Dunleavy misleads Alaskans on key piece of oil production guesswork a decade ago

In his State of the State speech Tuesday, Gov. Mike Dunleavy touched briefly on the history of oil production guesswork in Alaska and quoted a misleading statistic.

“Back in 2013, after years averaging 6 percent annual production declines, the forecast for production in the current year was projected to be a mere 340,000 barrels per day. Instead, we are in fact at around 500,000 barrels with multiple large projects in development and billions of barrels still in the ground.”

“Ten years ago some had the idea that the policies didn’t matter, that the oil was running out and a decline was inevitable. There was basically nothing we could do. Today, our production numbers prove that good policy that encourages business works.”

No one with any grasp of the details argued 10 years ago that policies didn’t matter, but that’s not the point of this blog post.

It’s about the projections made a decade ago.

In the winter of 2011-12, the state guessed that North Slope oil production in FY 2021 would be 458,000 barrels a day. It was a good guess, but the state backed away from it the next year.

As part of the lobbying campaign for the SB 21 oil tax overhaul, the Parnell administration sharply reduced the outlook for future oil production under ACES, slashing the FY 2021 estimate by nearly 100,000 barrels a day to 366,000, and cutting the guess to 338,500 barrels a day by 2022.

The lower forecast was a political prelude to Parnell’s tax cut plan, which he introduced on Jan. 16, 2013. The Legislature approved it on April 14. The effort to repeal SB 21 failed in the 2014 primary election, just before oil prices crashed.

Was the late 2012 decision to lower the oil production guess justified?

No. A smaller reduction would have made more sense. On Feb. 28, 2013, before the Legislature approved SB 21, ConocoPhillips told investors that it hoped to reduce the North Slope rate of production decline to 3 percent or 2 percent by 2017, while the state was predicting a much steeper rate of decline.

The state began using oil production guesses from Frank Molli, a Colorado contractor, who used a well-by-well analysis that Dudley Platt, the former state contractor, said would vastly underestimate the long-term production numbers. Platt said a far more accurate and higher number would be derived by the “pool method,” a claim upheld in a landmark Superior Court decision in 2012.

In a report prepared for the trans-Alaska pipeline property tax case, Anchorage petroleum engineer Bill Van Dyke said the state’s 2014 short-term production estimates were “far from accurate” and too low, “possibly out of design.”

Van Dyke said this performance “should not instill confidence in the short-term forecast methodology” and that it raised a question about the accuracy of the long-term forecast, which is subject to far more uncertainty.

He backed up that assertion by quoting Deputy Revenue Commissioner Bruce Tangeman, who told legislators that year: “My personal goal was to put a production forecast line out there and beat it for a change.”

Underestimating production guarantees production numbers that exceed the forecast. This can create an illusion of a change in activity and a trend when the only certainty is that there has been a change in the forecast.

The Parnell administration had claimed that previous guesses were always too optimistic about future production.

Platt contended that the system enacted in 2012 predicted a reservoir decline at existing fields, such as Prudhoe Bay and Kuparuk, that exaggerated future decreases. Platt was right.

North Slope oil production in FY 2022 is expected to be 487,000 barrels per day, according to the revenue sources book released in December. In spring 2012, the state guessed that oil production would be 464,000 barrels per day in 2021, had ACES remained the law.

A decade ago, Parnell said this in his 2012 State of the State speech: “Members of the Legislature: This evening, I ask you to join me in refilling Alaska’s pipeline to prosperity. You have had time to study this issue closely. We cannot allow the paralysis of analysis to set in. We must act, and we must act now. Let’s meet my goal of one million barrels a day. Let’s enact the oil tax reform and spark investment and growth in Alaska. And let’s show the world that Alaska’s resources can lead to America’s energy independence.”

In his speech Tuesday, Dunleavy didn’t mention 1 million barrels, but he talked about getting increased oil production—300,000 barrels per day, if multiple projects proceed. He made an obligatory reference to energy independence.

He didn’t say a thing about how oil prices now are in the range where the big oil companies qualify for the maximum state oil tax credits under SB 21, an amount expected to exceed $1.3 billion in FY 22.

Listening to him, you’d think that political obstacles from the Biden administration—ideas that he claims “border on insanity”—are the only real future threat to Alaska oil production.

He didn’t mention climate change, as if by ignoring the subject it will go away. But that appears to be his official climate change policy.

In an interview with Alaska Public Media last summer, Dunleavy said he doesn’t accept that there is a scientific consensus that the globe is warming because of the use of fossil fuels.

UN Secretary-General António Guterres said a report released last August was "a code red for humanity. The alarm bells are deafening, and the evidence is irrefutable.”

Dunleavy said the UN should “make sure that all the scientists agree with them because there are some that don’t.”

“Now with that said, if you believe in the different epochs in the world’s history—ice ages, then no ice ages, then very warm periods of time—it would appear that we've come out of the Pleistocene, which means we’ve warmed considerably. We’re in what they refer to the Holocene, is where we are now. Does that mean that it’s not continuing to get warmer? Some would say it appears to. I’m not trying to sidestep this. But it’s like the virus. There are differing opinions.”

Dunleavy said, “with regard to the climate, we’re going to continue to have problems, for those that really believe that this is manmade.”

Gibberish aside, the worldwide response to climate change cannot be ignored, even by Dunleavy, for it will be the single greatest factor deciding the future of the fossil fuel industry in the state. His refusal to accept the scientific consensus on climate change and his failure to recognize how this will impact Alaska and undermine the economics of the fossil fuel industry should be major issues in the campaign for governor.

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