Alaska’s Oil and Gas Tax Credits: An Investment in Alaska’s Future J. Benjamin Johnson Anchorage, November 19, 2015
Main Points – Applicable to Cook Inlet • 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 3
Typical Project Life-Cycle Cash Flow Exploration discoveries do not guarantee production! Break-Even (10-15 years from Sanction) Cumulative Cash Flow Initial Discovery Cosmopolitan Initial Self-Sustaining Point (as of 11-19-2015) (monthly cash flow above zero ) 4
Cook Inlet Crude Oil Supply and Demand History 250,000 1.35 billion bbl cumulative production to date 225,000 More Cook Inlet crude oil (Exports) = 200,000 • Improved security of supply 175,000 • Lower cost products to Alaskans 150,000 bopd 125,000 100,000 75,000 Tesoro refinery crude runs (avg.) 50,000 (Imports) 25,000 Impact of tax credits 0 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 Source: State of Alaska Department of Natural Resources. 5
Cook Inlet Natural Gas Supply and Demand History/Forecast 7.6 tcf cumulative production to date Substantial Cook Inlet gas 800 has now been discovered Daily production rate 700 but must be developed Original 600 production decline 500 Impact of tax mmscfpd Discovered but credits to-date undeveloped gas 400 (Hilcorp) 300 200 Total Southcentral consumption rate 100 Projections 0 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 2018 2022 2017 2019 2020 2021 2016 Source: State of Alaska Department of Natural Resources and US Energy Information Administration. 6
Cook Inlet Gas Supply and Demand • 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 7
Tax Credits Brought BlueCrest to the Cosmopolitan Unit • 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 8
Cosmopolitan Unit Development Concept • 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 onshore • 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 Gas Reservoirs Gas Reservoirs and is well underway, relying on the existing tax Oil Reservoirs Oil Reservoirs credit structure
Cosmopolitan Unit Oil Development • 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 Future tax credits (2016-2018) under existing law are integral to funding the already-committed contracts 10
Cosmopolitan Offshore Gas Development • 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 11
Spartan 151 Drilling Rig – Critical Path to Offshore Development • 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 12
Factors to Consider for Tax Credit Changes • 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 (Continued on next slide) 14
Factors to Consider for Changes in Tax Credit Program (Continued from previous 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 15
BlueCrest’s Suggestions for Development Project Credits • 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 17
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