SB21 is unlikely to boost throughput

In some circles, folks are lamenting the Legislature’s passage of Senate Bill 21, while others say this change will add more oil to the Trans-Alaska Pipeline System.

Department of Natural Resources Commissioner Dan Sullivan and his boss, Gov. Sean Parnell, both stopped by the Frontiersman offices at separate times this session to discuss resource issues and pitch their view that it is the state tax on oil that has fueled the pipeline’s declining throughput.

To us, the most important thing when looking at the pipeline’s historic throughput is the moment when the decline began. You have to go back to 1989 to find the beginning of the throughput decline. If reversing the decline was always as simple as changing our tax code, why didn’t we change the law immediately to reverse the drop?

Our guess is that back then, we saw the decline as a result of passing the peak and heading down the backside of production on the Prudhoe Bay Oil Field. At 213,543 acres, Prudhoe Bay is the largest oil field in all of North America.

Among others, it’s this big daddy that’s been on the decline for the past 24 years. And it’s that super-sized volume of oil we must replace to move past the decline toward increased throughput in the pipe.

But the nature of the present throughput decline was sold to Alaskans as a tax problem, not a production problem. Instead of discussions about exploration, development and production, we were told Big Oil can’t put more oil in the pipe because taxes are too high for it to make money. This is especially hard to swallow while ConocoPhillips is reporting record profits, most of which reportedly came from Alaska.

It would much more simple if all we had to do was change our tax structure and the TAPS tap would flood the state with thick, black crude oil tax dollars. If it is all that simple, though, we should have changed Alaska’s tax code a quarter century ago on the day throughput changed from increasing annually to decreasing annually.

Here’s how we see it: We need to use bigger buckets in order to reach the point where new oil outstrips decline from legacy fields.

For example, with the Prudhoe Bay and Kuparuk River oil fields, we tapped the two largest known oil reservoirs in North America. Prudhoe Bay alone has more than double the recoverable oil in the second largest field, the East Texas oil field. At the peak in 1989, 2 million barrels of oil a day flowed from these fields into TAPS.

So while there is exploration going on in the North Slope — and even new oil entering the pipe — what no tax change can ever generate is that there are more oil fields on this scale to feed the pipe. If not, we will need dozens of smaller finds to reach production and close the throughput gap.

It seems unlikely that a world-class reservoir on the scale of Prudhoe Bay remains to be discovered on the North Slope. What seems certain is that the tax changes approved by the Legislature and backed by the Gov. Parnell will cost generations of Alaskans billions in lost revenue paid to the state, and by extension to individuals through the Alaska Permanent Fund Dividend.