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Energy

Oil production is up, but is the state really benefiting from it?

  • Author:
  • Updated: September 28, 2016
  • Published April 9, 2016

Oil production on Alaska's North Slope is up after more than a decade of decline, and oil producers are crediting the state's oil production tax system for the boost even as the Alaska Legislature is exploring tax changes that would help cover a $4 billion deficit.

While the increased production is considered a positive development for oil-dependent Alaska, some say the current tax system is so weak that the state will receive limited long-term benefit from the extra production.

Meanwhile, the state's revenue forecast, newly updated Thursday, predicts that oil production this fiscal year is on track to rise by a "meaningful" amount of nearly 4 percent before once again resuming its long march downward.

The Alaska Oil and Gas Association, a lobbying group for the industry, announced in a media statement that North Slope crude oil production recently saw its first year-over-year increase since 2002.

Production rose 0.9 percent during the year-long period that ended in March, compared to a year earlier, the group said. Average production jumped to 512,456 barrels daily during the period, from 508,047 barrels a year earlier.

Prior to 2002, oil production had slid annually since 1991, led by declines at the giant Prudhoe Bay oil field that has now produced oil for 39 years but remains one of North America's most productive provinces.

That recent increase is expected to grow. The Department of Revenue's updated forecast, which reports production on a fiscal year calendar, is predicting North Slope oil production will rise 3.8 percent in the 2016 fiscal year that ends in June, compared to the year before.

The 501,000 barrels produced daily on the North Slope in fiscal year 2015 are expected to rise to 520,000 barrels this fiscal year, the forecast estimates. Production is expected to finish this fiscal year "strong," averaging about 533,000 barrels of oil daily in April, May and June, said Dan Stickel, assistant chief economist in Revenue.

"We've had some new stuff come online," said Stickel. "It's performing really strong, and there haven't been major setbacks."

Kara Moriarty, president of the industry group AOGA, noted that the increase comes at a time of low oil prices, with oil producers "cash-flow negative." She said it's a "powerful testament to what a competitive tax policy can do for oil production."

"Critics of the industry have long said reversing production decline was impossible," said Moriarty. "Obviously, it can be done when the right incentives are present."

Sen. Bill Wielechowski, D-Anchorage, said everyone wants more oil in the pipeline. But he said it's coming at a huge cost to Alaska. The state in the next fiscal year expects to pay out $707 million more in cash tax credits than it will receive in production taxes. Revenue forecasts say that another major source of money from oil, royalties, which are based on the state's ownership of oil in the ground, will help result in the state getting more income than it gives away in tax credits, but a large portion of that benefit will go to restricted funds like the Permanent Fund.

The fiscal year 2017 estimate, for the year starting July 1, shows the state paying cash tax credits of $775 million. The figure includes $200 million in payments held over from the year before, after Gov. Bill Walker deferred payment on those credits to jumpstart a conversation about the program's unsustainability. The state now faces a $4 billion deficit because of low oil prices.

The state expects to receive $68 million in oil production taxes in fiscal year 2017, with oil prices expected to average $39 a barrel, according to the new forecast. That's a sharp downturn from fiscal year 2013, when prices were more than $100 a barrel and the state collected $4 billion in production taxes.

The state receives other income from the oil industry, including corporate income tax and property tax. But by far the biggest share of income in fiscal year 2017 will come from about $700 million in royalty payments from oil producers.

Wielechowski said royalties are the owner's share of the oil and should not be counted as though they are a tax on producers. The state's royalty share is typically 12.5 percent of the oil produced, an amount traditionally paid to landowners who allow companies to extract minerals from their land.

"Experts have said, 'Don't count royalty,'" Wielechowski said. "They've said, 'That's your oil. That's off the top and you don't count it.' If you look at other states, the vast majority of royalties goes to the private landowner."

Moriarty said royalty payments to the state are just one benefit of increased production, one that is available regardless of price.

"When prices rebound, the state will generate more revenue from the additional volume," she said.

To help reduce the state's budget gap, lawmakers in the House Finance Committee are considering a bill that would scale back the state's oil tax credit program. The bill also contains measures to bring in more revenue, such as putting a five-year limit on perks for oil produced from new fields.

North Slope producers have taken steps to increase oil production, their representatives have said. They were quick to credit the Senate Bill 21 tax law passed in 2013 for providing incentives to pursue more drilling and well work.

In recent months, ConocoPhillips has initiated oil production at its CD5 field and the Kuparuk Drill Site 2s, projects with combined peak production estimated at 24,000 barrels of oil daily.

Hilcorp Alaska has increased production at North Star, Milne Point and Endicott, fields that Hilcorp began operating after acquiring some of BP's North Slope assets in late 2014, said Lori Nelson, external affairs manager with Hilcorp Alaska.

BP, which continues to operate Prudhoe Bay, has taken steps to reduce the decline at that field, said Dawn Patience, BP spokeswoman.

Prudhoe Bay produced 281,000 barrels of daily oil in calendar year 2015, down from 289,000 barrels the year before. Patience said that 2.8 percent decline is "amazing" for such an old oil field, and is better than the 8.8 percent decline the year before.

"It's all the well work activity and continued investment in Prudhoe," she said.

But continuing the momentum could be difficult. BP has operated five drilling rigs at Prudhoe Bay, but the company recently announced it would idle three of the rigs because low oil prices are hurting BP and other major Prudhoe Bay owners, ConocoPhillips and ExxonMobil.

Patience has said the decision will have a negative impact on production. She said this week BP will continue to work on stemming the decline by increasing its reliance on equipment that is smaller than a rig but can still enhance well production, such as coil tubing units and slickline units, both of which involve sending material down a well.

Ken Alper, director of the state's Tax Division, said the key reason for the current increase in production is ConocoPhillips' CD5 field, initially estimated to provide up to 16,000 barrels of oil daily.

A ConocoPhillips official said in February that the peak was quickly met and that production at CD5 is doing better than expected. At the time, only eight of 15 planned wells had been drilled, suggesting that the production goal would be exceeded as additional wells were drilled.

Natalie Lowman, a spokeswoman for ConocoPhillips, said on Friday that 10 wells have now been drilled. She said she did not have current production figures.

Alper said the 2002 increase in production was also driven by a new field coming on line. In late 2000, the large Alpine field – operated by Phillips Petroleum, now ConocoPhillips – came online, helping boost numbers in 2002 before the decline resumed.

After the estimated increase in production this fiscal year, levels are estimated to begin falling again as the state's largest oil fields continue to age, though production in fiscal year 2017 is estimated to be a bit higher than it was in 2015.

North Slope oil is estimated at 301,000 barrels daily in fiscal year 2025, the last year of the forecast.

Wielechowksi said it is "disingenuous" to credit the tax regime for the increased production, because ConocoPhillips pursued development at CD5 years before the current tax regime was put in place. Without that field, he asserted, production across the North Slope would be down.

"CD5 is a project they've been trying to get permitted for many years before Senate Bill 21 was passed," he said.

Because the project is on Native land within the federal National Petroleum Reserve-Alaska, the state will receive little royalty income and limited tax revenue, he said.

Moriarty said increased production is a good thing for Alaska.

"To suggest otherwise is asinine," she said.

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