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With oil-tax cut likely, where will new Alaska crude come from?

  • Author: Alex DeMarban
  • Updated: September 27, 2016
  • Published March 24, 2013

Brother, can you spare 82,000 barrels of oil a day?

That's the amount Alaska will need in the next six years to counter the loss of revenue from Gov. Sean Parnell's proposed oil-tax cut, according to the Department of Revenue. A state senator who supported the bill claims it's almost half that, though he appears to be painting an unjustifiably rosy picture.

Additional production to make up for expected revenue loss is of great importance because long-prosperous Alaska suddenly faces an uncertain financial future, now that more than two decades of dwindling production from North America's largest oil fields has reached critically low levels.

The proposed tax break, now in the House after passing the Senate last week, could hasten the day of reckoning if enough new oil isn't produced. Add the unwillingness of big oil companies to commit to new projects, and the massive tax break appears to be a huge "gamble," a word even proponents have use to describe the bill.

The Department of Revenue's mid-range estimate says the Senate-amended version of the bill will cost about $850 million annually averaged over six years, or $5.2 billion.

Though many Alaskans are skeptical that enough new oil will be produced to offset that cost, some of the 11 senators who narrowly passed the bill last Wednesday spoke in glowing terms about the new types of oil the tax bill would incentivize -- things like heavy oil and shale oil.

Unfortunately, at a press conference following the vote, those senators were more inclined to tell personal stories to defend their "courageous" decision to protect Alaska's children, than they were to provide specific projects that will pay the state's bills in the coming years.

Misleading information?

Sen. Pete Micciche, R-Kenai, an employee of oil giant ConocoPhillips, Alaska's largest producer, chose a low-end estimate when a reporter asked how much new oil will be needed to pay for the cost of Senate Bill 21 over the next five years.

The exact numbers fall between 41,000 and 55,000 barrels of new oil per day, Micciche said. Sen. Cathy Giessel, R-Anchorage, said there's an "exciting new project" underway that could meet that need at once.

Of course, the project she's talking about has moved ahead under the current tax system that's been on the books six years, offering massive subsidies for oil companies big and little. At Linc Energy's Umiat field, located in roadless wilderness about 100 miles west of pump station No. 2 of the trans-Alaska pipeline, exploratory drilling began just days ago. An estimate says the field could yield up to 50,000 barrels a day.

Time will tell how accurate those numbers are -- oil fields often produce less than forecast. But perhaps more important, Micciche didn't tell the full story.

Micciche's view is apparently based on the estimate of Econ One, the consultant hired by Parnell. Econ One estimated that the bill could pay for itself with between 45,000 to 51,000 barrels per day.

But those numbers are based on three decades of new production at that level, not six years, making it seem less relevant to a state expecting to face budget deficits as early as next year.

The Department of Revenue estimates 180 million barrels of new oil will be needed to offset the cost of the bill in a six-year period. That works out to 82,000 barrels per day during those six years.

Sappy stories

Where will all that oil come from? Hard to say.

At the unusual late-night press conference called by Republicans who passed the bill, Sen. Kevin Meyer, another ConocoPhillips employee, acknowledged that oil companies this year have made no commitments to new production they'll undertake if the bill passed.

In fact, representatives of oil giants Exxon Mobil Corp. and BP, who, along with Conoco, produce nearly all of the oil from the North Slope, have indicated the cut won't produce the amount of new oil Alaska is looking for. That makes one wonder how long until oil executives are back in Juneau asking for an even bigger break.

The 40-minute presser was laden with sappy personal stories as senators defended their vote. Sen. Anna Fairclough, R-Eagle River, said her 76-year-old mother shops for the cheapest gas prices and oil companies are the same way -- they want the best deal -- so Alaska must makes its tax-regime more competitive to attract investment from states such as North Dakota. Meyer, R-Anchorage, acknowledged that he had recently told a Juneau Empire reporter the bill was a "crapshoot," but more important was what else he said: Doing nothing was an even bigger gamble.

Later, freshman lawmaker Mike Dunleavy, R-Wasilla, seemed to revel in the measure's risk-taking, saying Alaska's always been a gamble, ever since William H. Seward bought the "icebox" from the Russians in the mid-19th century. Dunleavy recalled a picnic he attended when he first moved to Alaska from Pennsylvania in the early 1980s. Everyone was making loads of money thanks to the state's booming oil fields. Some three decades later, last summer, he attended another picnic, and the people there worked at Carrs-Safeway or Wal Mart.

"We lost our mojo," Dunleavy said. "Something happened in that time. We lost a lot of our spunk. We lost a lot of our risk-taking."

Perhaps Dunleavy is attending the wrong picnics these days. Two days later, on Friday, a new report showed that hiring on the North Slope has reached record levels yet again. Opponents of Parnell's measure say it's more proof the current six-year-old tax system, with its generous credits and other subsidies, is working and attracting new investment in Alaska's oil fields.

Potential oil opportunities?

So what about the oil? What are Alaskans, already facing cuts to education and other areas, going to get out of the bill?

After the personal stories and toward the end of the press conference, reporters began seeking specifics on where the new oil would come from.

Drilling in the federally owned Arctic National Wildlife Refuge can't be counted on, and drilling in the outer-continental shelf by Royal Dutch Shell won't put oil into the pipeline for 15 years, said Senate President Charlie Huggins of Wasilla.

That leaves viscous and heavy oil as the option. "It's just a matter of the technology emerging," Huggins said.

"What we're doing here is allowing us to bridge to a future that could be very bright," he said, referring to a potential offshore discovery. "But if we don't do something like we did tonight, it will be very bleak."

Giessel said the new tax structure's "gross revenue exclusion" feature, which eliminates taxes on 20 percent of new oil produced, will encourage all kinds of development: "heavy oil, shale oil, viscous oil, pockets of oil in legacy areas, coiled-tube drilling, all those hi-tech innovative areas."

Asked for specific projects, the senators mostly provided projects already underway thanks in part to subsidies under the current tax system.

Meyer mentioned the Mustang field east of the Colville River. Brooks Range Petroleum has said its Mustang field should begin producing late next year, yielding up to 15,000 barrels of oil a day at peak production.

Meyer also mentioned Repsol, the Spanish oil major that began exploratory drilling at the Qugruk unit near the Colville River mouth last winter.

Some hope it will be producing by 2017, but it's too early to tell. Repsol is planning to drill three wells this winter. What might the unit one day produce?

"It's just too early for Repsol to be able to forecast any kind of production level," said Trish Baker, a spokeswoman, in an email. "We are still in the exploration phase."

Meyer said both Repsol and Brooks Range won't be able to produce any oil without a change in taxes.

Meyer also said that although oil companies have made no promises, other potential projects might include expansion work at Kuparuk, a field run by Meyer's employer. Another opportunity could be I Pad, a project at western Prudhoe Bay that BP put off years ago, blaming too-high taxes.

BP said last year it would complete that project -- and others. But at the time, Parnell had dangled a much larger tax break. As that bill lurched through the old, more-Democratic Senate, BP estimated the break would allow them to extract 80 million barrels of oil with 50 new wells at I Pad. But that tax-break, estimated to be worth up to $2 billion a year for oil companies, failed to pass.

Now, with the proposed tax break smaller, BP has made no commitments under Senate Bill 21. Speaking on March 14, Damian Bilbao, head of Finance of Developments and Resources for BP Alaska, said the bill won't do what the state wants.

It "does provide some good steps forward to making Alaska more competitive, but we don't feel that it goes far enough to attract the type of meaningful investment that's required to make the future look different from the last six or seven years."

Contact Alex DeMarban at alex(at)alaskadispatch.com

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