Alaskas Oil and Gas Tax Credits: An Investment in Alaskas Future J. - - PowerPoint PPT Presentation

Alaska’s Oil and Gas Tax Credits: An Investment in Alaska’s Future

• J. Benjamin Johnson

Anchorage, November 19, 2015

• Tax Credits have worked well
• A solid investment in Alaska’s future
• New field developments are needed
• But additional time is needed for projects now

underway

• Immediate cessation or severe reduction:

–Already-committed development contracts –Loss of jack-up rig –Reduced gas supplies – shortages, higher prices –Agrium, in-state LNG, new industry

• BlueCrest’s suggestions

Main Points – Applicable to Cook Inlet

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Typical Project Life-Cycle Cash Flow

Cosmopolitan

(as of 11-19-2015)

Break-Even

(10-15 years from Sanction)

Initial Self-Sustaining Point

(monthly cash flow above zero)

Exploration discoveries do not guarantee production!

Initial Discovery

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Cumulative Cash Flow

Cook Inlet Crude Oil Supply and Demand History

Source: State of Alaska Department of Natural Resources.

25,000 50,000 75,000 100,000 125,000 150,000 175,000 200,000 225,000 250,000 1958 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

bopd

1.35 billion bbl cumulative production to date

Tesoro refinery crude runs (avg.)

(Exports) (Imports) More Cook Inlet crude oil =

• Improved security of supply
• Lower cost products to Alaskans

Impact of tax credits

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Cook Inlet Natural Gas Supply and Demand History/Forecast

Source: State of Alaska Department of Natural Resources and US Energy Information Administration.

7.6 tcf cumulative production to date

mmscfpd

100 200 300 400 500 600 700 800 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15

Substantial Cook Inlet gas has now been discovered but must be developed

Daily production rate

Total Southcentral consumption rate

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Original production decline Impact of tax credits to-date (Hilcorp)

2016 2017 2018 2019 2020 2021 2022

Discovered but undeveloped gas Projections

• Without the tax credits, there would have already been a

severe shortage

• Probably now have enough gas for 4-5 years’ local demand

–Very close balance between supply and demand –Any disruption could have severe consequences for Southcentral consumers

• Cook Inlet gas market does not exhibit typical elasticity of

supply

–Physical limitation on available gas supply

• No easy way to import gas

–Substantial new supplies would take 3-5 years

• New gas must be developed now to ensure future supply
• Markets for sales of excess capacity are necessary

–Fairbanks/Interior, Agrium, New in-state LNG, exports

Cook Inlet Gas Supply and Demand

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• Examined many domestic acquisition opportunities

–Evaluated comparative economics Alaska versus Lower-48 –Alaska costs are 3-5X higher –But Alaska’s tax credit program made the difference

• Employed the Endeavor rig (funded by AIDEA)
• The Cosmopolitan State #1 well was successful

–Proved up more Cosmopolitan oil –Discovered substantial new gas

Tax Credits Brought BlueCrest to the Cosmopolitan Unit

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Cosmopolitan Unit Development Concept Oil Reservoirs Oil Reservoirs Gas Reservoirs Gas Reservoirs

• Separate oil and gas reservoirs are located approximately

three miles offshore in the Cook Inlet

• The oil reservoirs can be reached by drilling wells from
• nshore
• The gas reservoirs are not as deep and can only be reached

with offshore wells and platforms

• Gas development is now on hold, pending confidence of

tax credit continuation or reasonable alternative Onshore oil development began in 2014 and is well underway, relying on the existing tax credit structure

• Requires approximately $525 million total investment before production

is self-sustaining (re: prior slide)

– All major contracts have been awarded (turnkey) – Facilities and drilling rig all close to completion – Construction/installation now underway – Startup in April 2016

• Cosmopolitan funding plan ($525 million):

– Funding sources are based on the existing tax laws – BlueCrest has already invested $200 million in cash (equity) – Have received ~$25 million to-date in tax credits – AIDEA loan ($30 million) for purchase of onshore drilling rig ($44 million total cost) – Projected future tax credits (three years 2016-2018): $120 million – Committed to a large private loan for the balance

Cosmopolitan Unit Oil Development

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Future tax credits (2016-2018) under existing law are integral to funding the already-committed contracts

• WesPac joint development plan:

–First wells drilled in 2016

• Funding decision needed by early 2016

–First gas production/sales in 2018

• All long term gas sales arrangements uncertain, pending tax credit

confirmation –Multiple Southcentral utilities (at lower prices than current alternatives) –Agrium (needs to make decision by year-end 2015)

• Development of Cosmopolitan gas would also provide ample gas for

LNG distribution throughout the state –Fairbanks/Interior –Lowered energy costs for villages, fish processors, other new industry

• Entire Gas development is on hold for now, pending

confirmation/stabilization of tax credit program

Cosmopolitan Offshore Gas Development

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• Now the only offshore rig in the Cook Inlet
• The two known large gas discoveries are offshore

– Kitchen Lights & Cosmopolitan – At least one jackup rig is required for any more wells – Multiple rigs needed for exploration and development

• Furie has now released the rig
• Spartan kept rig in Alaska to drill 2016 Cosmopolitan gas

– Spartan rig has depth limitations, but works for Cosmopolitan

• Spartan cannot keep rig standing-by in Alaska without 2016 use

– Once the rig leaves, costs to mobilize a new rig to Cook Inlet will be very high – Funding commitment on Spartan 151 rig must be made by early 2016

• BlueCrest and WesPac cannot commit to Cosmopolitan gas development

without economic advantage of existing tax credits – Or a reasonable alternative

• No funding commitment for 2016 offshore drilling can be made without

confidence of ability to complete the entire development

Spartan 151 Drilling Rig – Critical Path to Offshore Development

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• Benefits to the State of Alaska must outweigh costs

– Security of supply, jobs – Direct financial benefit

• Reductions/elimination of tax credits will result in lowered future state

revenues – What is the appropriate balance between current state incentives and future State revenues?

• Take a long-term investment approach

– All new developments take years to become productive

• The analysis should include all benefits/costs (taxes and royalties)

–Cosmopolitan basic example (including only oil royalties):

• 50 million barrels oil at $58/bbl, State royalties = $362mm, credits $120mm
• Benefit/Cost ratio = 300%
• Consider risks versus rewards

– Development is low risk, exploration is higher risk

• But exploration is the only source of future developments

Factors to Consider for Tax Credit Changes

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(Continued on next slide)

• Honor commitments to those who have already committed large sums

for development of known fields

– Low-risk, quantifiable benefits to the State of Alaska – Contracts were entered into based on existing tax structure

• Stability of tax structure is vital for continued industry investments

– Alaskan projects are typically very long-term – Potential investors must have confidence in future tax regime stability – A crisis in confidence -- immediate and lasting withdrawal of Alaska activity – A retroactive change would be devastating to Alaska’s future

Factors to Consider for Changes in Tax Credit Program

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(Continued from previous slide)

• NO RETROACTIVE CHANGES!
• Fully fund filings based on statutes at time of filing
• Reasonable time to phase into any new system
• Developments now in progress:

–Continue all current-law credit provisions, with phased expiration

• Existing credits for 2 years (including NOL credit)
• Phase-out after revenues exceed costs
• Alternative: State guarantees loans

–For new projects not currently underway –Third-party investment requires no immediate State funds –Non-recourse loans for low-risk/high-reward projects

• Time is of the essence for clarifying changes

BlueCrest’s Suggestions for Development Project Credits

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