News Column

CEO: Work for Doyon rigs, shareholders on rise after reform

July 10, 2014

By Elwood Brehmer, Alaska Journal of Commerce, Anchorage

July 10--Business is thriving at the Doyon family of companies largely due to Alaska's revamped oil taxes according to CEO Aaron Schutt.

The Fairbanks-based Alaska Native corporation for the Interior is big into the oil and gas industry through its subsidiaries, namely Doyon Drilling, Doyon Anvil and Doyon Associated and Doyon Universal Services.

"The health of the (oil) industry is critically important to our business success and being able to employ people and specifically shareholders, which is a big corporate goal that we have every year," Schutt said.

In May, Schutt joined five other Native Regional corporation leaders in forming a coalition to oppose Ballot Measure 1, aimed at repealing the oil tax structure in Senate Bill 21 pushed by Gov. Sean Parnell and passed by Republicans in the Legislature.

Since the passage of SB 21 in April 2013, Doyon Drilling's seven drill rigs -- six of which operate on the North Slope -- have been increasingly active, he said.

"There is more demand currently for rigs than there are rigs" on the Slope, he said.

Additionally, nearly 400 Doyon Associated employees chipped in to complete the pipeline between ExxonMobil's Point Thomson gas field and the Trans-Alaska Pipeline this past winter. Schutt noted that it is the first export-sized line built on the Slope in more than two decades.

The work available today is a stark contrast from 2008, when two Doyon Drilling rigs were sidelined for lack of work. At that time, the oil tax regime known as ACES had been in place for roughly a year. ACES, a progressive tax structure that taxes more on a barrel of oil as the price rises, would be reinstated within weeks if Ballot Measure 1 passes during the August primary elections.

Schutt detailed the cost to Doyon of having a drilling rig go down. He said each rig employs about 80 field hands that have an average salary of about $100,000. Additionally, each rig requires camp support staff, bringing the total number of jobs supported to nearly 100.

"Just our rig is about $8 million in annual salary," Schutt said. "Our Alaska-hire rate is very high, in excess of 90 percent, so you're talking about almost $8 million of Alaska salary gone."

Overall, about half of the workers manning Doyon Drilling rigs are Doyon shareholders, he said, further implicating the interest they have in keeping busy.

"The financial impact is huge when you have a rig go down. It's a very significant event for us," he said.

Beyond the well-known impact oil production has on the state budget, development activity supports local city and borough governments through property taxes in the millions of dollars, he said. Changing the tax structure again and reverting back to ACES, with the possibility of another tax plan proposed by Democrats to follow, would make the investment climate in Alaska unstable and uninviting, according to Schutt.

Former state senator and a leader of the "Repeal the Giveaway" campaign Vic Fischer wrote in an email to the Journal that while six Native corporations joined "No on 1," that's only half of the entire group. He also pointed out that the ones that did -- Doyon, Bristol Bay Native Corp., Cook Inlet Region Inc., Bering Straits Native Corp., NANA Development Corp., and Arctic Slope Regional Corp. -- all have a vested interest through either subsidiaries in the petroleum industry or contracts with producers that "mandates they oppose the referendum."

He wrote that the corporations speak only for their corporate interests and that they don't represent the views of the voters of the respective regions, a fact that he wrote will bear itself out Aug. 19.

Schutt said the state should be patient and let SB 21's 35 percent base tax play out, as it has been in place for less than a year. ACES had a base tax rate of 25 percent with the sharp escalation in the rate as prices increase.

The Legislature can "tweak" SB 21 if it sees fit, he said.

The "Repeal the Giveaway" campaign simplifies an issue that has vast implications on Alaska, with 90 percent of the state's revenue coming from oil taxes, Schutt said from his office in Anchorage.

"The bumper sticker slogans that we see around town are very inadequate for the very complicated set of economic incentives and penalties we have for oil and gas taxes," Schutt said.

It's no secret there are factors out of anyone's control that make Alaska a challenging place for any type of business. A lack of infrastructure, harsh weather and the high costs of labor and raw goods can deter investment.

The tenuous ice road season on the North Slope is a great example, according to Schutt. An event as simple as a warm winter can delay hundreds of millions of dollars of oilfield work for up to a year.

The tax structure is one piece of the "investment climate" that can be controlled, he said. A stable tax structure encourages investment, Schutt said, a message voiced by other opponents of Ballot Measure 1.

That investment often takes five years or more to come to fruition, and Schutt said he believes SB 21 should remain in place to provide the most inviting oil and gas climate possible while oil prices -- projected to remain at roughly $100 per barrel for the coming years -- aren't spiking.

He noted that ACES and SB 21 pull in roughly the same amount of tax revenue at current oil prices, about $105 per barrel.

"In the five-year horizon, if you can believe (oil price) projections that are fairly accurate, better than our weather here, we should be fairly indifferent in that tax structure as Alaskans," he said. "It's certainly not the giveaway that SB 21 opponents have portrayed it to be."

According to Fischer, the state shared in profits made by oil producers under ACES, something it could miss out on if prices rise under SB 21.

"SB 21 has essentially a flat tax, giving producers virtually all the benefit from price increases, which are a reflection of market prices, not of any change in cost of production," he wrote.

Schutt said that Alaska will be competing with rapidly-growing Lower 48 oilfields for investment money in the future, a claim Fischer dismissed because the fracking occurring there is technology that is accessing known reservoirs and production decline could happen there rapidly.

Schutt said it isn't wrong to say SB 21 doesn't guarantee investment as its opponents point out, but that ACES was "a very flawed bill and tax structure."

"I agree we need to maximize everyone can say that, maximize the states take," he said. "That doesn't mean you kill the goose that's laying the golden eggs because you want to have a big Christmas dinner with the goose."

Nenana exploration

As the battle over oil tax policy continues in all corners of Alaska, Doyon is continuing to explore in the center of the state.

The Native corporation has spent nearly $40 million on seismic and drill work on its state leases just west of Nenana, Schutt said.

In all, Doyon is the primary leaseholder of more than 400,000 acres that roughly parallel the Parks Highway in the Interior.

Schutt said "middle earth" exploration credits, as they are known, for Interior as part of the oil tax change were crucial to further work in the area.

Doyon drilled a second well near Nenana in 2013, to go with one drilled in 2009. He said seismic work this fall would determine if more drilling is to come, but that the company is optimistic with what it has seen so far.

"The things are all in place for a highly productive hydrocarbon system including possibly oil. You see a lot of source rocks including coals and shales that will produce oil in the right circumstances," he said.

Additionally, the area to the north at the edge of the Minto flats demands a lot of attention, Schutt said. If oil and gas can be produced from Nenana, he said it's an ideal location given its proximity to the highway and the ready market for a new fuel in the Interior.

It's new exploration, like Doyon's, that makes keeping SB 21 in place critical, he said.

"If Ballot Measure 1 passes and we find oil in the Interior we'll be taxed just the North Slope and that, even under SB 21, is a fairly healthy level of tax," Schutt said. "It doesn't consider that this would be a brand new field with all new infrastructure -- high risk for continuing to develop the field, so it doesn't match the oil and gas tax structure well, certainly not under ACES."


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Source: Alaska Journal of Commerce (Anchorage)

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