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Even as oil production decline slows, Parnell demanding tax cut

Alex DeMarban

Alaska's worrisome oil-production decline has slowed sharply, according to recent state figures, but that hasn't stopped Gov. Sean Parnell from insisting that state taxes on oil producers must be slashed to stimulate new development.

Parnell recently fired off a Facebook missive indicating that he's gearing up for another bitter fight to give the state's North Slope oil producers -- primarily BP, ConocoPhillips and Exxon Mobil Corp. -- a tax break. His current proposal would be worth up to $1.7 billion a year to industry.    

Tax-cut supporters have long argued that oil production in Alaska's Arctic -- the state's lifeblood resource -- has plummeted dangerously. Some have claimed it could be a decade or less before production is so low that operating the 800-mile trans-Alaska oil pipeline no longer pencils out. Cut taxes on oil producers, their argument goes, and they'll invest more in Alaska's oil fields.

They buttress their assertions with alarming figures: Annual oil production dropped 7.3 percent two years ago, at the end of the state's 2010 fiscal year. It fell 6.7 percent last year. The "6 percent" decline became a rallying cry for industry advocates like Prosperity Alaska, ConocoPhillips and Make Alaska Competitive Coalition.

Those declining-rate claims have for the most part been accurate -- though Make Alaska Competitive wrongly claims the decline is accelerating.

In fact, the decline has now slowed three straight years. For the most recent fiscal year ending June 30, annual production dropped 3.5 percent, nearly half of the previous year's drop. Production reached 578,000 barrels daily, down from 599,000, said Cherie Nienhuis, a commercial analyst at the Alaska Department of Revenue's tax division.

That's a huge difference from 6.7 percent, about 19,000 barrels a day. Over a year's time, that extra oil is worth more than $750 million at recent North Slope crude prices.

The slowing decline is great news, right? Yes, but there's always a caveat when it comes to oil taxes.

A shutdown in January 2011 makes the 2012 fiscal year's decline appear better than in past years, she said. That shutdown likely reduced production by some 5 million barrels of oil. Factor those additional barrels in, and the drop is more in line with the 5 percent annual drop experienced on the North Slope since 1988.

The best way to account for the 2011 anomaly, she said, is to look at the decline over two years. The drop remains 5 percent annually on average.  

When will the declining rate improve for good? Who knows.

The Revenue Department forecast in spring that the production decline will ultimately flatten out at 3 percent over the next decade, as increased production at some fields helps offset slowing production in others. But those projections could soon change for the worse, too. 

On the plus side, there's Prudhoe Bay, the nation's largest oil field. Producers at Prudhoe squeezed out 265,000 barrels daily in the last fiscal year, rather than the 255,000 barrels the state predicted.

At $110 a barrel, where North Slope oil prices have hovered lately, that extra oil is worth about $400 million a year. Prudhoe Bay began production in 1977. It's already well outlived its original estimate that it held 10 billion barrels of oil. And it's still humming, thanks to efforts by BP, the field's operator, to deploy new technology to pull more oil out of the ground. Those efforts, ongoing since the 1980s, have prolonged the field's life by decades and boosted oil recovery  from 40 percent to more than 60 percent, according to BP. Prudhoe's production has fallen at an average of only 2 percent the last two years. 

Also helping stem declining North Slope oil production is ENI and Pioneer Natural Resources. ENI's Nikaitchuq field and its Ooguruk field, operated with Pioneer, have boosted overall North Slope production. New drilling has also stabilized production at older fields, such as at the Alpine field run by Conoco, Nienhuis said. 

On the down side, anticipated production from some fields won't come on line as fast the Revenue Department had hoped in spring, said Nienhuis.

Consider the Point Thomson field east of the trans-Alaska pipeline. The U.S. Army Corps of Engineers recently announced it would delay key decisions needed to advance that project, throwing winter work plans into question. Also, BP's long-awaited Liberty project has recently been delayed again.

Come December, when the department makes its next forecast, the 3 percent decline projection might grow higher.

So what can Alaskans count on? More fighting when the Alaska Legislature gavels back to life in January.

Contact Alex DeMarban at alex(at)alaskadispatch.com