State Nervously Assesses Trans-Alaskan Pipeline

3/19/2012 4:59:00 AM, Purna Nemani
      ANCHORAGE (CN) - North Slope municipalities are fighting the State of Alaska over the taxes and profits from the proposed Trans-Alaskan Pipeline, with many Alasakans saying that they and the state - not the federal government and oil companies - should be the prime beneficiaries.

     Whether it's North Slope Borough trying to protect its tax base, or state senators pushing for incentives for gas companies, one thing is certain: With oil production on decline in Alaska, a lot hinges on the decisions coming out of Alaska's courts.
     First, you need to know where to drill. A state judge in March upheld a ruling that found an out-of-state contractor lowballed estimates of oil reserves in the North Slope, which were used to forecast the useful life of the Trans-Alaska Pipeline.
     Anchorage Superior Court Judge Andrew Guidi ruled on March 6 that the most accurate predictions of oil reserves in the North Slope were done by a veteran, in-state contractor, Dudley Platt of the North Slope Borough's Mayor's office, not by Platt's replacement, a Colorado contractor.
     Platt formerly did production forecasts for the Alaska Department of Revenue, first as an employee in 1989, then as a contractor.
     The two contractors, Platt and Frank Molli, used different methodologies to determine oil reserves: Platt used a "pool" method that both Judge Guidi and now-U.S. District Court Judge Sharon Gleason agree is more accurate than "well-by-well" analyses.
     Platt puts the "end of life" of the pipeline sometime between 2065 and 2068, whereas the state's Molli estimated it would run out 20 years sooner, between 2042-2046, according to reports in the Fairbanks Daily News,
     The estimates have implications on how the state assesses taxes on the property and who would benefit more from the Trans-Alaska Pipeline - the municipalities or the federal government.
     Judges Gleason's and Guidi's decisions could give municipalities such as Fairbanks and Valdez a greater stake in their oil and gas resources.
     Many Alaskans feel that they - not the federal government and oil companies - should benefit from development, which has been declining for the past decade.
     Platt, who holds a bachelor's degree in petroleum engineering from Marietta College, has done oil- and gas-field reserves analysis for native organizations, private landowners and the state since 1992.
     Since 2010, he's worked mainly with Mayor Charlotte Brower of North Slope Borough to "foster responsible onshore and offshore oil and gas development while preserving the traditional Inuit lifestyle," Platt wrote on his LinkedIn web page.
     Platt told Petroleum News in 2007 that bi-annual, field-by-field assessments allow him to adjust his projections and look for mistakes. Oil reserves fluctuate, and as healthy as North Slope ones are, infrastructure such as wells, lines and transport, as well as interruptions, all affect production. What company is operating in an area and its expectations are also determining factors.
     Platt said a lot of it comes down to timing.
     "You drill one, maybe two wells a year to see if it works. And you wait a year, and you do two more wells, and then you wait again," Platt told Petroleum News' Kristen Nelson in a 2007 article, "Alaska Oil Forecast Shaky."
     Platt said pipelines do not last forever. They require replacement, and if facilities are not expanded to handle more gas and water, production declines.
     In 2007, Platt said, there were few undiscovered resources, the North Slope being the "heaviest and shallowest."
     Point Thompson in the North Slope remains North America's largest known field. It is being studied - and its leases litigated - by ExxonMobil - which recently released its Point Thompson EIS (environmental impact statement) and plans to go active by 2016.
     Point Thompson is thought to have 8 trillion cubic feet of natural gas and hundreds of millions of barrels of petroleum liquids, one-fourth of the known gas resources on the North Slope.
     ExxonMobil is the largest leaseholder in Point Thompson, with more than half of the shares.
     The State of Alaska has been trying to win back control of Point Thompson land in a decade-long dispute. ExxonMobil and the other leaseholders (BP, Chevron, ConocoPhillips and Leede Operating Co.) claim to have the most knowledge of the area, but not all of the companies have signed on yet.
     The state claims that ExxonMobil has failed to develop the field, while the companies cite technical challenges and the absence of new pipeline.
     Judge Gleason ruled on the Point Thompson case at the trial court level, and it's been appealed to the Alaska Supreme Court. Oral arguments were held Feb. 8.
     Legislation is also pending. In February, Gov. Sean Parnell asked for public comment on Alaska Senate Bill SB 192, "An Act relating to the oil and gas production tax; and providing for an effective date."
     Many Alaskans believe the Act will give oil and gas revenue to gas companies with nothing in return, because it does not address the production decline.
     Parnell welcomed public comment on the bill at Legislative Information Offices throughout the state. A talking points memo distributed by the Fairbanks Chamber of Commerce showed the public weighing in, saying, "According to a Commonwealth North Study, the Department of Revenue has overestimated future oil production 100 percent of the time," which is consistent with what Dudley Platt testified to in the recent forecasting lawsuit.
     The memo added: "High oil prices have masked the negative impact of the production decline. The problem is the production decline and it is real. The state gets about 90 percent of its revenues from TAPS [Trans Alaska Pipeline System] and about half the state's economy depends on oil. However, the pipeline is now operating at one-third capacity and while it may be theoretically possible to operate TAPS down to 100,000 barrels per day, funding state government becomes extremely problematic at that level. Moreover, a 'low oil production economy' based on 100,000 to 300,000 bpd throughput will radically change Alaska's economy and depress virtually every sector."
     The TAPS is one of the world's largest oil transport systems, with more than 800 miles of feeder pipelines and 12 pump stations that alternate being "on line" to move oil from Prudhoe Bay to a terminal in Valdez.
     Democratic state Sen. Les Gara of Anchorage claims his April 2011 bill, HB 231, the "Alaska Oil Production Enhancement Act," is better.
     He says the bill would require companies to do new exploration, even while production is declining, with the hope of bolstering competition, inviting new players, and creating new jobs for Alaskans.
     He claims on his website that lower production taxes before 2006 coincided with decreased production and "40 percent less oil and gas investment and jobs in Alaska." He says that incentives such as tax breaks and decreased royalties should be given to only companies that can prove they need it to make an oil and gas field economically viable.
     BP's Claire Fitzpatrick told Gara in a January interview, "If your question was 'are we intending to do more exploration?' it is not in my current plan."
     Kara Moriarty of the Alaska Oil and Gas Association (AOGA) agreed. She represents North Slope legacy companies, including BP, ExxonMobil, Shell, and the new explorer Respol. Moriarty's testimony on SB 192 is here:
     She wrote: "AOGA did not support the changes that were made to the production tax system in 2006 and 2007. We believed then and we believe now that the current tax makes Alaska uncompetitive for investment dollars for long-term development and production. All of my member companies, from explorers like Repsol, to refineries like Flint Hills, to producers like Pioneer and BP believe meaningful changes to the tax system are necessary to stem the decline in oil production."
     She added: "One only needs to look to Cook Inlet for guidance. Co-Chair Wagoner and many members of the Legislature reacted to Cook Inlet production concerns with bold and meaningful tax reforms targeted at making Cook Inlet commercially attractive. By all accounts these reforms have been successful."
     Gara said: "Alaska is a sovereign state. We should act like one. The governor's bill gives companies the option to take $1.8 billion a year outside Alaska. Our bill requires that companies invest in Alaska, on development projects that will open new fields and heavy oil to production to qualify for the incentives we offer."
     The Senate Resources Committee has since drafted and advanced bill CSSB 192, "An Act relating to the oil and gas production tax; and providing for an effective date," which moved to the state Senate Finance Committee on March 5 for hearings.
     Gara's finance aid, Rose Foley, says the committee drafted CSSB 192 in response to the governor's Jan. 2011 HB 110, which passed against democratic opposition in the house but has not moved beyond hearings.
     Shell is next in line for new oil and gas exploration in Alaska, having obtained approval from the federal government on its 2012 Oil Spill Response Plan, making it a step closer to exploring oil and gas leases in the Chukchi Sea.
     Shell is sailing its largest rig from New Zealand to the Arctic to begin explorations this summer, or face the loss of billions of dollars in planning, permitting and manpower. It has sought to prevent interruptions to its activities there. It filed a lawsuit in February against 13 environmental groups, including Greenpeace, that allegedly boarded Shell's rig in protest.