Amid Production Cuts, Alaska Tightens Belt With Controversial Proposals

Amid Production Decline, Alaska Tightens Belt With Controversial Proposals
Despite a budget crunch, Alaska's North Slope makes a comeback.

As operators and service companies work on lowering their expenses to help weather the storm of plunging oil prices, states that are dependent on oil production are doing the same. None, perhaps, more than Alaska.

With more than 88 percent of its budget dependent on oil and gas revenue, the state – home to the largest oilfields in the country – is feeling more than a pinch from low oil prices and a gradual decrease in production from its oldest and most profitable fields, said Mark Myers, commissioner of Alaska’s Department of Natural Resources (DNR), to Rigzone.

Currently, the state is grappling with a $3.5 billion annual deficit.

“The reality of our current fiscal condition is that total state revenues have dropped more than 50 percent from fiscal year 2014, and, of that total, general fund unrestricted revenues have declined nearly 60 percent,” said Department of Revenue Commissioner Randall Hoffbeck in a December 2015 press release, attributing the drop to a decrease in oil production.

As a result, Alaska Governor Bill Walker has recently proposed several controversial measures – including a state income tax, a significant reduction in dividends paid to residents from the state’s Permanent Fund, new sales taxes, layoffs, and fewer oil-tax credits for operators – that would serve to revamp the state’s financial balance.

As the state began its legislative session in January to take Walker’s proposals into account and turn the state’s economy into a more well-rounded one, those in the DNR – the heart of Alaska’s oil lifeline – are reminding operators around the globe that state lands continue to hold lucrative resources. Pointing to a healthy number of operators that have recently made substantial discoveries on the North Slope, their message is clear: Viable opportunities remain in Alaska.

Surviving The Downturn

Despite the fact that Alaska cut $900 million of its budget last year, the state has found itself in the hole by $3.5 billion strictly due to a drastic drop in the price of oil and a decline in production of the Prudhoe Bay, Kuparuk and Alpine oilfields on its resource-rich North Slope.

For the first time in approximately 30 years, a 6 percent state income tax – equivalent to 1.5 percent of the annual income per person – has been proposed to raise roughly $200 million.

Walker also has suggested cutting annual dividends from the state’s Permanent Fund – set up in 1982 by the state’s constitution. While the average resident currently receives just more than $2,000 a year from the Permanent Fund, that amount would be cut to roughly $1,000 – the remaining balance funneled toward reducing the state’s deficit. Roughly 645,000 residents receive an annual dividend check.

Walker also proposed excising taxes on alcohol, tobacco, mining and fishing as well as additional fuel taxes – levying more than $100 million in revenue.

Furthermore, oil and gas companies would receive loan funds instead of oil-tax credits, cutting $400 million from the state’s $500 million oil-tax credit program.

It is reported that additional cuts, including layoffs, in state government would save the state an estimated $100 million.

While such bold proposals leave many in the state feeling uneasy, cutting state jobs could possibly backfire, especially in the DNR, which is responsible for selecting state lands for oil and gas lease sales, which generate the greatest income for Alaska, Myers said.

“You can’t solve this problem by cutting. You could lay off all the employees in the state and still only meet half the deficit,” Myers said.

Calling Walker’s proposals “aggressive” yet “necessary,” Myers said it is essential for the DNR to remain intact – especially after the department suffered drastic cuts last year. “How much more efficient would the DNR be if it we have additional cuts?” he asked. “The DNR is the economical engine of the state. If you cut too much, we lose more money in revenue than we gain in cuts.”

Nevertheless, Myers agreed that Alaska must undergo a significant shift in its budget to weather the oil crisis.

“We need to create a broad-based source of state revenue,” he said. “The cost of managing basic services is not going down, and the population is slowly growing, while oil production is declining. Right now, Alaska’s economy is based on a single, volatile commodity that’s not renewable. We must adjust the system and build one that’s more like a normal economy that’s less dependent on oil price and production.”

Opportunities Still Abound

Aware that production from its largest oilfields are on the decline, causing throughput in the Trans-Alaska Pipeline System to be one-third of its peak volume, recent discoveries made by Armstrong Oil & Gas in partnership with Repsol, Hilcorp Alaska and Caelus Energy Alaska are breathing new life back into the state’s North Slope.

While the North Slope’s large oilfields are depleting, operators are returning to the area with the goal of exploiting conventional oil in stratigraphic or strato-structural traps and unconventional oil in shale, said Steve Wright, a consulting geologist with Alaska Geosciences Unlimited, to Rigzone.

Prospecting there for subtle traps has been problematic in the past, but using today’s newer 3-D seismic technologies, including long offset, high-fold data which is more prevalent now on the North Slope, may offer big payoffs, Wright explained.

With oil reserves estimated to range from 497 million to 3.8 billion barrels in the Colville River Delta, Armstrong could produce roughly 120,000 barrels a day.


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