A Citizen’s Guide

In the Great Oil Tax Debate of 2006, it’s easy to get confused by the numbers.

The historical drop in North Slope oil production ought to be an easy one to pin down, but it turns out it’s not.

BP representatives say North Slope oil production has declined an average of 6 percent per year since production peaked in 1988.

Michael Williams, the Department of Revenue’s chief economist, says production has declined an average of 4.5 percent.

Why the difference? BP and the Department of Revenue use different ways of calculating the number.

And why does it matter whether production fell at 4.5 percent or 6 percent?

BP has based its argument against the higher taxes proposed by the Legislature—above the increase the companies agreed to with Gov. Frank Murkowski—at least in part on the “urgent need to attract very large amounts of capital to stem decline,” as BP Alaska’s commercial vice president Angus Walker described it in a written version of his testimony before the Senate Resources Committee in March.

“The tax regime you approve will directly impact how attractive Alaska is for investment, and that will translate into what the future decline will be,” he said.

Or, according to BP spokesman Daren Beaudo, “In order to stem decline, we have to invest more money.”

So how much is production declining?

Here’s a shot at bringing some clarity to one of the numbers in the Great Debate:

The state’s Department of Natural Resources has a Division of Oil and Gas that tracks oil production. The numbers in its most recent report show that between 1988, when North Slope oil production peaked at 744 million barrels per year, and 2004, production has fallen by an average of about 4.5 percent.

That is, if production fell 4.5 percent every year—from 1988 to 1989, 1989 to 1990, and so on—there would have been 356 million barrels produced in 2004. There were actually 352 million barrels, so decline fell by a hair over 4.5 percent.

If production had fallen by 6 percent each year since 1988, there would have been only 276 million barrels produced in 2004.

BP gets a different number because it uses different considerations to determine average decline.

The DNR’s tabulation, and the figure from the Revenue Department’s chief economist, include new fields that have started producing oil since 1988, such as Alpine and Northstar.

BP does not count Alpine and Northstar, which produced a total of 236 million barrels of oil between 2001 and 2005, according to Revenue Department figures.

Kevin Brown, a business consultant for BP, called the two fields a “temporary anomaly.”

“We are not going to let them mask the underlying basin decline,” he said.

Beaudo in an e-mailed response to questions from the News-Miner, wrote: “In the period between 1994-1999, the three major fields (Prudhoe Bay, Kuparuk and Endicott) were in decline, and there were no new developments.

“This is the most representative period during which to evaluate average decline.”

Instead of calculating year by year, BP tried to identify a “trend” in production decline.

“It’s a trend as opposed to a strict statistical average,” Beaudo said.

In his presentation to the Senate Resources Committee, Walker agreed that Alpine, Northstar and other fields had “successfully flattened” oil production for a few years, but he added that “2005 saw decline return to the 6 percent rate that has characterized this basin in the past,” according to the written version of his testimony. According to Department of Revenue figures, production fell 6.4 percent between 2004 and 2005.

Walker added that no other fields the size of Alpine and Northstar are “waiting to be developed.”

Gillian Kirby, a commercial analyst for BP, clarified that developing fields like Alpine had probably required additional investment. The lesson of Alpine, she said, is that increased investment can stem decline.

Doug Reynolds, an economics professor at the University of Alaska Fairbanks who studies oil and gas, called BP’s calculation “misleading.” He said it’s reasonable to expect that companies will find other new fields and that those fields will, in part, offset decline in the major North Slope fields.

“They’re defining it in the way they want for what they want to say,” he said.

Dawn Patience, a ConocoPhillips spokeswoman, said her company has not used the 6 percent figure publicly. Exxon Mobil did not return a phone call.

Staff writer Stefan Milkowski can be reached at smilkowski@newsminer.com or 459-7577.