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Through a portal; the grounding of the tanker Exxon Valdez ushered in a new era for Alaska's oil industry.

THE EXXON VALDEZ OIL spill did more than just raise a nation's environmental conscience; it catapulted Alaska's petroleum industry into a new and troubling era. In the wake of the tanker grounding lies uncertainty for the oil companies that both invested fortunes in and reaped fortunes from North America's largest and most productive oil fields. During the new era, increasing governmental restrictions and regulations on exploration, development and transportation will make it difficult for the industry to function and, therefore, the state to replenish its oil-dependent bank account. The state's economic future does not look secure in the wake of the Exxon Valdez tanker spill; nor do the country's future energy needs. With the supergiant Prudhoe Bay oil field now in decline - and nothing in the cards to replace it---oil executives see state income eroding and the country's domestic oil supply dwindling, forcing the United States to become even more reliant on imports. They also perceive a state government that, for some unexplained reason, is bent on running them out of town and an unsympathetic public that doesn't understand their business.

BP Exploration's Roger Herrera, who as a young man in the early 1960s walked the remote North Slope tundra collecting geological data that helped pinpoint the supergiant Prudhoe Bay field, puts it this way: "It is easy to come to the conclusion that this (spill) is a benchmark event that probably will have a profound impact on Alaska in the next decade. It also is easy to conclude similar impacts on the nation as a whole. The public does not distinguish one accident from another. To the general public, it is all the same."

Arco Alaska President Bill Wade adds, "The thing I worry about is where the future is going to end up. I don't see signs that people are trying to understand industry's problems. I am concerned about all the emotions over the spill. It is carrying the day, rather than people taking a logical, long-term view.?

Public outcry over the 10.8-million gallon oil spill on March 24 was deafening in the months following the tanker grounding, as news reporters across the country descended on Valdez to tell the world about the worst such accident in U.S. history.

In a matter of weeks, Alaska's oil industry began to feel the political effects of the public's outrage. In less than six months, industry's traditionally reclusive world was turned inside out and exposed to a suspicious public that never before really cared about how an oil company operated.

Ironically, many of the events that

affected the oil industry in the wake of

the spill had little or no direct relation to

the transportation end of the oil business,

the side that caused the ecological

disaster. Industry's casualty list, however,

mounted quickly.

Higher Taxes. The most notable

event was the Alaska Legislature's revision

of the long-debated Economic

Limit Factor, a tax measure that was

given little chance of passing before the

spill. The new ELF boosted the severance

tax on the most lucrative North

Slope oil reserves at Prudhoe Bay and

Kuparuk River, while lowering them on

smaller and less productive fields.

The legislature said the new ELF

would assure a fair return to the state - an estimated $2 billion over 10 years

- and encourage development of marginally

profitable fields. But industry,

which took the action as punishment for

the spill and a money-grab by the state,

quickly responded.

In early June, the state's largest oil

producer, BP, suspended its $80 million

Hurl State project at Prudhoe Bay, saying

it needed the money to pay its ELF

bill. Designed to extract an additional

37 million barrels of crude from the

western fringe of Prudhoe, Hurl State

would have generated about $120 million

in taxes and royalties for the state

over 10 years. Also lost were about 100

construction jobs and $6 million worth

of mini-module construction in Fairbanks,

a community hit hard by Alaska's

economic recession.

Arco Alaska, the state's other major

producer, followed BP with its own

headliner: The company dropped its

$58 million drilling and production test

program at its huge West Sak oil reserve.

It also deferred plans to lease an

additional drilling rig for development

work at the producing Kuparuk field

located below the untapped West Sak


Arco had planned to comingle West

Sak and Kuparuk oil using the Kuparuk

facilities, saying it was unprofitable to

produce the cold, gooey West Sak oil

separately. The ELF was designed to

reduce the tax burden on fields such as

West Sak. But in comingling oils from

the two fields, production would be

taxed at the higher tax rate applied to


The state claimed West Sak oil could

be metered separately, but Arco said

that also was too expensive. Arco's

Wade said West Sak had the potential of

creating thousands of jobs, requiring

billions of dollars to develop.

Six North Slope oil companies took

the state to court in late July to challenge

the effective date of the ELF

legislation. At stake is $90 million in

severance taxes covering the period

from January through August. Arco,

Exxon, BP, Marathon, Phillips and Unocal say the ELF had to be approved by a two-thirds vote of the legislature to make it retroactive to jan. 1. The ELF passed the Senate by just two votes, so the companies claim that legally the effective date should be August 6, 90 days after passage. In addition to the ELF, the governor signed into law legislation establishing a 5-cent-a-barrel tax to be placed in a special oil spill contingency fund and a $50-a-barrel fine on future oil spills. Two other tax-related issues raised by the state following the spill also irked industry, perhaps more for their untimely arrival on the scene than their prospects for becoming law. In June, state transportation officials, responding to budget cuts, suggested levying a $700-per-trip toll on truckers using the James Dalton Highway, unless oil companies paid $6.8 million a year to maintain the gravel road to Prudhoe Bay. Industry already had paid for the highway, as a service road during construction of the pipeline. The governor ultimately withdrew the proposal, saying oil companies had been taxed enough.

A few weeks later, the governor's revenue commissioner proposed changes to the state's oil and gas property tax laws, a measure that would double the $95 million the state collected from the oil industry last year. Malone said the tax was needed to protect state revenues and the financial viability of communities through which the pipeline passes. Industry said the tax would send another bad message about doing business in Alaska. Lease Sales Held. In the aftermath of the Exxon Valdez oil spill, Alaska's oil and gas industry also was jarred by sudden cancellations of federal and state competitive oil and gas lease sales planned over the next two years.

By far, the biggest hit in this arena came on june 8 when the state Division of Oil and Gas announced it was suspending its entire oil and gas leasing program for at least a year. Affected were five sales totaling 2.3 million acres and a program that has generated an estimated $1.8 billion in earnings for the state since 1959.

Lease sales are considered the lifeblood of the petroleum industry. They offer new territory for exploration and an opportunity to replenish depleted oil reserves.

The state oil and gas division blamed the legislature for not providing enough money for staff to handle the division's increasing work load, some of it due to the oil spill. One lawmaker said it was up to the division to set its own priorities within the legislature's new, austere spending policy. The legislature ended up adopting a bigger budget than the previous year.

On the federal front, the U. S. Interior Department in mid-May postponed an offshore oil and gas lease sale planned for the Gulf of Alaska next year. Interior Secretary Manuel Lujan said scientists needed time to assess the long-term damage caused by the Exxon Vaidez oil spill. Oil exploration in other federal lease areas off Alaska's coast also came under fire.

Gov. Steve Cowper lobbied Congress to impose a one-year moratorium on drilling in Bristol Bay, believing oil companies needed more time to prove their ability to handle a spill in the bay, home to the world's largest salmon fishery. Chevron USA dropped preliminary plans to drill on its Bristol Bay leases, and the company said the additional pressures on Chevron could force closure of its exploration and land office in Alaska.

"We don't have any plans to leave Alaska, and we have a positive attitude about being here," says Tom Cook, Chevron's Alaska exploration representative. "But we have to have access to lands to explore. We have a very strong interest in Bristol Bay."

Cowper also asked the federal government to postpone exploratory drilling in the Chukchi Sea, just as Shell Western E&P prepared to head to its Klondike prospect off northwestern Alaska. Interior Secretary Lujan rejected Cowper's request, saying Shell was capable of handling any oil spill from its drilling activities. Tougher Transport Rules. While the exploration and development end of the oil and gas industry has its long range problems, Alyeska Pipeline Service Co. and the shippers who transport North Slope crude to refineries on the West and Gulf Coasts faced an immediate mountain of governmental restrictions in the aftermath of the spill.

Alyeska was temporarily forced to curtail oil flow in the 800-mile pipeline by 60 percent because of federal restrictions on tanker movements in Valdez Harbor. The slowdown in production on the North Slope removed 13 million barrels of crude from the market, forcing a 10-20 cent a gallon hike in gasoline prices in the Lower 48.

The governor even threatened to shut down the line entirely unless Alyeska could demonstrate it could handle a major spill. Under state orders, Alyeska quickly assembled a "swat team" to guard against another catastrophe. The oil-spill contingency plan Alyeska finally submitted to the state will cost about $45 million a year to maintain.

By mid-June, congressmen in the nation's capital had introduced 12 bills dealing with oil spill matters, and the volume of proposed federal regulations addressing everything from safety inspections to marine navigational devices began to swell.

The oil industry must deal with at least 140 lawsuits filed in the aftermath of the spill. For example, the state and a coalition of environmental groups are seeking damages that could run into the billions of dollars. It likely will take years to settle the legal issues, adding to the mounting costs associated with the spill. By some estimations, Exxon already has spent about a billion dollars on the spill.

Jim Eason, director of the state oil and gas division, says mounting state and federal regulations will drive up industry's cost of doing business, a cost that ultimately will be passed on to the state as well as the consumer. Under state law, for example, oil companies can deduct "legitimate" operational costs from their state royalty payments.

"The state is going to share some of the cost as the royalty owner," Eason says. "When the operating costs go up, the tariffs are recalculated. But this will affect the lives of everyone: producers, consumers, suppliers, shippers. The feds are considering some big-ticket bills that are going to increase the cost of (oil) production and, at a time when we're having declining domestic production, those are not going to help."

Eason also says industry's exploration and investment plans will be affected by governmental intervention. "If their cost of getting oil to market is higher, it means they're going to have to find larger fields or somehow reduce costs elsewhere." ANWR Shelved. Of the events affecting industry since the oil spill, however, none poses a greater threat to the long-term welfare of Alaska and the Lower 48 than the shelving of proposed federal legislation to open the Arctic National Wildlife Refuge to oil exploration and development.

Geologists believe the 1.5-million acre ANWR Coastal Plain may hold North America's last major oil field, possibly containing a commercial reserve the size of Prudhoe Bay. But the nation's major environmental groups decided long ago to do battle with industry over ANWR, a remote and vast wildlife habitat.

Congress quickly put ANWR on hold following the spill. "Congress is hesitant to jump back into the fold on ANWR," says BP's Herrera, executive consultant to company president George N. Nelson. "One can suggest ANWR is dead this year and probably dead next year. Maybe it will be resurrected in the 1991 Congress."

Prudhoe Bay, on its way to an annual 10 percent decline, makes up about three-quarters of all North Slope production, 25 percent of the U.S. domestic oil supply. With no potential ANWR oil in the near future, the country's reliance on imports can be expected to exceed 60 percent in a few years, and that likely will put the Organization of Petroleum Exporting Countries more firmly in the price-control saddle.

Says Herrera, "There is nothing on the horizon to replace Prudhoe, and it's almost impossible to foresee anything that's going to change the situation. This is not good news for the nation."

Nor does a declining Prudhoe Bay field spell good news for Alaska, the most oil-dependent state in the country, with 85 percent of state revenues derived from royalties and taxes on crude oil. Alyeska reports the flow rate in the pipeline will drop from 2 million barrels a day to 1.9 million this year and to 1.8 million in 1990.

Jim Palmer, BP's director of government and public affairs, says given the combination of state spending, the wild card nature 6f oil prices and the decline in production, finding money to run the government in the 1990s likely will become a critical issue. "Every option has political problems: instituting an income tax, using the permanent fund, cutting down on (state) money that goes to municipalities," he added. All things considered, Palmer asks, "How much investment do you put in with this kind of risk?" Plans Derailed. Alaska's oil industry was recovering from a difficult economic recession and a period of mildly fluctuating oil prices when the roof collapsed at Bligh Reef, where the supertanker Exxon Valdez ran aground exactly 25 years to the day of the 1964 Good Friday earthquake.

After a few years of relative inactivity, both Arco and BP, the Alaska oil industry's two principal employers, had brought top exploration people to the state to renew their search for crude oil. Field work on the North Slope had picked up and, for the first time, industry started building oil production modules in the state, providing, at least some badly needed jobs in the depths of the recession.

The two companies, which operate most of the North Slope fields on behalf of several owner companies, including Exxon, were prepared to invest up to $20 billion in Alaska over 10 years. In light of the events since the spill, however, industry is now rethinking its future role in Alaska.

"We don't have any plans right now for further reductions, but plans next year may not include as many wells at Prudhoe and Kuparuk. Everything is being looked at more critically," Palmer says.

Notes Herrera, "The political climate in Alaska has discouraged all positive inclinations of the oil companies, and the state administration has totally underestimated that aspect of it. They (state administrators) get the idea oil companies work like computers and don't have any human feelings. Industry is totally negative in its attitude toward state government. In particular, the administration can't yell and scream at Exxon and turn around and support ANWR, because the public is saying the spill and opening ANWR are the same."

Bill Hopkins of the Alaska Oil and Gas Association, which represents 27 oil companies, says Exxon has been unfairly treated by government since the oil spill. "In March, recognizing the state was coming out of a pretty deep (economic) depression, there were about 8,500 people working for oil companies and their contractors," he notes. "Exxon (in early August) had over 11,000 employees. We've doubled the employment for the most important industry in the state with this accident, yet the company is taking a blast for walking away. It ain't so. I don't know how people can reach that conclusion. That, to me, is very ironic."

While the fallout on industry over the Exxon Valdez oil spill was considerable, not all the news was bad. In early August, after months of testing, Arco announced it could recover about 300 million barrels of crude from its Point Mclntyre field, making it one of the biggest discoveries in the United States in 10 years.

But just how the ELF would apply to future Point Mclntyre production is still uncertain to Arco, which wants to use its Lisburne facilities to produce Point McIntyre oil--similar to its plan to comingle West Sak and Kuparuk oil. Arco would like to bring Point McIntyre, just north of Prudhoe, on line in the early to mid-1990s.

The state would consider the new field a marginal operation, and therefore, it would be subject to a lower tax rate. "But if we do something at Point Mclntyre using Lisburne facilities, it could cause a higher tax rate on Lisburne oil," Wade says. "This will clearly affect the timing of Point Mclntyre development. Life has gotten more complicated."

Neither Arco nor BP says it plans to pull out of Alaska. But each is unsure of its role in Alaska's future.

While future projects, such as construction of a pipeline to carry North Slope gas to market, will serve to boost the morale of Alaskans, Herrera says, "The immediate future is going to be horrible, because people are so psychologically down. I just hope industry is down going to overreact to this and ship out."

"We've been here 30 years and will be here for decades to come," Wade says. "I suppose we are in a new era, but I don't know what those words mean. The old order has passed away, but I don't know what the new order is. And that is troubling because I don't know how restrictive that will be, so I don't know about our plans and long-term spending commitment."
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Author:Tyson, Ray
Publication:Alaska Business Monthly
Date:Oct 1, 1989
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