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Protestors in petroleum-based kayaks may be dominating headlines in Seattle, but Royal Dutch Shell’s (ticker: RDS.B) state of the art rig may help revitalize a prominent part of the U.S. energy sector that has been in decline for more than 20 years.

Since 1991, Alaska’s crude production has slipped to 500 MBOPD from 1,800 MBOPD. The slide is expected to continue through 2040, compounded by the tough economics of the area that include a challenging environment and lack of infrastructure. Alaska’s decline may experience a bit of a respite if Shells’ exploration efforts turn out to be successful, which would be a welcome development for the state’s economy.


Oil and Alaska’s Economy

It’s worth noting that Alaska will not receive any revenue from Shell’s offshore operations. The land is owned by the Federal government, but Alaska lawmakers are currently attempting to restructure the fiscal layout to share revenue with the federal government. Any success in the area would certainly not hurt future prospects for exploration in America’s northernmost state. In its year-end 2014 conference call, Shell management expressed optimism at future operations in Alaska but said it would do so “only under the right conditions.”

Alaska relies very heavily on its oil output. Approximately 88% of its general fund is sourced from oil production and its prices, and both have negatively affected the budget as of late. In December, the state forecasted a revenue deficit of $3.5 billion from 2015. That’s 150% more than the original forecast, which considered oil prices at $105/barrel.

The unrestricted general fund revenue is expected to reach $2.6 billion this year, down from $5.4 billion in 2014, reports Fox Business. That, combined with about $200 million in anticipated supplemental budget items like oil and gas credits, accounts for the predicted $3.5 billion deficit, said Jerry Burnett, a deputy revenue commissioner.

Alaska Permanent Fund

Changes Must be Made

Industry interest and activity in Alaska has declined due to taxes and permitting delays, and Governor Bill Walker knows adjustments must be made to reverse the downward trend. “When I look at other states such as North Dakota, New Mexico, Texas, Wyoming, and I look at their permitting processes and how long it takes to get a permit to explore for oil, it’s rather shocking how quickly they can [issue drilling permits] versus how long it takes us,” Walker said to Oil & Gas 360® in an exclusive interview. He mentioned Wyoming is roughly the same size of the North Slope, and it has drilled more than 30 times the amount of wells as Alaska.

Walker added: “Much of our land–62% of our land–is federal land in Alaska, and the permitting process is multiple years. Whereas in other locales, it’s a matter of weeks and in some cases days for permits to be issued… . We just need to make sure that we provide the appropriate infrastructure to assist [development opportunities], so that the next wave of companies coming into Alaska–they are coming in–the independents–so it shortens the time between their acquisition of leases and being able to drill. It also brings their costs more in line with the opportunity.”

The opportunity is there, but at what cost?

The resources certainly appear to be in place. According to estimates from the EIA, the North Slope Offshore holds 23.8 billion BOE of unproved technically recoverable resources, which is comparable to the Bakken Shale and more than twice the amount of the Eagle Ford Shale.

Alaska has approximately 3.3 billion barrels of proved crude oil reserves, representing 10.9% of U.S. total reserves, according to 2012 estimates from the Energy Information Administration (EIA). The state also has 9,579 billion cubic feet of dry natural gas reserves, which is approximately 3.1% of total U.S. reserves.

Alaska’s North Slope contains more than a dozen of the 100 largest oil fields in the U.S. and several of the 100 largest natural gas fields, reports the EIA. Alaska is the second leading natural gas producer in the U.S., but most of Alaska’s production is not brought to market. Almost 75% of Alaska’s natural gas withdrawals are consumed at the production site as the gas is re-injected into existing oil fields to provide pressure to maintain oil production rates.


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