SB 21 will cost state billions
In 1975, right out of high school, I went to work on the pipeline for a year. I then worked my way through Harvard University in the oil field. After college, I held a number of jobs in Prudhoe from field engineer to maintenance scheduling supervisor field wide for SOHIO. These were the early days when liquor flowed and tongues were loose. We had just built the pipeline and were building out the field.
Prudhoe is an elephant field. Kuparuk, Alpine and all other currently producing fields pale in comparison. Like every field, Prudhoe has a predictable decline curve. Production has been declining since 1987. Gas injection and sea water injection have helped slow the decline, but decline is inevitable.
The oil companies know this. To plan for the inevitable they set aside a 600 million barrel warehouse field on the eastern edge of the main Prudhoe structure. Essentially they warehoused this oil to keep the pipeline full through the main field’s declining years. Think of it as an oilfield IRA. This is “proprietary information.” I am not even sure how I know it. I have just known it for decades. The oil companies know it for sure. I expect the state reservoir people know it. Why we, the owners of the oil, are not allowed to know what is in the ground before making tax policy is a matter for another day. Trust me, it is there.
I have heard an oil field described as a glass of water that you put a straw into. This is wrong. It is many glasses. Sucking on a straw in one glass won’t change the level in the other glasses. Many sub-fields at varying pressures and depths make up the Prudhoe Bay structure. Under a previous tax regime called the Economic Limit Factor, most of the oil leaving Kuparuk and Prudhoe had zero production taxes. The producers used sleight-of-hand accounting to juggle these sub-fields to pay zero taxes on most of the oil.
The best thing Frank Murkowski did as governor was declare all sub-fields within the main Prudhoe structure one unit.
The bipartisan coalition worked really hard last year to come up with some much-needed changes to ACES which was killed in the House. Now the Senate is working on the governor’s bill, SB 21. This bill could have been written in a Houston boardroom. SB 21 allows major tax breaks for new portions of legacy fields. It is specifically written to exempt the 600 million barrel warehouse field that has been known about for 40 years. Trust me again, the majority of “new oil” entering the pipeline in the next decade will come from this single field. It is adjacent infrastructure and will be easy to develop. The oil companies are following the plan of 35 years ago to keep pipeline throughput viable. This governor wants to call it “new oil” and the Republican controlled Senate is ready to play along.
Calling the warehouse field “new oil” will cost the state $10-12 billion at current prices. SB 21 ensures deficit budgets as early as next year. Within a decade our budget reserve will be gone. Within a decade we will be instituting a state income tax.
During that decade everyone in Alaska will take a hit. Education funding will flatten or decline. Capital projects will decline. Revenue sharing will disappear. The Permanent Fund Dividend will disappear as the fund itself is raided to pay for basic services. Every person in the state will feel the pinch of SB 21. To call the warehouse field “new oil” is a farce of epic proportion.
Does anyone really believe that the biggest oil companies in the world did not have an end game play for the biggest oil field in North America? Six hundred million barrels equals 164,000 barrels a day for 10 years. The pipeline will be full enough. During that 10 years they will suck the last drop of light oil out of the main Prudhoe structure. That is their end game. That has been the plan for 35 years.
I cannot prove any of this because we Alaskans, the owners of the oil, do not get to see the well logs, but I am paying with my job to write this piece. Do not give tax breaks to new areas of legacy fields. Time will prove me right and the state will be many billions richer.
Brad Faulkner is a Homer resident. He writes: “My last job in Prudhoe was as a boat captain for Alaska Clean Seas in 2009. In 2010 I was a task force leader of about 25 boats cleaning up the Gulf Spill. Last season I was a spill response boat captain for the Shell effort in the Beaufort.”
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