High taxes, expensive exploration, delayed development: man-made obstacles may close trans-Alaska oil pipeline by 2014.

• Author: Bradner, Mike
• Position: OIL & GAS

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Things aren't looking so good in Alaska's oil patch these days, but there are pockets of industry activity, mostly smaller projects by small companies.

State officials and legislators are worried. Oil pays for about 90 percent of the State budget, and without it Alaskans would be faced with steep reductions in public services, ruinous taxes and a likely end to the popular Permanent Fund dividend.

That's according to studies by the University of Alaska Institute of Social and Economic Research, a respected Alaska think-tank.

What's more, one way or another, oil production accounts for about a third of the state's economy, again according to studies by ISER. Given that, all Alaskans have a stake in what happens in the oil patch.

The good news is that companies are still active and State leaders are beginning to recognize the problem and are looking for ways to help. State legislators stepped up to the plate last spring and approved new exploration and drilling incentives, though mainly for Cook Inlet, a smaller producing area in Southcentral. Gov. Scan Parnell signed the bills and said he would push for more incentives for the North Slope next year.

Alaska now has some of the world's most generous incentives for petroleum development. One new incentive for Cook Inlet, for example, would have the State pay $20 million to $25 million cash toward the cost of each of the first three exploration wells drilled with a jack-up rig. This is now attracting serious interest.

WORLD'S HIGHEST TAXES

The not-so-good news is that despite the incentives the State's overall fiscal structure imposes some of the world's highest taxes on oil production, and that's a touchy issue State leaders have yet to grapple with. The combination of high taxes, the high cost of working in remote areas, modest prospects for discoveries at least onshore, and what is said to be one of the nation's toughest regulatory regimes may have created the perfect storm in driving off new industry investment.

A grim scenario, but the news isn't all bad. As beset as it is with financial pressures from the Gulf of Mexico oil spill, BP is pushing ahead with its new Liberty oil project on the Slope. This is an offshore field to be reached by long-distance, extended-reach wells drilled from shore, some as long as eight miles drilled laterally from the surface location of the drill rig.

Another Alaska project for BP this year is a test production program for heavy oil the...