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Originally published March 26, 2011 at 10:01 PM | Page modified March 28, 2011 at 1:48 PM

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Corrected version

As Alaska oil production declines, governor wants to ease Palin tax on industry

The spectacular flow of North Slope oil wealth has enabled politicians here to abolish the personal income tax and create a savings account that last year sent each resident a check for more than $1,200. While other states are slashing spending and dismantling services, oil has let Alaska ride out the Great Recession flush with big budget surpluses.

Seattle Times staff reporter ANCHORAGE

Since its startup in 1977, the trans-Alaska pipeline that stretches from the North Slope tundra to the port of Valdez has funneled more than $90 billion into state coffers.

This spectacular flow of oil wealth has enabled politicians here to abolish the personal income tax and create a savings account that last year sent each resident a check for more than $1,200. While other states are slashing spending and dismantling services, oil has let Alaska ride out the Great Recession flush with big budget surpluses.

But the source of this wealth, the Prudhoe Bay oil fields, are in deep decline. Flow rates are less than a third of the 1988 peak annual flow.

There's not much hope for a quick turnaround as major oil companies have sharply cut investments in exploration for new sources of North Slope oil.

And a pipeline official warns that low flows are creating technical challenges that raise the risk of a winter leak triggering a prolonged shutdown.

"Every day we are in new territory," said Tom Barrett, president of Alyeska Pipeline Company, in a winter briefing to state legislators. "If I could ask for one thing, it's to try to get more oil into the pipeline."

All of this has caused Alaska Republican politicians to second-guess an oil-tax increase championed by former GOP Gov. Sarah Palin, which they fear is discouraging oil companies from following her advice to "drill, baby, drill."

"We are collecting an extreme amount of money compared to other oil jurisdictions," said Alaska Gov. Sean Parnell in a news conference earlier this month to press for an easing of oil taxes. "I'm looking to make us more competitive so we can get more (oil) companies here."

Palin, in a March 18 posting on her Facebook page, defends the oil tax, noting an increase in the number of oil companies that have registered with the state Department of Revenue as an indicator of increased competition.

"Regardless of the recent political posturing," she said the tax is a "success for all stakeholders who want more domestic energy supplies for our great country. ... It works."

Palin, John McCain's running mate in the presidential race two years ago, became governor in December 2006, in the aftermath of corruption scandal involving some legislators' ties to VECO, a major oil-field contractor. Palin said she wanted to remove the taint of corruption over the previous oil-tax legislation forged during the FBI investigation into the scandal. With the oil industry's reputation at a low point, her administration crafted a bill that created a kind of windfall-profits tax that would give Alaska an escalating percentage of the revenue as oil prices climbed. The legislature increased the tax rates, and she signed the bill into law.

The progressive tax, along with royalty payments from Prudhoe Bay oil, has helped fund about 85 percent of the state budget. The state government has been able to sock away about $12 billion in reserves.

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On top of that, Alaska has nearly $40 billion in an oil-wealth savings account. The Permanent Fund exceeds the size of the Bill & Melinda Gates Foundation. A portion of its earnings is used to send state residents an annual dividend check.

Key to economy

The oil wealth also has also underpinned the broader state economy, which barely broke stride the during the recent recession that rocked the Lower 48.

Though remote villages have faced a historic struggle with high unemployment, Anchorage's jobless rate through most of last year was 6.7 percent, far below the national average of 9.6 percent for 2010.

But Alaska's economy likely would wither without new energy development.

In 2011, the trans-Alaska pipeline is forecast to carry less than 600,000 barrels a day of oil, compared with peak of about 2 million barrels. Flow rates are expected to continue to decline at about 6 percent a year.

The decline has enabled Texas to regain the lead as the nation's top state oil producer. Some projections indicate that North Dakota will surpass Alaska's oil production within four years.

Alaska's industry boosters hope that Shell Oil will eventually find offshore deposits in the Beaufort Sea off its northern coast. But exploration, which initially was scheduled to start last summer, was delayed by BP's disastrous offshore-oil spill in the Gulf of Mexico.

If new fields are discovered, it is likely to be a decade or more before any of that oil might pulse through the trans-Alaska pipeline. Since offshore-exploration areas are owned by the federal government, the state gets a far lower percentage of the revenue from that oil.

If oil prices keep climbing, major oil producers could eventually tackle the higher costs and tougher technological demands of pumping out deposits of heavy oil on the North Slope. Alaska oil production also could receive a boost from fracking, a technology that uses water to flush out crude bound up in shale rock

Great Bear, a specialized mining company based out of Texas, has leased 500,000 North Slope acres, and company officials earlier this year told legislators that they could ramp up production over the next decade, and eventually stem the pipeline's decline.

But so far, the company has yet to produce any oil.

Technical challenges

Alyeska officials, who operate and maintain the pipeline, have become increasingly vocal about the technical challenges as oil flows decline.

Less than two weeks after taking the over as president of Alyeska, Barrett approved a shutdown of the pipeline to repair a leak in a North Slope pump station.

But engineers estimated the repairs, which involved installing a separate feeder line to bypass the leak, would take more than a week to complete. By then, the reduced volumes of oil in the pipeline risked cooling the crude to the point where dangerous amounts of ice and wax would form. That could cause major damage if the pipeline was restarted before the summer thaw.

To avoid that scenario, Alyeska, in an around-the-clock-emergency effort that involved hundreds of employees, took the unusual step of restarting the pipeline on Jan. 11 before the leak was fully repaired.

"Starting a lineup with an integrity breach runs against the DNA of every regulator I have ever known, and I've been one," said Barrett, a former Coast Guard admiral who once served as a federal pipeline-safety official.

Barrett says pipeline flows have been dropping even faster than forecast. So Alyeska is now exploring expensive new technology that would add heat to the oil as it travels down the line.

Still, Barrett said there is no easy fix for accommodating much lower flows. Last year, oil companies drilled three North Slope exploration wells, compared with 18 in 2008.

So Parnell and his Republican allies in the state legislature want to ease the tax system approved by Palin.

But a rollback faces plenty of opposition from Democratic legislators who say it's still too early to assess the impact of the new tax rates on oil investment or whether lowering the tax would trigger new exploration.

They also are wary of turning back billions of dollars to the oil companies that might otherwise be used to help the state government survive the oil decline.

"There's not going to be a bill this year," said Rep. Mike Doogan, a Democratic legislator. "He (Parnell) is offering a $10 billion give back to the oil companies without a hint of evidence that anything that will actually benefit Alaskans will actually happen."

Palin, in the March 18 Facebook comments, also criticizes Parnell for his proposed revisions that would reduce state revenue. She has not testified to this year to thhe state Legislature about the oil tax structure. "She has pretty much checked out of state politics," Doogan said.

"She has pretty much checked out of state politics," Doogan said.

Hal Bernton: 206-464-2581

The information in this article, originally published March 27, 2011, was corrected later March 27, 2011. This story has been corrected to include comments that Sarah Palin made about the oil tax on her March 18 Facebook page. The story initially said she had not made comments about the oil tax.

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