Royalty oil break is a smart deal for Alaska treasury and economy
December 19, 2014
The players and the plays on Alaska’s North Slope are changing. Companies like Caelus Energy, Brooks Range and Hilcorp are just some of the new but smaller players looking to develop Alaska’s resources. These independents are going after difficult plays, using new technologies and techniques.
Caelus Energy Alaska, which purchased Pioneer assets and was recently the big winner at the state’s North Slope lease sale, has a “shovel- ready” project, the Nuna development, targeting a tight reservoir.
Successful development of this reservoir has long-term implications for Alaska: More money for our treasury, oil for the trans-Alaska pipeline system (TAPS) and jobs for Alaskans. Because the geology is so difficult and expenses are much higher than normal, in order to develop the resource Caelus worked with the state to find a way to make the project economic. They applied for a short-term reduction in the royalty obligation to free up necessary up-front development dollars. Royalty modification is a long-standing tool designed to spur development or prolong the life of pools or fields on the North Slope.
After months of in-depth analysis and economic modeling, the Division of Oil and Gas (DOG), led by Director Bill Barron and his team of economists, came to the conclusion that the royalty modification requested by Caelus was in the “best interest of the state,” as the Nuna development will “economically benefit Alaska.”
Also found in the preliminary findings of the DOG were guarantees that protect Alaska’s interests in the deal. The project must be sanctioned by Dec. 31, 2014. Facilities spending must be initiated by March 31, 2015. Facilities spending must reach $260 million by March 31, 2017. Sustained production from Nuna must commence by March 31, 2017.
If any of these milestones are not met, the royalty reduction is rescinded. No results, no reduction.
So what exactly is the state giving, and more important, what is the state getting in return? The state will forgo approximately $44 million in royalty over a couple of years. What they receive in return is far more: $1.3 billion in royalties and taxes. In addition, there will be more oil running through the TAPS — an estimated peak production of 15,000-18,000 barrels of oil per day. And, in a new twist, Caelus must provide a white paper detailing critical development information to the state and other parties interested in developing similar plays in Alaska.
The state government isn’t the only benefactor of this agreement. Alaskans will also be rewarded in the private sector, Caelus will be investing more than $1.5 billion to build and develop this project. That’s an awful lot of new money flowing into our economy.
The two years of construction and several more years to drill and develop the resources will create hundreds of construction, drilling and operation jobs, not to mention the materials purchased and delivered by local companies and suppliers.
Nuna is a shovel- and drill-ready project that will put Alaskans to work and pump dollars into our economy and treasury. The royalty modification is a thoughtful and well-crafted agreement that will cause immediate development of Alaska’s oil and protect Alaskans’ interests as well. This is truly a win-win for Alaska and Alaskans alike.
At a meeting with the Alliance board in early November, then-candidate Bill Walker expressed his desire to see as many successful new operators across Alaska as possible. The Alliance shares that desire and encourages Gov. Walker and DNR to make a swift decision and issue a final finding before the end of the year so Alaskans can get to work.
Rebecca Logan is general manager of the Alaska Support Industry Alliance, a nonprofit trade organization serving Alaska’s mining, oil and natural gas industries.
The views expressed here are the writer’s own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.
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