Steven Kopits, Douglas-Westwood New York, provides insight into the state of the Alaskan oil and gas industry.
Alaskan oil production peaked in 1988 at around 2 million bpd and has been falling since, possibly down to 510 000 bpd this year. Virtually all of this production flows through the 800 mile Trans-Alaska Pipeline (TAPS), to Valdez, in southern Alaska. But TAPS is struggling, operating below a quarter of its capacity, with fears that it will lose its viability below 300 000 bpd.
In the wake of the run-up in oil prices before the recession, then governor Sarah Palin brought in a 75% tax rate from 2007. This stalled investment and production decline rates increased to nearly 7% from 4% a decade earlier. Alarmed by this, the current governor, Sean Parnell reduced the top tax rate to 35%. This brought promises of investment by BP and ConocoPhillips. However, expectations remain modest, at best to reduce declines to 20 000 bpd/year from the current 40 000 bpd pace. If expectations are met, TAPS will reach the 300 000 bpd threshold in 2024, rather than 2020. Many Alaskans are unimpressed and are forcing a referendum to re-instate the higher tax rates – they see the end of the state’s golden age of oil and want to get all they can, while they can.
On the other hand, Shell has big plans, as much as 1.8 million bpd from Alaska’s Outer Continental Shelf, 40% more than Gulf of Mexico production today. But cost to first oil is in the US$ 40 - 60 billion range, and one has to wonder whether Shell has the fortitude to hold out until initial production in 2025. Indeed, Goldman Sachs spent much of a recent report berating Shell for “overspending in low return assets and unproductive capital”. Shell’s incoming CEO, Ben van Beurden, comes from the chemicals division, where he managed to increase profitability and lower Capex. Will a downstream manager feel the exotic lure of Alaska as much as the upstream team has? Or will he decide that 2025 is just too long for investors who are looking for cash quarter by quarter? Alaskans have good cause to feel nervous.
Adapted from a press release by David Bizley