Though Shell (NYSE:RDS-A) recently said it would "pause" its Alaska oil campaign due to various setbacks, other oil majors are getting to ready plow more investment dollars into the potentially lucrative region.
Most Recently, BP (NYSE:BP) – along with ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP) – said it plans to invest an additional $1 billion in the North Slope of Alaska over the next five years, spurred by a tax reform signed into law in May that makes drilling in the region more attractive to oil companies.
In the Prudhoe Bay oil field on Alaska's northern coast, BP says it will boost capital spending by about 30%, with plans to add two onshore rigs in addition to the seven already operating there. The Prudhoe Bay field is jointly owned by BP, which commands a 26% stake, Exxon and Conoco, who each own 36% of the project, and Chevron, which has the remaining 1%.
The three companies are also mulling over a plan to drill more wells and remove bottlenecks from current facilities – initiatives aimed to boost Prudhoe's production – that would require an additional $3 billion in capital investment.
The main reason the companies have decided to act now is because of a recently implemented tax reform. Last month, Alaska lowered its production tax on oil and gas from an average of 74% to about 61%, an amendment aimed to attract new oil and gas investment. According to an analysis by the state's Department of Revenue, taxes on industry would be slashed by roughly $500 million a year starting in 2015, and as much as $1 billion a year beginning in 2018.
According to Janet Weiss, president of BP Alaska, the tax reform "was a monumental signal to the industry that the region is open for business." Some analysts estimate that the reform could yield roughly $1 billion in savings to the industry, though it's impact on Alaska's revenue will depend on the course and scale of future investment and production.
Alaska's production decline
The reform should hopefully offset the trend of declining production from North Slope oil fields, which has fallen by about 6% each year due to the lack of investment in new projects. At its peak in the late 1980s, Alaska used to pump out a little over 2 million barrels a day. But with output from its more mature oil fields in sharp decline, and with a lack of new investment, the state has fallen to fourth in the rankings of leading oil-producing states.
Last year, Alaska's oil production averaged just 526,000 barrels a day, about half its level in the early 2000s and down about 75% from its peak in 1988. In addition to concerns about absolute production levels, some commentators are worried that if volumes on the Trans-Alaska Pipeline, an 800-mile pipeline that delivers oil from the North Slope to the Valdez terminal on Alaska's south coast, fall below an estimated 350,000 barrel per day threshold, the decades-old system may have to be shuttered.
"Now that an improved tax structure is in place, oil and gas projects can once again move forward, keeping Alaska competitive in the midst of America's recent energy renaissance," Weiss said in a statement.
Though Shell may have retreated from its operations in Alaska due to harsh weather, equipment failures, and just plain bad luck, BP, Exxon and Conoco have decided to weather the storm. Since both BP and Exxon suffered meaningful year-over-year declines in their total oil and gas production in the first quarter, it's no surprise that both are meticulously surveying their portfolio of assets around the world in an effort to squeeze out as many additional drops of oil as possible.
Indeed, Weiss even made clear that Exxon's commitment wasn't to boost Alaska production, but rather to "go after reducing decline as much as possible." Expect this to be a dominant trend among the oil majors for the foreseeable future.
Fool contributor Arjun Sreekumar has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.