JUNEAU — Legislators are planning to look into a recently revealed benefit for a new oil field on Alaska’s North Slope that the administration of Gov. Sean Parnell says is needed, in addition to the oil-tax restructuring Senate Bill 21, to get the field into production.
The Legislature’s Budget and Audit Committee will review a 60 percent, multiyear reduction in royalties recommended for Caelus Energy for the new Nuna project, just south of its Oooguruk field on the North Slope. That discussion will take place Dec. 2, the day after new Gov. Bill Walker is scheduled to be sworn in in Juneau.
Caelus sought the reduced royalty rate on July 1, but the Department of Natural Resources kept mum about the application for months, opening it up for public comment in mid-November.
In between, Alaskans voted to retain SB 21 in a heated referendum election that determined whether or not to keep the oil-tax reform bill passed by the Legislature in 2013. During the referendum debate, supporters of SB 21 argued reform was needed because investments weren’t profitable under the old tax system, Alaska’s Clear and Equitable Share. Opponents of SB 21 said that royalty relief already existed and could be used to make new fields profitable, if they could prove they wouldn’t be profitable without lower royalties.
Committee to hear more
Now the Legislative Budget and Audit Committee wants to hear more about the proposed royalty reduction for Caelus.
Caelus did not return multiple calls for this story, but committee staff said Caelus will appear at the hearing.
Two DNR staff members, Bill Barron, director of the Alaska Division of Oil and Gas, and Alex Nouvakhov, commercial section manager with the agency, are expected to attend the hearing. Outgoing DNR Commissioner Joe Balash signed the “finding” giving Caelus preliminary approval and could appear as a private citizen, since his position will be filled by new Walker appointee Mark Myers.
Rep. Les Gara, D-Anchorage, called on the outgoing Parnell administration to withdraw the preliminary approval of the royalty reduction.
“The governor should just withdraw the recommendation — this is a policy call for a new governor,” he said.
The proposed royalty relief would drop the standard royalty of 12.5 percent to 5 percent until the Nuna development makes $1.25 billion, and will likely be worth about $75 million to Caelus, Balash said in an interview.
Royalty is the share of oil revenues that the state gets for owning the resource. It also collects severance tax, property tax, income tax and other revenues.
The benefit of reduced royalty rates
The idea behind a reduced royalty rate is to make a costly project more profitable for a company. The benefit to Alaska is more oil production, which could eventually be worth $1.4 billion to Alaska in production from the new field, according to the royalty relief finding.
Under state law, to award royalty relief it must be needed to ensure the project goes forward. Balash said that to make that determination, DNR analyzed what profits Caelus needed to earn to be persuaded to invest.
Balash declined to say how much profit DNR determined Caelus deserved, but said DNR staff consulted with Alaska Permanent Fund staff to determine what rates of return it was expecting on its new oil and gas investments.
“What I found there was they are expecting some pretty significant returns on the investments they make, and so ultimately that was one of the things I took into account,” he said.
Balash declined to say how profitable he determined an investment such as Caelus’ had to be to ensure it went forward with Nuna, but said DNR was reviewing with Caelus how much information could be made public to legislators.
The royalty relief is a good deal for Alaskans, but doesn’t overpay Caelus, he said.
“If we as Alaskans aren’t willing to invest our money for less than 25 percent return, why should we expect somebody else to?” he said.
Balash said what really makes the Nuna deal good for Alaska is what else it might get.
The Nuna development
Caelus wants to drill into “tight” oil at the Nuna development and try to use new techniques to extract the difficult-to-produce oil there.
“It’s not a question ‘if the oil is there,’ it is there. We know it’s there, everybody knows it’s there, it’s ‘can you get it out of the ground in an economical way.’ That’s where these specific techniques come into question,” Balash said.
But what Balash said is special about the royalty reduction that he’s proposing is that Caelus will have to make public what it finds when it drills, and that information could open up other tight oil plays on the North Slope.
“We think that the benefits of testing these techniques to see if they work are pretty valuable to the state and therefore in the state’s interest to forgo some royalty on the front end,” Balash said.
Caelus has agreed to make public a Society of Petroleum Engineers paper on what it finds, he said. That will benefit others as well.
Because Balash won’t make the final decision, he said it is in Caelus’ interest to make as much information public during the legislative hearings as possible, he said.
Caelus was also a big bidder during the Division of Oil and Gas’s North Slope lease sale last week.
The proposed royalty relief is now in the middle of a 30-day public comment period, with a decision on final approval coming some time after mid-December.
Related stories from around the North:
Canada: Canada ponders exceptions to relief well rule for Arctic oil drilling, Alaska Dispatch
Norway: No Norwegian services to Russian Arctic offshore oil, Barents Observer
Russia: Serious damage to drilling rig in Arctic Russia, Barents Observer
United States: Oil lease sale in Arctic Alaska draws big money, Eye on the Arctic