Alaska News

Alaska oil tax debate ignores the North Slope processing bottleneck

The advocates for Senate Bill 21 fail to realize that oil processing capacities on Alaska's North Slope are again at or near capacity and that declining oil recovery is not the issue. Even if production were increased as a result of the SB-21 via development, there would be no way to get the oil from the oilfields into the Trans-Alaska Pipeline System. It also introduces a situation where owners of the shared facilities make a decision on whose oil goes through the processing facilities. The decision on which oil, from a new discovery or a legacy field, will be determined surely by the outcome of the SB 21 vote.

I am no senator, but I do now clearly see the difference between declining oil production and processing capacity. In February, at the Alaska State Legislature Senate Resources Standing Committee Meeting, Thomas Walsh, Petrochemical Resources Alaska, and Bill Barron, director of Oil and Gas at Department of Natural Resources, stated that both the oil field pipelines and the TAPS can handle increased flow from new discoveries, but that the processing facilities were at or near capacity for gas and water removal.

Still, in response to a letter I wrote to the legislature, Senator Pete Kelly told me that we need to expand development on the Slope because the tax structure is killing development, with not a word about a processing facility. That bottleneck is what slows production, not the ACES tax structure. These facts are published online and available to the public.

Looking back to the 1990's, the last time the processing capacity issue arose, a new processing facility was built at Prudhoe Bay to get more oil into the TAPS. The gas-to-oil ratio (GORS) had increased dramatically due to reinjection, so after a certain amount of time these crude processing facilities essentially become water processing facilities.

For example, we have a 1000 barrel-per-day processing facility. At the beginning of oil field development there are 100 gallons of water and 900 gallons of oil. As the field is developed the gas and water that are removed are reinjected. Some years later the ratio may be reversed with 900 gallons of water and only 100 gallons of crude. That example shows that the processing facility capacity is remains the same over time even if the ratio of oil coming out does not.

Now imagine how much gas and water has been reinjected on the North Slope. The GORS is substantially higher in 2013, yet there is little talk of a building a new shared facility like they did in the early 90's. The current talk is about declining recovery and is putting the cart before the horse.

Knowing that there is an oil processing bottleneck that will not allow increased levels of oil, legacy or new discovery, into the pipeline, we should now consider how Gov. Sean Parnell's plan (SB 21) will play out. Experts have pointed out the larger players with leases in the legacy fields would have to "back out" some of their oil. Clearly, these companies recognize that and have to weigh options.

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If they back out oil, there may be some increased revenue from processing crude from new players, with the new players receiving a tax break on that new production. That does not sound profitable, so now they want a huge tax break on legacy oil under SB 21. And that's the rub.

If Parnell's plan passes, I suspect that the big oil players will keep the shared processing facilities at capacity with legacy oil that just became very lucrative as a result of SB 21. With the system at capacity, there will be no room to process oil from new discoveries. There will be no motivation to produce. There will be legacy oil flowing more freely than ever.

Co-Chair of the Senate Finance Committee, Senator Kevin Meyer, was recently quoted saying, "It's kind of a crapshoot ... the industry certainly isn't going to say one way or the other, because you know their motivation is to try to keep the rates down as low as they can." This Alaskan voter does not want to play craps with the funding for our schools, etc.

I want projected tax revenue, a real analysis of SB 21's effects. Kevin Meyer is wrong, it's not a craps shoot, it's a giveaway of Alaska's oil.

Mike Knoche owns and operates Straight Ahead Construction, LLC. He has a Master's degree from the University of Alaska Fairbanks and is a guide and naturalist for ExploreDreamDiscover Tours. Mike became interested in energy issues as he saw the Interior community struggling to pay for basic needs like home heating.

The views expressed above are the writer's own and are not necessarily endorsed by Alaska Dispatch. Alaska Dispatch welcomes a broad range of viewpoints. To submit a piece for consideration, e-mail commentary(at)alaskadispatch.com.

Mike Knoche

Mike Knoche owns and operates Straight Ahead Construction, llc. He has a Master’s degree from the University of Alaska Fairbanks and is a guide and naturalist for ExploreDreamDiscover Tours. Mike became interested in petroleum issues as he saw the Interior community struggling to pay for basic needs like home heating.

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