From the shadows of VECO comes ‘faces of ACES’

If we Alaskans are not vigilant, the corruption that ruled this state for more than 25 years will come roaring back with a vengeance. Former BP spokesman Paul Laird is now doing through the Alaska Support Industry Alliance what he can no longer get VECO to do for BP. The Anchorage Daily News is rehabilitating Paul Jenkins, VECO’s paid spokesman for 19 years and author of VECO’s paid-for column “The Voice of The Times.”

“The Voice of the Times” was paid advertising passed off as journalism, a sham the FBI raids on VECO’s offices finally shamed the Anchorage Daily News into removing from its pages. ACES is a reference to Alaska’s new tax on oil dubbed Alaska’s Clear and Equitable Share. “Faces of ACES” is a reference to the faces of saddened, laid-off seasonal oilfield workers Laird’s television ads falsely tell voters were laid off because of Alaska’s increased tax on oil.

Jenkins has a new column under a different label, and the same gang of once VECO-backed, now Alliance-backed, legislators are again lining up to collect the rewards that come to those who pretend there’s truth in the “Faces of ACES” campaign.

• Fact: Every major oil producer in Alaska has bid for the right to take over production of Iraq’s poorly maintained and under-producing oilfields in exchange for payment of less than $2 per barrel for their services.

• Fact: Even after a big tax increase, Alaska’s largest producers still average about $20 per barrel for providing the same service.

BP partnered with a Chinese oil company to win the bid to re-develop Iraq’s largest oilfield, the Rumaila field. BP will effectively be working under a service agreement that pays BP and its partner $2 per barrel for oil produced in excess of the Rumaila field’s current 960,000 barrels per day.

The Rumaila field was originally discovered by BP in 1953. BP operated the Rumaila field on terms much more similar to what it has with Alaska now, until 1972, when Iraq confiscated BP’s investments and threw it out.

To regain access to Iraq’s oil, BP recently agreed to a drastic reduction in its share of Iraq’s production profits and strict investment requirements as needed to ramp up the field’s production.

Those strict terms require BP to take responsibility for continuing the Rumaila fields existing production at a break-even cost. The payment of $2 per barrel applies only to increased production. Iraq’s stiffer terms require BP to increase the Rumaila’s production to 2.85 million barrels per day, as dictated, within six years, and Iraq reserves the right to cancel BP’s contract if BP and partner fail to reach Iraq’s production goal. By factoring in that BP is not being paid a profit on the first 960,000 barrels of production, one can see BP will actually be averaging $1.33 per barrel when its production target is reached.

On closer scrutiny of BP’s contract, Wood Mackenzie, the same oil consulting firm Ralph Samuels hired to advise the Alaska Legislature in 2004, reviewed BP’s contract with Iraq and estimated much lower returns for BP and partner’s Iraqi investments. Wood Mackenzie suggests an ultimate net of about $3 billion for 16 billion barrels of production (Business Week, July 24, 2009).

Although I think Wood Mackenzie’s 20-year profit projection is a bit low, if true, the Alaska comparison is that in the past two years BP has taken home more profit than that from its North Slope production. BP produces about 34 percent of the oil coming off the North Slope. In the past two years, BP’s North Slope production has equated about 1 percent of the 16 billion barrels BP hopes to produce in Iraq over the next 20 years.

Following the first publication of this column, I received a call urging me to call a morning talk show whose host was arguing BP’s lower profits in Iraq were warranted because Iraq had removed BP’s risks by guaranteeing a $2 profit and guaranteeing that 100 percent of costs would be reimbursed. The talk show host argued that BP’s extraordinary Alaska profits were justified because, in Alaska, BP accepts the risk of loss. I also heard the oil industry argue that comparing investments in Iraq to investments in Alaska is like “comparing apples to oranges.”

So let’s explore these notions for a moment.

In Iraq, BP delivers the oil and an invoice for expenses to the Iraqi government. The Iraqis count the barrels and pay BP $2 per barrel for its production in excess of 960,000 per day, plus a 100 percent reimbursement for all agreed expenditures. In Alaska, BP determines for itself what to spend, when to drill and what to build. As North Slope oil is produced, BP reimburses itself for 100 percent of whatever costs it incurred as BP sells or refines its production, then pays Alaska a tax on what’s left over. BP then takes home what’s left after all expenses are paid. What’s left over in Alaska is a net profit equaling 10 times as much as Iraq pays BP for doing the same thing while under the constant threat that BP may get shown the door without a dime’s profit the moment Iraq concludes it has failed to meet its production requirements.

I was unable to discover what expenditures BP’s Iraqi contract requires, but I did find Iraq’s investment requirements in a similar contract with Exxon and Shell for ramping up the production of a slightly smaller field. The Exxon Shell contract requires a $25 billion capital investment in new wells and infrastructure over seven years. That’s a little more than $3.5 billion per year.

Steve Rinehart, BP’s Alaska spokesman, says BP’s capital budget for Alaska for 2010 is $850 million, or one-fourth that amount on Alaska investments that made BP $1.89 billion in 2009. Under the best of possible circumstances, the most BP can ever expect to make from its investments in the Rumaila field is $1.36 billion. Clearly, Iraq requires more money and more risk for less return.

Wood Mackenzie also told Business Week that BP has admitted finalizing a similar contract in Abu Dhabi, which would ultimately pay BP even less: about $1 per barrel to produce its oil (Business Week, July 24, 2009).

John Mingé, president of BP Exploration, no doubt was at least vaguely familiar with the above. When asked about proposals to roll back Alaska’s new tax on oil, Minge told The Anchorage Press, “It’s a good start, but it’s not enough to sustain Alaska’s oil and gas industry.”

Exxon and Shell have signed similar contracts with Iraq. According to The Wall Street Journal, Exxon and Shell signed a joint agreement to produce Iraq’s West Qurna oilfield. Exxon and Shell’s contract requires a $25 billion investment over the next seven years to ramp production up from 279,000 barrels to 2.25 million barrels per day and another $25 billion for operating fees. They will be reimbursed for their pre-approved expenditures over the duration of their 20 year contract, not to exceed $50 billion. Exxon and Shell will operate the field on a break-even (no profit) basis until the agreed increased production schedule of 2.25 million barrels per day is reached. At that time, Exxon and Shell will be paid $1.90 for each barrel of daily production exceeding the original 279,000 barrels in production (Wall Street Journal, Jan. 18, 2010).

Shell won an additional contract on similar terms by partnering with Malaysia’s Petronas Oil. Together, they offered to redevelop Iraq’s Majnoon oil field for $1.39 for each extra barrel they can extract above its current 45,000 barrels per day (Wall Street Journal, Dec. 11, 2009).

In comparison, according to the Alaska’s Royalty Accounting Department, ConocoPhillips paid severance taxes to Alaska on 99,581,335 barrels of Alaska oil in 2008.

According to ConocoPhillips’ stated net earnings on its Alaska investments, ConocoPhillips’ profited in the amount of $2.3 billion. Dividing ConocoPhillips stated net profit by the same number of barrels reveals that ConocoPhillips’ net profit averaged $23.10 per barrel from its Alaska interests in 2008.

By applying the same calculations to 2009 and averaging them in with 2008, we can calculate that ConocoPhillips has averaged about $19.62 per barrel in the two years following the Legislature’s increase in Alaska’s oil tax.

BP and Exxon refuse to disclose their profits from Alaska oil, but a reasonably accurate estimation of their profit margin can be extrapolated by applying the same North Slope per-barrel profit margin to the number of barrels on which BP and Exxon paid taxes in 2008. BP paid taxes on 79,496,721 barrels, placing its estimated profits for 2008 at more than $1.8 billion. Exxon paid taxes on 53,756,656 barrels, placing its estimated 2008 profits at more than $1.2 billion.

On the same day an earlier version of this column appeared in the Juneau Empire, Gaffney Cline, a consulting firm hired by the Legislature, confirmed for the Legislature that BP had in fact bid $2 per barrel for the privilege of producing Iraqi oil. The firm also confirmed that Exxon had bid $1.90, and Shell $1.39. Three weeks later, the March 14 publication of Petroleum News reported that BP earned $1.89 billion in Alaska in 2009.

Alaska’s oil clearly makes Alaska’s producers about 10 times the per barrel profit they’re hoping to get from Iraq. Iraq doesn’t beg them to spend for more production; they tell them to do it or get out. Alaska’s oil fields have never been nationalized as were Iraq’s. Alaska’s oil is not in a war zone and isn’t likely to become the subject of a civil war between religious factions fighting over who owns the oil.

Combined, Alaska’s three big oil producers spent between $2 billion and $3 billion in 2008 and profited more than $5 billion.

Bottom line is, if Exxon and Shell reach Iraq’s required production target, they will first spend and recover at least $25 billion for infrastructure and operating costs before receiving a dime of profit. Once their required production target is reached, they will be paid $1.90 per barrel on 1,971,000 barrels per day for a total annual payment of $1.3 billion per year. If they don’t meet their target, they may be sent packing.

Hardball works far better than caving to demands. Every company mentioned above was demanding Iraq pay two to three times as much for their service until Iraq said get moving or get out. Alaskans, on the other hand, allowed Exxon to hold Point Thompson as a strategic reserve to access if its refineries ran short of crude. Thirty years slipped by before we Alaskans moved to take Point Thompson away. When we did, Exxon finally started drilling.

The above information has been published in the Juneau, Ketchikan and Kenai newspapers, and the Fairbanks paper’s daily blog. Perhaps the biggest story here is why Alaska’s largest newspaper in Alaska’s largest city has never provided its Alaskan readers with coverage of the above referenced and widely publicized information. In light of the advertising campaign by the Alaska Support Industry Alliance, such information would seem crucial to the decision-making process of Alaskans.

I hereby challenge Dan Fagan, Rick Rydell and the Industry Alliance sponsors of those “Faces of ACES” ads to debate the content of this column and their ads — any time, any place, any audience.

Ray Metcalfe is a former state legislator who helped expose VECO for bribing Alaska lawmakers.