Alaska’s oil and gas tax debate in 2012
The state administration is seeking to terminate the Alaska Gasline Inducement Act license held by Trans Canada Corp. Also, Gov. Sean Parnell said he will not propose an appropriation for reimbursement of TransCanada’s pipeline expenses for next year, in effect stopping the state subsidy of the pipeline company’s work on the gas pipeline and liquefied natural gas (LNG) export project (TransCanada was sharing the reimbursement, which is at 90 percend of expenses) with BP, ConocoPhillips and ExxonMobil, who are working on the project in an informal consortium).
State natural resources Commissioner Joe Balash told us the AGIA framework no longer fit the gas pipeline project with the state leaning now toward becoming an equity investor. For some historical perspective, this is the second of former Gov. Sarah Palin’s “legacy” accomplishments during her brief, stormy tenure as governor. The first was her oil tax bill, ACES, which has now been replaced by the Legislature. Meanwhile, the end of AGIA has important implications for the gas pipeline and LNG project. (Read more in our next Alaska Legislative Digest/Alaska Economic Report edition, coming soon).
Buccaneer Energy has formed a project team to plan development of a natural gas discovery at the Cosmopolitan offshore Cook Inlet prospect, company CEO Curtis Burton said in a teleconference with investors Sept. 10.
“Cosmo has turned out to be substantially nicer than we had ever hoped for,” when the asset was acquired from Pioneer Natural Resources, Burton said.
The plan is to work toward development of a gas discovery in the upper reservoir sections of the field and to work on further testing and possible development of a deeper oil reservoir, he said.
Buccaneer has now moved the Endeavour jack-up rig from the “Cosmo No. 1” well to its “Southern Cross” prospect in north Cook Inlet, and plans work on another well in the “North West Cook Inlet” prospect, but will bring the jack-up rig back to Cosmopolitan for more drilling and testing this winter, Burton told investors in the call.
Buccaneer is part-owner of the Endeavour rig along with Ezion Holdings of Singapore and the Alaska Industrial Development and Export Authority, the state’s development finance corporation.
“We have started the permitting for the new drilling we need to do,” this winter at the location, he said. Cosmopolitan is just offshore Anchor Point and south of the parts of Cook Inlet affected by winter ice.
Buccaneer is meanwhile also drilling another onshore gas well at its small Kenai Loop gas field near the city of Kenai. The “KL-4” gas well is almost drilled to its bottom location. It will take some additional time to run tests on the well and set casing before a decision on a gas production test can be made, Burton said.
The company is also sorting out issues with the Alaska Oil and Gas Conservation Commission on Kenai Loop that would affect decisions on the well, he said.
Following completion of that drilling, the mobile rig being used there, which is owned by Buccaneer, will be moved to the West Eagle prospect east of Homer, where it will drill a test well.
In other news on Cook Inlet exploration, industry sources have reported that Furie Operating Alaska, another independent exploring offshore prospects, has completed its planned drilling for the season and will be moving the jack-up rig it is using, the Spartan 151, back to Port Graham for winter storage.
Company officials could not speak the status of the company’s program but the source, asking to remain unidentified, said Furie is continued to work on development planning for a gas discovery made in late 2011.
Production tests on the discovery were done this summer, the sources said, but there is no information on gas reserve estimates. Furie Operating privately-owned and does not routinely release information on operations.
Buccaneer is a public company, in contrast, that is traded on the Australian stock exchange and under rules of that exchange must make detailed information available on its operations for investors.
When legislators open their 2013 session in Juneau, the knotty oil tax problem awaits them. Despite the new Republican-led leadership in the Senate, the Legislature will proceed cautiously in considering proposals to reduce the state’s oil production tax. The issue is highly complex and controversial, and the new Republican Senate leaders, while sympathetic to the need for changing the tax, will realize they must move carefully.
There’s more gloomy information on the Southcentral Alaska gas supply situation. Enstar Natural Gas Co. is about the begin 2013 with about 4.2 billion cubic feet of its gas requirement for the year unmet, meaning not under contract. Enstar’s total annual gas need is about 33 billion cubic feet, so this is a significant amount and the largest supply deficit the utility has ever had at the start of a year. Enstar’s gap grows to about 50 percent of its requirements by 2016. The electric utilities also see gas supply gaps out there. There are new gas wells coming on line, but they will not bring in enough supply to make a significant dent in the gap.
Will this make things worse? We hear one Beluga gas field owner is reluctant to fund its one-third share of the proposed $50 million 2013 capital budget for the field. These are funds needed for new wells and other work needed to keep the field operating at peak performance to produce gas.
A group of Japanese companies interested in a large Alaska liquefied natural gas project are getting a cool reception from the administration of Gov. Sean Parnell. The group has been talking with the administration on and off since summer, and would like to develop a large LNG plant either in Valdez or Cook Inlet they would own, with the pipeline owned by other parties. However, they have been asking for some form of Memorandum of Understanding with the state, similar to an MOU Gov. Frank Murkowski’s administration signed with the Alaska Gasline Port Authority in 2004, indicating that the state and the Japanese group would work together on a feasibility study. The president of the Japanese company has been in Alaska since mid-November attemping to meet with the state, but has not been able to arrange a meeting. The group is about to terminate its Alaska project and look elsewhere, we’re told.
It has been two and a half months since the Legislature adjourned its special session on oil taxes. Lawmakers have long since returned home to ponder the failure of the session, and to busy themselves, in most cases, on re-election campaigns. There was a lot of work done on oil taxes in the 2012 session and despite the failure, in the end there was some progress on this divisive and controversial topic.
Here’s the problem: As is well known, oil production on the North Slope is declining at rates of about 6 percent a year. The Trans Alaska Pipeline System is approaching rates of oil “throughput” where operating problems will occur – that rate is about 550,000 barrels per day. Countermeasures Alyeska Pipeline Service Co. is taking, such as heating the pipeline, will cost money. The best solution, Alyeska says, is to get more oil flowing through the pipe.
The state Department of Transportation and Public Facilities has released its summary of a reconnaissance study of possible road and rail routes to the Ambler Mining District of the western Brooks Range. The least expensive option, and the quickest to build, appears to be a road from the Dalton Highway to the Ambler district. Other routes for roads, and several options for railroads in the study, were longer and more expensive.
There are three significant known mineral deposits in the Ambler Mining District. The best known is Arctic roughly in the middle of the region, which has high grades of copper. At the eastern end is Sun, which has copper, zinc, and significant showings of silver. Smucker is to the west, a zinc deposit that also appears to have significant silver. Active exploration is underway at Arctic and Sun, but Smucker has been little recent exploration. Companies exploring in the region historically have been Kennecott Minerals, Anaconda and Cominco, and Noranda. More recently NovaGold Resources and NANA Regional Corp. have been active.
Alaska oil and gas operators are cautiously optimistic about prospects in 2012 on several fronts. Here’s an outline of where things stand for the industry in the new year:
• The state Legislature will resume work on a revamp of the state’s oil and gas production tax when it goes into its annual session Jan. 17, and although the measure remains highly controversial there are some signs that key obstacles may be overcome.
• Shell is very close to securing final approvals to pursue long-planned exploration in the federally-owned Beaufort and Chukchi Sea offshore areas of the Arctic. These areas are highly prospective and in the case of the Beaufort Sea could result in new production moving into the Trans Alaska Pipeline System in just a few years because of the presence of onshore pipelines in the area. The Chukchi is highly prospective as well but because of the remoteness of the region it would take a decade or more to plan and secure permits for infrastructure.
Utility costs in Anchorage will be mostly up in 2012, for wastewater and sewer, waste handling and electricity services. Enstar Natural Gas Co. is bucking the trend, however. Natural gas prices for 2012 will be down, the company said.