December 09, 2004 --- Vol. 10, No. 112December 2004

State of Alaska, AOGA differ on $60 billion investment estimate

Dan Dickinson, director of the Alaska Department of Revenue’s Tax Division, said Dec. 9 that the state can’t see how the Alaska Oil and Gas Association came up with a $60 billion number to keep North Slope production flat over 10 years. (See story in the Dec. 5 edition of Petroleum News.)

AOGA put out the $60 billion figure, he said, and the state had a hard time figuring out what it means. The association talked about maintaining production at a million barrels a day for 10 years, he said, which would be some 365 million barrels a year, which “averages out to an investment of about $16.44 required for each barrel — and that of course includes the barrels that are coming out of Prudhoe Bay tomorrow, and those clearly don’t require a $16.44 investment.”

The state does agree, he said, that new investment is needed.

But how much?

Dickinson said there is a new Wood Mackenzie study just out and the state’s understanding is that the study estimates investment costs at $10 a barrel. He said the division believes the cost to produce its forecast over the next 10 years will be about $20 billion “and we think that about a $14 billion capital investment is required. We put those two together, we come up with about $34 billion, instead of $60 (billion).”

The state’s forecast isn’t as high as a million barrels a day out into the future, Dickinson said, so what if you add the barrels to make it 1 million barrels a day for the next 10 years — even at AOGA’s $16.44 a barrel that adds about $5 billion. But it’s still only $40 billion.

When asked about the conflicting $34 billion and $60 billion numbers, Judy Brady, AOGA’s executive director, laughed and said “ well, when the state needs to attract new investment at these levels it is going to be more useful to work together to figure out how to attract that investment rather than worrying about which forecast is right. If either one is close to right Alaska will need to be strongly competitive with all the other oil and gas provinces worldwide. We believe our forecast is pretty close to the mark -- and that’s what it is, a forecast. We relied on figures in DOR’s presentation to the Legislature last year. Start with DOR’s projections showing that the North Slope needs 2.3 billion barrels of production from new fields and heavy oil plus 1.8 billion barrels from declining fields over the next 10 years – just to keep production flat at one million barrels a day. We estimated that the average cost of a barrel of oil would be $15.00, using the 2002 Wood Mackenzie Alaska cost of $12.82 per barrel with an additional cost factor for the oil from new fields and heavy oil.”

Brady noted that “production costs from the mature fields like Prudhoe and Kuparuk are increasing as well.

“When you multiple 4 billion by $15, the total is $60 billion. As to the Wood Mackenzie 2004 study, we also understand they used closer to a $10 per barrel price, apparently by not adding in the tanker costs. They also apparently included gas fields from Cook Inlet,” she said.

AOGA is reviewing the report now. “It would be wonderful if the cost for the 4 billion new barrels we need really was only $10 per barrel to produce. Unfortunately that just doesn’t pencil out in the real world of Alaska’s North Slope,” Brady said.

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