SB 21 and North Slope Natural Gas Commercialization

Transcription

1 SB 21 and North Slope Natural Gas Commercialization Roger Marks Anchorage Chapter SPE October 10,

2 Outline Oil Production Tax ACES and SB 21 review and comparison The referendum and investment climate North Slope Natural Gas Commercialization Political Climate Demand Competition Cost Price The bullet line 2

3 A Short History of the First 30 Years of Alaska s Production Tax : Gross System (Economic Limit Factor [ELF]) August 2006: Net Tax Enacted (Petroleum Production Tax [PPT]) Bribery Scandals September 06: FBI raids offices of 6 legislators Spring 07: 3 legislators indicted October 07: Palin submits revised tax bill (ACES) Fall 07: 2 convictions / Rumors that 26 will be indicted November 2007: ACES Enacted 3

4 Tax Rate 60% ACES Severance Tax Rate (Before Credits) 50% 40% 30% 20% 10% 0% $0 $20 $40 $60 $80 $100 $120 Net Value ($/bbl) 2006 Tax Palin Submittal ACES 4

5 Oil Does Not Produce Itself: Current International Investment Climate Lots of opportunities Capital is fluid Capital is finite Capital goes to where it gets the best deal Jurisdictions compete Taxes an important piece Fiscal system price paid for opportunity to develop Fair share is what you can get in a competitive environment 5

6 Suggested Alaska Peer Group Parameters Geography (North American regimes over 200,000 b/d) Institutional environment (OECD nations: tax & royalty regimes, leases by competitive bidding, statutory rule) Operating conditions (Arctic) Geological potential (similar production and reserves: production 400, ,000 b/d & reserves 2-6 billion barrels) 6

7 Government Take 80% 75% 70% Alaska Peer Group Government Take at $110/bbl Market Price (Total Taxes as a Percentage of Net Value) (All Taxes & Royalties) ACES 72% 65% 60% 55% 50% 45% 40% 7

8 $billions $4.0 How Much More Producers Earn After-Tax at $110/bbl Compared to Alaska ($billions) (At current production) $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 -$0.5 -$1.0 8

9 140% Increase in Capital Spending for Exploration & Development (Oil price [$/bbl]: 2006 = $62; 2012 = $113) 120% 100% 80% 60% 40% 20% 0% Alaska United States Worldwide 9

10 Barrels Per Day Forecasted ANS Production under ACES 1,000, , , , , , , , , , Source: Alaska Dept of Revenue (Spring 2013) 10

11 SB 21: Developing a New Tax Goal: Internationally competitive under a spectrum of prices Overcome regressive elements at low prices 11

12 Features of SB 21 35% base rate No progressivity No capital credit Gross Revenue Exclusion: 20% for new oil 30% for high royalty fields Per bbl credit: New oil: $5/bbl Old oil: sliding scale: Up to $80/bbl gross: $8/bbl Over $150/bbl gross: $0/bbl 12

13 Effective Tax Rate How Gross Revenue Exclusion Affects Effective Tax Rate 40% 35% 30% 25% 20% 15% 10% 5% 0% $70 $90 $110 $130 $150 $170 $190 ANS Market Price ($/bbl) effective tax rate without 20% GRE effective tax rate with 20% GRE 13

14 Effective Tax Rate How Per Barrel Credit Affects Effective Tax Rate 40% 35% 30% 25% 20% 15% 10% 5% 0% $70 $90 $110 $130 $150 $170 $190 ANS Market Price ($/bbl) effective tax rate without $5/bbl credit effective tax rate with $5/bbl credit 14

15 Government Take 80% Government Take: SB 21 75% 70% 65% 60% 55% 50% $70 $90 $110 $130 $150 $170 $190 ANS Market Price ($/bbl) Existing Production New Production 15

16 Support for SB 21 May Not Be Overwhelming Short-term revenue losses Inability of producers to guarantee investment Record of production decline under ELF years The repeal referendum 16

17 Short-Term Revenue Losses: The ACES Trap Economic principles demonstrate that with a competitive tax there should be increased investment / production Exactly how much is impossible to say But there will be lead times for the response to unfold Therefore the tax cut will cause short-term revenue losses 17

18 The Oil is There Estimated technically and economically recoverable oil at $90/bbl price Central North Slope: 3.0 billion barrels* Half of this is conventional oil in existing fields NPRA: 0.5 billion barrels* * Source: USGS Report

19 $Billions $150 Total Petroleum Revenues over 15 Years* ACES at Trended Current Production Forecast vs. SB 21 with Various Potential Production Increases (w/5-year lead time) $110/bbl ANS Market Price ($billions) $125 $100 $75 $50 ACES at current decline rate $25 $0 breakeven 0 20,000 40,000 60,000 80, , , , , , ,000 Barrels Per Day Increase Over Forecasted Production Under ACES * Royalties, production tax, property tax, state corporate income tax 19

20 $Billions $200 Total Petroleum Revenues over 15 Years* ACES at Trended Current Production Forecast vs. SB 21 with Various Potential Reserve Growth (w/5-year lead time) $110/bbl ANS Market Price ($Billions) $175 $150 $125 $100 $75 $50 ACES with current decline rate $25 breakeven $ Billions of Barrels in Potential Reserve Growth * Royalties, production tax, property tax, state corporate income tax 20

21 Why Producers Cannot Commit to Additional Investment Nobody made them promise not to invest less when ACES passed Corporate budgeting process Forces outside producers control State is constitutionally forbidden from engaging in any such deal where it commits to not changing taxes in exchange for producer response 21

22 Production Decline Prior to ACES Tax rate on most of the oil was not low While 75% of the fields had low tax rates, 60% of the oil had tax rates similar to ACES at the oil prices at the time Prices averaged $18/bbl Incentives not to invest in big fields (very high marginal tax rates due to field size and well productivity elements) Incentives to invest in small fields 22

23 Barrels Per Day 1,600,000 The ELF Years: High Tax vs. Low Tax Fields (Barrels Per Day) 1,400,000 1,200,000 1,000, , , , , High Tax Fields Low Tax Fields 23

24 The Political Climate The ACES era may have set a dangerous precedent Punishing captive investment Considered no different than a seizure of assets 24

25 Uncertainty and Political Risk The threat of 2007 happening again: putting in captive investment only to have it punished once it cannot go anywhere Huge tax increase may only be: An election away A legislative vote away A redistricting away A referendum away An oil spill away A bribe away 25

26 North Slope Natural Gas Commercialization Will investors spend $65 billion in this environment? Constitutional amendment for fiscal certainty necessary? 26

27 Large Scale North Slope Gas bcf/d from Prudhoe Bay / Pt. Thomson Gas treatment facility on North Slope 800 mile pipeline to Nikiski or Valdez Liquefaction plant bcd/d sold into Asia $45-$65 billion cost (excluding shipping) 27

28 Problems Fiscal risk Fierce competition High cost Large size Falling prices 28

29 BCF/D 50 Asia LNG Demand (BCF/D) Under Contract Potential New Supplies 29

30 Brief History of North Slope Producers Efforts : Low prices in the U.S s Looked at Asia LNG Dismissed as non-competitive 2000: U.S. prices up look at U.S. 2007: Shale gas revolution begins Back to Asia competition more daunting Funded 90% by state through AGIA 30

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34 Potential Lower 48 & Canadian Projects Total = 44 bcf/d DOE has approved 4 export licenses 20 more applications pending These 24 have more capacity than world consumed in

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36 Asian LNG Pricing Prices had been linked to oil Reflected in existing long-term contracts Made sense as long as oil and gas pricing were related De-coupling of oil and gas began in 2005 Torrent of new gas supplies Demise of diesel fueled power plants With high oil prices suppliers were making a windfall Buyers understand this With intense supply competition buyers can leverage for lower prices based on actual costs Will have to compete based on cost 36

37 Costs Producers estimate costs of 3 bcf/d project (treatment, pipeline, liquefaction) at $45-$65 billion $11-$16/mmbtu breakeven cost 37

38 ALASKA 38

39 They All Have Problems: Some Will Be Built High costs Politics Environment Distance to markets Long lead times Domestic energy needs 39

40 Alaska Advantages & Disadvantages Advantages Distance to market Low gas production costs Gas already produced Share costs with oil Proved reserves Disadvantages Need for long large pipeline High cost Seasonal restrictions Stronger environmental restrictions 40

41 Alaska s Big Problem: The Size Burden Alaska is the most sizeable pipeline project Alaska is biggest, most expensive project Needs to be big to bring the p/unit costs down on the pipeline Needs to get all the gas into the market in a short amount of time to preserve economics (i.e., 2 years) Asian market growth = 2 bcf/d/yr To capture bcf/d in demand over two years would mean capturing over 50% of the incremental demand over that time frame 41

42 The Bullet Line (AGDC) 500 mmcfd from Prudhoe Bay to Big Lake via Fairbanks $7.7 billion estimated cost Tariff of $5-$7/mmbtu plus local distribution costs plus wellhead purchase price 2015 open season with 2019 first gas (if successful) 42

43 Prospects for Successful Open Season Half of throughput (250 mmcfd) for local demand However, because of economies of scale, a pipeline serving only local demand would have an unacceptably high tariff Dependent on other half of throughput (250 mmcfd) to be industrial gas, most likely LNG exports to bring per unit costs down Will anyone pay $10/mmbtu (or more) for feedstock to start LNG process? Cook Inlet gas supply (or perhaps cheaper LNG imports) still available to local utilities Tax issue still looms for North Slope producers 43

44 Roger Marks & Associates