Flatline: oil prices are up, but operating and capital costs are too, making production increases less likely this year.

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

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There are substantial undiscovered and undeveloped oil and gas resources in northern Alaska and crude oil prices are at record highs, but North Slope producing companies are not in a rush to take on new projects. They are increasingly concerned about thinning margins and the effects of a new tax law enacted by the state of Alaska last November.

One problem producers BP, ConocoPhillips and ExxonMobil face is that operating and capital costs are climbing as fast or faster than crude oil prices. Alaska rig costs and other expenses have increased at levels far above U.S. and world averages.

Secondly, production is falling faster than producers had estimated despite increased investment. The state Department of Revenue estimates that production will drop 6 percent next year, but some producing companies say it will be more.

That is worrisome because it means revenues from fewer barrels of production must be spread across fixed costs of aging production infrastructure, which also raises per-barrel costs.

Finally, the infrastructure itself, the networks of wells, pipelines and processing facilities, some of it more than 30 years old, now requires increased maintenance and downtime for repairs and upkeep.

What this translates into is that despite record oil prices, producers' returns on new projects in Alaska often isn't that great, Brian Wenzel, a senior ConocoPhillips manager, told state legislators in a briefing last year.

Moreover, a current major uncertainty was caused by a new state tax law last November approximately doubling the Slope producers' state production-tax bill. State Department of Revenue economists acknowledge that the state's tax rate on new projects, what economists call the marginal investment, is 75 percent of net profits. Producing companies say it is higher on some projects, more than 80 percent.

In addition, there are questions about whether a planned gas pipeline, which will commercialize huge gas reserves on the Slope, can be built given rising costs and terms the state government is pressing on potential pipeline builders.

Gov. Sarah Palin and state legislators pushed through the tax change late last fall mainly because they saw record oil prices and company profits. For the North Slope operators, however, the tax increase couldn't have come at a worst time, given rising costs and production decline.

The changes were revisions to the state Petroleum Profits Tax, a net-revenues state production tax. The state's take of net revenues was increased from 22.5 percent to as much as 75 percent or more on new projects in some of the large producing fields.

What concerns the industry is that while the broad...