Short-term fix masks long-term perils.

Author:Tyson, Ray
Position:Oil industry outlook

Once again, Alaska is riding high on oil. North Slope production is at levels never thought possible; cash is pouring into the state treasury; and a new governor with established ties to industry is in power. So why is there so much restlessness in the air? Could it be that oil-dependent Alaska is setting itself up for another big fall in the new decade?

"Yes, it's developing a sense of false security, putting off the inevitable facing of reality once again. But that reality is there staring us in the face," says Roger Herrera, executive consultant to Julian Darley, president of BP Exploration (Alaska).

As Herrera and other oil company executives keep pointing out, no matter how much cash the oil industry pumps into exploration and development - an estimated $15 billion to $20 billion in the 1990s - Prudhoe Bay eventually will fall into a radical decline, and there's nothing on the horizon to replace Alaska's motherlode by the turn of the century.

Even if the biggest plum of them all, the Arctic National Wildlife Refuge, were opened to exploration, it's doubtful any major discovery could be brought into production by the year 2000. By then, North Slope oil production will have plummeted by half, as will the state royalty and tax revenues that drive Alaska's economy.

"What we can do about it, given the long lead times inherent in any development in Alaska, is problematic," Herrera explains. "We (the state) should have done something about it 10 years ago and didn't."

In the meantime, North Slope operators are pumping oil at near-record levels extracting more than 2 million barrels a day for U.S. markets. After the super-giant Prudhoe Bay field peaked in 1988, who would have dreamed Alaska oil production would ever again reach levels attained during Alaska's heyday?

Certainly, higher oil prices spurred by the Persian Gulf crisis have encouraged profit taking, although companies are reluctant to attribute higher production levels solely to a profit motive. They point out that plans to increase production were laid long before Saddam Hussein's army marched into Kuwait.

Central to that plan was the $500 million GHX-L gas-handling project, which has served to boost production at Prudhoe Bay by about 100,000 barrels a day. Well stimulation and remedial work at the Prudhoe and Kuparuk fields also have helped to increase daily production by several hundred thousand barrels.

"We haven't resolved the long-term problem of replacing Prudhoe Bay reserves," says Chuck Logsdon, the state's chief petroleum economist.

But a combination of higher oil prices today and investments made in the past are all sort of kicking in right now, so we have the best of both worlds."

Since oil prices began escalating in early August, the windfall for both industry and the state of Alaska has been enormous. In its fall forecast, the Alaska Department of Revenue estimates that depending on the outcome of the Gulf crisis, state oil income during the current fiscal year that ends June 30 could range from $2.78 billion to $4.98 billion, representing a $660.5 million to $2.86 billion gain over fiscal year 1990. About 85 percent of state revenues derives from royalties and taxes on oil.

But neither oil companies nor the state expects the surge in oil prices and production to continue beyond six months to two years. At some point, oil prices will fall and Prudhoe Bay will again lapse into decline, even with installation of the $1.3 billion GHX-2...

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