Is Alaskan Oil Production About to Make a Comeback?

Photo credit: ConocoPhillips

Since its peak in 1988, Alaskan oil production has been in a freefall. Overall, daily production has gone from 2.1 million barrels to just 526,000 last year. That trend, however, could be about to reverse.

A new tax law has oil companies rethinking capital-allocation decisions. For example, just last month ConocoPhillips (NYSE: COP  ) announced that it will soon be adding a second new drilling rig in the state in an effort to boost its output. The company said that the new tax plan has improved the business climate in the state. Further, ConocoPhillips is planning additional announcements in the future that will boost its Alaskan production.

It's not alone. While Pioneer Natural Resources (NYSE: PXD  ) recently decided to ditch Alaska for Texas, the private company that bought its Alaskan assets isn't. Instead, the buyer pointed to the new tax law as the reason why it's choosing to invest in the state. It's hoping to develop the significant resources and grow the production. For Pioneer Natural Resources, the sale had more to do with the capital needs of its massive Permian Basin position than any lack of oil resources in Alaska.

In fact, despite producing more than 16 billion barrels of oil so far, it's believed that Alaska's North Slope still holds more than 10 billion barrels of recoverable oil. The issue, at least according to oil majors like BP (NYSE: BP  ) , is that the previous tax system proved to be a disincentive to drilling as it could make more money elsewhere.

With the new plan in place, BP has already announced a $1 billion increase in production spending and, like ConocoPhillips, it's adding two new drilling rigs to the North Slope. Further, the company and its partners are currently evaluating a $3 billion project, which would mark the first new well pad built at Prudhoe Bay in more than a decade.

Other projects could soon be given the green light as well. For example, BP noted that new oil fields such as the Sag River formation could be tapped. That formation is estimated to hold 200 million barrels of oil.

After a long cold spell, it would appear that Alaska's oil industry is about to heat up. That is as long as the new tax plan stays in place. There is a referendum on the 2014 ballot to reverse the tax plan. That gives oil companies a very limited window to scale up in the state and show that the tax plan is doing what it's intended to do, which is grow oil production and not pad the pockets of big oil as some suggest.

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