Nonconventional oil production: the North Slope's cost-prohibitive treasure.

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

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If the impasse on oil taxes in the 2012 state legislative session had any positives, it is the recognition by lawmakers that much of the large, known oil resource of the North Slope is technically challenged, difficult to produce and not economically viable under the state's current oil tax system.

There is a great deal of potential for new oil on the slope but much of it is unconventional oil, like heavy oil. Meanwhile, the large conventional "light" oil fields of the slope, like the giant Prudhoe Bay and Kuparuk River fields, are declining in production. Not enough new conventional oil is being discovered to replace this and the pace of research and development on unconventional oil is not proceeding quickly enough.

Gov. Sean Parnell and one group of legislators, mainly in the state House, believe the state oil tax should be adjusted to encourage more new oil development. A group of state senators has disagreed with this. Thus, the Legislature has been deadlocked for two years.

However, the extensive discussions in Juneau last spring have at least resulted in a consensus around certain key points, and one is that the state tax should create incentives for nonconventional oil. At the end of the 2012 state legislative session that adjourned in mid-April and a two-week special session that followed it the state Senate wrestled with a bill that would grant special tax reductions for "new" oil, including unconventional. However, in the end there was a lack of agreement on just how to do it, and the initiative failed. The effort will start again in 2013, but a positive note is that the legislators' information level is now higher and there is consensus that something should be done, particularly for unconventional oil and gas.

Unconventional Oil and Gas

What are the unconventional oil and gas resources, and how difficult will they be to extract? There are indeed a lot of resources in the ground--tens of billions of barrels--and when it comes to unconventional gas, the estimates are even greater. However, the key question is how much of this can be technically produced, much less economically produced. Those answers aren't known, and the amount of the state tax is important in relation to whether the oil can be economically produced.

On the North Slope, when unconventional oil is mentioned, heavy oil is what first comes to mind. There is actually no standard industry understanding on what constitutes "heavy" oil, but the general view is that true heavy oil is that which has an American Petroleum Institute gravity of 15 degrees or less. On the North...