Alaska pipeline operator calls for political action

URGENT: Alyeska official testifies that consequences of reduced oil flow are dire.

March 18, 2011 

JUNEAU -- The state's economic artery, the trans-Alaska pipeline, could require expensive upgrades or even shut down if more oil doesn't begin coursing through it soon, the line's operator said Friday.

"This needs to be a wake-up call for the state," Tom Barrett, president of Alyeska Pipeline Service Co., told the House Finance Committee.

The testimony comes in the midst of a heated debate over whether to cut oil production taxes, as Gov. Sean Parnell has proposed.

Oil provides nearly 90 percent of Alaska's unrestricted revenue, and Parnell believes the tax change is needed to boost investment and increase declining production. He is getting support from prominent House Republicans, including Rep. Mike Hawker.

But House Democrats see the plan as little more than a corporate giveaway, and members of the Senate's bipartisan majority are have questioned whether the proposal will work as intended and not deplete the state's multibillion-dollar reserves.

While Barrett did not endorse Parnell's plan, he said in an interview that he would encourage lawmakers to do whatever they could "to get me more oil."

Barrett said he would like to move between more than 800,000 and 1 million barrels of oil a day. The total currently averages around 640,000 barrels a day and is declining.

He said it would take at least five years for an oil development project to get online; for a larger field, it would be about 10 years, he said.

"We are already, from my perspective, behind," he told the committee.

Production has been declining since 1989, when the line hit its peak of moving 2.1 million barrels a day. Decline over the past five years has been around 5 to 6 percent per year, he said.

This creates operational concerns for the warm-oil pipeline. The lower the flow gets, the more potential for problems including ice formation in the line, water and wax deposits, and buckling.

Back in 1989, it took about 4 1/2 days for oil to move through the pipeline to the terminal, Barrett said in written testimony. It now takes 14 days to reach the Valdez terminal and will take a month when the flow sinks to 300,000 barrels a day.

Barrett said that at some point, the owners of the line, which include the three major players on Alaska's North Slope, will have to look at making "major, major investments" to upgrade and extend by decades the life of the line. He said he would expect some reluctance.

The 800-mile pipeline currently provides at least 10 percent of the nation's crude oil production. It also serves refineries in the state that provide jet fuel to Alaska's largest commercial airport, in Anchorage, and energy to parts of interior Alaska, including the city of Fairbanks.

Barrett said the line's viability depends on political will in Alaska and Washington, D.C., for more oil development in the state.

Hawker said lawmakers have been "screaming from the top of the mountain" for years now that the No. 1 issue facing Alaska is oil decline. But he said Barrett's testimony Friday makes abundantly clear the need to address the matter now.

By one estimate, the governor's plan will cost up to $1.8 billion a year in revenues, though critics say that figure could be much higher. The state has not yet provided projections for when the state might recoup the losses or see investment levels increase.

Company officials have not committed to new investment if the tax rates are cut but said they see the changes Parnell has proposed as a step toward making the state a more hospitable place to do business.

In a presentation to the Senate Resources Committee, consultant Gaffney, Cline & Associates said it would be worth about $30 billion to the state if it got an extra 150,000 barrels of oil per day for 20 years that it otherwise might not have gotten. This assumes $100-a-barrel oil.

It also found a $20 billion to $50 billion "potential downside" for the state looking out through 2050, assuming that changes were made to the tax structure but there was no new investment and no enhancements to the pipeline. This undiscounted cash-flow scenario was represented as an absolute worst case.

Parnell has said the state can intervene and take up the tax issue again in the future if the bill doesn't accomplish what he hopes it will.

Hawker said people need to look at what the greater risk to the state is -- a loss of immediate revenue or the risk of the pipeline shutting down.

He said that companies are willing to invest in Alaska: "The money is there," he said. "It's ready. We simply have to be a competitive place to operate."

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