Support of HB110 - Tom Maloney
My name is Tom Maloney and I am a long term resident of South Anchorage. Currently, I am the Alaska Area Manager for CH2M HILL and the Board President of the Resource Development Council. I am pleased to have the opportunity to testify today. I very much appreciate all of your services to the State.
By way of background, my degrees are in Accounting and Finance and I am a CPA, CMA and CFP. I am very concerned with the current state of the Alaska oil industry. Why, throughput in the Trans Alaska Pipeline System (TAPS) has been decreasing at an increased pace over the last several years. For example, in 2008 the production decline through TAPS was 18,000 barrels per day (bpd). The decline increased to 24,000 bpd in 2009 and 48,000 bpd in 2010. This is an alarming rate of decline that should serve as a wakeup call that without doing something different in the very near future, we will not have a North Slope oil industry. Just think, in the last twenty years, production rates are down around 70%.
Wayne Gretzky the Great One said, “You miss 100% of the shots that you don’t take.” The same is true with hydrocarbons. Without new investment, there is no drilling and without drilling Alaska gets no new production. Without new production, the only question is when will TAPS shut down? Companies involved in the oil industry know that production and related jobs are drying up in Alaska. The Department of Labor in January 2011 indicated that the oil and gas industry lost 1,000 jobs over the past year, or almost 8%. What can we do? DRILL.
How has drilling activity been over the last several years? The number of North Slope exploratory wells in 2007 was 18. This year there is 1, a decrease around 95%. Exploratory wells create a significant number of great high paying jobs. Attached is a drilling graphic that displays some of the types of jobs associated with drilling.
Fortunately for the residents of Alaska including myself and my family, the two largest oil fields in North American history – Prudhoe Bay and Kuparuk – are located on State land. These two giant oil fields require a tremendous amount of new investment to minimize decline in production numbers. Unfortunately, the number of total North Slope development wells has also been decreasing over the past several years. For example, the number has fallen from 139 in 2007 to 110 in 2010. The negative trend in drilling is resulting in a faster decline in production than most of us would care to see.
How does one stop the decline in drilling? There is only one answer and that is to DRILL, but first we must bring investment back to Alaska, in my view, it is difficult to see how the punitive tax structure of ACES will encourage the oil industry to ramp up drilling in Alaska – when the government takes almost 80 cents of each additional dollar of profit earned at $90 oil.
Wall Street and other analysts have raised red flags about steadily declining oil production and its impact on the Trans-Alaska Pipeline System (TAPS), the lifeblood of Alaska’s economy. The recent temporary shutdown of TAPS in January sent shock waves across the nation and gave Alaskans a preview of what the future may hold. A CNBC story by Scott Cohn used the shutdown to highlight the impact of declining throughput on TAPS, Alaska, and the nation.
The challenges of restarting the pipeline in extreme cold at reduced flow clearly foreshadow the line’s future. Studies show that ice can form in the pipeline at a flow of 500,000 barrels a day or less, a threshold that may be breached within four years. While new investment in TAPS could help mitigate low-flow challenges, less oil in the line will hasten the day when the pipeline may be forced to shut down.
Analysts warn an accelerating TAPS throughput decline could lead to the premature shut-down of the pipeline, stranding billions of dollars in state royalty payments, which exceeded $2 billion in 2010 alone. Remember, we only get royalties from State Lands when there is actual production. In 2005, the State predicted TAPS production would average 832,000 barrels per day (bpd) in 2010. Actual production was 644,000, 22% less than forecasted.
In 2005, the State forecasted 762,000 bpd in 2015. Yet current production is 630,000 bpd and falling. Will we be less than 500,000 bpd in 2015, or can we take steps to reverse the steep decline? With oil accounting for almost 90% of the State Treasury, we are fast approaching a very steep cliff.
Tax policy must change in a way that reflects the important role drilling has in Alaska’s economy. Investors take 100% of the risk to lease, explore and develop a resource. At high prices, government can take more than 80% of the income stream of a barrel of oil. What is the incentive for an investor to take risk? Would anyone in this room with their own real estate, stock, or other investments give the government almost all the upside while taking nearly all the downside?
How has the rapid decline in North Slope drilling activities affected a major employer like CH2M HILL? In Energy, CH2M HILL works primarily in engineering, construction, and operations and maintenance including drilling and well-support services.
Our engineering segment is headquartered at 949 E. 36th Street in Anchorage. We have seen a 60% decrease in engineering and design staff. The primary driver of this lower activity is the lack of new production opportunities, including challenged or heavy oil. I might also add that the federal government has not been helping out Alaskan employment opportunities as it relates to the National Petroleum Reserve Alaska (NPRA) and the Outer Continental Shelf (OCS).
Construction, including NORCON, our Union Construction Company, has also seen decreased employment. For example, with the lower level of drilling opportunities, there is a decreased need for modular construction, well tie-ins and related installation work.
In our drilling and well-support work, we have seen a decrease in all areas, including drivers, mechanics, support services, etc.
The overall downturn in business affects us and other employers in multiple ways. For example, several years ago we hired as many as 38 interns. These were high paid jobs for Alaskans, including Alaskan high school students in drafting positions. This year we expect the number to be 7 interns, which will be a challenge for us quite frankly.
One area that really concerns me is that many years ago we use to talk about the Alaska brain drain and the fact that many of our best and brightest were leaving the State for education and job opportunities. Many Alaskan employers, including ourselves, have worked hard to educate young Alaskans about a future in the oil industry. The week of February 20th was Engineers Week, nationally. CH2M HILL had a numbers of engineers and support staff, visit a number of schools to educate our youth about engineering opportunities in the state. We want to give our young people hope that we will have highly skilled and well-compensated private industry jobs for them in the next few years.
In summary, there is a need to drill to pay the bill. To keep some dough, we need oil flow. I hope and trust that the legislature will take proactive steps this year to address the steep decline in oil production that we have been experiencing. One only needs to look at Cook Inlet production which is down 95% from its peak of 40 years ago to the Ketchikan Pulp mill, Agrium, and now the Kenai LNG plant to recognize that we cannot take industry for granted. Let’s make Alaska more competitive in attracting the investment necessary to stem the production decline and sustain TAPS to the point where OCS production could ultimately enter the pipe. Please encourage more private investment, more jobs and a brighter future for our kids and grandkids. After all, I have an 18 year old son majoring in welding and non-destructive testing at UAA who is very concerned about future employment activities in Alaska.
Thank you for listening. I sincerely appreciated the opportunity.
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