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BP gives $1 billion upgrade boost to Alaska

It will add two new rigs to the Prudhoe Bay field and upgrade existing facilities

Spurred by generous tax incentives, BP will increase North Slope spending by as much as $4 billion over the next 10 years.

The UK supermajor plans an initial outlay $1bn to add two new rigs to the Prudhoe Bay field and upgrade existing facilities, which it said it would create 200 extra jobs by 2016.

BP has also begun considering $3bn in future projects with the other Prudhoe Bay operators, ExxonMobil and ConocoPhillips, in the western region of the field.

The announcement comes days after the state legislature slashed oil-production taxes in a bid to increase investment in the state. On 21 May, governor Sean Parnell signed Bill 21, the More Alaska Production Act, into law.

First proposed by former governor Sarah Palin, the bill cuts the state's oil tax to a flat 35%, replacing a progressive system that rose to 50% during high prices. Various estimates suggest the measures will cost the state government $1bn a year, which it hopes to make up with higher production.

Nonetheless opponents are sending out petitions to have the bill repealed and force a referendum on the 2014 ballot. So there is palpable political pressure for the oil companies to loosen the purse strings.

BP-operated fields, including Prudhoe Bay, account for two-thirds of Alaska's oil production, and the company was quick to credit the state's favourable policy change for its decision to ramp up activity.

"The Alaska legislature and governor Parnell have taken an important step towards improving Alaska's long-term economic future," BP regional president Janet Weiss said in a statement. "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."

State legislators justified the tax break on the grounds that Alaskan production has dropped more than 70% since reaching a peak of 2m barrels per day (b/d) in 1988, and continues to fall at a rate of 5% per year.

According to the most recent Energy Information Administration (EIA) statistics, Alaska pumped 533,000 b/d in March, down from 567,000 b/d in 2012. It was the first time since 1978 that Alaska ranked behind California in output. Alaska is now the US' fourth-largest oil producing state.

In September 2012, the EIA said that maintenance problems on the Trans-Alaska pipeline would increase once throughput on the line fell below 600,000 b/d. It predicted the line would be decommissioned when production fell below 350,000 b/d or when gross North Slope oil revenues fell below $5bn per year.

Given that Alaskan oil sold for $95.79 per barrel in March, according to the EIA, that day of reckoning is fast approaching.

The downward production trend belies the state's enormous resources. The US Department of Energy estimates recoverable oil reserves on the North Slope to be 22bn barrels, including reserves from existing fields as well as undiscovered resources. Natural gas estimates reach as high as 124 trillion cubic feet (cf).

A revised US Geological Survey (USGS) assessment of the National Petroleum Reserve in 2011 produced an estimate of 900m barrels of oil and 17.5 trillion cf of natural gas. A separate USGS assessment of the Arctic National Wildlife Refuge gave a mean estimate of 10.4bn barrels of technically recoverable oil.

Offshore, the Alaska outer continental shelf holds a potential 27bn barrels of crude and 132 trillion cubic feet, most of it in the Chukchi Sea.

In light of the US tight-oil boom, BP is hoping it can replicate Lower 48 drilling techniques in the Arctic. It is unlikely Alaska's output will ever surpass its 1988 peak, but BP is clearly hoping to flatten the decline curve while keeping its existing operations profitable. The $1bn downpayment signals a renewed commitment to the Alaskan frontier that shows BP doesn't plan to pack up before the end of the decade.

But the taxation debate raises a tricky question. Is Alaska's impressive potential resource base is relevant - or economic - without government help? The state must now contend with Texas and North Dakota in a new era of basin-on-basin competition.

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