Crude oil production from Alaska’s prolific North Slope fields has been steadily declining for 25 years, creating a pipeliner’s challenge of major proportions.

Many of North America’s established plays to the south in Canada and the Lower 48 currently enjoy shale-revolution renaissances with corresponding midstream buildouts. However, there’s no similar trend in the Last Frontier—not yet, anyway. The U.S. Geological Survey says the North Slope’s geology is prospective for unconventional oil and natural gas but development has yet to start. That may change soon.

Prudhoe Bay, Kuparuk and the other North Slope fields have combined to produce a remarkable 16 billion barrels (bbl.) of Alaska North Slope (ANS) crude since commercial production began in 1977—nine years after Prudhoe Bay’s discovery—with the start up of the near-legendary Trans-Alaska Pipeline System (TAPS).

The pipeline and associated terminal at Valdez, Alaska, is one of the most massive midstream operations ever built: a 48-inch, 800-mile link between the prolific fields along the Arctic Ocean coast and the ice-free port. It cost $8 billion to build in 1970s dollars, equal to around $31 billion today, a number that would give any CFO pause.

TAPS throughput notched above 2 million bbl. per day in 1988 but production has been dropping at roughly 5% per year since. Current throughput hovers around 550,000 bbl. per day. Alaska was the biggest oil-producing state in the 1980s but now ranks No. 4.

The drop has created operational headaches for Alyeska Pipeline Service Co., the midstream operator owned by five North Slope producers—BP, ConocoPhillips, ExxonMobil, Koch and Chevron. Reduced flows hamper pipeline efficiency. What to do? Alyeska has taken several steps to keep the oil moving.

For now, it adds extra heat to keep the oil warm and prevent traces of water from freezing in the line during Alaska’s brutal winters. A palm-sized hole in the insulation at Milepost 0 outside Deadhorse, Alaska, permits visitors to reach up and touch the bare pipe filled with 110ºF crude, which feels good on a bare hand when the air plunges below zero.

Also, more frequent pigging keeps the line clear of wax. At some point in the near future, Alyeska expects to reengineer the line for “cold, dry flow” in which virtually all water must be taken out of the crude stream before it enters the line. That might solve the freezing water problem but not the wax problem. Engineers are still looking into that.

Tax time

This declining production conundrum left the state government charged with finding innovative ways to encourage production boosts to help keep state coffers full.

And so, along came state Senate Bill 21 (SB21). In an effort to address declining production, the Alaska legislature passed SB21 this year, which Gov. Sean Parnell signed in May. The legislation contains numerous changes to the state’s oil production tax system. It extends tax breaks and production credits to qualifying producers. It’s expected that SB21 will decrease state oil production tax payments by between $4- and $6.3-billion through 2020. But it should help encourage new activity that will help slow the state’s drop in output.

“Although tight-oil potential is believed to exist in the state, it is not expected that the state will enjoy a shale-production boom as other states have,” Wood Mackenzie Analyst Andrew McConn, who specializes in Alaskan upstream development, tells Midstream Business. “Alaska’s production is mainly sourced from legacy fields, like Prudhoe Bay, that are in the late stages of field life. SB21 is aimed at incentivizing producers to stem that decline.

“We’re doing some analysis on it now, can’t give you any hard numbers, but instincts will tell you the bill is positive and will incentivize more development and production in the North Slope,” he adds.

TAPS now transports a little more than one-quarter of its record flow, and the firm faces considerable investment to efficiently accommodate the lower levels of throughput. The easier, more economical way to solve those problems, says McConn, is to increase production.

“TAPS’ throughput is at unprecedented low levels,” he says. “Every day that production declines, the pipeline is at a new frontier of lowest throughput ever.”

The new legislation, officially the More Alaska Production Act, amends what was in place with the Alaska Clear and Equitable System (ACES). Under this outgoing regime, as oil prices climbed, the Alaskan government would receive a larger chunk of production profits. Of course, this gave producers little incentive to boost production.

The SB21 legislation aims to replace ACES’ progressivity mechanism with a more business-friendly mechanism, McConn says. The base tax rate will remain the same for each incremental barrel, but the effective rate will change when accounting for new tax credits—even as oil prices and profits climb.

Bill battle

“This will encourage producers to develop projects that have been on the shelf but weren’t developed because of the old tax regime,” says McConn. “It was a long, drawnout battle in the Alaska state legislature, but they finally got it passed. Producers generally have a good feeling about it. The general consensus is that it will not move mountains in terms of increasing production, but it will move the needle and probably help stem the decline.”

ConocoPhillips was quick to cheer the bill’s passing. The company said it plans to increase its investments on the North Slope as a result. The company says it will bring an additional rig into Kuparuk and is working with co-owners on funding for a new drill site on the southwest flank of that field.

As well, ConocoPhillips is entering the regulatory and permitting phase and moving forward with engineering for the Greater Moose’s Tooth Unit in the National Petroleum Reserve-Alaska, the sprawling, 22.8 million-acre reserve— nearly as big as the state of Indiana—to the west of current producing fields. It is administered by the federal Bureau of Land Management.

“These are some examples of the activities ConocoPhillips plans to kick off in the near future to help bring new investments and produce more oil from legacy and satellite fields,” Trond-Erik Johansen, president of ConocoPhillips Alaska, said in a public statement. “ConocoPhillips is here for the long-term. The new oil tax bill makes the North Slope a more attractive business environment and should lead to more investment in oil-producing projects than we have seen in recent years.”

North Slope partner BP plc was not far behind, announcing shortly after the governor signed the new law that it will invest in a $1-billion expansion of its NorthSlope operations, including two additional rigs and a debottlenecking of existing production facilities.

“With this new tax law, the Alaska legislature and Gov. Parnell have taken an important step toward improving Alaska’s long-term economic future,” said Janet Weiss, BP Alaska region president, in announcing the plan, adding the expansion indicates “that BP is committed to being a part of that future and to continuing to extend the life of North America’s largest oil field.”

In addition, BP said it will start an assessment of new development projects on the west end of the Great Prudhoe Bay production area. That work could extend for 10 years.

For its part, ExxonMobil announced plans to build a 12- inch, 22-mile, $253-million pipeline serving its Point Thomson natural gas and condensate field, 60 miles east of Prudhoe Bay. Capacity will be 70,000 bbl. per day with initial production of 10,000 bbl. per day scheduled to start in May 2016. The pipeline will run along the coast and transport Point Thomson’s gas condensate production to the producing Badami unit. Once there, the liquids will be transported through the Badami pipeline to TAPS.

Analysts quickly noted the change in producer mood after the bill became law. “Increased producer investment could be a sign of slowing Alaska’s crude production decline,” Tudor, Pickering, Holt & Co. observed in a report, noting the North Slope’s 74% cumulative decline in production from the 1988 peak. The tax change is “positive for producers but policy has not historically been stable,” the report added.

The opposition

Not everyone is pleased with the bill, however. Some feel it gives the major oil companies an unfair advantage and an uneven North Slope playing field. They also note that there’s no guarantee that SB21 will boost oil production.

Greg Vigil, president of Savant Alaska LLC, is among the smaller independent companies opposed to the legislation. “(It) will negatively impact Savant’s ability to maintain or grow existing production, both in the Badami Unit and on its leasehold outside of the Badami Unit,” he said in a public statement.

Alaska’s oil and gas world is dominated by the three North Slope majors: Conoco Phillips, Exxon Mobil and BP. While they’re no doubt pleased with the changes, the smaller and independent companies had hoped for more from SB21. For example, they were hoping the state’s current small producer credit would be extended beyond 2016. As things stand, it will not be. This disappointment has inspired the smaller independents to push for alternative legislation that would be of greater benefit to them.

They’re lobbying for the creation of the 77-7 Plan, which supporters say would give equal incentives to the majors and independents. Such legislation would keep a fixed state royalty in place while giving a seven-year tax exemption for new production outside participating areas. Existing participating areas would continue to pay the current ACES tax. As well, companies who find and produce new oil would receive credit under the proposed plan.

“It’s possible that smaller companies could get a better deal in the future, but it’s fair to say they did not get as much as they wanted from SB21,” says McConn. “There’s a reason for that. If the main objective of the bill was to stem the production decline, you have to incentivize the producers who operate fields with large resources and have the infrastructure in place to quickly bring new production onstream.”

Though SB21 might seem like a done deal, uncertainty lingers. It’s possible the bill could be repealed by a referendum next year. A petition is currently circulating to do just that. If enough signatures are gathered, a referendum to repeal the legislation would appear on the ballot for the next statewide election in August 2014. This would be a serious setback to the state’s legislature, which worked tirelessly on passing the bill.

“If everything goes forward as planned, you can expect a ramp-up in activity,” McConn says. “I expect major players to get more certainty on what to expect over the next couple of years before announcing plans for new, large projects or making huge investments.”

Paul Hart, editor, contributed to this story.

What About The Gas?

By Paul Hart, Editor

All the talk about the North Slope’s declining crude oil production— and what to do about it—obscures a lingering operational and economic challenge: What about North Slope natural gas?

The potential answers create all sorts of midstream scenarios. North Slope conventional proved gas reserves have been estimated at 35 trillion cubic feet (Tcf) with more than 200 Tcf of undiscovered, technically recoverable resources. The geology for unconventional, shale-based plays looks favorable, too.

Prudhoe Bay and other fields in the region flow a lot of associated gas, a product for which there has been no market since the fields went on production 36 years ago. Producers have added impressive gas-injection operations that help boost oil output and avoid flaring.

But at some point that gas must be produced to keep the oil flowing.

Meanwhile, worldwide demand for liquefied natural gas (LNG) expands. The go-ahead for some sort of gas gathering, processing, transmission line and associated liquefaction plant would surpass even the mega-scale Trans-Alaska Pipeline System built 40 years ago. Estimated cost to build such a system goes well north of $60 billion. But annual revenues could reach $20 billion per year, so it might just work.

Last year, Alaska Gov. Sean Parnell brought together competing plans for a system to help meet Asia’s LNG appetite. That joint proposal, called the Alaska South Central LNG Project, is for a 42-inch, 800-mile pipeline with eight compressor stations that would roughly parallel the existing crude pipeline and move around 3 billion cubic feet per day of gas. Partners include ExxonMobil, BP and ConocoPhillips—the major North Slope producers—along with TransCanada Pipelines.

The state announced plans for a fast-track review of the proposal in early 2013, allocating $500,000 for studies during the state’s fiscal year ended June 30, with an additional $300,000 for studies during fiscal 2014, which began July 1, according to the Anchorage Daily News. The partner firms announced summer field work under way on a pre-front end engineering design program.

But given 40 years of discussions and proposals, the term “fast track” may be relative.

If the plan goes the way of multiple earlier suggestions—in a filing cabinet and forgotten—separate plans are under way for a 600-mile, intrastate gas pipeline that would roughly parallel the Dalton Highway and the Alaska Railroad. LNG and export plans would be dropped. The market would be comparatively small but vital, given Alaskans’ need for cold-weather heating.

Gov. Parnell last spring signed legislation authorizing this Alaska Stand Alone Project (ASAP) if the larger export plan falls through. ASAP would link the North Slope fields with consumers in Fairbanks, Anchorage, and multiple, smaller settlements in Alaska’s interior. The South Central proposal calls for five take-off points to supply in-state markets.