THE ‘CONCHO RESOURCES EFFECT‘
On Monday, ConocoPhillips announced the purchase of Concho Resources, an oil company based in Midland, Texas, with a presence in the Permian Basin.
The response from Alaskans to that news should be: “Uh-oh.”
An all-stock transaction (no cash was required), what makes the Concho acquisition so important to Alaskans?
It’s a shale production company that moves ConocoPhillips, the largest oil producer in Alaska, into position as a much bigger player in the Permian Basin of Texas and New Mexico, where it costs less than $30 a barrel to supply oil to market.
Alaska’s oil production costs over $38 a barrel to supply.
Concho’s revenue last year was $4.592 billion, and it has over 1,400 employees.
To compare, ConocoPhillips has 1,200 employees in Alaska.
Alaska’s oil fields are competing more than ever with the rest of the United States, where production costs, driven down by innovation, are making Alaska oil plays less attractive.
This also makes Ballot Measure 1 a huge gamble for Alaska. Driving up oil taxes would deepen the state’s economic woes at a time when the economy is already on its knees. It jeopardizes existing and future jobs, new projects and State revenue, economists say.
While some Alaskans think that higher taxes will “stick it to the big oil companies,” the purchase of Concho Resources shows that Alaskans would suffer if oil companies are taxed out of production here.
ConocoPhillips, Hilcorp, and Exxon have more choices than ever around the world, and Alaska has, as a result of innovation and tax structures here and elsewhere, become a smaller oil province with unpredictable tax regime in the resource economy.
If the oil companies won’t be hurt by higher Alaska taxes, who will be? Those who have jobs that are in any manner tied to resources: Small businesses owned by lifelong Alaskans, retailers, pilots, plumbers, landscapers, and restaurant workers.
Also hurt is the State’s bank account. ConocoPhillips paid more than $1 billion in taxes and royalties to the state in 2019. The state could jack up taxes to the detriment of oil production.
In response to soft oil prices, ConocoPhillips announced $400 million in cuts to spending in Alaska in 2020, and by April the company the company told Doyon Drilling that it would put its North Slope drilling rig fleet into hibernation indefinitely. Then it went and made a big stock trade deal for Concho.
All taxes have implications and change the behavior of taxpayers. Ballot Measure 1 may have already scared companies from investing in what is an increasingly expensive place to operate.
According to IHS, an oil analyst company owned by Daniel Yergin, the “Fair Share Act ballot initiative is introduced at a time when the oil industry faces twin crises—the COVID-19 and the oil price crash. While the measure is likely to have a devastating impact to oil and gas investment in the state in the current low oil price environment, the measure is not sustainable even under a long-term base case scenario of $60/bbl.”
Alaska’s current fiscal system is one of the least competitive ones within US and international peer groups in terms of dollars per barrel, for investors, the report continues. “A combination of relatively higher unit costs needed to bring Alaskan North Slope crude oil on stream contribute to lower project profitability compared with Lower 48 and international jurisdictions. The provisions of the Fair Share Act further deteriorate Alaska’s competitive position. The ballot initiative is expected to affect 84% of the current production the state.”
Deeper dive: Readers may download the entire report on the impacts of Ballot Measure 1 at this link:
