Alaska fiscal woes give oil firms the upper hand

By Robert Campbell - Analysis

ANCHORAGE, Alaska (Reuters) - Alaska is driving a hard bargain with the oil majors that dominate its energy sector but the state is negotiating from a position of weakness as falling oil production will soon begin to bite into its revenue.

Gov. Sarah Palin has raised taxes on oil production and is trying to find a way to build a natural gas pipeline to the rest of the United States without involving the majors in a bid to wrest more control over the industry from the companies.

She has also threatened to cancel oil field leases if the producers do not fall into line with her policies.

The state's bargaining power, however, is hampered by its growing fiscal problems, even with oil at $100 a barrel.

"The state doesn't have a whole lot of leverage on these issues," said Steven Haycox, an Alaska historian at the University of Alaska, Anchorage. "The economy is on a very narrow base and is at the end of a very long economic chain."

Alaska depends heavily on oil revenue to fund its budget. Oil revenue of $5.7 billion accounted for 46 percent of the state's $12.3 billion in revenue in fiscal 2007.

Output from the aging oil fields on the North Slope has been declining since 1988 when Alaska North Slope (ANS) crude oil output peaked at 2 million barrels per day (bpd).

ANS production was 740,000 bpd in 2007 and the Alaska Revenue Department projects ANS production will fall to 680,000 bpd in 2018. The state's forecast, however, is heavily dependent on new investments in oil production capacity since output from wells now in production will be only 373,000 bpd in 2018.

The state's oil companies have a much gloomier view of the state's future output.

"When we talk of (a decline rate of) 7 percent a year, it doesn't sound like much, but it compounds," said Doug Suttles, president of BP Plc's (BP.L) Alaska unit. "At the current decline rate, the (output) rate on the Slope halves every six to seven years."

Output from older fields could fall faster as the oil companies have announced cuts to planned capital spending after the state raised oil taxes earlier this year and only three new oil fields are expected to start in coming years.

The three fields will have a combined peak production capacity of only 85,000 barrels per day (bpd), but this new oil will only mitigate, not counteract, the declines in production at aging giants Prudhoe Bay and Kuparuk.

LACK OF A PLAN

Alaska's budget problems are compounded by rapid growth in spending in recent years and the lack of a solid plan to build the multibillion-dollar gas pipeline needed to help the state secure its fiscal future by making the transition from major oil producer to major gas producer.

Palin is working to cut down the growth in state spending after increases of up to 14 percent in recent years.