A Citizen’s Guide

One of the key questions in the debate over the oil production tax is how the tax will affect production. How much money the state receives from oil depends not only on how much tax it gets per barrel, but also how many barrels there are.

BP, one of the three companies that has agreed with Gov. Frank Murkowski to the terms of a natural gas pipeline, has stressed in newspaper ads and testimony before the Alaska Legislature that oil production is falling fast and will continue to fall unless oil companies spend more money in Alaska.

“With producers investing at current levels, we’ll be at half of today’s production in just 10 years,” BP claimed in an advertisement published April 13.

To increase investment, the companies argue, the Legislature should keep the overall production tax rate relatively low.

Predicting future production isn’t easy, but the Department of Revenue, which tracks oil and gas production, takes a shot at it.

Twice a year, the Revenue Department tax division puts together a Revenue Sources Book detailing past and future oil and gas production, prices and revenue, as well as other sources of income to the state.

The most recent report, published earlier this month, assumes long-term oil prices of $25.50 a barrel and a continuation of the current oil production tax using the economic limit factor.

The report predicts North Slope oil production will fall from an average of 917,000 barrels per day in fiscal year 2005 to 853,000 barrels in 2006, a drop of 7 percent.

In 2007, the Revenue Department predicts, production will fall another 3.3 percent to 825,000 barrels. After that, new fields will come online and production will level out and even rise in 2011, 2012 and 2016.

“The North Slope production decline has slowed and new smaller fields are coming online,” said Revenue Commissioner William Corbus in a press release dated March 7.

According to the department, North Slope oil production will decline by an average of 1.5 percent per year between 2005 and 2016. In other words, production 10 years from now will be 91 percent of what it is now.

BP and the Alaska Oil and Gas Association, an industry group, have both claimed that without new investment in the state, production will tumble 50 percent in the next 10 years.

Earlier this month, the association came out with a dramatic newspaper advertisement warning that Alaska could become a “has-been oil province.”

“Without new oil development,” the ad read, “production will be cut in half within 10 years.”

Its source was the Department of Revenue’s most recent forecast.

The two projections—one for a decline of 9 percent over 10 years and another for 50—don’t necessarily contradict each other. The state’s forecast assumes companies will invest more in the state.

The Department of Revenue makes three separate estimates for how much the oil companies will produce on the North Slope. The first estimate is for the wells that are already producing and assumes that the companies running them will put enough money into them to keep them going. Based on how well forecasts did in the past, the department is 90 to 95 percent sure the companies will produce this amount of oil.

That’s the number AOGA used. That is, if companies only kept up current wells, production would decline about 8 percent per year, dropping more than 50 percent in 10 years, according to the Revenue Department.

But the department has two other categories—“currently under development” and “currently under evaluation.” The first refers to projects that are already funded and being designed and built, as well as using new techniques for getting oil out of old wells. Because of uncertainty about the timing and extent of these projects, the state is only about 80 to 85 percent confident they’ll happen.

If these projects happen, production will not be halved in 10 years.

The big question mark is the last category, projects “currently under evaluation,” which includes unfunded projects being evaluated for engineering, cost, risk, and reward. The state doesn’t put more than 70 to 75 percent confidence in these projects.

“All production from this category is subject to delays and scope changes that might impact reserves or production rates,” the report reads.

When the Revenue Department forecasts a decline of 1.5 percent, it assumes all the projects under development and all those under evaluation will come to fruition.

But the projects under evaluation, and even those under development, are just the type of projects that could be affected by the tax rate passed in Juneau, according to Kara Moriarty, AOGA’s external affairs manager.

“We don’t know for sure if the tax rate is going to have an effect on those projects,” she said of the projects under development, “but it certainly could.”

Projects that are further along would be less likely to be canceled or postponed than newer ones, she added.

Jim Bowles, president of ConocoPhillips Alaska, said the Department of Revenue forecasts tend to be “overly optimistic.” Since 2000, the department has overestimated future production.

But, Bowles said, ConocoPhillips would not pull out of a project under development because of a change to the tax rate.

“If we have a project that’s moving forward, we’re going to continue to fund it,” he said.

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