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Differing forecasts of Slope production decline are key factor in oil tax debate

Lisa Demer

No one disputes that oil production is declining on Alaska's North Slope but sharp disagreement over projections of the future rate of decline is boiling up in the legislative fight over Gov. Sean Parnell's proposal for massive tax cuts.

The state's oil production forecast is one of the most important facts in the argument over how much tax revenue the state would give up under Parnell's plan.

Estimates of future production and future prices drive any analysis of the cost of the tax measure, Senate Bill 21. The more oil that goes into the pipeline, and the higher the price of that oil, the more money the state treasury loses with a lower tax rate.

Parnell and the Republican majorities in the Legislature are pushing for tax cuts to induce oil companies to invest millions of dollars to increase Alaska production, which has been slowly declining for many years.

Rep. Les Gara, a Democrat from Anchorage who sits on the House Finance Committee, on Thursday released a new analysis -- done at his request by the state Department of Revenue -- showing that the governor's proposed tax cuts could cost the state $1.6 billion to more than $3 billion a year. That analysis assumes high oil prices and a relatively modest production decline of 3 percent a year.

The Parnell administration's current official forecasts assume lower prices and steeper production declines, which leads it to project smaller revenue losses if the tax cuts become law.

It's politically advantageous for proponents of tax cuts to show less overall future revenue, so they can show less lost revenue. For opponents of the tax cuts, their argument is strengthened if revenue projections are as high as possible, which which results in much greater estimated tax losses.

A ConocoPhillips executive told investors in February that by 2017 the company could slow the decline in oil production on the North Slope to 3 percent a year, or maybe lower, by using new technology, according to a report in Petroleum News. ConocoPhillips is Alaska's biggest oil producer and one of three major oil companies with leases on the North Slope.

The state's latest forecast predicts an annual production decline of 4.6 percent in 2017 and 7 percent the year after that.

"There's no way the department's estimate of 7 percent decline in those out years makes any sense," Gara said. "They only did it to try and lower the loss" so that the governor's tax cuts don't look as severe.

The issue has lurked since last year when Parnell administration officials alerted some legislators of plans to change how they forecast oil production.

For years the state has overestimated production by including expected production from planned projects that were either slow to develop or never did, Bruce Tangeman, the state's deputy revenue commissioner, said Thursday. The department's new approach is more conservative. The farther into the future the projection, the less oil from new production the state includes in its official forecast, he said.

The Revenue Department estimates that under a maximum 35 percent profits tax, similar to what's now before the House, starting in 2017 the state would lose revenues of $815 million to $1 billion a year, compared to the current tax system, the Palin-era measure known as Alaska's Clear and Equitable Share. ACES was passed in 2007 to replace a corruption-tainted measure.

Using the 3 percent decline figure argued by Gara, and under the state's current price forecast, the tax cuts will cost $25 million to $125 million a year more than the Parnell administration projects for 2017-19. The revenue department says it doesn't agree with the projections done for Gara. But if they're wrong and more oil is produced, it said, the department will adjust its forecast.

Revenue officials are familiar with ConocoPhillip's projections, Tangeman said.

"Those numbers are incorporated into our forecast," he said. "There is no smoking gun. There is nothing that (Rep. Gara) has overturned or uncovered."

The state predicts oil prices between $109 and $118 a barrel through 2019.

If those assumptions about the price are too low, the hit to state revenues grows much bigger. At $120 a barrel, the state would lose roughly $1.6 billion a year under the governor's tax bill. If prices top $150 a barrel, the annual loss could exceed $3 billion, the analysis for Gara says. Tangeman said that unlike its production forecast, the department's price forecasts have been accurate.

Sen. Bill Wielechowski, an Anchorage Democrat who serves on the Senate Resources Committee, said he and Sen. Johnny Ellis were briefed in December about the change in forecasting by Tangeman, Revenue Commissioner Bryan Butcher and Mike Pawlowski, the department's oil tax adviser.

"I was very suspicious right from the moment I heard it," Wielechowski said. "It just seems awfully coincidental that the month before session, when we're about to engage in this historic oil tax debate, the numbers change in such a way that (the new forecast) lowers (the cost to the state) by over a billion dollars, probably a billion and a half dollars."

Last year, a different version of the governor's oil tax cuts, using the previous forecasting approach, projected a revenue loss of nearly $2 billion a year.

If oil development projects are stalling, Wielechowski said, the state should push to find out what is going wrong.

On Wednesday, 560,167 barrels of oil were produced on the North Slope, according to the revenue department. Under its new "risk-adjusted" forecast, it projects an average of 538,300 barrels a day this budget year and 476,900 barrels a day by 2017.

If the oil tax bill passes, and production exceeds the forecast, it may be impossible to tell whether that was the result of the tax cut or a lowball forecast, Wielechowski said.

North Slope production peaked 25 years ago with more than 2 million barrels of oil a day, and has been on a fairly steady decline since.

Reach Lisa Demer at ldemer@adn.com or 257-4390.


By LISA DEMER
ldemer@adn.com
Contact Lisa Demer at LDemer@adn.com or on