Resource Development Council

From The President - Tom Maloney

The need to dill to pay the bill

Alaska has been a great domestic oil source, including 33 years from Prudhoe Bay made possible by the Trans-Alaska Pipeline System (TAPS).

How are current production levels? What will the next decade bring? Will TAPS have enough oil to continue running? Will our kids and grandkids have a future in Alaska? Will state and federal governments take positive action in time? These are just a few questions that our leaders need to address. The clock is ticking.

What can we do to get our economy moving again? For starters, we all need to acknowledge the decline problem.

Cook Inlet oil production peaked at 230,000 barrels per day (bpd) in 1970. Production levels are now around 12,000 bpd, down about 95%. The Prudhoe Bay and Kuparuk oil fields, the two largest in North American history, were leased, drilled, and developed by private investment on state lands. North Slope production peaked at 2.1 million bpd in 1988. We are now under 650,000 bpd, a reduction of 70%.

Wayne Gretzky, The Great One, said, “you miss 100% of the shots that you don’t take.” The same is true with hydrocarbons. Without drilling, you get no new production. Without new production, the only question will be when the oil runs out.

Industry recognizes things are drying up, but too many Alaskans don’t know there has been a 70% decline in TAPS over 20 years because high oil prices have masked the production decline.

What can we do?

With drilling activity sharply down over the past several years, tax policy must change. An investor takes 100% of the risk to lease, explore, and develop a resource. At high prices, the government can take over 90% of the profits. What is the incentive for an investor to take risk? Would anyone with their own real estate, stock or other investments give the government all of the upside while taking nearly all the downside risk?

We need to encourage industry and government dialogue to reverse the steep decline in drilling and overall production.

Drilling credits are a fast way to stimulate investment, which would benefit multiple employment sectors. Governor Parnell proposed drilling credit legislation last year. Legislators did not vote on his 2010 proposal. However, recently he announced at an RDC luncheon a two-part plan to make oil exploration more competitive, including capping progressivity at higher oil prices and offered tax credits for technically-challenged fields.

Tax credits combined with research are needed to increase heavy oil investment. Heavy oil is abundant on the North Slope with over 20 billion barrels of reserves. Recovery rates are currently low and production costs are high.

Regarding the proposed gas pipeline, opportunities around a positive Open Season would accelerate gas and oil developments. In other words, “drill baby, drill.” We need positive change and action in 2011, or we may not have a long-term future as an oil and gas state. We need to encourage production.

Federal Oil

TAPS is running two-thirds empty not because we have already developed most of the oil in the Arctic, but rather the lack of development in highly prospective federal areas, both onshore and offshore. Over the past 30-plus years, over 16 billion barrels of oil have been produced on state lands along the central North Slope and virtually all of it has gone to Lower 48 markets. However, the sustainability of TAPS going forward will require some combination of federal oil.

Federal prospects in the Arctic National Wildlife Refuge (ANWR), the National Petroleum Reserve-Alaska (NPR-A) and offshore in the Chukchi and Beaufort Seas may contain up to 40 billion barrels of oil and over 250 trillion cubic feet of natural gas (over seven times the gas resources of Prudhoe Bay and Point Thomson combined). Development of these enormous oil and gas resources would sustain Alaska’s economy for generations. At current prices, the oil alone would be worth over $3.2 trillion, stimulating federal and state coffers, and creating hundreds of thousands of jobs across the nation.

Obviously, the reserves beneath federal areas in the Arctic have the potential to easily eclipse what has been developed on state lands. Now is the time for the federal government to step up to the plate and open these frontier areas to development. After all, what other country has turned away from developing its most promising onshore oil prospect (in our case, ANWR)? What other country refuses to move forward with exploring its most promising unexplored offshore basin (the Chukchi Sea)? And what other country has deferred from development its most prospective lands in a petroleum reserve set aside for development? Instead, America has chosen to elevate its reliance on foreign imports to over 60 percent of the oil it consumes.

In the case of NPR-A, industry has invested billions to lease, explore, and drill over the past decade. How many barrels of oil have been produced? Zero. Billions of dollars out the door, and nothing in – partly due to multi-year delays in permitting and other regulatory issues. These delays cost Alaskans dearly in high paying jobs like drilling, engineering, fabrication, and installation.

With regard to ANWR, the federal government is considering expanding the refuge’s wilderness designations to specifically include the energy-rich “1002 area” of the coastal plain. Such an action would block future development of ANWR’s 10 billion barrels of oil. Yet polls reveal 78% of Alaskans favor responsible energy development in ANWR. However, the majority of Americans believe Alaskans oppose opening ANWR. Let’s clear this up, once and for all and put it on a ballot.

Alaska and the federal government have the opportunity to stem the rapid decline in production. We should continue to work with all interested parties to ensure that we have a bright future by growing Alaska through responsible resource development.

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