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Faith-based effort to increase oil production requires careful look at production forecasts

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Posted: Saturday, March 23, 2013 9:16 am | Updated: 5:33 pm, Sat Mar 23, 2013.

Oil production under the existing tax system will be 70,000 barrels a day higher in 2022 than the state Department of Revenue is predicting.

That is not the wild-eyed forecast of someone trying to defend the existing oil tax structure in Alaska.

Rather it is the prediction of the consultant hired by the state to create forecasts about future oil production.

His information is collected privately and based on "timelines and profiles delivered by the companies," according to state officials.

To be precise, the consultant says that oil production in 2022 under the current tax system will be 410,600 barrels per day.

But the Parnell administration predicts that oil production will be 338,500 barrels a day that year under ACES.

The Department of Revenue and the Department of Natural Resources argue that the lower numbers are justified because the oil companies are too optimistic about future projects.

They say the companies could be wrong, as they have been in the past, so the state adjusted its production numbers down by a percentage on all projects that have yet to be built.

In either instance, oil production in 2022 would be lower than it is today. The question is by how much.

For 2022, the Parnell administration has concluded that about half of the new oil production expected by the companies from projects that have not been built will not materialize by that year.

With the state poised to cut oil taxes by an amount that is expected to run into the billions of dollars in the years ahead, the difference between the forecast numbers and the official state forecast looms large on the horizon.

Cutting oil taxes to make operations in Alaska more profitable is based on the faith that the profits will be reinvested in Alaska by the oil companies and lead to more oil production.

But judging the success or failure of this faith-based effort is complicated by the wide gap between the higher numbers offered by the state consultant and the lower final forecast produced by the administration last fall.

The consultant, Frank Molli of Colorado, had already trimmed his 2022 forecast by 30,000 barrels a day from the forecast he produced in the spring of 2012.

His predictions have been criticized in some quarters for being too high in the short term and too low in the long term. The cut he made between last spring and last fall may mean that he is no longer too high in the short term.

A year ago he predicted that total oil production would be 438,000 barrels a day in 2022.

The lower forecast created by the Parnell administration last fall is 100,000 barrels a day lower than the consultant's forecast from a year ago, which was the official state forecast until late 2012.

The new lower target is the one that will be used to judge the success of failure in the years ahead of a reduction in oil taxes.

Much has been made over the years that the state oil forecasts have long been overly optimistic and that its forecasts have never been right. But there is more to the story.

The substantial errors in the long-range forecasts have not been for production levels from the two largest fields that still dominate the landscape-Prudhoe Bay and Kuparuk. The production forecasts for those fields have been close to the mark.

Where the forecasts have gone awry is on the pace of development for the smaller and riskier projects, mainly because of political, legal, technological and economic considerations.

In recent years, the biggest factor slowing down projects was probably not the ACES tax system, but the large amount of repair and maintenance work required after corroded pipes put BP back on the front page in 2006.

If oil taxes are cut this year, which appears likely, and if 70,000 to 100,000 barrels a day of additional production are on line in 2022, that increase will be attributed to the oil tax cut of 2013.

If oil production in 2022 or the years leading up to it exceed the amounts in the latest forecast, the case will be made that it would never have happened under ACES.

But those increases, if they materialize, would get Alaska oil production close to the levels predicted by the state consultant for ACES.

In other words, are the increases likely to happen if oil taxes remain unchanged?

It may never be possible to answer a question like that.

This topic is as tangled as crossed fishing lines. Since the state is paying a lot of money for its consultants, our legislators should be asking more questions about the oil production forecasts.

They are an essential part of this faith-based effort.





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