Brennan: Saudis know what Alaska doesn’t

By Tom Brennan

Saudi Arabia is talking about diversifying its economy. The Saudis have worried for years about being too dependent on oil for most of its revenues.

But now the world’s largest oil producer is getting really worried because oil produced with fracking techniques in the United States and elsewhere is eating away at demand for its own oil.

So if fracking is starting to eat the Saudis lunch, how can Alaska ignore what is happening in the outside world and happily sack the treasuries of its own producer companies and assume everything will be fine.

Some of our “experts” assume the major companies will continue to invest here even though the returns on their Alaska investments – under the ACES tax regime – are often the lowest in the world.

The tax burden varies as the price of crude oil changes, but Alaska’s tax system generally tends to drive investments to competing oil-patch venues.

The companies operating in Alaska are somewhat captive to the huge investment and infrastructure they already have built here over the years. And that will assure that considerable money will be spent here in the future just to keep the expensive system operating and essential volumes of oil moving.

But those volumes are dropping.

North Slope output and oil running through the trans-Alaska pipeline are declining at 6 percent a year, down from 2.1 million barrels a day in 1988 to an average of 548,000 barrels per day last year – and slipping steadily.

The decline could be slowed if oil from new fields is added to the mix, but the best bet for a turnaround is probably investment in increased production from the legacy fields.

The big fields – Prudhoe, Kuparuk and Alpine – are capable of significantly greater volume output. But that would require large investments, which would be impractical if Alaska insists on taking the lion’s share of the profit.

ConocoPhillips and BP are investing in new drilling and indicate more will be spent if tax restraint continues. The problem calls for more wells drilled using trickier and more expensive configurations.

Conoco President Trond-Erik Johansen said he would like to try turning the decline curve around – increasing production — if that is possible.

Turning the curve around may or may not be feasible, but the decline can be slowed significantly with enough new investment. And Alaska holds the key to whether such investments will be feasible or not.

Without slowing the decline, the day will come in the foreseeable future when falling state revenues from the North Slope fields will collide with low oil prices. When that happens (ask Saudi Arabia whether it is worried about falling prices) Alaska’s oil will not generate enough revenue to cover its ever-burgeoning budgets. (That happened briefly last year, though prices – and the state budget – later recovered.)

We are fortunate that the state has more than $15 billion in accessible reserves that can be tapped to keep state spending in the black. After that we can tap the $46 billion in the Alaska Permanent Fund. (Hang onto your checks, folks.)

That may seem like a bundle of cash, but the state budget these days is running about $13 billion a year. Depending on how big the deficit is in revenues, we could eat up $61 billion pretty quick. (How long before your children or grandchildren go to college?)

But the attitude among some Alaska Democrats and those who signed the petition to roll back the ACES oil tax repeal seems to be: “What, Us worry?”

Perhaps we should be talking to Saudi Arabia about diversification of an economy. They seem to know more about it than we do. At least they understand there is a problem.

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