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Will shale oil production lead Alaska crude prices to crash or surge?

Craig MedredAlaska Dispatch

For the last few years Alaska has lived the high life thanks to a combination of high oil prices and former Gov. Sarah Palin's landmark oil-tax reform known as ACES, which adjusted state taxes on oil in congress with the higher prices oil companies were demanding, and yielded billions of dollars in new revenue for state government as other states suffered through recession.

But has the gravy train come to an end? At least one oil industry veteran thinks so, and he speculates that North Slope crude prices could soon depress, according to the Fairbanks Daily News-Miner.

Sandy Felden, who crunches energy industry data for the consulting firm RBN Energy, predicts that rising production from the Bakken shale deposit in North Dakota and Montana -- North Dakota surpassed Alaska last year to become the country's No. 2 oil producer -- will likely lead West Coast oil prices to drop, dragging down the value of North Slope crude, too. And that's bad news for the state of Alaska, which collects no income or sales tax from residents, instead looking to the oil industry to deliver about 90 percent of the state's revenue.

Almost all of Alaska's oil is sold to West Coast refineries. For the past few years Alaska has made $15 to $17 per barrel, in part because the West Coast market is rather isolated from other oil-producing areas; however, companies are now starting to ship oil from North Dakota to the West Coast by train, challenging Alaska's easy access.

"Because of lower crude prices and the surge of domestic production from shale that is far closer to the market, the Alaska 'oil rush' is over for the time being," Felden wrote. "New production investment in that remote Arctic region will have to wait until the U.S. has finished harvesting greener pastures closer to home ... changes in the U.S. crude supply position have made that new investment in Alaska less economically attractive."

Felden thinks that "competition from domestic shale and eventually Canadian exports via the West Coast will put downward pressure on (Alaska North Slope) prices." He expects the price drop will happen fairly rapidly, withing the next few years, leaving Alaska's oil prices more in line with West Texas, according to the News-Miner.

Alaska lawmakers are preparing to return to Juneau next week for another legislative session that's likely to be disproportionately devoted to oil tax philosophy, and whether or not to award oil producers with tax cuts estimated by some to be worth $2 billion a year in the hopes that cash will be invested in the state's aging oilfields. Hopefully, they're paying equal attention to the Felden position in the News-Miner, that of state economist Scott Goldsmith, and the others who counter that Alaska crude will become even more valuable once shale and other easy oil plays are exploited.