Archive for the ‘natural gas’ Tag

Interior gas must be affordable – FDNM   Leave a comment

This Community Perspective does an excellent job of explaining the challenges faced by my local community in a state that is constitutionally obligated to “spread the wealth”, but is dominated by a single city that thinks it should get special treatment. It’s not just Fairbanks that would benefit from a gas line running along the TAPS corridor as opposed to the Railbelt. Approximately half of the non-Anchorage Alaska population would receive a benefit AND the gas could be used for export.

Interior gas must be affordable – Fairbanks Daily News-Miner: Community Perspectives.

Alaska’s Colonial Tax History   Leave a comment

GC-2I’ve said before that Alaska is a colony in all ways except the federals call us a state. Statehood changed nothing. We are as beholden to the federal government and the large resource extraction corporations as we ever were … not because we’re required to be by law any longer, but because we’ve been an abused colony for so long, we don’t know how to act like an owner state.

Alaska is about to vote on oil tax reform in two weeks and it’s important for us to understand why. So I’m going to look at some history of Alaska oil taxation, because I believe we are still suffering from abused colony syndrome and we need an intervention.

Prior to Prudhoe Bay, Alaska taxed on a well basis.

  • First 300 barrels per day taxed at 5% of gross value  or 17 cents a barrel).
  • Next 700 barrels per day taxed at 6% of gross value  or 20 cents a barrel.
  • Anything over 1000 barrels per day taxed at 8% of gross value or 27 cents a barrel.

Note that if a well didn’t produce that day, they were still taxed on the gross value of the well.

Alaska has operated under five tax regimes since production on the North Slope began.

Economic Limit Fact (“ELF) 1 (1977-1989)

The theory was that there is an economic limit where the cost of producing a barrel of oil exceeds revenue. When a field is at its economic limit, the burden of the tax should not cause the field to shut down. Scale down production taxes as production declines toward economic limit so tax is zero at the economic limit.

The original proposal was that company should not pay tax on the barrels that generate the revenue to cover operating costs at economic limit. Each well got 300 barrels per day tax-free to cover operating costs at the economic limit.

ELF 1 applies to a nominal tax rate of 12.25% of gross for the first five years of a field, then 15% of gross thereafter.

The problems with ELF 1 were that 300 barrels was an arbitrary choice as far as revenue to cover operating costs, drilling wells reduces the tax rate and field decline reduce the tax rate as well.

The Alaskan colony bowed before its corporate masters and licked their boots.

Then came a catastrophe. OPEC decided they wanted to corner the market in oil, so they dropped their prices to almost nothing in 1986. At $9 a barrel, the State of Alaska’s royalty share of oil wasn’t meeting the needs of the state. The oil companies were disincentivized to produce because of the low per-barrel prices, so production was declining and that meant revenues from ELF were declining.

ELF II (1989-2006) came in to correct the problems, but it really was an oil industry giveaway. It was meant to spur production in Prudhoe Bay, so the oil companies moved into satellite fields to avoid having to pay a bit higher taxes in Prudhoe. Field size declined, well production continued to decline and the tax rate declined regardless of price.

In 2005, the State of Alaska decided to aggregate Prudhoe Bay and the satellite fields because we saw them all as the North Slope, not as separate fields. They were interdependent upon one another, sharing common facilities, for example.

When oil was discovered in Prudhoe Bay in 1968, the oil companies also found an estimated 26 trillion cubic feet of natural gas, which is more gas than the entire United States consumes in a year. There was actually more discussion of building a gas line in the early days of North Slope development than there was discussion of oil development. Then, for a variety of reasons, primarily discoveries of significant amounts of natural gas in the Lower 48, the gas line idea was tabled after the Trans-Alaska Pipeline was built. In the early 2000s, the price of natural gas began to rise and the 2001 National Energy Plan recommended an expedited construction of an Alaska natural gas pipeline to the Lower 48. In 2004, Congress passed the Alaska Natural Gas Pipeline Act that was meant to put us on the fast-track to a pipeline In 2006, 16 federal agencies with roles and responsibilities related to the pipeline signed a memorandum of understanding (MOA)  to establish a framework of cooperation on the project management.

Every Alaska governor since completion of the TAPS has tried to spur construction of a natural gas pipeline. In 1998, the Alaska Legislature passed the Alaska Stranded Gas Development Act to encourage North Slope producers to bring the natural gas to market by allow the state and producers to negotiate tax, royalty and other fiscal terms for a liquified natural gas export project. A new version in 2003 applied to any North Slope gas project. Under the new law, the State was not authorized to provide fiscal stability to the oil producers. Then-governor Frank Murkowski negotiated a new oil tax system and sought to amend SGDA. The Legislature took the negotiated product as a starting point for amending the severance tax statute. The oil industry began bribing Alaska legislators to vote their way. That led to several convictions of fraud and the eventual election of Mark Begich, but it also led to an interim taxation ttructure called Petroleum Profits Tax (PPT).

PPT (2006-2007) deducted all costs of production before applying a base rate of 22.5% of net value. There was a progressivity element to the taxation when net value per barrel exceeded $40 a barrel.

At $90 a barrel, net value was $61 a barrel, which would result in a 7.75% progressivity rate. Total tax rate on a $90 barrel of oil would be $16.93 a barrel.

The problem was that the costs always seemed to be higher than estimated, which made revenues lower than expected. What can you expect from a law that was written by legislators who, if they were not taking bribes themselves, knew their fellow legislators were accused of taking bribes? Thus the law only was in place for two years.

The bribery scandal and Murkowski’s clear favoritism of the oil industry resulted in the election of Sarah Palin who had been one of the first to point out the wide-spread corruption in the Murkowski administration when she was on the Oil and Gas Development Authority board. The Alaska’s Clear and Equitable Share (ACES) tax structure was really her brain child.

ACES provided a 25% base rate of net value after deducting all costs. For the first time, Alaska was drawing on the example of other oil-producing countries like Iraq, who “pay” the producers a base rate for the production of the oil, but then charge a tax on what is produced. ACES also had a progressivity element when net value per barrel exceeded $30 a barrel. Again, we took our example from elsewhere.

At $90 a barrel, net value was $61 a barrel, progressivity was 12.4%, total tax rate was $37.4% for a tax of $22.81 per $90 barrel of oil.

That’s an increase of about 25% over PPT and about 50% over ELF, but it is on-par with tax regimes in the Middle East and far below what is charged by countries like Russia.

ACES offered credits for production:

  • Capital credit of 20%
  • Well lease expenditure credit (excl. North Slope) of 40%
  • Exploration credit of 20-40% (depending on location) **Expires 2016***
  • Small company credit of $12 million if sufficient offsetting income – **expires 2016***

Alaska made a lot of revenue off ACES. During that same time period Conoco Phillips (the only American company producing on the North Slope and thus the only one required to publicize its PL report) reported record earnings after taxes and Prudhoe was its highest grossing field WORLDWIDE.

Now if Conoco Phillips was doing so well under ACES, how do you suppose BP and Exxon were doing?

Lawmakers not quite done in Juneau, but gas project is approved – Alaska Journal of Commerce – Breaking News 2014 – Anchorage, AK   Leave a comment

Lawmakers not quite done in Juneau, but gas project is approved – Alaska Journal of Commerce – Breaking News 2014 – Anchorage, AK.

Posted April 22, 2014 by aurorawatcherak in Alaska

Tagged with , ,

A different route for export of Alaska’s natural gas – Fairbanks Daily News-Miner: Community Perspectives   Leave a comment

A different route for export of Alaska’s natural gas – Fairbanks Daily News-Miner: Community Perspectives.

For the record, I think this is a crazy idea because it is not taking into account that the current warming trend is a natural trend. Alaska’s north coast (as Mr. Fields calls it) will be socked in with ice most of the year again — maybe not for a century or maybe in a year or two. Then Alaskans will look a lot like the Vikings who farmed southern Greenland during the Medieval Warm Period only to die of starvation in the Little Ice Age that followed.

This idea was floated as an alternative to the TransAlaska Pipeline, btw. Back then, the need for ice-breakers showed how ridiculous the idea was. Today, it’s tempting … but the climate is only temporarily warming, so ….

Let’s use our heads!

Alaska needs the gas instate and trucking is expensive. The LNG trucking project Golden Valley Electrical Association is planning will reduce my $200 a month electric bill by 6% (estimated). It will put about 50 additional trucks on the Dalton a day, but at that rate it will do nothing for my heating bill.  If they triple the number of trucks, they can heat my home at just about the price I currently pay for diesel. How does that help me? Trucking LNG is a short-term bandaid solution to the problem. Mr. Fields would know that if he didn’t live in the Anchorage Bowl where a sweetheart deal with the natural gas producers of Cook Inlet has given residents a false sense of how much energy actually costs in the rest of the state. We need a gas line to make it affordable — at least to Fairbanks. We could save a lot of money by not taking it Anchorage, but then Anchorage would never let the funding through the Legislature if they were not included.

Mitsubishi offered to build a pipeline for us back in the Palin era, Prudhoe to Valdez, with takeouts for instate use, but primarily for export to Japan. They ended up building a similar pipeline in Japan because Palin was set on the Trans-Canada line and then Parnell was in the pockets of the oil producers. The market is there.

I do agree however that we should deep-six the Trans-Canada deal. They’ve had plenty of time to do what they said they were going to do. Clearly they aren’t going to do it. Why should they when US shale gas as made export to the US fiscally unsound. That doesn’t affect the Asia markets. If we would take the hit with TransCanada and commit to building the gasline whether to Nikiski or Valdez (Valdez being the better choice because it provides gas to a wider region), we could have it built in two years. By 2017 or 2018, gas could be flowing to our homes and businesses here in the Interior and elsewhere in the state and being shipped to the Asian markets (if the federal government would give us a Jones Act waiver).

But building a pipeline and port facility on the north coast of Alaska … how does that help Alaskans? It helps our government, but that’s not necessarily the same thing.

Why not use permanent fund to build a gas line? – Fairbanks Daily News-Miner: Community Perspectives   Leave a comment

Why not use permanent fund to build a gas line? – Fairbanks Daily News-Miner: Community Perspectives.

Alaska Senate passes bill to advance gas project – Fairbanks Daily News-Miner: Alaska News   2 comments

Alaska Senate passes bill to advance gas project – Fairbanks Daily News-Miner: Alaska News.

Again, a project that is important to my town and to me personally. Alaska has waited for 35 years for the petroleum companies to build the natural gas pipeline that they promised us right after they completed the TransAlaska Pipeline. I get the market considerations. A pipeline from the Slope is expensive and for-profit companies want to make a profit. I “get” that.

Yet, Alaska is sitting on a monsterous sea of oil and natural gas that the petroleum companies continually say they want to access, but then they don’t. Some of these companies have been sitting on leases for 30 years, tying up proven gas and oil reserves and refusing the develop them. Sarah Palin forced some development at Point Thompson by calling the leases. She exercised her authority as the CEO of the State of Alaska corporation to demand production or set aside the leases. And, it worked, sort of. More oil production is “in the pipeline”, though the oil itself is not yet in the TAPS.

But gas … we’re still waiting. In the meantime, here in Fairbanks, we’re paying $4 a gallon for home diesel (it takes about 1200 gallons to heat a modern 1800 square foot home through six months of winter) and the EPA is demanding we ban wood burning to meet impossible PM 2.5 standards. The State is whispering that it may mandate homeowners switch to natural gas. There’s a plan underway to truck it from the North Slope. The Dalton Highway isn’t actually the most dangerous highway in America (that distinction may go to the Seward Highway on the Kenai Peninsula), but it isn’t a great idea and it’s expensive. It will save us about 6% on our $200 a month electric bill and 2% on our heating costs.

Fairbanksans struggle with this because Anchorage has had a “sweetheart” deal with natural gas producers in Cook Inlet that means you can heat a 2000 square foot home for less than $100 a month and most of that is administration fee. Now that Cook Inlet reserves are running low, it is a priority for Anchorage to access North Slope gas, but for 35 years, Fairbanks has been expected to struggle with high energy costs because Anchorage controls the Legislature and we didn’t have the votes to swing State ownership.

So, a natural gas line is  a necessity for Fairbanks and, again, because private interests won’t invest here because, my theory, they prefer to use Alaska as a future landbank and only access the resources when we’re desperate and will give them away virtually for free.

Fracking Jobs   Leave a comment

Natural gas is already a critical part of America’s energy portfolio and consequently a critical part of the country’s economic growth. It provides over 25% of electricity generation, but it also provides feedstock for fertilizers, chemicals and pharmaceuticals, waste treatment, and food processing. It is the largest energy source for home heating and fuels industrial boilers.  The abundance of shale gas brings the possibility of low, stable prices. North America has approximately 4.2 quadrillion (4,244 trillion) cubic feet of recoverable natural gas that would supply 175 years worth of natural gas at current consumption rates. Further, the National Petroleum Council estimates that fracking will allow 60-80% of all traditionally-drilled wells during the next 10 years to remain viable.

The abundance of natural gas makes the United States an attractive place to do business for energy-intensive industries. Royal Dutch Shell recently announced plans to build a petrochemical plant in western Pennsylvania, cited the proximity to natural gas production as the reason for the location. The $2 billion plant will create 10,000 construction jobs and thousands of permanent jobs for Beaver County, Pennsylvania. Shuttered steel towns like Youngstown, Ohio (where pipe and tube producer, V&M Star, is building a factory to manufacture seamless piples for hydraulic fracturing), are seeing a re-emergence of manufacturing employment opportunities. That one factory will employ 350 people.

I have a special interest in North Dakota because my mom is from there and I still have distant relatives living there. The average worker in the oil and gas sector in the Bakkan oil and gas fields earns more than $90,000 a year — a sum so large that it’s pushed up incomes in non-oil sectors. The overwhelming majority of these oil jobs require a high school degree or less. The oil and gas workforce in North Dakota has increased from 5,000 in 2005 to more than 30,000 today.  North Dakota recently approved a budget that increased 12% over the previous two-year cycle.

So what’s the problem? Is there really one?

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