Conoco argues for tax cut; production drops

JUNEAU -- Conoco Phillips on Wednesday announced its profits from Alaska grew to $1.74 billion last year, even as oil production declined. The same day the company argued to the Alaska AFL-CIO and state legislators that oil taxes need to be cut so more oil can be produced.

"I think Alaska is at a point it has to decide, do we want to try to do something to incentivize and mitigate that production decline or not," said Wendy King, Conoco's vice president for external affairs.

King and Anchorage Democratic Sen. Bill Wielechowski, who defends the oil tax, argued their positions at a forum held by the Alaska AFL-CIO at the Baranof Hotel in Juneau. Several legislators of both parties showed up to the first forum on the issue to be held during a 90-day session of the Alaska Legislature that's expected to be dominated by debates over the oil tax.

Oil money built the Alaska Permanent Fund, accounts for about a third of the jobs in the state, and provides for 80 to 90 percent of general state government revenue, King reminded the audience. She said Alaska needs the long decline in North Slope production to be at least slowed.

Conoco is Alaska's biggest oil producer, and biggest taxpayer.

"In Alaska we have not drilled an exploration well for two years in a row ... the first time since 1965 that Conoco Phillips had not drilled an exploration well in the state of Alaska," King said.

The forum happened to be on the same day Conoco reported its 2010 earnings. The company's $1.74 billion profits in Alaska compares to just over a billion for the Lower 48. Conoco's Alaska profits rose by more than $200 million from 2009. The main reason for Conoco's increased profit from Alaska was higher oil prices.

Conoco reported its Alaska production dropped from 252,000 barrels a day in 2009 to 230,000 barrels last year.

The report filed with the U.S. Securities and Exchange Commission didn't break out how much the company paid in taxes in Alaska. King, in her presentation to the Alaska AFL-CIO, focused on the "marginal tax rate," which reflects the combined share of all state and federal taxes and royalties.

King said the marginal tax rate means that as the price of oil rises above $90 a barrel, for example, the government takes almost 80 cents of every dollar earned after operating costs.

The companies need to know that if they explore for oil it's going to be economically beneficial to develop, she said. That's where the tax comes in, she said.

SENATOR: TAX IS FAIR

Wielechowski said the debate is about whether to specifically cut Alaska's production tax. He said the average production tax rate has been 32 percent, before tax credits, over the past four years.

He maintained that Alaska's tax system compares favorably, and is vastly lower than the government's take in a place like Iraq. He said there are more Alaska oil jobs than before the oil tax system was imposed in 2007 (although jobs are currently on the downslide). North Slope oil investments and expenditures are going up, he said.

He said 152 new North Slope wells were drilled last year and new oil companies have come to Alaska in recent years. Meanwhile, he said, revenue from the tax gave the state a big savings account and let it fund services and construction projects that brought jobs statewide.

"Giving away $6 to $7 billion over the next five years with nothing in a return is not a good deal for Alaska," Wielechowski told the AFL-CIO crowd.

He said there's no guarantee lower taxes will mean more jobs.

In fact, Alaska saw oil jobs and investment go down at a time when most of the North Slope oil fields paid a zero production tax, Wielechowski said.

DECLINING PRODUCTION

The decline in North Slope oil production began after 1988. Production is forecast to be about 622,000 barrels a day in the coming year.

King said it won't be long before it drops to the point where big investments are necessary so the trans-Alaska pipeline can run with so much less flow than its peak.

North Dakota says its oil production could overtake Alaska's in less than a decade. King told the Alaska AFL-CIO that Lower 48 oil production and drilling rigs have increased during the recent years of higher oil prices. But the number of Alaska drilling rigs stayed about the same while production declined 36 percent since 2003.

King said it's been forecast that almost 90 percent of Alaska's oil over the next four decades will come from the big existing Prudhoe Bay, Kuparuk and Alpine oil fields. She said those core fields are key to slowing the decline in oil production. Conoco believes there is more oil to be found in those fields, she said, but it's of a type that's more challenging and expensive to develop.

King said investment is going down in those core fields. She said her company's investments on the North Slope went up from 2006 to 2009 but that was because of required maintenance and repairs, not new exploration and development.

A natural gas pipeline to the Lower 48 or Chukchi Sea development is a decade away at least, she said. Big investment will be needed to keep enough oil in the pipeline in the meantime, she said.

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