BP to spend $1 billion in Alaska’s North Slope

WASHINGTON — BP announced Monday that it will sink $1 billion into revving up crude production from Alaska’s declining North Slope, weeks after the state decided to give the oil industry a $750 million annual tax cut.

The British oil giant plans to add two drilling rigs to its Prudhoe Bay field, bringing the count up to nine, the highest in about six years. New well work and drilling, along with upgrades of existing facilities, could support 200 new jobs, the company said.

Separately, with the agreement of its working interest partners at Prudhoe Bay, including ConocoPhillips and Exxon Mobil Corp., BP will begin evaluating another $3 billion in additional development projects in the field’s west end.

The prospective development could include the construction of drilling pads and expansion of existing ones, possibly facilitating the drilling of more than 110 wells, following two to three years of appraisal and engineering work.

BP also will begin expansions and upgrades aimed at reducing bottlenecks at existing Prudhoe Bay facilities and better using the capacity of gathering centers that separate oil from natural gas and water. As the field has aged, more water is pulled out of the ground along with oil, and the facilities have been adapted to that dynamic. But newer areas generally yield an oilier mix. Handling them more efficiently can mean more production overall.

“There’s a lot more potential out there than when we brought these facilities up several decades ago, so we need some more facility capacity,” BP Alaska’s regional president, Janet Weiss, said in an interview. “It’s really about smartly using technology and the gathering centers’ capacity to fully utilize what’s up there and expand upon that.”

All of the changes seek to reverse the fortunes of Alaska’s North Slope — and the Trans-Alaska Pipeline System that transports the harvested oil to Valdez. Oil production from the North Slope peaked in 1988 at an average 2.02 million barrels per day, most of it from the Prudhoe Bay field that BP operates. It has been dropping ever since.

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“What we’re after here is changing decline … trying to significantly reduce it,” Weiss said. “To do that, we’ve got to have the facility capacity, and we’ve got to have more rigs.”

BP is crediting Alaska’s just-inked tax changes with unleashing the new investment. Weiss said it was key to getting all partners on board in starting to appraise new west end development.

The new plan will tax oil production at a flat 35 percent rate, replacing an approach adopted under former Gov. Sarah Palin that started with a 25 percent base rate that climbed along with the oil prices to above 50 percent. By taking advantage of other incentives, oil companies could end up with a new effective tax rate as low as 14 percent.

Even as companies focus on extracting oil from dense rock formations in North Dakota and West Texas, the Prudhoe Bay Oil Field remains the nation’s largest oil field. Oil companies argued that the tax cuts were essential to support investments in infrastructure, fresh analysis and enhanced oil recovery methods.

BP, ConocoPhillips and Exxon Mobil made the case that Alaska’s tax structure was outmatched by North Dakota and other states when it came to encouraging investment — even though new production is essential to ensure oil keeps flowing through the Trans Alaska Pipeline System and the resulting revenue keeps flowing to state coffers and residents. Alaska residents have for decades collected annual dividend checks from the state’s permanent fund — largely financed by oil dollars — that was $878 per person in 2012.

The tax break “puts us back in the game,” Weiss said. “It puts us on more of a playing field where we’re going to be able to attract capital.”

But many Alaska Democrats opposed the change, calling the tax break a giveaway of the state’s oil resources. And angry residents have already launched repeal campaigns, with hopes to put the issue to a statewide vote next year.

Just days after Alaska Gov. Sean Parnell signed the new tax bill into law, ConocoPhillips announced it would add a new rig to its Kuparuk field on the North Slope.

Critics suggest oil companies are eager to trumpet new North Slope investments as evidence that the tax cut was a good idea, even if the spending was in the works well before the state rewrote its tax code.

“A smart oil company will try to keep the generous tax reductions by saying the new bill is responsible for all of its new investment,” said state Rep. Les Gara, a Democrat from Anchorage, in an Alaska Dispatch opinion piece.

Even without the tax break, Gara said, “ConocoPhillips, Exxon Mobil and BP have every incentive to develop as much oil as possible in a field in which they have invested billions for infrastructure.”

BP’s Weiss acknowledged some of the projects might have gone forward even without the tax cut.

“It’s not that they wouldn’t have gone forward eventually, but this way we can reduce decline faster,” Weiss said.

BP said it expects to increase well work on the North Slope as soon as the fourth quarter of 2013, with the first additional rig expected on-site by 2015. A second would arrive in 2016.