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Good oil times are ending, so what can we do?

We've reached a dubious milestone in our state's history. For the first time, Alaska's revenues will turn down mainly because of the continued decline in oil production and not because of some wobble in oil prices.

The drop will be significant, about $700 million this year, according to state estimates.

We've all had a nice ride since North Slope oil production began in 1977. Now we can see the end of the good times.

The public is generally unaware of this, comforted by a state economy that is perking along, at least compared with the Lower 48. Most of our politicians, who should be watching these things, seem asleep at the switch.

Here's the situation: Our North Slope oil fields have been declining gradually since 1989. This year, production is expected to average about 560,000 barrels a day, roughly one fourth of what it was at peak in the 1980s. The decline is averaging about 6 percent a year but it's best looked at this way: Last year, the average was about 600,000 barrels a day.

Alaska's oil revenues -- the taxes and royalties -- are paid based on the number of barrels we produce. For many years, the effect of the reduced production has been masked by rising oil prices, now about $110 a barrel.

We've had enough to pay the ever-rising costs of state government, for healthy state capital (mostly construction) budgets, and have even had surpluses ($1.7 billion last year) that we've prudently tucked away in savings.

Very few, however, have noticed the weakening of the underlying foundation of all this -- the oil production.

Here are the numbers: Unrestricted state general fund revenues, about 95 percent from oil, are expected to be down about $770 million in state fiscal year 2013, the budget year that started July 1, compared with the previous year. When an expected decline in federal funds is included, the total reduction in funds available for the budget will be about $1 billion.

Fortunately we have a big cushion of cash reserves, about $15 billion plus the $40 billion Permanent Fund, so there's no immediate danger of the state going broke. Still, we could burn through our savings faster than we think.

Another factor is that lower volumes of oil moving can cause operating problems for the trans-Alaska pipeline system, particularly in winter. The pipeline was designed to pump four times the amount of oil it is now moving. Smart people at Alyeska Pipeline Service Co. are working on ways of dealing with this but those ways involve spending more money. Anything that adds to the cost of moving the oil means reduced revenue for the state.

We absolutely do not want Alyeska in a position where some midwinter hiccup could result in a shutdown of several weeks or months, which almost happened two years ago. That would be a disaster. The best solution for the pipeline is simply to get more fluid moving through the system.

Industry argues it could produce more but the state's high tax rates make the investments uneconomic. Gov. Sean Parnell and many legislators agree and have pushed for a reduction in taxes. Other legislators disagreed on Parnell's initial approach and want to examine this complex issue more closely.

It's pretty apparent that something is amiss. Oil investment is booming in the Lower 48 but is stagnant in Alaska. A telling sign is that some Alaska oil service and support companies are losing their skilled workers to the Lower 48.

After extensive work in the Legislature last spring, most lawmakers now agree some adjustment in taxes is needed, but they ran out of time this spring before the big issues could be joined, which are just what is to be done and how much of a reduction is justified.

The failure by lawmakers in the 2012 legislative session was basically a consequence of the short 90-day session, in my opinion. Progress was actually being made toward the end of the session but people just ran out of time.

It isn't going to be easy to turn this around. It takes several years to find new oil fields and bring them into production. There is a lot of undeveloped oil in existing fields that could be produced if more investments are made, and that could get new oil into the pipeline fairly quickly.

The tax issue will be rejoined next spring by a new Legislature. Let's wish the new legislators luck. We can't afford another failure on this.

Tim Bradner writes for an Alaska economic reporting service. He also consults for private clients and writes for business publications. His opinion column appears every month in the Daily News.



Economy
By TIM BRADNER