This undated file photo shows the Trans-Alaska pipeline and pump station north of Fairbanks, Alaska. The future of Alaska’s unique program of paying residents an annual check is in question, with oil prices low and an economy struggling during the coronavirus pandemic. (AP Photo | Al Grillo, File)

This undated file photo shows the Trans-Alaska pipeline and pump station north of Fairbanks, Alaska. The future of Alaska’s unique program of paying residents an annual check is in question, with oil prices low and an economy struggling during the coronavirus pandemic. (AP Photo | Al Grillo, File)

Opinion: Recent opinion piece was off the mark

A response to Fair Share Act criticism.

  • By Ray Metcalfe
  • Wednesday, June 3, 2020 4:00pm
  • Opinion

Last Nov. 13, Roger Marks accused me of misleading Alaskans in my Nov. 5 article comparing ConocoPhillips’ $26 per barrel net profit in Alaska with their profits “in the rest of the world.”

He wrote “Metcalfe is comparing the oil profits in Alaska, where we produce 100% oil, with the combined oil and natural gas profits everywhere else.” In response to another writer’s similar comparison, he wrote, “it was like comparing apples to oranges.”

[The Fair Share Act has a data problem]

So, as he wishes, I’ll compare Alaska’s costs to three winning bids for production of crude, just like Alaska’s pure 100% crude.

BP formed a partnership with China’s state-owned CNPC to make a costs-plus-$2 net bid to produce 100% pure crude from Iraq’s Rumaila field. BP’s bid required Iraq to reimburse 100% of all BP’s hard costs plus pay BP $2 for every barrel produced.

It makes no difference whether the price of oil is $25 per barrel or $100 per barrel, a net profit of $2 per barrel is what Iraq pays BP.

ENI, an Italian oil company that has interests on Alaska’s North Slope, won a similar cost plus $2 net profit bid to produce 100% pure crude from Iraq’s Zubair oil field.

Exxon and Shell formed a partnership that made a similarly structured bid to produce 100% pure crude from Iraq’s West Qurna oil field. To beat ENI’s and BP’s $2 bids, Exxon and Shell bid hard cost plus $1.90 per barrel net.

Five years into the above contracts, BP, Exxon, and Conoco spent $16 million telling Alaskans that they needed a tax break because the hard cost plus the $26-$32 per barrel they were making from Alaska’s oil in 2014 was not enough to warrant the investments necessary to continue Alaska’s North Slope production.

Meanwhile, Exxon’s $1.90, and BP’s $2 net profit fields in Iraq are not only still producing, increased investments have increased Iraq’s production threefold.

Before someone tries to mislead readers, let’s take two more sleights of hand off the table. Although BP’s contract with Iraq is titled “A Technical Services Contract” BP’s Iraqi advertising cited Alaska as an example of where “they are doing the same thing.” They provide engineering, manage hundreds of subs and thousands of workers. And BP did not walk into a risk-free already operating field. BP discovered and developed Iraq’s Rumaila field. BP, in my opinion, got kicked out for being too greedy and got back in by offering to resume production services at market rates.

Another way to make sure we are comparing “apples to apples” is to compare BP’s international rate of return on investment to BP’s rate of return on their Alaska investments.

After signing with Iraq, BP’s CEO Tony Hayward explained in the July 28, 2009 edition of Bloomberg Business & Financial News. “We’re looking at returns in Iraq that are compatible with 15 to 20% returns we earn across the rest of our portfolio.” Colin Lothian, Middle East Upstream Research Analyst for Wood Mackenzie, told Bloomberg News that BP had similar contracts in Iran, Abu Dhabi, and Kuwait. Bloomberg News explained that BP had an international average rate of return on investment of 19% in fiscal year 2007.

On average, BP earns $1.19 for every dollar invested in oil production. Except, in Alaska, BP got $2.23 back for every dollar invested. According to Gaffney and Cline, an internationally respected oil consultant hired by the Alaska Legislature, BP’s estimated North Slope investment returns were 123% during the same 2007 time period.

I have analyzed dozens of ConocoPhillips’ quarterly earnings reports on their Alaska earnings. Not once have I seen a Conoco report reflect an annual profit of under 100%. Conoco’s proven Alaska earnings are five times BP’s stated international averages.

Roger Marks also stated that Alaska’s “government take” now equals 74% of net proceeds, leaving 26% to oil companies. BP’s own website says Iraq’s “government take” is 98%, leaving 2% of net for BP. To top it off, BP’s CEO told Bloomberg News 2% meets BP’s normally expected return on investment. Why should Alaska accept a paltry 74%?

For 40 years, Alaska has been paying oil companies a fair price for their services, plus giving them a large chunk of our equity.

I’m a commercial real estate broker. I analyze investments and compare rates of return on properties I am marketing. My commissions range between 3% and 6% of sales price. Similar to Iraq’s production contract, when I’m selling a newly constructed building, it doesn’t matter if the seller’s expected net proceeds after all costs of construction are paid, add up to $2 million or $8 million, the equity belongs to the seller. My percent of sale commission for my services remains between 3% and 6%.

For 40 years, we owners have been paying oil companies a fair price for their services, plus we have given them billions of dollars worth of our North Slope equity.

Just like my real estate commission, proceeds from selling oil that exceed hard costs and fair payment for producer services equals equity that rightfully belongs to all Alaskans.

Had we received our equity in 2019, we would have received about $4 billion more. If the Fair Share Act that Roger Marks is against becomes law, it will make up for about 25% of the Alaskan wealth that has, for 40 years, been hemorrhaging into the pockets of the stockholders of the companies.

The “Big Three” have historically made 14 times as much producing Alaska’s half million barrels per day as BP makes producing 3 million barrels per day in Iraq. Allowing oil companies to continue fleecing Alaska rather than financing education, infrastructure, ferry systems and dividends is insane.

• Ray Metcalfe rough-necked and drilled on the North Slope in the early 1970’s. He was in the Legislature in the 1970s and 1980s. He chaired the House State Affairs Committee and co-authored the legislation establishing the investment strategy for Alaska’s Permanent Fund.Ray Metcalfe has built several residential subdivisions in Anchorage and he has owned Metcalfe Commercial Real Estate Inc. since 1976. Columns, My Turns and Letters to the Editor represent the view of the author, not the view of the Juneau Empire. Have something to say? Here’s how to submit a My Turn or letter.

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