comparative analysis of alaska’s oil and gas fiscal terms ......2020 t ®. 6 alaska’s current...

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Confidential. © 2020 IHS Markit®. All Rights Reserved.

Comparative Analysis of Alaska’s Oil and Gas Fiscal Terms and the

Fair Share Act Ballot Initiative

Prepared for American Petroleum Institute

August 3, 2020

Irena Agalliu, Vice President

Aube Montero, Director

Stephen Adams, Associate Director

Divya Ramaswamy, Associate Director

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• The Fair Share Act ballot initiative is introduced at a time when the oil industry faces twin crises—the COVID-19 and the

oil price crash. While the measure is likely to have a devastating impact to oil and gas investment in the state in the

current low oil price environment, the measure is not sustainable even under a long-term base case scenario of $60/bbl.

• Alaska’s current fiscal system is one of the least competitive ones within US and international peer groups in terms of

$/bbl present value accruing to investors. A combination of relatively higher unit costs needed to bring Alaskan North

Slope crude oil on stream contribute to lower project profitability compared with Lower 48 and international jurisdictions.

The provisions of the Fair Share Act further deteriorate Alaska’s competitive position. The ballot initiative is expected to

affect 84% of the current production the state.

• The impact of the Fair Share Act exacerbates as commodity prices recover to the long-term base case scenario of

$60/bbl. At prices above $60/bbl the NPV of Alaskan projects suffers a loss of $450 - $700 million per project.

• Alaska’s fiscal system becomes one of the least competitive oil and gas fiscal systems in the US under the Fair Share

Act. Alaska’s ranking within the international peer group erodes as well under the Fair Share Act.

• Since 2006 the Alaskan oil and gas fiscal system has undergone frequent changes, resulting in fiscal instability and loss

of investor confidence in the state. The introduction of the Fair Share Act goes against a recent trend by the majority of

the jurisdictions towards lowering the government take. Such a measure comes at a time when other states have either

introduced or are considering measures to incentivize the industry.

2

Executive summary

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3

Most of the jurisdictions in the peer group improved fiscal terms since the

2014 oil price crash

2018201720162015

• Reduces SC

from 32% to

20%

• Reduce PRT

from 50% to

35%

• Reduces

Supplement

ary Charge

from 32% to

20%;

• Introduces

basin wide

investment

allowance

for SC;

• Reduces

rate of PRT

from 50% to

35%

• Reduces

Supplementary

Charge from

20% to 10%;

• Permanently

reduces PRT

to 0%

UK

BR

• Changes from

mandatory to

optional

participation by

Petrobras in

pre-salt

• Reduces

corporate income

tax

• First year bonus

depreciation of

100%

• Offers lower

royalty rate for

shallow water

• Repeals royalty

valuation rule

US

BR

• Extending the

validity of the

temporary import

regime by 20

years

BR• Reduced

royalty for

marginal

fields

• Transferable

tax history for

late-life assets

UK

UK• Funding

geological

surveys

AO

• New gas law

offering lower

tax for gas

• New fiscal

terms and

incentives for

marginal

zones

• Royalty

valuation rule

US

AO• Incentives for

marginal fields

Hig

he

r

GO

V T

ake

Lo

we

r G

OV

Ta

ke

Source: IHS Markit

2020

AK• $1/bbl tax on Cook Inlet

• Sunsets Cook Inlet

credits

• Sunsets credit for

exploratory wells in

frontier basins

CO • Increases

royalty from

16.67% to 20%• Increases

royalty from

18.75% to

20%

NM

AO Angola NO Norway

BR Brazil NM New Mexico

AK Alaska UK United Kingdom

CO Colorado US United States

ND North Dakota WY Wyoming

• Lowers

extraction tax

from 6.5% to 5%

and removes

lower price

triggers

UK

ND

2019

WY• Reduced

severance

tax and

conservati

on tax

NO• Increased

uplift on

capital

expenditure

Alaska

Fair Share

Act

AK• Imposes

further

restrictions

on tax credits

and

deductions

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4

The Fair Share Act erodes the competitiveness of Alaska’s oil and gas

investments in the US and internationally

78%

Brazil

Alaska Current

Alaska Fair Share

Norway

Angola

Texas

Ø 59

63%

UK

North Dakota

US DW GOM

66%

56%

37%

Guyana

50%

72%

55%

58%

57%

New Mexico

Wyoming

Colorado

58%

62%

57%

Government Take—$60/bbl Average

Source: IHS Markit

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5

Alaska’s North Slope higher unit costs require on average higher commodity

prices for investments to break even at 10% rate of return

0

10

20

30

40

50

60

70

80W

yo

min

g(P

ark

ma

n/T

urn

er)

New

Me

xic

o(P

erm

ian

Ba

sin

)

Te

xas (

Pe

rmia

nB

asin

)

United

Kin

gd

om

(Offsho

re)

Nort

h D

ako

ta(B

akken

)

United

Sta

tes

(Offsho

re)

Bra

zil

(Off

sho

re)

Guya

na (

Off

sho

re)

No

rwa

y (

Offsh

ore

)

Co

lora

do

(N

iob

rara

Wa

tten

be

rg)

Ang

ola

(O

ffsh

ore

)

Ala

ska (

No

rth

Slo

pe

)

Source: IHS Markit

20

20

Fu

ll-c

yc

le B

rea

keve

n C

os

ts in

term

s

of

Date

d B

ren

t (U

SD

/bb

l)

Range of breakeven costs @ 10% IRR Average breakeven price @ 10% IRR

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6

Alaska’s current and proposed fiscal systems are the least competitive

within the international and US peer groups in terms of $/bbl present value

5.9

5.1

4.8

4.0

3.7

2.5

1.2

0.2

Angola

US DW GOM

Brazil

UK

Guyana

Norway

Alaska Current

Alaska Fair Share

Ø 3

Turner WY

4,1

Parkman WY

Bone Spring Deep TX

Wolfcamp Middle Hotspot TX

Bakken New Fairway ND

Niobrara Wattenberg CO

Bakken Parshall ND 7,5

Wolfcamp Southern Liquids TX

Bone Spring Deep NM

Bakken Elm Coulee ND

Alaska Current

Alaska Fair Share

Niobrara Fracture Play WY

Ø 6

10,5

9,7

9,1

8,1

0,2

6,9

6,8

5,5

3,5

1,2

0,2

International Peer Group NPV per BBL—$60/bbl US Peer Group NPV per BBL—$60/bbl

Source: IHS Markit

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Content

7

International competitiveness

Competitiveness within US Lower 48

Methodology and application of Fair Share Act

Recent changes in fiscal systems

Conclusions

1

2

3

4

5

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• Peer group selection

> Alaska’s oil fields compete for investment in the domestic and international market

– Deepwater offshore oil fields are considered comparable with Alaskan North Slope oil fields in terms of reserve size

as well as cost of development and production

– In the domestic market Alaska’s North Slope competes with tight oil plays in the Lower 48

> A theoretical conventional oil field of 500 million barrels of oil is modeled onshore Alaska North Slope and compared to

500 million barrel oil fields in deepwater Angola, Brazil, Guyana, Norway, UK and the U.S. Gulf of Mexico. Brownfield

developments have been used for this analysis.

– The development concepts feature the actual cost of developing a 500 MMbbl oil field in the respective jurisdictions

accounting for differences in water depth, total vertical depth, regional costs, distance from liquid markets, well output

etc. 2020 costs have been used for this analysis.

> Comparison with investment opportunities in the lower 48 focuses on tight oil and shale plays in Colorado, New Mexico,

North Dakota, Texas and Wyoming. Single well economic models have been used for this analysis representing

average type curves for each play

• A 10% discount rate is used for this analysis under four oil price assumptions of $25, $35, $60, $85 in real terms

throughout the project lifecycle.

> The $60/bbl price represents the base case scenario pre COVID-19. The assumption is that $60/bbl will ultimately be

the base case scenario in post COVID-19 world.

8

Methodology

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9

Scope of Fair Share Act Ballot Initiative

This is a tax on oil only in addition to the current

production tax for fields, reservoirs and units north of 68

degrees north

The tax only applies after 400MMbbl of oil have been

produced and if the production rate was over 40kbbld in

the prior 12 months

No credits or offsets are applicable and the tax cannot

be reduced below the Alternative Minimum Tax

Fair Share Act

35% Production Tax + 15% of the difference between

$50/bbl and the Production Tax Value¹ of oil

Pay the greater of:

Alternative Minimum Tax

10% to 15% of the percentage of the Gross

Production Value² of oil.

The tax rate is 10% for ANS Prices under $50.

An additional 1% is paid for within each $5/bbl

increment beyond $50/bbl up to $70

or

0

20

40

60

80

5 6 16

Thousand bbl/d

71 2 3 27194 8 229 10 2011 12131415 1718 21 23242526

Fair Share tax applicable

Fair Share tax not applicable

Example 500MMbbl Green Field

Production Profile

Brownfield projects may experience the

liability of Additional Production Tax

immediately

Note:

• ¹Production Tax Value is the same taxable base per unit that is

calculated for the production tax. It is net of royalty and certain

E&P cost. There is ring-fencing for Fair Share Act purposes: i.e.

use of excess lease expenses in non-targeted fields against

targeted fields is now disallowed

• ²Gross Production Value is net of transportation costs and royalty

Year

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10

North Slope brownfield developments are more likely to be affected by the

Fair Share Act initiative

WillowEst. 2P Reserves:

Oil - 625 MMbbl,

Gas - 250 Bcf

Status: FID date

planned for 2021

Est. start year: 2026

PikkaEst. 2P Reserves: Oil - 788 MMbbl, Gas - 600 Bcf

Status: FID date estimated for 2020

Est. start year: 2025

Greater Kupurak DevelopmentEst. Remaining Reserves: Oil – 1400 MMbbl

Status: Producing

Alpine DevelopmentEst. Remaining Reserves: Oil – 255 MMbbl

Status: Producing

Greater Prudhoe Bay DevelopmentEst. Remaining Reserves: Oil – 3100 MMbbl, Gas - 25000 Bcf

Status: Producing

Brownfield developments

Greenfield developments

• To date, mainly brownfield developments achieve:

• cummulative production of oil greater than 400MMbbl

• and a daily production rate greater than 40,000bbld

• Discoveries such as Pikka and Willow might also trigger the tax.

• Consequently, all calculations completed for this presentation are

on a point forward basis for brownfield developments.

84% of the current production in the state is impacted by the measure

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Content

11


Competitiveness with US Lower 48



Conclusions

1

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4

5

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12

Alaska’s oil fields and most deepwater projects are uneconomic at oil prices of $25

and $35 per barrel. Alaska’s competitiveness deteriorates under the Fair Share Act

as commodity prices increase

International Peer Group Development Forward NPV per BBLUSD / BBL

0.6

0.1

-0.1

-1.5

-1.7

-1.8

-2.5

-3.0

Angola

UK

Brazil

Alaska Fair Share

Norway

Alaska Current

Guyana

US DW GOM

Ø -1

-1.3

-2.0

-2.2

-4.3

-4.5

-4.8

-5.1

-5.2US DW GOM

UK

Alaska Current

Norway

Angola

Brazil

Alaska Fair Share

Guyana

Ø -4

$25/BBL $35/BBL

Source: IHS Markit

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13

At prices above $60/bbl Alaska’s proposed fiscal system is the least

competitive within the international peer group

11.9

11.6

11.0

9.4

5.4

5.0

3.8

2.4

Alaska Current

US DW GOM

Brazil

Alaska Fair Share

UK

Guyana

Norway

Angola

Ø 8

International Peer Group Development NPV per BBLUSD / BBL

5.9

5.1

4.8

4.0

3.7

2.5

1.2

0.2

Alaska Current

US DW GOM

Brazil

Norway

UK

Guyana

Alaska Fair Share

Angola

Ø 3

$60/BBL $85/BBL

Source: IHS Markit

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14

From a government take perspective Alaska ranks at the bottom of the pack

in the low oil price environment

International Peer Group Development Forward Government Take

Percent of Contractor Divisible Income

97%

Alaska Current

UK

Alaska Fair Share

74%Norway

Brazil

Angola

US DW GOM

Guyana

Ø 84

0%

98%

100%

100%

100%

100%

Brazil

Ø 73

77%

Alaska Current

UK

Angola

US DW GOM

Norway

Guyana

Alaska Fair Share

66%

24%

61%

75%

82%

100%

100%

$25/BBL $35/BBL

Source: IHS Markit

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15

At or above $60/bbl Alaska’s government take slides towards the bottom of

the peer group

Angola

51%

Ø 59

Alaska Fair Share

UK

Guyana

US DW GOM

Norway

Brazil

Alaska Current

38%

44%

55%

59%

68%

78%

78%

International Peer Group Development Forward Government Take


58%

US DW GOM

UK

Brazil

Norway

Alaska Fair Share

Alaska Current

Guyana

Angola

Ø 59

37%

50%

55%

56%

66%

72%

78%

$60/BBL $85/BBL

Fair Share Act increases government take by 9-11 percentage points, further eroding Alaska’s

competitive position

Source: IHS Markit

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16

Alaska’s NPV erodes by about $200 million in the low oil price environment

International Peer Group Development Forward NPVMillion USD

286

74

-64

-771

-830

-906

-1,264

-1,515

Norway

Angola

Alaska Fair Share

UK

Guyana

Brazil

Alaska Current

US DW GOM

Ø -624

-640

-988

-1,111

-2,140

-2,239

-2,418

-2,538

-2,576

Alaska Fair Share

Norway

Angola

Alaska Current

Guyana

Brazil

UK

US DW GOM

Ø -1,831

$25/BBL $35/BBL

Source: IHS Markit

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17

At prices above $60/bbl the NPV of Alaskan projects suffers a loss of about

$450 - $700 million per project

5,933.6

5,781.9

5,475.8

4,678.5

2,722.9

2,513.0

1,888.0

1,189.0

Guyana

Brazil

US DW GOM

UK

Alaska Fair Share

Norway

Angola

Alaska Current

Ø 3,773

International Peer Group Development Forward NPVMillion USD

2,931.3

2,538.3

2,407.3

1,998.4

1,829.1

1,228.8

580.0

124.0

UK

Brazil

Ø 1,705

US DW GOM

Angola

Alaska Current

Guyana

Norway

Alaska Fair Share

$60/BBL $85/BBL

Source: IHS Markit

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Content

18





Conclusions

1

2

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4

5

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19

Low oil prices of $25 to $35 per barrel do not favor the development of most

projects in the US

US Peer Group Development Forward NPV per BBL

USD / BBL

-3.9

-4.5

-4.8

-6.1

-6.3

-6.5

-7.1

-7.8

-7.8

-10.7

-10.8

-11.7

-14.8

Turner WY

Bakken Parshall ND

Bakken Elm Coulee MT

Bone Spring Deep NM

Parkman WY


Alaska Current

Alaska Fair Share


Bone Spring Deep TX




Ø -8

0.6

-1.3

-1.5

-2.1

-2.3

-2.5

-2.5

-3.0

-3.1

-5.6

-6.0

-6.8

-10.2



Parkman WY


Alaska Current

Bone Spring Deep NM

Bakken Parshall ND


Alaska Fair Share

Turner WY

Bone Spring Deep TX


Bakken Elm Coulee MT

Ø -4

$25/BBL $35/BBL

Source: IHS Markit

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20

At and above $60/bbl oil prices Alaska’s fiscal systems generate

significantly less value per barrel than Lower 48 tight oil plays

20.42

20.40

20.36

17.50

16.87

16.39

15.79

15.61

13.21

12.58

9.46

3.78

2.38


Parkman WY


Turner WY


Bone Spring Deep NM

Bakken Parshall ND

Bone Spring Deep TX




Alaska Current

Alaska Fair Share

Ø 14

US Peer Group Development Forward NPV per BBL

USD / BBL

$85/BBL

10.51

9.67

9.14

8.13

7.46

6.94

6.83

5.46

4.06

3.49

1.16

0.25

0.23


Parkman WY

Bone Spring Deep TX



Bone Spring Deep NM

Bakken Parshall ND

Turner WY



Alaska Current

Alaska Fair Share


Ø 6

$60/BBL

Note: the closeness of unit NPV for the Parkman, Turner and Wolfcamp projects is a mathematical coincidence. Type curves are different. Wells EURs are resp. 504Mbbl, 361Mbbl and 621Mbbl.

Wells resp. NPVs are 10.29MM$, 7.36MM$ and 12.64MM$

The Fair Share Act ballot initiative further erodes the weak competitive position of Alaskan oil fields

Source: IHS Markit

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21

The passage of the Fair Share Act would increase Alaskan government take by 18

percentage points in the low oil price environment, making it even less likely for

project sanction

US Peer Group Development Forward Government Take




Bone Spring Deep NM


Bakken Parshall ND


Ø 100

Bone Spring Deep TX


Parkman WY

100%

Turner WY


Alaska Current

Alaska Fair Share

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

$25/BBL

Alaska Current

Bone Spring Deep NM



74%

Ø 85


100%


Alaska Fair Share

Turner WY

Parkman WY


Bakken Parshall ND

100%


Bone Spring Deep TX

69%

71%

74%

80%

80%

82%

86%

91%

100%

100%

$35/BBL

Source: IHS Markit

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As prices increase Alaska’s competitiveness with the US Lower 48 tight oil

plays deteriorates to the least competitive in the peer group

Turner WY

54%

51%




Bone Spring Deep NM

Alaska Current


Alaska Fair Share


Ø 54

56%

50%

Parkman WY

Bakken Parshall ND


56%

Bone Spring Deep TX

50%

50%

51%

52%

53%

59%

68%

59%

Unconventional Peer Group Development Forward Government Take


Alaska Current

Bone Spring Deep NM




Alaska Fair Share

55%

54%


65%


Parkman WY

Bone Spring Texas Deep TX

Turner WY

Bakken Parshall ND


63%

54%

55%

56%

56%

56%

60%

62%

62%

66%

Ø 59

$60/BBL $85/BBL

Source: IHS Markit

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Content

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Competitiveness with US lower 48



Conclusions

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Alaska has one of the most unstable oil and gas fiscal systems in the world

1977Production tax

system using the

Economic Limit

Factor (ELF)

2006House Bill 3001,

aka Petroleum

Production Tax

(PPT)

2007House Bill 2001, aka

Alaska’s Clear and

Equitable Share

(ACES)

2008Increase of the

alternative credit for

exploration and

establishment of an oil

and gas tax credit fund

2013Senate Bill 21, aka

the More Alaska

Production Act

(MAPA)

2016HB 247 in 2016,

reduced or

eliminated some of

the credits

Various changes

Alaska Production Tax—Legislative signposts (Focus since 2006)

© 2020 IHS MarkitSource: IHS Markit

2010Senate Bill 236, House Bill

280, and Senate Bill 309

amended some provisions

and created new tax credits

2012Corporate income

tax credit for LNG

storage facility, set

a cap on tax for oil

etc

2013 2017HB 111 further

restrictions on tax

credits and

allowances

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Most of the jurisdictions in the peer group improved fiscal terms since the

2014 oil price crash

2018201720162015

• Reduces SC

from 32% to

20%

• Reduce PRT

from 50% to

35%

• Reduces

Supplement

ary Charge

from 32% to

20%;

• Introduces

basin wide

investment

allowance

for SC;

• Reduces

rate of PRT

from 50% to

35%

• Reduces

Supplementary

Charge from

20% to 10%;

• Permanently

reduces PRT

to 0%

UK

BR

• Changes from

mandatory to

optional

participation by

Petrobras in

pre-salt

• Reduces

corporate income

tax

• First year bonus

depreciation of

100%

• Offers lower

royalty rate for

shallow water

• Repeals royalty

valuation rule

US

BR

• Extending the

validity of the

temporary import

regime by 20

years

BR• Reduced

royalty for

marginal

fields

• Transferable

tax history for

late-life assets

UK

UK• Funding

geological

surveys

AO

• New gas law

offering lower

tax for gas

• New fiscal

terms and

incentives for

marginal

zones

• Royalty

valuation rule

US

AO• Incentives for

marginal fields

Hig

he

r

GO

V T

ake

Lo

we

r G

OV

Ta

ke

Source: IHS Markit

2020

AK• $1/bbl tax on Cook Inlet

• Sunsets Cook Inlet

credits

• Sunsets credit for

exploratory wells in

frontier basins

CO • Increases

royalty from

16.67% to 20%• Increases

royalty from

18.75% to

20%

NM

AO Angola NO Norway

BR Brazil NM New Mexico

AK Alaska UK United Kingdom

CO Colorado US United States

ND North Dakota WY Wyoming

• Lowers

extraction tax

from 6.5% to 5%

and removes

lower price

triggers

UK

ND

2019

WY• Reduced

severance

tax and

conservati

on tax

NO• Increased

uplift on

capital

expenditure

Alaska

Fair Share

Act

AK• Imposes

further

restrictions

on tax credits

and

deductions

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Conclusions

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• The Fair Share Act ballot initiative is introduced at a time when the oil industry faces twin crises—the COVID-19 and the

oil price crash. While the measure is likely to have a devastating impact to oil and gas investment in the state in the

current low oil price environment, the measure is not sustainable even under a long-term base case scenario of $60/bbl.

• Alaska’s current fiscal system is one of the least competitive ones within US and international peer groups in terms of

$/bbl present value accruing to investors. A combination of relatively higher unit costs needed to bring Alaskan North

Slope crude oil on stream contribute to lower project profitability compared with Lower 48 and international jurisdictions.

The provisions of the Fair Share Act further deteriorate Alaska’s competitive position. The ballot initiative is expected to

affect 84% of the current production the state.

• The impact of the Fair Share Act exacerbates as commodity prices recover to the long-term base case scenario of

$60/bbl. At prices above $60/bbl the NPV of Alaskan projects suffers a loss of $450 - $700 million per project.

• Alaska’s fiscal system becomes one of the least competitive oil and gas fiscal systems in the US under the Fair Share

Act. Alaska’s ranking within the international peer group erodes as well under the Fair Share Act.

• Since 2006 the Alaskan oil and gas fiscal system has undergone frequent changes, resulting in fiscal instability and loss

of investor confidence in the state. The introduction of the Fair Share Act goes against a recent trend by the majority of

the jurisdictions towards lowering the government take. Such a measure comes at a time when other states have either

introduced or are considering measures to incentivize the industry.

27

Conclusion

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