilling rig in 2015 and another in 2016 at Prudhoe Bay, resulting in a total investment of only $1 billion over five years and maybe 30-40 wells. But with the tax incentives and proceeds of the transaction, BP is cranking up billions of dollars in ANS oil exploration and development:

  • Submit a development plan in 2014 to drill for the Liberty field two miles under the Beaufort Sea to tap 100 million barrels;
  • Start a 3-D seismic survey of the northern edge of Prudhoe Bay covering a 190 square mile area that could hold 55 million barrels of new oil and lead to 30 wells;
  • Develop 200 or more production wells in the Sag River over next 10-year period to add 150 to 220 million barrels of new reserves to the Prudhoe Bay;
  • Drill 7 exploratory wells in the Milne Point that could increase estimates of original oil reserves from 100 million barrels to 330 million barrels.

Hilcorp believes its ability to breathe new life into mature oil basins is a great fit for the fields, said John Barnes, Hilcorp’s senior VP of exploration and production. He said the Bill 21 tax cut that is worth hundreds of millions of dollars a year for Alaska’s largest oil producers is “an encouraging sign for the long-term viability of its operations.”

Alaska Department of Natural Resources Commissioner Joe Balash said the old Alaska tax regime with rates that rose and fell with the price of oil made transactions like the Hilcorp-BP difficult.“Having a stable tax regime is a big factor in trying to evaluate the remaining value of any oil field.” He praised the BP-Hilcorp deal as great news because “folks at Hilcorp want to be here and have demonstrated their ability to increase production out of mature assets.”

The author welcomes feedback and will respond to comments by readers

In a flurry of Alaskan oil deals, London-based BP announced sale of interests to American-based Hilcorp in four North Slope oil fields and the use of the proceeds for a big growth of investments on the North Slope. The major reason for America’s energy crisis over the last two decades was the 72% decline of Alaska oil production. But passage of Bill 21’s exploration and development tax cuts is igniting a new American energy boom.

Alaska North Slope (ANS) oil production accounts for over 1/3 of the entire economy of the state and contributes 90% of the state government budget.  But since oil production in 1992, production has fallen by 1.3 million barrels a day (mpd)from 1.8 mpd to .5 mpd. The Trans-Alaska Pipeline System that was built to carry over 2 mpd of ANS oil is now 3/4 empty. More importantly, ANS lower volumes combined with distance to markets has made the Alaskan oil relatively more expensive than fracked shale oil in North Dakota (Bakken) and Texas (Eagle Ford), oil from resurgent drilling on older existing fields in the Permian basin and new oil sands production in Canada.

To try to resuscitate oil production and stay solvent, last year Alaska’s Legislature passed Bill 21, which became law on January 1, 2014. The legislation has a number of oil and gas tax incentive items, but the biggest stimulus is “Gross Revenue Exclusion” (GRE) that on new fields or new projects within existing fields allows 20% of “new oil” to be tax free. It also extends for small to medium-sized independent companies, loss carry forward tax credits from 2016 to 2022. This works out to a highly lucrative 45% tax credit for smaller drillers on the North Slope until 2016, and then 35% after that.

Although ANWAR and numerous other colossal oil exploration and development projects in Alaska were halted by the Obama Administration’s federal moratorium on offshore drilling, all the ANS projects are on State of Alaska lands. Furthermore, the administration’s new delay on the Keystone XL Pipeline Project gives ANS an advantage of guaranteed transport from existing capacity in the Trans-Alaska Pipeline. 

London-based oil giant BP announced that because of the tax cut, the company would sell interests in 4 existing fields for about $10 billion, so that Hilcorp, a smaller, more aggressive company based in Houston, can benefit from the independent company incentives to extract more oil out of existing fields.  

BP Exploration president Janet Weiss said, “Our plan is to reinvest 90 cents on every dollar we make back into Alaska,” she said. “That’s a 60 percent increase over the levels” before taxes were cut. 

Prior to the incentives passage, BP only planned to add a drilling rig in 2015 and another in 2016 at Prudhoe Bay, resulting in a total investment of only $1 billion over five years and maybe 30-40 wells. But with the tax incentives and proceeds of the transaction, BP is cranking up billions of dollars in ANS oil exploration and development:

  • Submit a development plan in 2014 to drill for the Liberty field two miles under the Beaufort Sea to tap 100 million barrels;
  • Start a 3-D seismic survey of the northern edge of Prudhoe Bay covering a 190 square mile area that could hold 55 million barrels of new oil and lead to 30 wells;
  • Develop 200 or more production wells in the Sag River over next 10-year period to add 150 to 220 million barrels of new reserves to the Prudhoe Bay;
  • Drill 7 exploratory wells in the Milne Point that could increase estimates of original oil reserves from 100 million barrels to 330 million barrels.

Hilcorp believes its ability to breathe new life into mature oil basins is a great fit for the fields, said John Barnes, Hilcorp’s senior VP of exploration and production. He said the Bill 21 tax cut that is worth hundreds of millions of dollars a year for Alaska’s largest oil producers is “an encouraging sign for the long-term viability of its operations.”

Alaska Department of Natural Resources Commissioner Joe Balash said the old Alaska tax regime with rates that rose and fell with the price of oil made transactions like the Hilcorp-BP difficult.“Having a stable tax regime is a big factor in trying to evaluate the remaining value of any oil field.” He praised the BP-Hilcorp deal as great news because “folks at Hilcorp want to be here and have demonstrated their ability to increase production out of mature assets.”

The author welcomes feedback and will respond to comments by readers