The number one issue of concern to RDC members – no matter the industry – is the ongoing throughput decline in the Trans-Alaska Pipeline System (TAPS). The oil pipeline is now running at one-third capacity in what I would call a self-induced production decline. Although 17 billion barrels of oil have been produced in Alaska, at least 40 billion barrels exist in the Arctic, both onshore and offshore. Most of the oil is in federal areas, much of it offshore, and up to seven billion barrels likely remain in state producing fields and known or possible fields. But it will take “political will” in both Washington and Juneau to get this oil into TAPS.
While the upcoming North Slope exploration season is encouraging, it is important to keep in mind that it takes up to ten years from discovery to production to bring a new field online. While exploration is vital to the long-term health and stability of Alaska’s economy, it often does not result in commercial discoveries and will do nothing to slow or reverse the production decline in the short to medium term.
The best immediate solution to stemming the production decline is additional investment in existing fields, but development drilling is down due in large part to an oil production tax structure which takes the lion’s share of a company’s upside (a marginal tax rate of 90 percent at high oil prices), making Alaska non-competitive for investment with other oil and gas jurisdictions in the Lower 48 and abroad. New production is also needed to head off escalating technical and operational challenges TAPS is facing due to low throughput.
While major oil production from offshore areas is a long-term prospect, at the earliest sometime in the next decade, Alaska needs to increase TAPS throughput now by encouraging infield drilling in currently producing state fields. However, development drilling has dipped since 2007 and has remained virtually flat at a time infield drilling should be through the roof during a period of high oil prices. This is a major concern because more than 50% of total North Slope production in 2020 is forecasted to come from new oil, but most of that production will require huge investment from industry in the right places that is currently not occurring.
In an effort to attract major industry investment to promote more infield drilling and stem the production decline, RDC is encouraging legislators to pass Governor Sean Parnell’s HB 110, which would make major revisions to the state’s oil production tax structure, including capping a progressive surcharge which is discouraging new investment in the legacy fields. The debate on the governor’s bill will be the biggest issue in the next session and its passage would be a big step toward restoring Alaska’s competitiveness in attracting the investment needed to quickly put new oil into the pipeline.
The new exploration anticipated for this winter is great news and highlights some provisions in Alaska’s tax regime that are working well, such as attractive exploration credits and incentives, which partially mitigate a company’s risk to capital. However, there is more than one part to the equation. Both explorers and producers have said that provisions on oil production are terrible and not encouraging investment. For example, there is no significant difference in a producer’s net income between $100 and $125 a barrel, leaving the company little upside at high prices.
As a result, Alaska has become less competitive and investors have turned indifferent to investing here at high oil prices. It is no wonder production has been steadily falling beyond state projections since the passage of Alaska’s Clear and Equitable Share in November 2007. Throughput in TAPS declined by 18,000 barrels per day (bpd) in 2008, 24,000 bpd in 2009, and 48,000 bpd in 2010. The production decline is the crux of the issue and it has raised concerns that production forecasts are too optimistic and inaccurate.
The alarming decline clearly illustrates a fix is needed on the production side of the tax structure. Despite the good news on exploration, a big problem still exists and it is dampening the motivation for investment in development drilling. We need more than exploration to keep TAPS operating and functioning well.
Return to newsletter headlines
