A Free-Market Energy Blog

Repsol, Burned in Argentina, Comes to Alaska (but will the state’s tax reform survive referendum?)

By Dave Harbour -- October 25, 2013

Would you rather invest your money in a safe or an unsafe place? Spanish oil and gas company Repsol, the 15th largest hydrocarbon entity in the world, has answered that question by shifting its attention from Argentina to Alaska and other areas inside the Organization for Economic Cooperation and Development.


In 1998 Repsol paid $13 billion for nearly 60% of YPF, the Argentine oil company.  In 2010, Repsol discovered a significant oil shale play in an area called Vaca Muerta. All seemed well for the investor and for locals for greater economic activity and more energy.

But in 2011, Argentine President Cristina Fernández de Kirchner nationalized 51 percent of YPF, leaving Repsol with 6.4 percent ownership . Repsol wants $10.5 billion in compensation; Argentina’s most recent offer is $1.5 billion. There is a chance that Repsol could get less or nothing.

Production has declined with the fight, eight percent in 2012 alone. The EU, UK, Mexico, Chile and Colombia have condemned Argentina’s action, as has the U.S. State Department.

Senate Bill 21: Alaska Oil Open for Business

In 2011, Repsol acquired a large lease position in Alaska given the rich prospecting and the upside of positive tax reform in the state. The latter occurred in mid-2013 with the passage of Senate Bill 21, the More Alaskan Production Act, signed into law by Governor Sean Parnell.

The pro-reform, pro-production bill, while an improvement over the prior regime, is still complicated. The new law:

  • Reduced the progressivity formula in the production tax;
  • Increased the base tax rate from 25 percent to 35 percent
  • Eliminated a 20 percent capital investment tax credit for North Slope industry investment that included maintenance. (The 20 percent capital investment tax credit still continues for Cook Inlet and “Middle Earth,” the unexplored basins of Interior and Northwest Alaska.)
  • Replaced the capital investment tax credit with a per-barrel production tax credit to link a company’s production to its tax reduction.
  • Set a flat $5 per-barrel credit that applies in new oil fields; and
  • Set a sliding-scale tax rate that applies in existing fields that begins at $8 per barrel at low price ranges ($90) and is reduced to zero at high prices ($150).

Governor Parnell summarized the new law as follows:

It is Fair to present and future generations of Alaskans.

  • Increase in base rate provides fair and stable revenue stream for Alaskans.
  • Cuts the billion dollar risk to Alaskans’ treasury by reducing capital tax credit payments.
  • Creates real minimum tax on legacy oil production.

It Drives New Production, growing economic opportunity for Alaskans.

  • Ties tax relief to new oil production, not merely to an increase in company spending.
  • The MAP Act incentivizes more production with a per barrel credit and a Gross Revenue Exclusion (GRE) for new oil.

It is Simple with a Balanced fiscal impact across all oil prices.

  • Generates more revenues for the State treasury at low oil prices, while keeping Alaska competitive at high prices.
  • Tax credit system is now based on the production of oil, not simply on company spending.

It is Competitive, benefiting Alaskans for the Long Term.

  • The MAP Act already benefits Alaskans with recently announced new investments.
  • Eliminates excessive progressivity, making Alaska competitive with other oil-producing jurisdictions.
  • Investments today will lead to more production, jobs and revenues tomorrow, benefiting generations to come.


Anti-Energy Pushback

Alaska’s business community and oil companies (and workers) supported SB 21. But anti-energy activists and anti-reform legislators — among others – are promoting repeal of the law via a voters’ referendum. The vote will be in August 2014.

Recognizing the voters’ referendum to repeal tax reform during the primary election next summer, Hardham said that, “We purchased leases and partnered with Armstrong Oil and Gas Company [of Denver] with confidence that Alaska would adopt a tax reform proposal.  Repsol remains confident that Alaska voters will see the benefit of filling the pipeline and attracting new investment into the state.”

Hardham briefed members on the company’s significant progress since obtaining its Alaskan stake.  In addition to offshore leases in the Chukchi and Beaufort Seas, Repsol  has a 70% working interest in and is operator for 700 thousand leased acres on the Alaska North Slope (ANS).  In 2012 the company completed 48 miles of ice roads and drilled two exploration wells.

Last winter, the company completed 38 miles of ice roads, drilled three wells and identified gravel sources for future operations.  This winter, the company is, “well underway with its planning and permitting,” Hardham said, for 22 miles of ice roads, an air strip, 3 wells, appraisal of last year’s work and flow testing.

“We want to be here for the long haul,” Hardham emphasized – more than once.

At conclusion of the presentation, NANA Development Corporation’s Senior Vice President and Chief Operating Officer David Marquez said, “I appreciate your confidence in Alaska voters but what would a vote for oil tax repeal do to your plans?”

“Plans would change,” Hardham said.

Commonwealth North President and University of Alaska – Anchorage Chancellor, Tom Case wondered about ‘surprises’ the company had experienced upon its arrival in Alaska. Hardham spoke of the complexity of the permitting process and said, “Without our very capable consultants, we would have had a very difficult time navigating the regulatory process.”

Another member asked about what ‘we’ could do to help.  “The best thing Alaskans could do would be to defeat the referendum to repeal tax reform.  Other than that,” he said, “it would be nice if you could lower Alaska’s very high operating costs.”  The audience greeted that commentary with knowing smiles and a little ironic laughter.

Former Revenue Commissioner, now a Great Bear Petroleum LLC Vice President, Pat Galvin, asked about Repsol’s plan regarding expiring leases. Hardham replied that the company regarded expiring leases as a ‘driver’ of plans. He said that expiring leases would have priority attention while in other cases the company could seek extensions of expiring leases.

Hardham concluded with a summary of the many consulting and contracting opportunities Repsol’s development projects would require, including employment for several hundred Alaskans.

“Hopefully, we’ll have multiple phases of development,” he said, a statement of optimism chastened by caution. It was clear that the jury is still out on whether Alaska’s policies will enable the company to continue its progress, or whether a repeal of oil tax reform will align Alaska more with the policies of Argentina.

Lessons Going Forward

One listening to the presentation could take heart at Repsol’s large, decisive and rapid Alaskan investments.  But Alaskans who wish to learn from others should also heed the counsel of Fredrik Erixon, director of ECIPE, the world economy think tank in Brussels.

The author of “Pariah in the world economy – how should other countries respond to Argentina’s return to  economic nationalism”, he wrote this spring that, “ the most damaging consequence of the confiscation is that the government has undermined efforts to fund new production in the giant oil shale reserve, Vaca Muerta, discovered by Repsol in 2010.  The expropriation has created a very uncertain investment environment, to say the least, for potential partners in Vaca Muerta.”

Repsol’s management will, no doubt, long remember Argentina’s 2011 expropriation of over $10 billion in shareholder assets, including the undeveloped shale play called Vaca Muerta. Vaca Muerta is fittingly translated as, “Dead Cow”.

One hopes that Repsol’s current investment in Alaska is greeted by a friendlier regime – one that does not take assets by increased taxation after investments are made—as has been Alaska’s recent practice. After all, “killing the Alaskan goose that lays golden eggs, up here”, in principle, is similar to “killing an Argentinean cow that sustains a faltering economy, down there.”


Dave Harbour is former Chairman of the Regulatory Commission of Alaska; Commissioner Emeritus of the National Association of Regulatory Utility Commissioners; and former Chairman of the Alaska Council on Economic Education.

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