BP plans to pull investment from Alaska after a $1.5bn tax increase

The latest broadside against the oil industry will eat into the value of the UK giant’s huge operation in the Arctic state

Carl Mortished, World Business Editor

BP is preparing to slash its spending on future oil developments in Alaska in response to a $1.5 billion (£760 million) tax increase imposed by the US state on oil companies.

The fiscal reform, which was signed into law last week by Sarah Palin, the Governor of Alaska, will eat into the value of BP’s huge Alaskan operation and could mean the cancellation or deferral of projects in one of America’s leading hydrocarbon provinces.

“The effect of [the tax increase] is likely to be reduced investment,” said Steve Rinehart, a spokesman for BP in Alaska. BP is currently revising its 2008 budget for Alaska. The company spent more than $2 billion in the state last year, including $1.2 billion in capital expenditure.

ConocoPhillips this month retreated from pledges to spend $1 billion in the state and scrapped plans to invest $300 million in a small refinery to produce clean diesel for use by vehicles in the Prudhoe Bay area.

Alaska’s move is a further blow to international oil companies, which have seen their assets come under threat in Bolivia, Kazakhstan, Russia and Venezuela. The fiscal broadside in the heartland of the US oil industry represents a home-grown political backlash against big oil after several years of mounting concern about bribery, corruption and operational negligence.

Two Alaskan legislators were recently convicted on corruption charges relating to efforts by the industry to stem the impact of tax reforms. Peter Kott and Vic Kohring, both Alaskan Republicans, were convicted of accepting thousands of dollars in bribes after an FBI investigation involving executives of Veco, an oilfield services company.

Meanwhile, sentiment towards the oil producers was damaged by a major oil spill in August 2006 caused by poor maintenance of BP’s pipelines. The spill became an issue in the political debate over oil taxes when it emerged that the British company would seek to take advantage of tax deductions from the cost of replacing old pipelines.

The reforms will raise Alaska’s tax burden on oil and gas producers by almost 10 per cent, according to Wood Mackenzie, the oil consultancy. On modest oil price assumptions, that would slice $2.7 billion from the present value of existing oil production on the Alaskan North Slope, but on a current oil price of about $90 per barrel, the loss of value to the oil companies would be more than $11 billion, representing 16 per cent of the present value of the known resource.

“After three tax increases in three years, would-be players may now question the frigidity of Alaska’s investment climate, rather than that of its Arctic tundra, before making the decision to move north,” said Wood Mackenzie.

BP said it had not yet decided which projects would suffer from the changing tax regime. “The projects that are the most challenging are going to be the ones that are affected,” Mr Rinehart said. “The easy oil is out. There is a lot left but it costs more.”

Alaska’s big resource of heavy oil could be a casualty of the tax increase. Extraction of the viscous fluid, similar to tar, would add extra technical difficulties in the already challenging environment of the Arctic and an additional cost burden from higher taxation could reduce returns to unacceptable levels.

Doubts are also being expressed about the viability of the state’s ambition to pipe the Prudhoe Bay gas reserves south to markets in the lower 48 states.

Prudhoe Bay contains some 35 trillion cubic feet, 13 per cent of America’s known gas reserves, and the Alaskan Government has been at loggerheads with the three oil majors, BP, Conoco and ExxonMobil, which control the Prudhoe Bay oil and gas resource, over a $30 billion project to pipe the gas to Chicago, via Canada.

The three majors failed to submit bids in a recent tender organised by the Government under the Alaska Gas Line Inducement Act.

BP said the fiscal regime offered by the Alaskan Government was still too uncertain for such a vast project over such distances.

“A ten-year limit on tax increases was not enough to mitigate the risk in a $30 billion project,” Mr Rinehart said.

Source: Times Online