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Increasing costs cloud view of prices
Petroleum News ^ | Week of December 28, 2008 | Eric Lidji

Posted on 12/29/2008 5:16:42 AM PST by thackney

As oil prices fall to levels not seen since mid-2000s, costs are becoming more important for assessing the near term in Alaska

Some say Alaska survived $40 oil in the past. Others say $40 ain’t what it used to be.

Unveiling her fiscal year 2010 budget on Dec. 15, Gov. Sarah Palin said oil at $40 to $42 a barrel would have been considered “healthy” a couple of years ago, and even “relatively high, compared to some years.” She added that “compared to the $140 that we were blessed with many months ago, the $40-something a barrel looks relatively low.”

With the sharp run up in oil prices over the past three years, Alaska became accustomed to benchmarks that would have been unthinkable just a decade ago. But after peaking at $144.59 per barrel in early July, oil prices began tumbling in October and November.

Through the first three weeks of December, the delivered price of Alaska North Slope crude oil averaged around $38 a barrel, a price not seen since 2005. And on Dec. 19, Alaska crude oil traded below $30 a barrel for the first time since Dec. 5, 2003.

While prices remain well above the infamous $10 oil Alaska faced and survived in 1999, many in the industry say $40 today doesn’t buy what it bought just a few years ago.

“The fundamental cost of our business has changed over the past couple of years,” Jim Bowles, president of ConocoPhillips Alaska, told members of the Resource Development Council during their annual conference in Anchorage in mid-November.

At the same event, outgoing BP Exploration (Alaska) President Doug Suttles estimated oil industry costs have increased between 15 and 20 percent per year for the past few years.

Costs associated with new upstream oil and gas facilities have risen 9.2 percent over the past six months, according to the Upstream Capital Costs Index, published twice each year by the affiliated consulting firms IHS and Cambridge Energy Research Associates.

CERA and IHS create the index using information from their proprietary databases.

The index shows upstream costs doubling since 2005 after several years of only slight growth. A piece of equipment costing $100 at the start of the decade now costs $230.

The cost increases over the past six months can be traced in large part to the parallel rise in oil prices, which increased demand for materials and equipment. As such, the fall in oil prices over September and October has already started to dampen the cost of business.

“Hidden in these substantial increases are the first signs of what may be a change in direction,” Daniel Yergin, CERA chairman and IHS executive vice president, said in a statement released with the report. “Moderation in the last two months of the third quarter was a response to the unfolding financial crisis and the spending cutbacks and points to a precursor to a downward turn in the direction of the (Upstream Capital Costs Index).”

Tax code measures costs

Industry costs now impact state revenues in a way they didn’t just a few years ago. For decades, state economists primarily relied on two figures to estimate oil revenue: the projected price of oil and the projected amount of oil that would be produced in Alaska.

But a new production tax code enacted in 2006, and revised last year, created a credit program to deduct certain capital expenses, like exploration work, from tax payments.

The state issued $662.2 million in these credits during fiscal year 2008.

The winter of 2007-08 was a banner season for exploration in northern Alaska, as exploration and production companies started 14 wells and sidetracks, worked to bring new prospects online and conducted major seismic programs on Alaska lands and waters.

This winter is shaping up to be just as busy across northern Alaska, with companies planning to drill between 13 and 15 wells, and conduct several major seismic programs.

But sinking oil prices and the global credit crunch threaten to dampen industry interest in high cost environments like the North Slope. So far, that business climate hasn’t led to major cutbacks in Alaska, but some companies have spoken about adjusting spending.

The state doesn’t expect a slowdown in exploration activity this year. The most recent projections for this fiscal year show tax credits increasing 16.5 percent to $771.8 million.

For the coming fiscal year, beginning July 1, the projections show tax credits falling 7.2 percent to $715.6 million, highlighting an expected slowdown in work, and not a reduction in industry costs, according to Cherie Nienhuis, acting chief economist with the state tax division.

“I think this reflects that a bit,” Nienhuis said about the most recent revenue forecast.

Although Alaska is a unique cost environment in some regards, Nienhuis said the state estimates tax credits by combining actual receipts with global economic indicators like the cost of materials and labor, as well as the relationship between costs and oil prices.

Oooguruk confuses budget

In her proposed budget for fiscal year 2010 (July 1, 2009, through June 30, 2010), Palin included a $300 million appropriation for tax credits. The Legislature approved $400 million for tax credits this year. The decline doesn’t represent a drop in exploration work, though. The budget line only covers exploration companies that don’t produce oil yet, and therefore don’t pay taxes.

The tax credit information is highly proprietary, but the change from year to year can probably be traced to Pioneer Natural Resources and Eni Petroleum, the partners that brought the offshore Oooguruk unit online this past June. The companies can now deduct expenses from their tax payments, rather than request reimbursements from the state.


TOPICS: News/Current Events; US: Alaska
KEYWORDS: drilling; energy; oil
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1 posted on 12/29/2008 5:16:43 AM PST by thackney
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2 posted on 12/29/2008 5:19:58 AM PST by thackney (life is fragile, handle with prayer)
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To: thackney
"She added that “compared to the $140 that we were blessed with many months ago, the $40-something a barrel looks relatively low.”"

Hey, maybe if we elect her POTUS in 2012, we can all be blessed with $140.00 per barrel oil on a permanent basis. Yup, she sure has a way with words! /s

3 posted on 12/29/2008 5:26:00 AM PST by Kolokotronis ( Christ is Born! Glorify Him!)
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To: thackney
"$40 today doesn’t buy what it bought just a few years ago"

Wait five minutes.

There is no general inflation. Commodity prices have already collapsed. Pretending oil prices need to double in real terms to cover increased "costs" is pretending, and nonsense.

2005 prices are not impossible to live with. That was 3 years ago, for crying out loud. Also, it is on the high end of normal by all historical standards. Get used to it, three digit oil isn't coming back, any more than 4 digit South Sea stock.

4 posted on 12/29/2008 5:26:06 AM PST by JasonC
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To: Kolokotronis

“She added that “compared to the $140 that we were blessed with many months ago, the $40-something a barrel looks relatively low.””
Hey, maybe if we elect her POTUS in 2012, we can all be blessed with $140.00 per barrel oil on a permanent basis. Yup, she sure has a way with words! /s

Well, you’ll never hear her say anything about her Muslim faith.


5 posted on 12/29/2008 5:29:52 AM PST by stevecmd
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To: stevecmd

“Well, you’ll never hear her say anything about her Muslim faith.”

No, no we won’t; the hissing of her snakes is just a tad too loud.


6 posted on 12/29/2008 5:31:25 AM PST by Kolokotronis ( Christ is Born! Glorify Him!)
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To: thackney
She added that “compared to the $140 that we were blessed with many months ago...”

Anyone out there who doesn't believe that quote won't come back to haunt her in 2012? Anyone?

7 posted on 12/29/2008 5:35:12 AM PST by Non-Sequitur
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To: stevecmd
Well, you’ll never hear her say anything about her Muslim faith.

And you won't hear anything about her birth certificate, either. Both are BS issues that the overwhelming majority of people couldn't care less about. What people will hear, once the spin is done, is that Palin loves the idea of $4-plus a gallon gas. That's gonna stick.

8 posted on 12/29/2008 5:37:19 AM PST by Non-Sequitur
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To: Kolokotronis

She didn’t add a Billion Dollars of new spending to the previous budget cycle because oil prices and taxes were down.


9 posted on 12/29/2008 5:37:48 AM PST by thackney (life is fragile, handle with prayer)
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To: Kolokotronis

She’s from an oil-producing state. Every oil producing entity in the world thought $140/bbl oil was a blessing, let me tell you. But you knew that of course, let’s just be fair.


10 posted on 12/29/2008 5:52:06 AM PST by domenad (In all things, in all ways, at all times, let honor guide me.)
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To: Non-Sequitur

I think you have to hear her say this and in context...It sounds like a sarcastic statement.


11 posted on 12/29/2008 5:55:48 AM PST by Sacajaweau (I'm planting corn...Have to feed my car...)
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To: JasonC
2005 prices are not impossible to live with. That was 3 years ago, for crying out loud.

I agree. It doesn't really say in the article why costs have jumped so much. Could there have been greater taxation, regulation from the govt. to cause it?

12 posted on 12/29/2008 5:57:17 AM PST by raybbr (It's going to get a lot worse now that the anchor babies are voting!)
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To: Sacajaweau
I think you have to hear her say this and in context...It sounds like a sarcastic statement.

Even if she was being sarcastic it won't matter. All people will hear is the 'blessed with $140 a barrel' part.

If Palin really plans on running in 2012 then she's going to have to consider every public word she says.

13 posted on 12/29/2008 5:59:45 AM PST by Non-Sequitur
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To: Sacajaweau
I think you have to hear her say this and in context...It sounds like a sarcastic statement.

She was speaking to her Alaskans who saw their state revenues increase by Billions of Dollars this year. It was not sarcasm.

14 posted on 12/29/2008 6:01:51 AM PST by thackney (life is fragile, handle with prayer)
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To: raybbr
Taxes are part of the increase, especially in Alaska where her administration implemented a retroactive tax. Even if oil prices had remained stable, they were going to cost an extra billion dollars to the oil companies.

Windfall tax lets Alaska rake in billions from Big Oil
http://seattletimes.nwsource.com/html/localnews/2008103325_alaskatax07.html

ConocoPhillips said that in total, once royalty payments and other taxes are added in, the state captures about 75 percent of the value of a barrel.

But costs for both exploration and production of oil has signficantly risen around the world.

Exploration Costs Rise in Still-Busy Oil Industry
http://www.freerepublic.com/focus/f-news/2146325/posts

15 posted on 12/29/2008 6:10:36 AM PST by thackney (life is fragile, handle with prayer)
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To: Non-Sequitur

I think the difference is in how Alaska distributes part of the profits “to the Alaskan people”...not like here in NY..


16 posted on 12/29/2008 6:12:02 AM PST by Sacajaweau (I'm planting corn...Have to feed my car...)
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To: domenad

“She’s from an oil-producing state. Every oil producing entity in the world thought $140/bbl oil was a blessing, let me tell you. But you knew that of course, let’s just be fair.”

Of course! That goes without saying. If, however, she is to have any chance of ever being president (something I sincerely doubt will ever happen, though I know many Democrats who just as sincerely hope the GOP nominates her in another one of those self delusional triumphs of hope over experience)she needs to understand that comments like that, while acceptable in a few states here and there and certainly welcomed in Russia, Venezuela and various Mohammedan hell holes, are sure to make her pretty soundly and roundly disliked.


17 posted on 12/29/2008 6:14:06 AM PST by Kolokotronis ( Christ is Born! Glorify Him!)
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To: JasonC

Well said.


18 posted on 12/29/2008 6:22:38 AM PST by AmericanVictory
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To: Sacajaweau
I think the difference is in how Alaska distributes part of the profits “to the Alaskan people”...not like here in NY..

And as a resident of Kansas I'm all for paying $4.40 a gallon so that the people in Alaska can get a bigger distribution. </sarcasm>

19 posted on 12/29/2008 6:34:37 AM PST by Non-Sequitur
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To: thackney

Once again pointing up the fact that if we are not self sufficient in oil we are at the mercy of world leaders who don’t necessarily have our interests in mind. Drill here...drill now!


20 posted on 12/29/2008 6:48:17 AM PST by Don Corleone (Leave the gun..take the cannoli)
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