ConocoPhillips vice president Scott Jepsen says that due to improvements in lateral drilling technology — including “drilling laterals from laterals” — oil producers can develop 154 square miles of a field from a single 12-acre pad. Unfortunately, the same lateral drilling technology is also making production in the lower 48 more competitive than ever before. (ConocoPhillips image)

Contrary to projections from as recently as five years ago, oil production on Alaska’s North Slope is trending up.

Scott Jepsen, a vice-president with ConocoPhillips based in Anchorage, told the Sitka Chamber of Commerce this week (9-5-18) that improvements in drilling technology, new discoveries, and a favorable tax structure (SB 21, passed by the legislature in 2013) had all combined to steadily increase oil production — representing a reversal from his company’s 2013 outlook.

“It will come on at different times,” said ConocoPhillips VP Scott Jepsen, of his company’s new prospects on the North Slope, and the the likelihood that they could boost income for the state. “And other fields will decline. But it’s still pretty substantial revenue (for Alaska).” (KCAW photo/Robert Woolsey)

In his remarks to the Sitka Chamber, Jepsen attributed some of this change to world oil markets, and the fact that some of America’s global competitors underestimated the industry’s response to cost pressure.

Jepsen – You know we had the oil price crash starting in 2014, ‘15, ‘16, and saw prices dip below $30 a barrel when they previously had been at $100-120. I think that was one of the biggest strategic mistakes the Saudis ever made: They saw competition coming from the unconventionals and they thought, “If we flood the market, regain market share, we can drive these guys out of business. Then supply will diminish, the price will come back up, we’ll have larger market share and higher prices.” Well, the price did go down, but what they forgot about was that in a capitalistic system like ours what the people do when they see price challenges: They find ways to reduce costs. That’s what happened in our industry. Back in 2014 they had basically the cost of supply, or a break-even price for the development of the unconventionals in the range of $50-80 per barrel. Now it’s $40 per barrel or less. That’s even changed in Alaska, where the cost of supply in this timeframe was over $60 per barrel, and now it’s under $40 per barrel. So, we’ve been able to compete, and we’ve seen some remarkable increases in production.

Jepsen contrasted his company’s projections for 2013 (for production, in gray) again this year’s more optimistic trend (in red). Jepsen cited numerous reasons for the reversal, including Alaska’s controversial oil tax overhaul in 2014, known as SB 21. (ConocoPhillips image)

Jepsen told the Sitka Chamber that thanks largely to development of “unconventionals” — or shale rock — the US was poised to become the top hydrocarbon producer in the world.

But while Alaska is benefitting from the uptick, most of the growth has been in the lower 48, especially the Permian Basin on the border between Texas and New Mexico. Jepsen said this area had the potential to equal “five Prudhoe Bays.”

He called these “unconventional shale plays,” which are tapped using fracking technology, “the greatest challenge to Alaska.”

Jepsen – They really are the center of gravity right now. That’s where the vast majority of capital is being spent. And there are really an incredible number of drilling opportunities down there. There are tens of thousands of drilling opportunities in the unconventionals in the Permian Basin, North Dakota, Eagleford in South Texas, and you have a lot of companies actively exploring down there. That’s really the engine that’s driving production in the United States up as high as it is. Texas has had an incredible increase in production that’s being driven by the unconventional plays.

Nevertheless, Jepsen said that ConocoPhillips was increasing its investment in the state — hence the special trip to Sitka. He said that Conoco was buying out BP’s interest in the Kuparuk Field on the North Slope, as well as the Colville River Field — and would soon have a 100-percent interest in both. Further to the east, Jepsen said Conoco was planning to spend billions on an entirely new production facility to develop its Willow Discovery — the most promising find on the North Slope since Prudhoe Bay.

Jepsen was cautious about how these new projects would benefit state government, which continues to struggle with deficits: Although they had the potential to double the current volume of 500,000 barrels per day through the Trans Alaska Pipeline, he said, “If you assumed it came on stream at the same time — which it won’t — that’s like 400,000 barrels per day. It will come on at different times, other fields will decline…. Still, it will be pretty substantial revenue.”

Kreiss-Tomkins’ news was not all bad. Some departments, like Fish & Game, will survive deep cuts without much disruption. (KCAW photo/Robert Woolsey)

Despite having to deal with a massive budget deficit, Alaska’s slightly more moderate House of Representatives is working pretty well.

That’s the report from Sitka Rep. Jonathan Kreiss-Tomkins, who spoke to the Sitka Chamber of Commerce on Wednesday (3-4-15).

But Kreiss-Tomkins also said solutions Alaska’s fiscal problems are far beyond the scope of any political shifts in government.

Downloadable audio.

The House Finance Committee is taking testimony from residents in Kreiss-Tomkins’ district this afternoon (Thu 3-5-15) beginning at 4:30 PM. Participants are asked to arrive 15 minutes early and sign in at the Legislative Information Office in the Totem Square building. You’ll have 2-minutes to testify before the Finance Committee on any matter of the state’s budget. For KCAW listeners who don’t have a LIO in their communities, please call 907-465-4648 for instructions on how to call in to the Finance Committee. If you would like to submit a written comment, you can email the committee here.

Just how bad is a $3.5-billion deficit? Rep. Jonathan Kreiss-Tomkins didn’t need a thesaurus to spell it out.

“It’s dreary, and macabre, and dark.”

Kreiss-Tomkins also portrayed Alaska’s reality in a more concrete way. Residents of the US are accustomed to hearing large deficit and spending figures tossed around. But even for Alaska, $3.5-billion is pretty huge.
He gave two examples.

The first is: The State of Alaska could let go — could fire — every single state employee from Ketchikan, to Kotzebue, to Unalaska, and it would cover about half our budget deficit. About half of the $3.5-billion — every state employee gone. The second anecdote I want to offer: We could zero out all k-12 education funding in the state of Alaska. The Sitka School district gets nothing. Every single school district in the State of Alaska gets nothing. Every regional attendance area gets nothing. The Department of Education gets nothing. We could zero out all state contributions to the State of Alaska university system, and we could zero out every dollar that goes to Medicaid, and that would get us about two-thirds of the way through our budget deficit. So it’s a very, very significant number, a $3.5-billion dollar deficit.

If that was the dreary and the dark news, Kreiss-Tomkins then asked the Chamber to picture the macabre: Oil prices suddenly reverse their slide, and skyrocket back to $150 per barrel. Even this doesn’t close the gap.

Our financial standing doesn’t improve that much because of our new tax regime. If oil becomes wildly profitable, the state’s share of the profit of that oil — at $150 per barrel — is greatly diminished, given all the tax policy we’ve busied ourselves with the last two years, namely SB21.

SB21 — or Senate Bill 21 — was the revision in oil tax regime developed by former Governor Sean Parnell in last year’s legislature. More moderate Republicans, like Sitka’s Sen. Bert Stedman, opposed SB21 on the grounds that it disadvantaged the state. Alaska voters nevertheless refused to repeal SB21 when it appeared on the ballot last year.

But voters did turn out Sean Parnell, and put Bill Walker in the governor’s office. They also elected a more moderate Republican majority in Alaska’s House, which Kreiss-Tomkins said has been positive change.

Yet there is tension now, Kreiss-Tomkins said, because Walker campaigned on accepting the Medicaid expansion under the Affordable Care Act, or Obamacare. Kreiss-Tomkins called it “one of the more important policy calls we’re going to make in Alaska.”

Medicaid expansion, over the short- and medium-term, is a multi-billion dollar infusion into the state economy. It’s a huge infusion of money to health care institutions that currently are responsible for providing charity care for anyone who walks in through the emergency room doors. So there’s a direct financial interest for anyone who cares about our local health care institutions to expand Medicaid.

Under the expansion, states are reimbursed by the federal government for 100-percent of costs through 2016. The amount of the reimbursement then tapers to 90-percent by 2020 — where it would remain indefinitely, unless Congress changes the law. That was the issue for former Gov. Sean Parnell, and it’s the source of the tension now between Gov. Walker and the legislative leadership. What if Alaska is stuck with the check for Medicaid at some point in the future?

In Alaska’s current budget “apocalypse,” as Kreiss-Tomkins calls it, the state has very little to gamble on the future. Alaska can get by on deep, painful cuts for two years, he says, until the state’s savings are gone.

After that, we’re going to make very big decisions that are going to alter the status quo we’ve had in Alaska for the last 40 years.

In addition to budget solvency and Medicaid expansion, Kreiss-Tomkins said that the third major issue before legislature this session was adopting a legal framework for the commercialization of marijuana

Stedman, a vocal opponent of SB21, says Alaska has to find an oil revenue structure “that doesn’t change with every governor.” (KCAW photo/Robert Woolsey)

Sitka Senator Bert Stedman may be looking at one of the most difficult legislative sessions of his career. A financial manager by trade, Stedman openly opposed the previous governor’s modifications to Alaska’s oil tax structure. He anticipated a day of reckoning and — thanks largely to steep declines in the oil market — that day has come sooner than anyone expected.

Downloadable audio.

State senator Bert Stedman represents Sitka, Petersburg, Wrangell, Ketchikan, and most of southern Southeast Alaska. The 29th session of the Alaska Legislature gavels in on Tuesday, January 20th.

Read Gov. Bill Walker’s recent op-ed piece about oil prices here. Raven Radio will broadcast Gov. Walker’s State of the State speech Wednesday evening (1-21-15) at 7 PM. His State of the Budget speech will air on Thursday evening (1-22-15) — also at 7 PM.

Stedman says there’s still plenty of work to do, besides wrestling with the state’s finances.

“You will not see the state stop everything everywhere and put their heads in the sand. We can’t operate like that. But we need to be prudent with what we do and build.”

Alaska is facing a scenario that anyone of us might encounter if we lost our job. We’ve got enough savings to ride out a rough patch — for a while.

“We still have to educate our children, maintain our roads, and have a good public safety system. There’s fundamental duties that the state has to see that it gets done, regardless of today’s or tomorrow’s price of oil or the volume down the pipeline.”

But the problem is a bit more complicated than just paying our bills. In a recent opinion piece, Gov. Bill Walker reported that the state expects to pay out in tax credits to oil companies about $100-million more than it takes in. That’s right — Alaska is still producing a large amount of oil but thanks to a perfect storm of large production incentives and falling prices — we’re looking at paying oil companies to haul the stuff away.

If world oil prices remain low, that bill could rise to $400-million next year. The governor calls it “irresponsible” to be paying for our own oil, but producers are already urging him not to change the tax structure.

Alaska’s oil revenue scheme tends to change with administrations — which Stedman considers a liability. When he was appointed 12 years ago by then-Governor Frank Murkowski, the state was trying to raise revenues. Stedman says the oil tax system at the time — known as the Economic Limit Factor, or ELF — was outdated.

“And that was fixed with PPT, the Petroleum Production Tax, under Murkowski. And that was modified by Palin with ACES (Alaska’s Clear and Equitable Share), and modified again under Parnell with Senate Bill 21. In my opinion we’re in worse shape now than we were initially under ELF. So we went full circle. In fact, the circle went beyond full circle.”

Stedman made headlines last year when he defied fellow Republican Gov. Sean Parnell and signed the citizen initiative petition that put Senate Bill 21 on the statewide ballot. He also didn’t play nice with Parnell’s predecessor, Sarah Palin. Although Stedman held a powerful chairmanship in that era — of the Senate Finance Committee — the governor vetoed his projects liberally.

Stedman has a less influential role in Alaska’s new, more right-wing senate. But he’s optimistic about Gov. Walker.

“I expect a good working relationship with him. I think he’s interested in dealing with this situation head-on in a very open and transparent way. With some governors that is just rhetoric. I don’t think it is with Walker. And he wants to be fair across the state from what I can see.”

Gov. Walker has already pulled back state funding for capital projects that don’t have a significant federal match. That puts at least a couple of big roads in the district — Katlian Bay in Sitka, and the Kake-Petersburg Road — at risk. Stedman says there can be no sacred cows this session.

And also no favorites.

“I want our region, and particularly the district I represent, to be treated fairly across the state as we deal with these budget reductions. And not be adversely affected because we’re in a less-populated area.”

And there is an upside for Southeast as it weathers state budget reductions, according to Stedman. Both commercial fishing and tourism will benefit from low oil prices. Nevertheless, as he heads to Juneau, Stedman wants Alaskans to understand the scope of the problem: Oil prices are not expected to go up again soon. It’s likely that producers will scale back operations on the North Slope regardless of tax credits. And Stedman is preparing for a long haul.

“This is not going to be a one-year discussion and reduction. At first you look at travel budgets and how many pencils you have in your drawer. And you’ll squeeze it up a little bit. But that’s not even going to register the needle to what we have to deal with.”

Bert Stedman says that, with tax credits, it’s “mathematically impossible” to reach the 35-percent top tax rate for oil produced on the North Slope. (KCAW photo/Robert Woolsey)

It was a bill that was dead on arrival when it was introduced it in back in February. In an election year, with a high-stakes battle being waged this summer to repeal the governor’s signature oil tax legislation, SB 192 was not going anywhere, and the bill died in committee when the legislature adjourned in April.

But SB 192’s author, Sen. Bert Stedman, still believes there’s a common-sense adjustment to Alaska’s oil tax structure. The Sitka Republican has become a student of the oil industry, and his ideas are influencing the race for governor.

Bert Stedman is standing in front of the Sitka Chamber of Commerce. Gone is the three-piece suit — the uniform of the legislature. He’s wearing a ski sweater and topsiders.

There’s a full house, and the audience has given the senator its full attention for a short lesson in the economics of oil.

Well, I guess the point I want to make is that there’s no such thing as a 35-percent tax rate. To pay 35-percent you’ve got to pump oil. You’ve got to make money to pay taxes. You’ve got to make revenue. What’s the first thing that happens when you pump oil, you get a per-barrel credit. Every barrel you pump in ‘15, that’s $6 bucks a barrel. It’s mathematically impossible to get to 35-percent. Our effective rate for ‘15 is about 22-percent. So, when somebody stands up and says they’ve got a 35-percent base tax, you say, Great, pay it!

It wasn’t too long ago that Gov. Sean Parnell stood in front of this same audience and argued that Alaska was competing against North Dakota, where developments costs were far lower than in the Arctic.

Stedman said the governor’s legislation, SB 21, was not delivering on the promise to increase production. In fact, he said, cash flow had far more to do with oil production than tax structure, and SB 21 was simply pushing money across the table to the North Slope oil producers. Stedman’s SB 192 was intended to address that, by rolling back production credits.

Stedman said that there were people in the room who probably disagreed with him. But there was at least one who didn’t.

“I think he’s right.”

Bill Walker is a former Republican, running as an independent for governor. He says he listened in when Stedman introduced his bill into the Senate Natural Resources Committee.

“I agree with him that SB 21 went too far. There’s a compromise in the middle that everybody stepped over — the middle ground — to go to the extreme. And as a result of that, I think we’re going to pay the price.”

Walker was making a second campaign trip to Sitka and Southeast. His attendance at the Chamber of Commerce on Stedman’s day to speak was coincidental.

Alaska voters will decide whether or not to repeal the governor’s legislation at the August primary. Walker the politician doesn’t think the efforts of Stedman the legislator to suggest a middle path were wasted.

“I think he did it because he wanted it to be on the record, that there’s another option out there.

Stedman also parsed the revenue structure in North Dakota, home to the lower 48’s current oil boom. Subsurface rights in that state — and in Texas — are privately owned. Stedman said no rancher would make the deal that Alaska has with oil companies, and the state is falling behind.

That was the argument. We want to be competitive with North Dakota…

“We’ve always heard about North Dakota, North Dakota, North Dakota. How they’ve got everything right, and we’ve got nothing right. So he did a great job of comparing the tax structure in North Dakota with where we are now. And taking one slice out of his presentation: This year, if Alaska was on the same structure that North Dakota was on, we’d have $1.4-billion more revenue than we do now. We’re $1.4-billion under North Dakota.”

Stedman was appointed to the legislature in 2003 by then-governor Frank Murkowski because of his mind for finance. At the end of a 40-minute talk Stedman can seem embarrassed about his blunt approach to the numbers.

“I’d better be quiet because I don’t want anyone to lose their lunch. I know there are advocates for the other side of the issue in the room, and I’m looking forward to heading to Anchorage to have more detailed discussion (applause).”

“He’s a rarity. Most of those who are out for reelection don’t want to talk about the problem, because someone may say, Aren’t you part of the problem?”

Bert Stedman is not up for re-election this fall, but Gov. Sean Parnell is, and Bill Walker is aiming for that office. He’s hoping that the ideas and economics in a going-nowhere senate bill, will help him get somewhere.

State Sen. Bert Stedman, R-Sitka

Sitka Senator Bert Stedman, it all came down to the final day of the legislative session. That was when the House voted on two issues that Stedman views as key for the economy of Southeast Alaska: language authorizing Sitka to apply for a state loan to finish the Blue Lake hydro project, and a green light for the Alaska Industrial Development and Export Authority to finance two mines on Prince of Wales Island.

Both issues were attached as amendments to a larger bill, SB 99. The House passed the bill on Friday, April 25 – in literally the final hours of the two-year legislature.

It wasn’t supposed to come down to the wire.

Stedman: It’s not a good strategy to have some of the most key economic issues over a two-year session for your area all on one bill in the final moments of the legislature. It’s not how you plan things. But sometimes, your friends help you position yourself to have that accomplished (laughs).

This might not have happened in previous legislatures, when Stedman was co-chair of the powerful Senate Finance Committee. He held that post as part of the bipartisan majority that governed for six years, until 2012, when Republicans won an outright majority in the State Senate. I asked if it was frustrating to lose the chairmanship.

Stedman: It’s extremely rare to have someone from Southeast co-chair of the Senate Finance Committee. Lyman Hoffman was my co-chair and six years straight is a state record. You can’t expect to be chairman of that committee until you retire. That’s just not something you should expect.

And, Stedman said, Southeast might need to get used to having less power in Juneau. He said the bipartisan coalition, which empowered coastal lawmakers, is unlikely to return.

Stedman: I would say that it would be nice, but I wouldn’t expect it. We used to have a senator from Sitka, one from Petersburg and Wrangell, one from Ketchikan and one from Juneau: four senators from Southeast. Now we have two. Ten years from now, my expectation is we’ll have one and a half.

That’s largely because of population growth in the rail belt. Stedman has long said that the biggest divide in Alaska is not Republican vs. Democrat, but urban vs. rural: the railbelt vs the coast.

Stedman: And there is a difference in political philosophy amongst the islands. And I don’t know if we’re just secluded, if we’re the older part of the state, a little more mature in some of our viewpoints…We have a little longer longevity of Alaskans, and our economic interests don’t correlate as tight. As an example as I sit here in Raven Radio and I look out at the trollers sitting in ANB Harbor, you know there’s a vast amount of trolling poles sticking up in the air. You don’t see that in Anchorage. What you see in Anchorage is a discussion on oil. Hydrocarbons.

About those hydrocarbons. Stedman supports the repeal of SB 21, the new oil tax regime passed in 2013, which he argues tilted too far towards the interests of oil companies. This year, he presented his own oil tax bill, SB 192, which would raise the minimum tax on oil companies and reduce tax credits. The bill didn’t move out of the Senate Resources Committee; Stedman says the future of Alaska’s oil taxes now rests with voters. A citizen initiative to repeal SB 21 will be on the ballot in August.

Stedman: One of the things that people in the discussion should remember before you go to the polls here in August and express your opinion is that we’re an ownership state, we own the oil, and the tax mechanism is just a methodology for us to put a sale price on the hydrocarbon. And as the only state in the union that owns the subsurface, Alaska is different, and we need, we the people need to stand up for our ownership rights, because if we don’t stand up for it, I can guarantee that nobody else is going to.

Stedman also introduced a resolution urging the US Congress to transfer land in the Tongass National Forest to the state. He says he’d like to see more access to the Tongass for everything from recreational cabins to second-growth timber sales.

Stedman: It’s not a park. People should have access to it.

Stedman says state control of the land would be an economic shot in the arm for Southeast.

Stedman: We’re not the park for Rhode Island, or New Jersey. Maybe we should have New York go back the way it was 200 years ago…see what they think about that. Would be not very popular in New York
KCAW: I don’t really want the Tongass to look like New Jersey, though. I’m from New Jersey.
Stedman: Well, we’re not, the Tongass isn’t going to look like New Jersey! We’re not crazy. We’re not going to do anything like that!

The Tongass resolution passed both houses of the legislature, and is now waiting for the governor’s signature.

The Vote No on 1 Coalition argues that Alaska’s old tax structure made it less competitive than other oil producing areas in the US and around the world.

Ads urging Alaskans to Vote No on 1 have begun to appear on television and in print — and some members of the campaign are appearing in person.

Former Sitkan Rocky Elerding traveled from Ketchikan this week (1-22-14) to speak to Sitka’s Chamber of Commerce on the issue. Elerding is a 1995 graduate of Sitka High School. He now is a mortgage manager for First Bank.

Elerding’s 20-minute Powerpoint echoed much of the tax reform debate that dominated the Alaska legislative session last year. The Republican majority in 2013 passed a measure known as Senate Bill 21, restructuring Alaska’s system of taxing oil profits.

Opponents of SB 21 have referred to it as a “giveaway.” Some notable Republicans, including Sitka Sen. Bert Stedman, made headlines last year by signing the initiative petition that is now known as Proposition 1. If passed by voters this August, Prop 1 would repeal SB 21.

Elerding’s presentation focused on the importance of the oil economy in Alaska: It provides 90-percent of state revenues, and is directly or indirectly responsible for one-third of all jobs in the state.

Elerding said that the Vote No on 1 campaign also wants Alaskans to think about their personal revenues. The Permanent Fund Dividend, especially.

“Think about families if the PFD went away. Some families save their PFD’s to pay for their kids’ college education. I wish my parents had done that. As I said earlier, oil and gas income lets Alaska enjoy no state income or sales tax. No other state can claim that.”

The legislature is starting the session this week with a budget from the governor that is $2-billion in the red. Opponents of SB 21 argue that the new tax structure is mostly to blame for the shortfall. Elerding, however, argued that SB 21 will eventually provide the state with more tax revenues than the old structure, once the state decline in production is reversed.

Chamber audience member Max Rule, asked for his reaction after the presentation, agreed that it was too soon to throw out SB 21.

“SB 21 should have a chance to work before we jump to conclusions that after only being in place for a year, that we think it’s not working. That if it turns out, as we go down the road, that we think it’s not working, that we can make changes to it.”

As a businessman, Rule is also sympathetic to the idea that any business — even the big three oil companies — is looking for ways to hold down the cost of investment.

“For me it’s not a partisan issue. It’s not Democrat or Republican. It’s a situation of economics. That it’s cheaper for the oil companies to develop wells in the Balkans, North Dakota, Montana, and these other areas. From a business perspective, business will go where you have the least cost of production.”

Scott Saline, however, sees things differently. Saline is a refrigeration mechanic, who has plans to open a seafood cafe this summer.

He thinks the new tax structure is giving the oil companies too much, at the expense of the public.

“It just doesn’t make sense to me. The margin wasn’t shown to me of how much money they’re losing. I’m more concerned that the shareholders want a higher percentage — you know, if you have to grow 2 or 3 percent a year. The extra cost of going to Alaska, that oil is still in the bank because it will be harvested at some time. And to forsake any money going to the schools, or whatever the state needs, without showing me that the shareholders and CEO’s aren’t enjoying a growth that none of us are, I just can’t not try to have them pay more.”

Saline is also aware of the position of Sitka’s legislators. Rep. Jonathan Kreiss-Tomkins joined his fellow House Democrats in opposing SB 21 last year. Sitka Sen. Bert Stedman and Kodiak Sen. Gary Stevens were the only two Senate Republicans to break from the majority and vote against the bill, which passed the senate 11-9.

Saline says Stedman has made an effort to become a student of the oil industry, and he trusts his judgment.

“I’ve got faith in Bert looking out for us, and not to be swayed by muscle in the Mat-Su, or wherever this is coming from.”

Ballot Proposition 1 repealing Senate Bill 21 is one of several measures Alaska voters will decide during the statewide primary election on August 19. A proposition raising the minimum wage by $1 to $8.75 an hour has made it to the ballot. So has a proposition legalizing the recreational use of marijuana.

A fourth initiative, requiring the legislature to fully consider the health of the Bristol Bay’s salmon fisheries before allowing any mining in the area, is awaiting certification by Lt. Governor Mead Treadwell.