Alaska oil production dipped by 21,000 barrels a day during first year of SB 21

FAIRBANKS — Alaska oil production during the first year of the SB 21 tax regime fell by about 4 percent compared to 2013, the last year under the old system known as Alaska's Clear and Equitable Share.

That contradicts repeated statements made by some supporters of SB 21 that the decline in production ended this year before the repeal election in August. For the entire year, production averaged about 513,000 barrels a day, down about 21,000 barrels a day from 2013.

The year-end total doesn't prove that the supporters of SB 21 were wrong in their predictions, but it demonstrates that relying on one statistical measure to create definitive pronouncements can produce misleading results.

In fiscal year 2014, which ended June 30, the trans-Alaska pipeline carried about 529,000 barrels a day, about the same amount of oil as in the preceding fiscal year.

Quoting that number, former Gov. Sean Parnell said repeatedly that "we stopped the drop in the first year under SB 21." Sen. Lesil McGuire said, "In just six months we've already seen an increase in production," while Sen. Charlie Huggins said, "the 24-year decline in North Slope oil has finally abated."

But the problem of using the fiscal year is that it ends during the maintenance season on the North Slope, which is when production facilities are often shut down and production drops. Scheduling major maintenance projects in June has a big impact on one fiscal year, while projects pushed to July have a big impact on the following fiscal year.

In 2014, there was an average 80,000 barrel-per-day cutback in oil production in July, compared to a year earlier. That was not reflected in the "drop has stopped" discussion. And August production was down 45,000 barrels a day from a year earlier, which also had no impact on fiscal year 2014.


Anchorage Rep. Les Gara, a consistent critic of SB 21, said the maintenance schedule was no accident. "They shortened the period of annual maintenance shutdowns on the pipeline by a number of weeks, to keep the FY 2014 production numbers up. Then, after the FY 14 production numbers were artificially inflated because they skimped on maintenance, they did the longer, normal amount of maintenance after June 30 of 2014, as they did back in FY 2013 when maintenance caused production cuts," he said.

Four months after the election—in which the tax system survived by a 53 percent to 47 percent margin—Alaskans remain divided on the issue. Anchorage Sen. Bill Wielechowski, another opponent of SB 21, said he was surprised a little about the 4 percent decline.

"I really thought they'd try to bump it up a little to try and show SB 21 was increasing production," Wielechowski said. "It proves to me we were lied to by a lot of people."

Two vocal supporters of SB 21 said that the calendar year decline does not discourage them at all. Andrew Halcro, president of the Anchorage Chamber of Commerce, said the year-end statistic is not indicative of future gains or losses.

"Trying to judge the results with any finality this early would be to ignore the additional production investments that have been announced since August. In addition, without SB 21 the state would be taking in less money today under ACES when already the budget is upside down," he said in an email.

"The vote in August sent a clear message to the producers that Alaskans expected more production investment. And even with the collapse in oil price that nobody saw coming, the producers are keeping their promises and we should stay the course," said Halcro.

Kara Moriarty, president of the Alaska Oil and Gas Association, said trends in oil production need to be measured in years, not months or a single year. She said the state forecast showing that oil production in 2017 could be about 25,000 barrels higher than 2014 shows the system is working.

"We are seeing a positive trend for production and TAPS since SB 21 was enacted and we are optimistic that the new projects that have been announced since the new tax was passed will continue to lead to more oil," she said.

Gara said much of that new oil was already in the works under ACES, including expansion at Prudhoe Bay and Kuparuk and new projects such as CD-5 and Mustang.

"We've been taken for quite a ride -- effectively the same amount of oil production and exploration activity that was projected under ACES, for a tax rate that on post-2002 production units gets Alaskans a near zero or negative net present value on our production tax. The negligible state share on those fields is going to harm this state immensely," he said.

It will take years, if ever, to show the full range of cause-and-effects from the new tax system, because the pattern of industry strategy and scheduling is subject to internal factors which are impossible to know, as well as external factors, such as the price of oil. It is too early to say what the collapse in oil prices will mean to future North Slope projects that have yet to win final approval by the companies. The longer low prices last, the more likely that Alaska projects will take a hit.

When nearly double today's rate, a variety of older projects received renewed publicity after the approval of SB 21 in April 2013, with accompanying pledges by companies to increase production and investments. With those projects, a flattening of the decline curve or a production increase is possible in the next few years.

For the calendar year, the natural decline of the oil fields exceeded efforts made to increase production, such as the addition of a few new drilling rigs, but the state Department of Revenue predicted in early December that the next few years could show a reversal in the trend. Oil production is expected to be about 510,000 barrels per day in fiscal year 2015, which ends next June, while the forecast shows it climbing to 539,000 by 2017, before dropping back to 514,000 by 2019.

In recent years, the annual decline in oil flow has varied from about 20,000 barrels a day to 50,000 barrels a day. Over the past seven years, there has been a total drop of about 200,000 barrels per day, which works out to about 4 percent a year over that period. Oil production peaked in 1988 at about 2 million barrels a day and has been on a downward trend since then.

Halcro and Moriarty both mentioned that SB 21 amounted to a tax increase at low prices, compared to ACES. "In addition to the increased investment and more production than forecasted, the state is also generating hundreds of millions more in revenue during this period of low oil prices," she said.

The 50 percent drop in oil prices since the summer has triggered the 4 percent gross tax floor in the law, which is designed to guarantee that the companies pay some production tax. It is at a rate that is lower than the tax under the old Economic Limit Factor. A similar minimum tax was also included in the ACES law, but credits could be applied to reduce the amount the companies paid. Under SB 21, the credits cannot be taken against the 4 percent tax on most oil, but for so-called "new oil," the tax can drop below that level.

During the legislative debate over oil taxes, the Republican majorities in the House and Senate rejected efforts to raise the floor above 4 percent. Last spring, Sitka Sen. Bert Stedman said the 4 percent floor and other provisions mean the "state's exposure increases as oil prices drop."

Dermot Cole

Former ADN columnist Dermot Cole is a longtime reporter, editor and author.