As oil prices continue to plunge, and as companies are reevaluating shale oil investments in the Lower 48, something seems to be working in Alaska. On Wednesday, the state accepted bids for 524,387 acres of land, and oil companies, most of them independents, spent $65.2 million on lease rights to that land. It was the richest bid since 1993. Dallas-based Caelus Energy and 70 & 148 LLC, a subsidiary of Denver-based Armstrong Oil and Gas, respectively bid on the most acreage and paid the most for acreage. Last year, a comparable lease sale drew in $5.1 million in bids. Many, particularly those who championed it and defended it, are attributing that success to the passage of SB 21.
Activity in Fairbanks is through the roof. Every pipe yard is stuffed, every truck available is heading north loaded to the max.
Oil cos take the long view and they understand that oil is not going to stay at $80. They also know that Bakken and the big shale fields have a short life. In 15-20 yrs, production will fall off a cliff down there.
Lynn,
Alaska’s budgetary problems have three main causes.
(1) Lack of ANS production, which in turn has been caused by a lack of investment and too few companies coming to Alaska. ACES was amazing in bringing in a ton of revenue. We would be totally screwed right now if it wasn’t on the books to build up our reserves. But ACES kept capital and companies away from Alaska and did nothing to reverse the throughput decline. Under Parnell the state took many steps to attract capital and companies to get more wells drilled and more reserves into production. For example, the Parnell Administration changed the tax structure, improved the permitting process, and marketed the state to attract investors and companies. All of the new activity and the new companies on the Slope are a direct response to the Parnell Administration’s efforts. We are already seeing dividends – in particular more jobs and more production, which means more revenue.
(2) We are way too reliant on oil to fund state services. It is insanity. We must find a way to diversify.
(3) Increased operating budgets, which in turn have largely been driven by mandatory spending on health care, Medicaid, education, pensions, and inflation. The operating budget grew by $4 billion over the past decade because of these forces. Dumb capital projects haven’t helped, but the true cause of the budget mess is mandatory spending in the operating budget. No politician is going to take on these issues until they absolutely have to. What we need to do is start having real conversations about how we can control these costs – e.g.,what can be done to bend the cost curve on health care?
I agree with your lack of confidence in any particular political party. The political game nowadays is re-election, period. Politics has become a full time career. Many of our leaders have done nothing else, and will do nothing else, because the job simply requires a good wardrobe and being the best poser in the room.
I am afraid that the political machine is very broken, and we will see electoral swings back and forth between R’s and D’s as the frustrated public will vote out the majority, thinking that a political party change will facilitate better outcomes. Both parties are focused on self-preservation, resulting in fiscal squandering that in their simple minds will buy votes. The perpetual political beast is killing governance, the only answer is increasing the tax burden on the fiscally prudent.
After all, the fifty percent of us who work and pay taxes need to be punished because we are successful and greedy.
Deep,
The lease sales are competitive. The state gets a royalty of 16.667 % percent of all of the oil produced. For years the state’s royalty rate was 12.5%, so the state is already getting a decent chunk of the oil. Add on top of that an effective production tax of between 10-25% depending on the location of the field, the cost of development, and the price of oil. Add on top of that a big property tax – which depends on the value of the property, and a corporate income tax.
Jon,
Thank you for your apology. I am not trying to paint the bleakest possible picture; however, I have lived through what we are facing and am not looking forward to another trip through that scenario. I am beyond tired of those who refuse to face reality or refuse to hold responsible those who have placed us in such jeopardy.
I am not a member of any political party. I now loath the two party system and the damage it does when it creates a permanent standing caucus in the legislature and binds the Executive to a cabal of sycophants . For all who see that system as the solution I might point out that this state has had virtually one party rule for the last four years and absolute one party rule for the last two years – and how prepared are we now to face our future?
I wonder how we could deal with an actual 64′ quake? I do think we are about to experience another 64′ quake only this one will be a “fiscal quake” in relative slow motion.
My apologies Lynn re aces – you did get it right! I read what you wrote too quickly.
Lynn, you forgot to add that another ’64 earthquake is bound to happen at some point. Might as well pack the bags.
After all of the debate I thought you would at least understand that aces doesn’t being in more revenue when oil prices are below $105 or so. Please stop misinforming people with unqualified and inaccurate assertions that ACES brings in more revenue.
This is encouraging; however, absent profitable production of oil from these leases, with the subsequent realization of state revenues, the State of Alaska will not benefit beyond the immediate lease sale revenues. Also, the State certainly won’t see any production revenue until any lease is developed. Cook Inlet is an example of how state inducement for production does not necessarily lead to significant (if any) state revenues.
Apparently the motive for this increased activity on the North Slope was not exclusively the tax rates promulgated by SB21 because the tax rates at current prices for oil were actually less under ACES; therefore, the producers would be making even more profit if ACES had remained.
And speaking of the legacy of the last few years, are we facing the loss of millions of dollars in state tax revenue? How much revenue do we stand to lose if the tax audit backlog is not resolved as reported in the ADN? (Statute of limitations running out on state oil tax audits, report warns.
Dermot Cole, November 19, 2014). If we don’t complete the audits within the statutory time allowed, we cannot recover any possible additional revenue owed the state. Or, is that tax revenue not as important because it is not as “sexy” as revenue from lease sales which can be spun for political gain?
Thanks John. I wasn’t around then. Any place I could read about it? Seems like a good idea to me, but then again I’ve got no real knowledge of the industry.
I suppose the status quo lease auctions (as I understand them) should capture most of the remaining surplus from any overly low tax rates anyway? Assuming that it’s a competitive process, if the tax rate is too low, then I think the bids to produce the resource would be correspondingly higher- and no matter how low the tax rate, there would be a similar amt of revenue generated, at least from the areas being presently leased.
The lease sale isn’t the only sign that SB 21 is working. The level of activity and the number of companies pursuing projects is impressive. 15 different companies are active from the ANWR boarder to Smith Bay, which is not far from Barrow. Conoco, Hilcorp,
Brooks Range, and Caelus have the money and are pursuing major new development projects outside of legacy fields that will add a ton of new oil over the next several years. BP and Conoco are spending billions more and bringing new rigs to the slope for infield drilling. New pads are being constructed in the legacy fields. There is also a ton of exploration and delineation work all over the slope – great bear, Royale, Repsol, Caelus, Linc, Nordaq, Brooks Range, Savant, ASRC, etc. And the capital markets are lining up to finance projects at reasonable rates for the independents, this simply wasn’t happening pre-SB 21, which means money is available for drilling and development. The bottom line is we are going to see more oil, revenue,
competition, and jobs because of this law.
And here’s the kicker: SB 21 is bringing the state more revenue than ACES would have.
Virtually everything the Anti-SB 21 crowd said about the law has been wrong. The wise men predicted SB 21 would bring in less revenue than ACES, scare away the independents, and discourage exploration. Worse, they accused those defending the law as being stooges of big oil.
Walker has a ton of problems he needs to contend with, but he is inheriting a booming oil and gas sector. I really hope he doesn’t mess it up.
Derp- we tried something similar in the late 1970s with net profit share leases. Everybody pretty much agrees it was a total failure.
We should simplify the system: instead of revenue from lease bids, plus tax revenue, we should give away the leases for free– and have companies instead bid in the form of the highest production tax rate they’d be willing to pay. Would allow the market to tell us what a fair tax rate is, instead of our state senators.
Thank you, Sean Parnell.