Letter: Exploration costs recouped in production

Mr. Blanas’ letter (July 1) shows little, if any, knowledge of oil field economics. I represented several Alaska oil field service companies (not the oil companies) as well as other Alaska businesses during the 80s as they attempted to cope with the economic downturn. As result I became very familiar with the economics of oil and gas production as well as the overall impact of oil on the state’s economy. 

 I agree that the oil companies were spending little in 1988 — they had spent it in the 70s and early 80s bringing the fields into production.

What Mr. Blanas fails to understand is that there are two phases to an oil field:  exploration/development and production.  During the exploration/development phase, because time is money, costs are not a priority; nor do the oil companies generate any revenue from the field. As a consequence, exploration/development costs must be recouped by amortization over the production life of the field. Thus, when a field shifts from development to production, not only do the oil companies reduce spending (reduction in necessary personnel and support activities), but the revenue generated must cover both the costs of production and recoup the prior costs of exploration/development (in the case of the North Slope, billions).

Added to this in Alaska was the construction of the trans-Alaska pipeline, which also sharply reduced oil-company spending after its completion.

Also, during the mid-80s the well-head price of crude literally “tanked,” averaging less than $13/bbl in 1988. Result: the revenue from the North Slope fields was reduced for both the oil companies and Alaska.

What Alaska experienced in the 80s was another of its historic “boom and bust” cycles. Given the state’s relatively small population and the magnitude of the impact of oil on our economy, that the confluence of shifting from development to production and the sharp decline in the price of crude caused a recession is anything but remarkable.

Oh, by the way, in 1988 Alaska got more than 250,000 barrels of royalty oil each day.

— Thomas J. Yerbich