Rig cut back could accelerate long-running production decline

The news just keeps getting worse for the ailing Alaska economy with BP officially announcing on Monday a plan to idle three oil productions rigs on the North Slope.

The cut backs, which required the agreement of BP operating partners Exxon-Mobil and ConocoPhillips, are expected to eliminate 200 jobs in the oil patch and further reduce the flow of crude in an Alaska oil pipeline already down to about one-third capacity.

BP spokeswoman Dawn Patience said the plan is to try to hold crude productions losses to a minimum with the two rigs left operating in the field.

Prudhoe Bay, a super-giant find that sparked the Alaska oil boom, produced an average 281,000 barrels per day last year, Patience said. That’s down from more than 1.5 million barrels per day in the early 1990s.

An aging oil field with corrosion problems, Prudhoe has become increasingly costly to operate as production has fallen.

Some sort of move to reduce operating costs there has been expected by many since BP reported a $6.5 billion loss in February with global oil prices in the tank. The Times of England called the loss the biggest by the London-based company in 20 years. Losses in Alaska have been pegged at near $200 million.

News of rig shutdowns and a possible production decline from Prudhoe comes at a bad time for the state, which is facing a $3.5 billion deficit in a budget built almost wholly on  revenues from oil taxes and royalties. Oil has historically funded about 90 percent of the cost of state government.

Threatened by the revenue shortfall, state officials have this year been tinkering with possible modification to the Alaska tax code to try to increase oil revenues in times of low oil prices.

The Alaska Oil and Gas Association on Tuesday warned that would be a bad idea.

“The news that Prudhoe Bay is shutting down rigs is more evidence of how dire the situation is for the oil and gas industry in Alaska,” AOGA CEO Kara Moriarty said in a prepared statement. “These stubbornly low oil prices are creating extreme financial stress at a time when companies are cash flow negative.  Less rigs means fewer Alaskans working, causing our economy to shrink.”

Economists estimate up to a third of jobs in Alaska are in some way linked to the oil and gas industry. Earlier layoffs by BP and ConocoPhillips have sent ripples through the economy from Ketchikan at the southern tip of the Panhandle to Barrow on the edge of the Arctic Ocean.

“The hard truth is (that) oil is not the answer to the state’s budget shortfall and raising taxes on an industry that is already bleeding cash will only make a bad situation worse,” Moriarity said.

Ken Alper, the director of the state Tax Division, last month briefed the House Resources Committee on a 5 percent minimum tax plan that would see the state increase its revenue by taking all the profit on oil sold for less than $50 barrel.

“This bill is called HB 247 because you are hellbent 24/7 to run every last company off the (North Slope),” Bill Armstrong, president of Armstrong Oil & Gas told the committee after seeing the proposal.

Any talk of new taxes has the state oil industry already on edge with U.S. crude at $36.50 a barrel and again falling. A rebound in oil prices any time soon does not look likely.

“The market was also buffeted with a series of headlines Tuesday reinforcing the notion that a recovery remains far off,” The Wall Street Journal reported.

Long the envy of other states because of oil riches that have not only funded government but allowed Alaska to give its citizens an annual handout — the Permanent Fund Dividend — as large as $2,072, the state now faces tough times.

But they are not dire. Between the Permanent Fund and others accounts, Alaska is sitting on about $65 billion in savings. It could live off its savings for years, or use earnings from its savings account to set up some sort of trust fund to pay for government.

Both the governor and the Legislature have offered ideas for such a fund, but it faces opposition from some Alaskans who fear it could force the loss of their annual dividends.

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