Opponents of Gov. Sean Parnell's oil production tax reform bill claim it is foolish to lower taxes by hundreds of millions of dollars per year when such action would force the state to tighten its belt to offset what they consider unnecessarily high budget deficits.
They appear to be in denial of the fact that state spending at the historic rate of growth in an era of declining oil production is putting Alaska's economy at risk. The trend of increased spending with decreasing production is not sustainable, economists have warned, and will require tighter budgets with or without an overhaul of our tax system.
At the core of the issue is declining production. Alaska's current oil production tax structure has generated billions of dollars in short-term revenues, but at the expense of long-term investment, production, jobs, and a sustainable economy. Clearly, taxing ourselves to prosperity is a poor strategy and will undermine our future.
With the current tax rates on North Slope producers capturing most of the profits otherwise earned by oil companies in a high price environment, there has been a massive re-allocation of investment dollars from Alaska to other more inviting oil and gas jurisdictions. The flight of capital has contributed to an unchecked decline in North Slope production of six to eight percent annually.
This is bad news since oil production accounts for more than 90 percent of Alaska's unrestricted general fund revenues.
With oil production in steep decline, throughput in the pipeline has fallen sharply. The pipeline is now operating at one-quarter the volume it once carried.
However, the state has seen revenue surpluses as high oil prices have masked decline, but the ongoing fall in production is now to the point where elevated oil prices will no longer make up the difference.
Some of the most vocal proponents of oil production tax reform are Alaskans not directly involved in the oil and gas industry. The business community is fearful of what continued throughput decline in the pipeline will do to our economy as a whole.
Under the current tax structure, the state is guaranteed lower production, less revenue, and higher budget deficits over the long term, resulting in a weaker economy and a lower standard of living for Alaskans. The state will face leaner budgets and challenges to funding state services and education as production continues to decline.
To boost production, the state must address the challenges of its legacy fields. We should ask ourselves, if those fields are so profitable, why isn't industry spending more in legacy production, yet is investing a lot more in such fields outside Alaska? It all comes down to where the industry can get the biggest return on its investment, and it's not here. Capital investment has exploded everywhere except Alaska.
We remain concerned that the legislative process will result in a tax policy that is too timid and does not encourage the investment needed to stem the production decline. An average government take is not a good position for Alaska to be in because we need a tax policy that makes our state a compelling place to invest. Alaska needs to stand out from its competitors. The resources are in the ground and we need the right policy to get the oil into the pipe.
The Legislature should rely on what the consultants and investors have shared and take to heart what they consider are the strengths and weaknesses in the governor's bill. After all, it is the investor who will ultimately determine where to invest.
Legislators should do sufficient due diligence to ensure the goals set out in the legislation are fully achieved. Industry will respond to significant reforms that move the needle.
Take the shot. Alaska has more to lose under the status quo and will face its own fiscal cliff if we fail to address unchecked production decline.
Rick Rogers is executive director of the Resource Development Council.