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Vol. 14, No. 11 Week of March 15, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

$15.3 billion for Alaska?

New study projects state revenue, employment from AK offshore oil and gas

Alan Bailey

Petroleum News

Shell has long championed the potential economic benefits to Alaska of oil and gas development on the state’s outer continental shelf, a region that the company sees as strategic to its future Arctic plans.

And a new Shell-commissioned study by Northern Economics and the Institute of Social and Economic Research, University of Alaska Anchorage, has concluded that bringing oil and gas fields into operation in the Beaufort Sea, Chukchi Sea and North Aleutian basin would substantially swell the coffers of state and local government treasuries, as well as stem the decline in Alaska oil and gas production and creating thousands of new jobs.

All development considered

On March 9 when announcing publication of the study report, Shell’s Alaska general manager Pete Slaiby said that the study considered the potential impact of all Alaska OCS oil and gas development, not just that of Shell. However, Slaiby also commented on the scale of Shell’s Alaska program.

“The investment we have already made in designing infrastructure, gathering seismic data, (doing) baseline scientific studies and acquiring the leases themselves make Alaska one of the largest investments in Shell’s global portfolio,” Slaiby said.

However, although Shell expects oil prices to rebound from their current relatively low levels, viable oil and gas development in the remote waters around Alaska will be no slam dunk.

“The development of offshore Alaska is not a foregone conclusion,” Slaiby said.

But Shell is itching to mobilize its drilling team in the Beaufort Sea, despite continuing delays as a result of lawsuits questioning the potential environmental impacts of offshore exploration.

“We are shovel ready,” Slaiby said. “We have been shovel ready for a number of years.”

The economic study that has now been completed only considered the quantitative economic impacts of OCS oil and gas development. It did not consider social and environmental impacts, said Northern Economics Principal Patrick Burden — Slaiby said that Shell is carrying out a separate social impact study.

And, for the purposes of the economic evaluation, the study considered a 50-year timeframe ending in 2057 and with oil prices averaging $65 per barrel.

Base case

Then, as a base case, the analysts tried to forecast what would happen to Alaska in the event that OCS oil and gas development does not take place, taking into account the ensuing shutdown of the trans-Alaska pipeline in perhaps 2046, a date determined by uneconomic pipeline deliveries of declining oil production. Closure of TAPS would necessitate the subsequent use of expensive marine transportation for the shipment of North Slope oil.

The analysts assumed that a North Slope natural gas export pipeline would go into operation in 2020 and that this pipeline would operate at a full capacity of 4.5 billion cubic feet per day through 2057, without the need for any natural gas from the OCS.

“This is something that’s based on a U.S. Geological Survey resource assessment which suggests that there are yet-to-be-found (onshore) gas resources that are sufficient to keep the pipeline full for that entire time period,” Burden said.

The end result of all of this would be a peak in Alaska job growth during gas pipeline construction, with petroleum industry jobs declining thereafter, Burden said. And, although other industries would grow while oil and gas declines, household income and population growth would tend to slow.

And eventual state revenues from natural gas production would be insufficient to replace oil revenues.

“We’ve assumed that new revenue sources will be needed to meet the needs of the population,” Burden said. “This results in a general tax being imposed and using earnings from the permanent fund. The general tax that we’ve modeled here is a (personal) income tax, but it could also be a sales tax.”

MMS scenarios

The analysts then assessed the impact of adding OCS development into the mix, using various U.S. Minerals Management Service environmental impact statement development scenarios, modified as necessary to accommodate the assumed construction of a North Slope gas line and the use of up-to-date technologies. Oil and gas production estimates came from a 2006 MMS assessment of economically recoverable resources, Burden said.

Based on the current MMS lease sale program, the analysis assumed for the 50-year study period the development of seven Beaufort Sea platforms producing a total of 6.3 billion barrels of oil and 7 trillion cubic feet of natural gas; four massive, gravity-based Chukchi Sea platforms, a Chukchi Sea shore base, with oil and gas transportation pipelines across the National Petroleum Reserve-Alaska, delivering 6.2 billion barrels of oil and 7.8 trillion cubic feet of gas; and, in the North Aleutian basin, two offshore platforms coupled with pipelines across the Aleutian Peninsula to export 390 million barrels of oil and 5 trillion cubic feet of gas.

First offshore oil would flow in 2019 from the Beaufort Sea, in 2021 from the Chukchi Sea and in 2022 from the North Aleutian basin. And, on the assumption that factors such as shale gas in the Lower 48 states and gas production from the Gulf of Mexico would depress natural gas prices for several years, the analysts estimated that first gas from the Arctic offshore would not flow to market until 2029 for the Beaufort Sea and until 2036 for the Chukchi Sea.

After a 10-year ramp-up, oil production rates would peak at about 1.5 million barrels per day before entering a multiyear decline, with the peak throughput necessitating an upgrade to the trans-Alaska oil pipeline. OCS gas production would require the capacity of the North Slope gas line to also be expanded.

A generation of jobs

For more than 20 years direct employment from OCS work could exceed 7,000, with average annual employment levels during the complete 50-year timeframe for OCS development and production running at about 6,000.

“Potentially it’s a generation of OCS activity,” Burden said. “It’s a generation of jobs for people in the state.”

Taking into account the in-state spending of people directly employed in OCS work, the resulting indirect employment, including service jobs in transportation, health care and public utilities, would raise peak Alaska employment levels to perhaps an annual average of 35,000. That total employment figure could peak as high as 50,000 around 2038, Burden said.

Many direct jobs would be done offshore and in the boroughs adjacent to the offshore oil and gas fields. However, historic patterns suggest that the majority of people doing these jobs would reside in Anchorage, in the Matanuska-Susitna Borough, on the Kenai Peninsula and in Fairbanks.

“But it represents an opportunity for the residents of those regions (close to the oil and gas fields) to take those jobs if they desire to do so,” Burden said.

And although many of the people engaged in indirect work would likely live and work in the population centers of Southcentral Alaska and Fairbanks, there could be 2,000 indirect jobs in the North Slope Borough, adjacent the Beaufort and Chukchi seas, and 1,000 indirect jobs in the Aleutians East Borough, adjacent the South Aleutian basin.

Because OCS oil and gas fields would be in federal waters, the State of Alaska would miss the production tax and royalty bonanza that the state has enjoyed from onshore and nearshore oil and gas — assuming, that is, that the federal government does not introduce some new arrangement for state revenue sharing for Alaska OCS production.

$5.8 billion

However, local governments would collect property taxes assessed on onshore facilities and, under state tax law, the state would be able to collect corporate income tax from companies with any onshore infrastructure. Estimated local property taxes of $4.5 billion, mostly on the North Slope, added to state property taxes and corporate income tax would result in a total government tax take of $5.8 billion over 50 years.

Then, given the expected drop in state revenues as onshore oil and gas production declines, the analysts think that the state will be forced at some point to raise additional revenues from a new general tax, despite the fact that OCS oil and gas would be coming online. But, since OCS activity would increase the number of employed state residents, the state’s revenue from a general tax would be higher than it would have been in the “no OCS” case.

Moreover, the addition of OCS oil to the throughput of the trans-Alaska pipeline would reduce the unit cost of transporting oil in the pipeline, thus increasing the wellhead value of North Slope oil, encouraging the development of additional onshore oil reserves and extending the life of the pipeline. The increased value and quantity of onshore oil would push up the state’s production tax and royalty take.

“Filling the TAPS pipeline … accounts for about $5.7 billion of indirect benefits,” Burden said.

Adding OCS gas to the North Slope gas line would also drive down the tariff on that pipeline, he said.

Adding up the direct and indirect revenue increases from OCS oil and gas production, and subtracting back out some cost factors such as government services associated with the OCS industry, the total state and local government income could be increased by $15.3 billion over the 50-year study period, if OCS development were to take place, the analysts determined.

And although the data presented in the study report represent just one view of the future, other plausible scenarios also indicate substantial economic benefits from OCS development, Burden said.

“We know right off the bat that the future will not unfold as we have laid it out,” Burden said. “… Different scenarios would have different results, but we think that any reasonable set of assumptions for a reasonable scenario would end up with a similar finding that the OCS provides benefits to the State of Alaska. … Our modeling suggests that the benefits and these revenues that we see are robust through a wide variety of changes in the assumptions.”

The state needs to think through its policies and determine how to capture those benefits, he said.

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Itta: Sounds good, but is it too good?

Mayor Edward Itta, mayor of the North Slope Borough, said March 9 that he likes the sound of the new Shell-commissioned evaluation of the potential economic benefits of oil and gas development on Alaska’s outer continental shelf. But the mayor also questioned whether the report paints too bright a view of a future in which OCS hydrocarbon resources might provide major numbers of jobs and significant new income for the state.

“With state revenues and the national economy in such tough shape, it sounds like music to our ears,” Itta said. “I don’t want to rain on Shell’s parade, but this report paints a picture that is so rosy it’s hard to believe.”

Alaskans, battered by a downward slide in oil revenues and job losses in the oil industry, will welcome any good news about the future. But although the analysts from Northern Economics and the Institute of Social and Economic Research who carried out the study say that they used information from the U.S. Minerals Management Service as a prime source of data, the estimates contained in the study report vary “dramatically” from the MMS data, Itta said.

Need to be realistic

In addition, recent experience of oil price fluctuations suggests that “50-year projections are as much about guesswork as they are about science,” Itta said. It is important to be wary of setting unrealistic expectations about the future, he said.

Itta added that the North Slope Borough does support oil and gas development.

“I will continue to work with the state and the industry on development issues,” Itta said. “In particular, I look forward to working with Shell to make sure that, along with economic benefits, social and cultural impacts are analyzed closely, too.”

—Alan Bailey