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Community Perspective

Don’t blame the Alaska oil flow decline on oil taxes

North Slope oil that comes out of the ground is crude, which consists of many things, including saltwater, carbon dioxide and natural gas. Before crude enters the Trans-Alaska Pipeline System at Prudhoe Bay Pump Station 1, the crude must be processed to remove the water and gas. The processing of crude occurs at above-ground treatment facilities, which are located between the oil-producing wells and Pump Station 1. The processed crude enters the pipeline at Pump Station 1 and travels 800 miles south before arriving at the marine terminal in Valdez.

You likely heard over the years that the Trans-Alaska Pipeline System (TAPS) has declining throughput. Some of you likely heard that it takes longer for crude to reach Valdez now than it did in the past. These are real issues.

Importantly, you may also have heard that oil tax policy was a major reason for this decline in throughput. This last belief is false; it is erroneously raised by the major producers and their surrogates.

Both production and investment in the major fields fell dramatically after the change from the Alaska’s Clear and Equitable Share tax system to the tax system under Senate Bill 21.

In 2012, the last full year under ACES, Alyeska Pipeline Service Co. reported TAPS throughput averaged 547,866 barrels of oil per day. In 2019, after seven years under SB21, the throughput was 490,366 barrels per day, a greater than 10% decline. Despite the producers receiving billions of dollars in credits under SB21, the North Slope is producing 57,500 fewer barrels per day than prior to SB21. Most telling is that the producers failed to make the investment necessary to arrest this decline, let alone achieve the promised increase in production. During the last seven years since SB21 passage, we didn’t see the needed investment in wells and in above-ground treatment facilities in the three major legacy fields — Prudhoe Bay, Kuparuk and Alpine. Instead, we saw less drilling and little investment in the expansion of the treatment facilities that would be necessary for any anticipated increased production.

Rather than investment into field infrastructure under SB21, we saw our tax credits going to fund exploration and development outside of Alaska and support increased stock dividends for their shareholders and rapid repayment of their company international debts and liabilities.

Expanding the treatment facilities to handle more produced water and gas becomes critical to the processing of increased production from existing fields. Within existing fields, both seawater and gas are injected into the reservoir to increase production. These enhanced recovery methods increase both the total recovery of oil from the fields and the rate at which oil is produced from the wells. However, as the field depletes, the ratio of gas-to-oil and water-to-oil increases. Unless the capacity of the treatment facilities is expanded to handle the ever-increasing water and gas, less oil can be processed and field production will decline.

Through expansion of key elements of the treatment facilities these production bottlenecks can be removed. Under SB21, the people of Alaska provided abundant credits that should have incentivized — if credits work at all — such expansions. They didn’t happen, and production fell significantly. SB21 didn’t work as advertised.

Under SB21, major producers have chosen not to make the investments for these expansions. This has resulted in more and more bottlenecks and lower throughput in the legacy fields. At Prudhoe Bay, the last major above ground treatment facility was built over 20 years ago. If SB21 had worked in the last seven years as promised, there would have been both increased production and associated treatment facility investment. SB21’s promise was not kept by the major producers of our legacy fields.

Expanding the treatment facility capacity is critical not only to manage increased production within existing fields but also to process water, oil and gas from smaller discoveries located close to the large fields. Expansion of treatment facilities should also encourage production from new fields near existing infrastructure. Done right, this facility-sharing model is a win-win situation. However, the legacy field producers ask very high charges of and refuse to de-bottleneck facilities to accommodate oil, gas and water from other non-partner producers. This troubling attitude makes facility sharing the rare exception.

The truth is that the decreasing oil flowing through TAPS from the legacy fields and nearby satellite fields is in significant part due to the business decisions of the oil companies and directly linked to the amount of money not spent on treatment facilities. With more investment in treatment facilities, the production in these fields can and should increase. It is demonstrated that Alaska’s SB21 subsidy has not led to needed investment in treatment facilities. Don’t expect that to change under SB21 in the future. It is SB21 that needs to be changed now.

If SB21 worked, why was it necessary for the Alaska Industrial Development and Export Authority to subsidize Brooks Range Mustang? Mustang’s production could have been processed through the nearby Kuparuk River Unit facilities, but the Kuparuk River Unit owners did not allow this. Instead, Alaska had to 1) provide more money to support Mustang’s treatment facilities and 2) pay the Kuparuk producers the $8 per barrel tax credit without their making any investment. An SB21 failure.

Don’t let scare tactics influence your thinking. Be wary of arguments asserting that changes in oil taxes are a key driver in legacy field investment. The lack of investment and production decline under SB21 demonstrates that low taxes and large credits are not a key driver to investment.

SB21 is a failed experiment and needs to be changed for Alaska to provide basic services to its citizens, to continue a PFD program and stabilize our economy.

Vote Yes for Alaska’s Fair Share in November.

Joe Paskvan is retired after almost 40 years as an attorney in private practice. He is a former state senator who served as chairman of the Senate Resources Committee. He lives in Fairbanks.

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