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State predicts oil decline to stay roughly the same, despite tax cut

Pat Forgey
When can Alaska expect an increase in oil production from the North Slope producers after cutting taxes? Well, if the state's own revenue projections are an accurate guide, not over the next ten years. Aaron Jansen illustration

JUNEAU -- So when's all that new oil coming?

Despite promises from Gov. Sean Parnell and other tax cut advocates, don't hold your breath. The official word from the state is to expect continued oil production declines for the next 10 years.

Alaska earlier this year passed a new oil tax bill aimed at cutting oil taxes. At expected prices, that would have meant cuts worth a billion or more a year. Gov. Sean Parnell, who sponsored the bill, said it would also do something else: Spur oil companies to produce more oil. That would eventually bring in more revenue to the state.

Following the passage of Senate Bill 21 in April, Parnell was pressed to explain how the bill should be judged.

"I measure it by new production coming online," Parnell said.

Parnell in April repeatedly pointed to the "fall forecast" when he was asked how his bill should be judged.

He was referring to the Revenue Sources Book, a document put out each fall, with an addendum in the spring, listing the state's best guess as to how much it will receive in oil taxes and various other income sources in coming years.

It's produced by the Department of Revenue, and is the bible for legislators and policy makers as they work through budget decisions in each year's legislative session.

Despite passage of Senate Bill 21, the fall Revenue Sources Book shows a gradual decline in oil production over the next 10 years, slightly steeper but essentially the same as before Senate Bill 21.

The book shows an expected production of 508,000 barrels per day of North Slope oil in the current fiscal year, falling to 313,000 barrels per day in 2023. That's a total decrease of 38 percent.

That's a cumulative change over the decade, with steady decline in legacy fields counterbalanced with some increases as new projects come online.

Its release last week startled many with unanticipated $2 billion in revenue reductions.

Rep. Chris Tuck, D-Anchorage, said the production forecast shows the folly of using low tax rates to try to get the state's big oil companies to produce more oil.

"Just giving it away, as we should have learned from our past mistakes, doesn't work," Tuck said.

But the Revenue Sources Book's numbers shouldn't be taken as gospel, according to Department of Revenue officials.

Deputy Revenue Commissioner Bruce Tangeman said the department believes that new projects which the department has been told about but which aren't certain enough to include in official projections may well result in higher than expected production.

"There's not a spigot up there -- I wish there was -- that you could just turn it on," he said.

The department develops a "high case" and a "low case" of what might happen, with the official projection somewhere in the middle, said Mike Pawlowski, policy adviser to the department.

"There's a lot of upside," if all the projects are developed, he said.

The Revenue Sources Book itself says revisions may come.

"It is likely that future forecasts will increase further as uncertainty around fiscal terms are alleviated and companies complete a budget cycle under the new terms," it says.

It takes time for companies to shift gears, Tangeman said, and despite Senate Bill 21's passage earlier, "We're still living under ACES until the end of the year."

Alaska's lower taxes will influence company decisions, he said, which could even have a production level relatively flat for some years, before falling later, according the Revenue Sources Book.

There's a downside risk as well, but Pawlowski said that changes in recent years to prediction methodology to stop years of overestimating production should help reduce the chance actual production levels will be much lower than predicted.

"Previously those forecasts have been fairly wrong," he said.

Producing oil fields have steady production decline rates, with the uncertainty coming from completion dates for new projects. Some new projects, such as Point Thomson and CD-5, have been in the works for years or decades, and are considered highly likely to begin production, though dates sometimes shift.

The Revenue Sources Book's production forecasts come from information provided confidentially by oil companies, but that information is sometimes overly optimistic, Pawlowski said.

The new estimates rely on oil industry experts at the Department of Natural Resources to get a more realistic prediction, he said.

Parnell has suggested that if legislators question the reliability of the fall forecast, they have the ability to hold hearings on it to elicit more information.

Deputy Commissioner Tangeman said Senate Bill 21 is already working, as evidenced by a projected decrease in oil production last year of 8.2 percent to 4.5 percent in the current year.

"The decline has been cut in half in one year," he said.

Tuck was skeptical.

"There were some shutdowns that really added to the decline last year, you've got to look at it over a period of years," he said.

The Revenue Sources Book points out other factors in declines -- including a decision to re-inject some natural gas liquids instead of shipping them in the pipeline -- affected production.

Despite the conflicting predictions, there's one number that's nowhere to be seen.

Gov. Parnell had originally set a goal of producing one million barrels of oil per day, nearly a doubling of current production.

"The governor's goal was a million barrels a day, and what's telling is that in their own Revenue Sources Book, it shows that 10 years from now we're going to be maybe even in a little bit more of a decline than we are under our current ACES tax regime," Tuck said.

Contact Pat Forgey at pat(at)alaskadispatch.com

Correction: An earlier version of this story mistakenly reported North Slope oil production projections as 508 million barrels per day falling to 313 million by 2023. The correct figures are 508,000 and 313,000. The story has been updated to reflect the correct figures.