Some facts about North Slope oil profitability

Four facts most of Alaska’s major news outlets won’t tell you regarding how profitable Alaska’s oil has been for the state’s three major oil producers. Fear of losing advertising revenue from BP and ConocoPhillips has purchased their silence.

Fact No. 1: BP makes less than $2 net profit for producing an Iraqi barrel of oil (Bloomberg Business & Financial News, April 28, 2009). Under ACES, BP was making a net profit of more than $28 per barrel from Alaska’s oil (Petroleum News, March 14, 2010), as calculated with Alaska profits divided by Alaska production. ConocoPhillips’ annual reports demonstrated $28 to $30 per barrel net profit from Alaska oil under ACES, many times its international average earnings per barrel.

Fact No. 2: Gaffney and Cline, Alaska’s most trusted oil income and oil tax consulting company, told Alaska’s legislators that BP’s return on North Slope investment approximated 123 percent under ACES. BP’s CEO Tony Hayward, on July 28, 2009, told Bloomberg Financial News that its $2 per barrel return on Iraqi investments was «compatible with returns we earn across the rest of our portfolio. » According to Bloomberg Financial News, BP worldwide portfolio earns an 18 percent annual average return on capital.

Fact No. 3: BP brags Governor Parnell’s $2 billion tax cut will create 200 new Slope jobs (Fairbanks Daily News-Miner, Oct. 3, 2013). That $2 billion is enough for the state to put 20,000 Alaskan residents to work at $100,000 per year.

Fact No. 4: Frank Murkowski brags Parnell’s tax cuts are nearly identical to those he pushed through the Legislature in 2006. Since then, five legislators were found guilty of exchanging “yes” votes on Murkowski’s bill for bribes from Bill Allen and other employees of his oilfield service company VECO. A sixth legislator who, while in Juneau, was being paid $2,900 per month to be VECO’s liaison to the Muldoon Community Council, (go figure) was convicted of accepting bribes in exchange for his “yes” vote on a private prison scheme also involving VECO. On March 4, 2008, Jim Clark, Murkowski’s chief of staff who had lobbied Murkowski’s bill through the Legislature, pleaded guilty to conspiring with Allen and VECO officials to channel $68,550 in illegal contributions to Murkowski ‘s political campaign.

So if North Slope oil is so profitable, why aren’t the three producers producing more? Here are three reasons.

Reason No. 1: Prudhoe and Kuparuk are experiencing the same irreversible declines that all aging oilfields experience. When legislators pressed for answers, not one Prudhoe or Kuparuk producer was willing to support Parnell’s claim that production would increase if taxes were cut.

Reason No. 2: Shortly after BP persuaded Congress to let the company export Alaska crude, BP jumped on the opportunity to buy ARCO’s West Coast refineries and retail gas stations. ARCO’s refineries were built specifically for North Slope crude. BP’s purchase of ARCO West Coast assets incentivized BP to abandon ideas of exporting and pursue the much more profitable business of refining its North Slope crude into products to retail in what were ARCO’s gas stations.

When BP’s North Slope production exceeded its ability to refine and retail on the West Coast and BP’s West Coast storage tanks nearly ran over, BP demonstrated the high value it places on its North Slope crude. Rather than sell its excess crude before returning tankers to Valdez, BP retained possession sending several tankers back to Alaska with half their load still in their hulls. Controlling Alaska crude from the wellhead to the gas pump is very likely the most profitable cash cow BP has. Producing more North Slope oil than BP’s refined products market share can absorb would shorten the life of BP’s Alaska cash cow.

Reason No. 3: As Prudhoe and Kuparuk decline more and more water is injected to bring the oil up; and more and more gas is re-injected. Over time, a mix of more and more gas and water comes up with the crude, which must be separated from the crude and re-injected again. The facilities on the slope for separating and re-injecting water and gas are running at or near capacity. More production would require new separation and reinjection facilities. New construction is unlikely without the mutual agreement of all three major producers.

So ask yourself, even if we gave them the oil for free, why would BP cooperate in an expensive investment that would effectively shorten the life of its extraordinarily profitable cash cow?

Ray Metcalfe served in the Alaska Legislature from 1978 to 1982 and began writing and speaking publically about VECO’s bribery schemes in 1998, eight years before the FBI’s investigation became public. Contact him at rayinak@aol.com.