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Paul Jenkins: ACES must go, but that still leaves a question

Paul Jenkins

Watching the Senate Finance Committee struggle with a measure to fix Alaska's Clear and Equitable Share oil tax at times bordered on the painful.

Senators antsy about surrendering perhaps $11 billion in revenue over the next five years to boost trans-Alaska oil pipeline throughput pressed oil industry executives hard during a hearing last week for reassurance that a tax cut would spur production. They asked Question A. The executives, tiptoeing lest they make a commitment, answered Question B.

"Thank you," an exasperated Sen. Lyman Hoffman told an unsmiling Exxon official, "For not answering my question."

Alaska, the executives said, must appear more attractive on the world stage; that ACES throttles investment; that, of course, a tax cut will spur huge expectations; that things would happen with a tax change ... near-term. Senators looked puzzled. Weary. The fact that the fixes likely would not satisfy all the industry factions only makes things tougher.

The measure under the microscope is the Senate Resources Committee rewrite of Senate Bill 21, Gov. Sean Parnell's ACES reform legislation. Last year, ACES reform died at the hands of a Democrat-driven Senate coalition dismantled later by voters. This year, with Republicans in charge, there is renewed hope for common sense.

ACES, as former BP Alaska President John Minge described it, is a "short-term, going-out-of-business policy." With trans-Alaska oil pipeline throughput drying to a drizzle at 6 percent annually, with investment going elsewhere, with North Slope production waning, it appears he was right.

It is a grab-all-we-can-now tax strategy to produce short-term state revenue windfalls at the expense of Alaska's future. It will bite our grandchildren with a vengeance.

ACES was a bitter slap at the North Slope oil industry in 2007 by then-Gov. Sarah Palin and a Legislature petrified by her popularity. It contains a 25 percent base rate with a progressive, ratcheting mechanism that lacks bracketing. The first dollar is taxed at the same rate as the last. It contributes to an investment-choking marginal tax rate in Alaska of more than 90 percent at higher oil prices.

With any drive to reverse the North Slope production decline an incredibly expensive proposition -- Hoffman estimates it may cost as much as $5 billion annually -- ACES makes the effort absolutely Herculean.

ConocoPhillips, for instance, reports making $570 million in 2012's fourth quarter and $2.3 billion in earnings in Alaska for the year. Industry detractors are quick to point that out, but never mention it came after the company chipped in $3.7 billion in taxes and royalties to Alaska for the year. How can any North Slope company afford to increase production without tax changes?

While vocal critics on the Left who must know better claim ACES is working, that Alaska and industry are making wads of money, you have to wonder: If that were true, why would the companies not simply pump more oil and make even more money? The truth? ACES makes it uneconomic.

The tax steals about $2 billion a year too much from North Slope oil industry investors, making investment for new oil and new production a pipe dream. What investment there is goes to maintenance and infrastructure, with Alaska underwriting much of it -- an anticipated $1 billion this year -- with tax incentives. As investment booms elsewhere, the reality is that industry investment in Alaska is nearly static.

At some point soon, high oil prices masking declining production will slip and it will be Katie bar the door. The mess should have been fixed three years ago. SB21 is a good beginning -- finally.

Among other things, the bill would increase ACES' 25 percent base tax rate to 35 percent and end progressivity. It also would add a $5-a-barrel credit and shelter from taxes 30 percent of production from new fields and new areas of legacy fields

As the ever-evolving measure wends its way through the Legislature, the facts are painfully clear. North Slope oil production peaked in March 1988 at about 2 million barrels daily. In March 2011, it was 647,000; in December, 544,000. To entertain any notion of turning that around, ACES must be fixed. Period.

The U.S. Energy Information Administration says falling production could shut down the pipeline by as early as 2026.

We are running out of time to get Question A asked -- and answered.

Paul Jenkins is editor of the

Paul Jenkins