Weekly Offshore Rig Review: Alaska Angst

Alaska has overestimated its budget by $364 million for the next fiscal year, which starts July 1. At the root of the problem lie an overestimation of oil tax dollars and recent downward revisions of North Slope oil production.

New oil taxes were sorely miscalculated, coming in about $90 million below the estimate. Under the new Petroleum Profits Tax (PPT) payments were $813 million, which is $137 million less than the $950 million forecasted by the Revenue Department. The state underestimated about $66 million in payments made under the old tax laws, which were higher than those owed under the new system. In addition, operating expenses turned out to be 50% higher than expected, which equates to about $50 million in lower tax revenues. The remaining $21 million of the difference was not accounted for.

Looking forward, the Revenue Department predicts a record $4.98 billion in revenue by the end of this fiscal year compared to only $3.5 billion in 2008. Oil production’s decline is a key contributor. In 1988 Alaska was producing 2 MMb/d compared to just 764,000 b/d predicted in 2008 and 682,000 b/d in 2016.

Another significant contributor to the overestimated budget was the Prudhoe Bay shutdown in August 2006. About 200,000 gal leaked from BP’s pipeline, and oil had to be rerouted to other lines, which caused inaccurate production estimates. The operator is currently replacing 16 miles of pipeline, which has increased operating costs.

There currently are two bills up for debate in Alaska that would prevent oil companies from deducting taxes and claiming credits for maintenance and repair costs due to neglect, such as in the Prudhoe Bay case. These deductions, which are currently available to BP, could cost the state over $115 million in tax revenue if the bill is not passed.

To prevent future shutdowns due to oil field infrastructure failure, Alaska has established the Petroleum Systems Integrity Office to oversee the entire pipeline process, from permitting to maintenance.

Lease Sale
Even while the state worries about its budget shortfall and decreasing oil tax revenues, operators are still eager to take a risk and explore for oil off Alaska. For evidence, just look at the 10th Beaufort Sea oil and gas lease sale in which oil companies bid more than $42 million for offshore leases.

According to a statement from the MMS, John Goll, MMS Regional Director said, "The oil and gas resources present in the Beaufort Sea are vital to our nation's and Alaska's economy, and we hope this will boost future supplies into the Trans-Alaska pipeline.”

Shell was the leading bidder, with high bids on 49 blocks of 92 offered, which equates to $39.3 million of the $42 million total submitted for all of the blocks.

Total submitted high bids on 32 blocks, totaling $2.2 million. Eni submitted high bids on seven blocks, which have a total cost of $466,000, and ConocoPhillips and BP were high bidders on one block apiece.

Alaska Rigs
Though there is no offshore drilling activity at this time, some activity is ramping up to start soon. Pan United Marine’s Executive Chairman Henry Ng summed up the drillship market when he said, "The buoyant oil and gas market has created such demand for drillships that were previously laid up. We reckon that there are at least eight drillships that are being modified/re-activated this year.“

Shell is taking the lead and readying a drillship and a drill barge. The Frontier Discoverer drillship is currently in a Singapore shipyard being re-outfitted and upgraded after being cold stacked for more than two years. In July it is heading to Alaska to work for Shell as part of a three-year contract.

Frontier Drilling contracted Aker Arctic of Helsinki, Finland, to develop a modified hull form and protection for the riser to suit the harsh environment of the Beaufort Sea. Aker Arctic also conducted a series of ice model tests and developed an ice management plan, involving several icebreakers.

In addition, Pan United Marine fabricated and installed a new sponson tank as well as a new accommodation block and refurbished the marine and drilling equipment to meet ice class requirements.

The Kullu Arctic drill barge is also getting ready to go to work for Shell offshore Alaska. It has been stacked for more than seven years, but is currently in MacKenzie Bay, Canada, being prepped to go to work.

Aside from Shell, Devon Energy has recently worked off Alaska. From June 2005 to September 2006, the SDC Arctic drill barge was under contract and working in the Beaufort Sea. The rig was ready stacked when the contract ended.

Thus, while the market for offshore drilling rigs in Alaska is a small one, the level of activity and interest from operators is growing. As the Arctic waters begin to yield a return of oil and gas in the coming years, Shell is set to be the dominant player in the area thanks to its upcoming drilling activities and its overwhelming share of leases won during the recent lease sale.

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