Alaska oil tax debate ignores the North Slope processing bottleneck

SB-21 will not increase exploration on the north slope

The advocates for senate bill-21 (SB-21) fail to realize that oil processing capacities on Alaska’s North Slope are again at or near capacity and that declining oil recovery is not the issue. Even if production were increased as a result of the SB-21 via development, there would be no way to get the oil from the oilfields into the Trans- Alaska Pipeline. It also introduces a situation where owners of the shared facilities make a decision on whose oil goes through the processing facilities. The decision on which oil, new discovery or legacy field, will be determined surely by the outcome of the SB-21 vote.

I am no senator but I do now clearly see the difference between declining oil production and processing capacity. In February, at the Alaska State Legislature Senate Resources Standing Committee Meeting, Thomas Walsh, Petrochemical Resources Alaska, and Bill Barron, Director of Oil and gas at DNR, stated that both the oil field pipelines and the TAPS can handle increased flow from new discoveries but that the processing facilities were at or near capacity for gas and water removal. Still, in response to a letter I wrote to the legislature, Senator Pete Kelly, told me that we need to expand development on the Slope because the tax structure is killing development with not a word about a processing facility. That bottleneck is what slows production, not the ACES tax structure. These facts are published online and available to the public.

Looking back to the 90’s, the last time the processing capacity issue arose, a new processing facility was built at Prudhoe Bay to get more oil into the TAPS. The gas-to-oil ratio (GORS) had increased dramatically due to reinjection so after a certain amount of time these crude processing facilities essentially become water processing facilities.

For example, we have a 1000 barrel-per-day processing facility. At the beginning of oil field development there are 100 gallons of water and 900 gallons of oil. As the field is developed the gas and water that are removed are reinjected.  Some years later the ratio may be reversed with 900 gallons of water and only 100 gallons of crude. That example shows that the processing facility capacity remains the same over time though the ratio of oil coming out does not.

Now imagine how much gas and water has been reinjected on the North Slope. The GORS is substantially higher in 2013 yet there is little talk of a building a new shared facility like they did in the early 90’s. The current talk is about declining recovery and is putting the cart before the horse.

Knowing that there is an oil processing bottleneck that will not allow increased levels of oil, legacy or new discovery into the pipeline, we should now consider how Sean Parnell’s plan (SB-21) will play out. Experts have pointed out the larger players with leases in the legacy fields would have to “back out” some of their oil. Clearly, these companies recognize that and have to weigh options.

If they back out oil there may be some increased revenue from processing crude from new players, with the new players receiving a tax break on that new production.  That does not sound profitable so now they want a huge tax break on legacy oil under SB-21.

And that’s the rub.

If Parnell’s plan passes I suspect that the big oil players will keep the shared processing facilities at capacity with legacy oil that just became very lucrative as a result of SB-21.  With the system at capacity there will be no room to process oil from new discoveries.  There will be no motivation to produce. There will be legacy oil flowing more freely than ever.

Co-Chair of the Senate Finance Committee, Senator Kevin Meyer (also employed by Conoco Phillips), was recently quoted saying that, ““It’s kind of a craps shoot...the industry certainly isn’t going to say one way or the other, because you know their motivation is to try to keep the rates down as low as they can.”  This Alaskan voter does not want to play craps with the funding for our schools, etc. I want projected tax revenue, a real analysis of its SB-21’s effects.  Kevin Meyer is wrong, it’s not a craps shoot, it’s a giveaway of Alaska’s oil.

Thanks for taking the time to read the article.  This perspective has also been published in the Alaska Dispatch.  Please help spread the word on Facebook too.

Sources and related materials:

Alaska State Legislature: Senate Resource Standing Committee minutes February 3, 2012

Gas and Water Handling Constraints on Alaska’s North Slope

Alaska legislature shared facility study

http://www.adn.com/2013/02/22/2798775/aidea-considers-funding-north.html

http://www.adn.com/2011/03/25/1776047/aces-tax-system-shuts-alaska-off.html

http://juneauempire.com/state/2011-04-09/jobs-aces-oil-tax-adoption#.US13Olee6So

http://www.sitnews.us/0213News/022413/022413_oil_tax_bill.html

http://www.alaskadispatch.com/article/parnells-oil-tax-cut-proposal-clears-alaska-senate-taps-committee

http://juneauempire.com/state/2013-03-15/senators-preparing-oil-tax-bill-vote

Follow this link to see more of my articles on Alaska’s energy issues.

See more about me at my website.

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About Mike Knoche

Straight Ahead Construction is a licensed, bonded, and insured general contractor, construction company based in Fairbanks, Alaska with a great reputation for honest, good work. View all posts by Mike Knoche

11 responses to “Alaska oil tax debate ignores the North Slope processing bottleneck

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