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Analysis: 2013 a pivotal year for oil and gas

Posted: December 27, 2012 - 9:42pm  |  Updated: December 28, 2012 - 9:14am

The year 2013 could be pivotal for Alaska’s oil and gas industry. To breathe new life into the state’s aging, and declining, North Slope oil fields, the Legislature will consider once again a reform of the state’s oil and gas production tax.

Gov. Sean Parnell argues the tax is too high compared with other producing regions and is impeding the industry investment needed to stem a continuing 6-percent annual decline in oil production.

Parnell is expected to introduce a bill making changes when the Legislature convenes in Juneau on Jan. 15.

A critical question for legislators will be whether a tax decrease can somehow be linked to a demonstration of increased production in the large producing fields. This was one of the key issues which caused the failure of the legislation in the 2012 session.

Writing a tax bill that would accomplish this is complicated, however.

There seems wide agreement in the Legislature that new fields outside of the existing producing fields could receive a tax break. However, much of the potential for new oil yet to be developed on the Slope, particularly in the near-term, are prospects within the existing fields where there is infrastructure that is in place.

The potential for large oil discoveries in new fields on the North Slope, outside of the Arctic National Wildlife Refuge, is quite limited.

ANWR is off-limits to exploration unless Congress approves it.

Another key development in 2013, hopefully in the first half of the year, would be the first substantial step by North Slope producing companies and TransCanada Corp., a pipeline company, on a large-diameter natural gas pipeline and liquefied natural gas, or LNG, export project.

That step would be a decision to begin “pre-Front End Engineering and Design” on the giant project, a step that will involve expenditures of several hundred million dollars.

The companies are now in the “concept development” stage, a very preliminary scoping of options. When the pre-FEED decision is made, several important decisions will have been made including a proposed southern terminus for the pipeline and location for the LNG plant.

Valdez and Cook Inlet are the leading contenders for the location of the plant.

A separate gas pipeline project, related indirectly to the bigger pipeline plan, is the state’s proposed project to build a pipeline from Prudhoe Bay to Southcentral Alaska to serve communities and industrial customers in Alaska.

This is being worked on by the Alaska Gasline Development Corp., or AGDC, a state corporation. AGDC has done preliminary engineering and has secured a final environmental impact statement for its initial plan for a 24-inch pipeline, an important step.

The project has now been reconfigured to a 36-inch, lower-pressure pipeline to allow less expensive access by communities along the pipeline route.

However, the state Legislature must pass a bill in 2013 to allow the project to proceed, and more importantly, to set money aside for the project in a special fund. About $200 million was set aside for engineering two years ago but a separate appropriation is needed to allow AGDC to actually tap the fund.

Last year the Legislature failed to approve the change, which has effectively set the project back a year.

A third important development is Shell’s continued exploration, and possible discoveries, of oil in the Chukchi and Beaufort Sea federal offshore areas where the company began exploration wells.

Those wells, one in the Chukchi Sea and one in the Beaufort Sea, were only partially-drilled. They will be completed in 2013, along with other wells Shell plans to drill.

To do the drilling Shell must again mobilize its drill fleet to the Arctic in early July, ice conditions permitting. The vessels are at least closer this year. One of Shell’s two drillships, the Noble Discoverer, is spending the winter moored in Seward. The second, the mobile, conical drill structure Kulluk is at Dutch Harbor.

An assortment of other vessels such as anchor-handling tugs and oil spill response barges will also be on hand.

One hurdle Shell will face in 2013, as it did in 2012, is moving a specialized spill response barge and undersea containment dome to the Arctic. Federal rules require that the system be in the vicinity when exploration wells are being completed.

The containment dome is designed to capture any oil leaking from an undersea blowout with the captured fluids contained and transported to the surface. The barge at the surface has facilities that will separate oil, gas and water from the captured fluids.

Shell suffered delays in finishing work on the barge and securing final inspections in 2012, and the undersea containment dome was damaged during a test in Puget Sound.

The dome is being repaired this winter but will be tested again before the system moves to the Arctic.

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