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Another billion barrels - focus on Alaska's oil industry.

After last year's unmerciful beating, employment in what remains of the state's beleaguered oilfield service industry rebounded during the first half of 1993, regaining much of the turf it lost in 1992. But other leading oil indicators, production and crude prices, were running well below expectations moving into the last half of the year.

Representing about 85 percent of state income, North Slope oil production decreased five out of the first six months of the year, largely because of disruptions caused by field and maintenance work and unseasonably warm temperatures that affect gas-operated machinery in the Arctic.

Averaging 1.634 million barrels a day for the first six months of 1993, crude production was about 31,000 barrels a day below official state forecasts for the year and about 100,000 barrels below last year's average daily rate. Additional hits were expected during the third quarter of the year as workers prepared to install GHX-2 gas-handling modules.

A two-season project, GHX-2 ultimately will serve to boost daily output from the supergiant Prudhoe Bay field by roughly 100,000 barrels when fully operational late next year. The first sealift, containing three of the largest modules ever delivered to Alaska, arrived on the North Slope in early August.

While the GHX-2 project at Prudhoe Bay and start-up of the new Point McIntyre field are expected to temporarily stem the production slide, the long-term forecast calls for rapidly falling output after 1995, as Prudhoe Bay, -- which accounts for about three-fourths of Alaska's oil production--slips farther into natural decline.

Price Predicament

More difficult to predict are oil prices, a huge factor that can play havoc with Alaska's oil-dependent state budget, set in advance of royalty and tax collections. A forecast miscue of even $1 per barrel translates to roughly $150 million in income.

As the state moved into its new fiscal year July 1, oil prices were lagging about $2 a barrel behind the amount required to support this year's $2.5-billion operating budget. Chuck Logsdon, the state's chief petroleum economist, says world markets are a little nervous.

"There's a feeling that oil prices are going to go up in the future. At the same time, there's plenty of oil available right now. You've got this tension, so it's created a fairly volatile but weak market," he says.

For one, oil analysts explain, Kuwait's desire to further increase production to pay for war damage, and Iraq's efforts to skirt U.N. sanctions and re-enter the marketplace, has cast a huge cloud of uncertainty over the future of world oil prices.

Meanwhile, the Organization of Petroleum Exporting Countries (OPEC), as usual, is finding it difficult to stay within its own quotas. Moreover, the North Sea is producing at an all-time high, and non-OPEC production is holding even though crude output in the United States is falling.

But Roger Herrera, an Anchorage oil consultant, believes crude prices will rise to about $18 a barrel, because of continuing U.S. and Third World demand, OPEC's inability to meet that rising demand in the long term, and the former Soviet Union's inability to make a significant move into world markets.

Says Herrera, "If you throw Iraq into the picture, then God knows what the end result is going to be. But without them, I can't see the well capability on production increasing significantly for at least three or four years. I don't think the future looks bad as far as the price of oil is concerned. If anything, I think it's going up a little more than what we expect."

Dramatic Improvement

Meanwhile, overall employment in Alaska's oil industry continued to slide during the first half of the year but improved dramatically in oilfield services.

Statistics furnished by the Alaska Department of Labor show less than a 1 percent employment increase in oilfield services compared to the same six-month period in 1992. But that slight gain appears large when compared to the 18 percent job-trashing contractors took last year because of major corporate restructuring to cope with declining production and increasing costs at Prudhoe Bay. Oilfield service jobs averaged 4,715 during the first half of the year, compared to 4,692 for the same period last year.

Neil Fried, a state labor economist, attributes much of the recovery in oilfield services to activities on the North Slope, including the huge GHX-2 project and development and exploration drilling. He adds, "Everybody thought it would be a busy season up there, and I think it'll be relatively busy up there next year."

While oilfield services regained ground, however, employment among6 Alaska's producer companies for the first half of the year fell to 4,233, a hefty 11 percent drop from the same period in 1992. But much of the decrease was attributed to carryovers from layoffs that began late last year.

"The losses on the producer side will moderate somewhat but will be there all year," projects Fried. "Field services probably are going to continue to grow throughout the summer and backfill some of the losses on the producer side."

When combining producer and field service jobs (8,948) for the first half of 1993, overall employment fell about 5 percent from the same period last year. Peak employment of 10,540 came in 1991. Notes Fried, "It's a brighter picture up here, but it certainly isn't sunshine."

Nevertheless, Alaska represents a bright spot among the nation's oil-producing states. With U.S. oil production at a 35-year low, Alaska continues to find new fields and develop old ones, while drilling in the Lower 48 has dropped to its lowest point in decades.

Another Billion Barrels

In the past year, Arco Alaska, the state's most successful and aggressive explorer, has announced major oil discoveries in Cook Inlet and on the North Slope, projects that have breathed new life into exploration on America's last frontier.

"They eptimomize the upside surprise potential that we've talked about for decades now -- that Alaska is a great place and full of oil and so on," says Herrera, a former executive with BP Exploration (Alaska) Inc.

Arco hopes to have a firm schedule next spring for developing its Cook Inlet Sunfish prospect, among the largest U.S. discoveries in decades with 750 million barrels of estimated crude reserves.

"If you can't get excited about that, then shoot, you can't get excited about anything," says Herrera. "I mean it's a major, major field, and it's sitting right on your doorstep. That tells you can afford to be very optimistic about the state because undoubtedly there are going to be more of those around."

Alaska producers also are doing remarkable things to the state's motherlode at Prudhoe Bay, North America's largest and most prolific oil field. BP Exploration, the state's largest producer, now believes the reservoir could yield an additional billion barrels of crude above current official estimates of 12 billion barrels.

Brian Davies, BP's senior vice president in charge of the Prudhoe Bay Unit, attributes much of the potential increase in reserves to a highly successful drilling program and a better understanding of the complicated reservoir.

"This reservoir is probably the most heavily-studied reservoir in the world," says Davies. "I don't believe there is one in the world that has the incredible data banks and use of data to get the maximum out of it."

In fact, adds Davies, the Prudhoe Bay field consists of a number of reservoirs, with some areas of the field yielding a 60 percent recovery rate, and others bringing in as low as 15 percent to 20 percent. He says, "That represents an opportunity for us to really focus our attention on."

At field startup in 1977, North Slope producers estimated oil recovery at 9.6 billion barrels, a level that years later was increased to 12 billion barrels largely because of waterflood and so-called Enhanced Oil Recovery programs and the ongoing GHX gas-handling project.

BP's Davies now believes another 1,000 wells could be drilled at Prudhoe, which would nearly double the present well count and exceed current plans for only several hundred wells over the field's projected lifetime.

Says Davies, "It seems that no matter where we are in the development of Prudhoe Bay, there's always another 250 wells to drill." He explains it's "certainly within the bounds of possibilities" that another billion barrels of oil can be recovered from Prudhoe Bay.

However, Davies emphasizes future development plans hinge on continuing efforts by field operators BP and Arco Alaska to reduce operational costs in the wake of decreasing production at Prudhoe, which entered its natural decline in 1988.

But Davies put to rest last year's hot rumor that BP might turn over its Prudhoe Bay field operatorship to Arco. Since 1977, BP has operated the western half of the field and Arco the eastern portion.

"It was something that we considered," Davies acknowledges. "But the basic reality is that the operatorship at Prudhoe Bay is too important to both BP and Arco for either one to give it up. We believe we can add value by a close involvement as an operator, in order to be comfortable that the right actions are being taken."

However, Davies says that as oil production continues to decline, more employment cutbacks in Alaska can be expected. He adds, "We're hopeful of being able to manage this thing down without the big cataclysmic events that occurred in the past. It's disruptive to morale, disrupting all around."
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Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Sep 1, 1993
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