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ConocoPhillips first quarter profits on Alaska oil add fuel to tax-cut debate

Pat Forgey

JUNEAU -- Alaska's biggest oil producer is reporting more than half a billion in Alaska profits for the quarter that ended March 31, but is continuing to say that it needs higher profits.

ConocoPhillips Thursday reported making $540 million after taxes in Alaska, while earning $2.1 billion worldwide. ConocoPhillips is the state's largest oil producer, and reports more Alaska detail about its earnings than do BP and Exxon Mobil, the the state's other two major oil producers.

Exxon Mobil also announced earnings Thursday, $9.5 billion worldwide. Its Alaska totals are not broken out. 

ConocoPhillips' oil production in Alaska was down about 4,000 barrels per day for the quarter, compared to the 218,000 barrels of oil equivalent it produced the previous quarter. That measure also includes smaller amounts of natural gas and natural gas liquids. The company said the decline was due to "normal field decline." The rate of decline was less than 2 percent.

Slowing decline rate?

In its just-completed session, the Alaska Legislature cut taxes for oil companies by what could amount to a billion dollars a year, depending on future prices and production. Oil decline rates played a key role in that debate, with Gov. Sean Parnell and allies blaming North Slope oil production declines since the adoption of the state's ACES oil tax regime in 2007 on the tax increase that was a cornerstone of that measure. ACES is shorthand for Alaska's Clear and Equitable Share.

During the debate on oil taxes, Parnell claimed the future decline rate would be 6 percent per year, while the official estimates published by his Department of Revenue said the decline rate was expected to be 3 percent or less in future years. When the official state Department of Revenue estimates came out prior to this year's legislative session, they were closer to the 6 percent touted by Parnell.

That change makes both the future cost of the tax cuts Parnell was proposing appear smaller, and also sets a lower benchmark from which changes in oil production will be measured.

Sen. Bill Wielechowski, D-Anchorage, said he wasn't surprised to see the slowing decline rate. "That's what they've been telling their shareholders to expect," he said. "In all fairness to them, it's one quarter, it's only a quarter, and you can always have some blips up and down."

ConocoPhillips oil production rate of 218,000 barrels per day during the first quarter was above 2012's full-year production rate of 213,000 barrels per day after some unplanned downtime in the middle of last year. Last year, the first quarter was the highest of the year, at 236,000 barrels per day.

Prices in the just-completed quarter were up about $1 per barrel, to $110.79, in the quarter.

Conoco says taxes, royalties too steep

The earnings announcement quickly joined the ongoing battle over oil taxes in Alaska, with Conoco pointing out how much it paid in severance taxes, royalties, income taxes, and property taxes -- about $900 million in Alaska, by its estimate. And the company praised recent tax cuts approved by the Alaska Legislature and awaiting the signature of Gov. Sean Parnell. 

“Our first-quarter earnings continue the general trend where under ACES, ConocoPhillips Alaska pays more than twice as much in taxes and royalties as we keep,” said Bob Heinrich, Vice President of Finance, for ConocoPhillips Alaska.

That payment included $300 million in federal income taxes.

The companies said that following the changes to ACES, they may begin investing more in Alaska and produce more oil.

Legislative critics of the tax cut, including Rep. Les Gara, D-Anchorage, said ConocoPhillips was claiming that long-planned projects that were profitable and underway under ACES will now cost the state billions without producing any additional oil.

In discussions with industry analysts about ConocoPhillips' profit announcement Thursday, company executives praised the passage of Senate Bill 21.

"We are currently analyzing the possible impact to our business, including where we could or would increase investment in Alaska, and we expect to provide more details of ... our future plans over time," said Jeffrey Wayne Sheets, ConocoPhillips chief financial officer.

Sheets said the lower taxes will encourage new investment, but specific investments won't be known until later in the year. He cautioned against expecting to see any significant change in the decline rate in the short term.

Who gets the credit?

Gara questioned whether the changes would have any effect. 

"The bottom line is Conoco is making $2 billion a year in Alaska profits under ACES and they announced a $2.5 billion investment program about three months ago and said they were going to do that regardless of whether Senate Bill 21 passed," he said.

Gara said he expects those investments to now be credited to SB 21's passage.

Opponents of the tax cut scored a minor victory, Thursday, when Lt. Gov. Mead Treadwell certified a referendum on SB 21. If the referendum's organizers gather enough qualifying signatures, voters may get the opportunity to repeal the legislation. Sponsors have until July 13 to collect 30,169 signatures.  

Contact Pat Forgey at pat(at)alaskadispatch.com