When oil throughput began to decline in 1988, I joined efforts to put more oil into the Trans-Alaska Pipeline System. I have been to D.C. numerous times working to get ANWR open for exploration. I joined Gov. Hickel and others in an epic battle to ensure Phillips Petroleum (now ConocoPhillips), rather than BP, could purchase ARCO so Alaska could have MORE -- not fewer -- oil companies. By opening the door for ConocoPhillips to come back to Alaska as a third major operator on the North Slope, Alaskans are better off today having them on the North Slope.
When issues arise with the oil companies, I always take the side that is best for Alaskans. This brings us to the massive oil tax reforms in SB 21. Had I drafted SB 21, it would have been a balanced piece of legislation with better incentives to bring more oil companies to Alaska, resulting in new oil into TAPS. Should "Vote No" prevail in the primary, as governor, I will follow the wishes of the voters on Proposition 1. However, given my 30 years of working in and around oil and gas issues here in Alaska, I felt it appropriate to explain why I am voting yes on Proposition 1.
First, taxes don’t increase recovery from existing fields, geology and technology do. Production will decline no matter the tax structure. For example, although Kuparuk Field paid almost no production taxes through much of its history, decline continued. In order to stem decline, new fields and reservoirs need to be brought online.
In 2010, Shell Alaska’s vice president showed me their Alaska leases, which were all federal offshore. They are offshore, he explained, not due to ACES, but because they hunt elephant fields. While new elephant opportunities are offshore, there is plenty of oil on state lands and Alaska needs the next wave of independents content with smaller finds. His point was that majors like Shell, BP and Exxon are high-cost operators not interested in the smaller onshore prospects. Smaller operators can leverage a lower-cost structure to take on smaller projects. They hunt deer, not elephants.
Yet while oil decline in Alaska has continued, production has taken off in the Lower 48. That success is due to technology breakthroughs applied to shale plays and the activity of scores of smaller producers, not tax breaks on conventional legacy fields. Alaska should target tax and regulatory changes that will lead to that same success.
If Alaska is to experience dynamic oil production growth it will likely be in one of four areas. First is large offshore pools recently targeted by Shell in the Bering and Chukchi Seas. Since taxes are not paid to Alaska from offshore development, it is not a matter of tax policy. Second, is the exploration of new onshore fields. BP and Exxon will not explore outside of existing fields so tax reductions for them will yield no further exploration. Rather than hoping the larger companies explore for smaller pockets of oil, we want an attractive climate for smaller producers. The third area we should incentivize is the shale plays largely south of Prudhoe. It is not known yet whether they are economic, but the efforts of this large potential resource should be aggressively aided. Fourth, is heavy and viscous oil in the legacy fields (larger fields like Prudhoe and Kuparuk). These are massive in-ground deposits that co-exist with the conventional pools already under development.
SB 21 should have tied tax reductions to direct investment in those areas. Instead it awards reductions for continued production of already producing fields while eliminating the ACES investment credits. While ACES rewarded spending in Alaska, SB 21 rewards existing production, even for oil that will be produced under any tax structure. The result will be more rapid production of the legacy fields, not more oil over time.
And Alaska was already competitive in the legacy fields. If royalty payments to the state as the landowner are added to taxes, SB 21 yields less revenue than typically paid in the Lower 48 or internationally. With the administration’s help, Sen. Bert Stedman, R-Sitka, compared the North Dakota take, from royalty to the landowner and their state taxes, to Alaska’s system. Alaska would have received $1.4 billion more this year under the North Dakota regime. A 2012 analysis to the Alaska Legislature showed ConocoPhillips’s net income in Alaska on a per barrel of oil equivalent basis was approximately four time more profitable in Alaska than their Lower 48 production.
However, ACES does need adjustment. The progressivity rate is too high and investment credits are not adequately focused on yielding large oil production increases. With minor adjustments the balance between revenue to the state and effective incentives can be achieved. Of concern to me is that under SB 21 the producers can take all of their tax savings out of Alaska because the tax concessions were not tied to any reinvestment in Alaska.
Encouraging production solely through tax incentives is also failed policy. Instead, tax breaks should coincide with other steps to encourage new investment and entrants. Wells can be drilled on Mental Health Trust lands in a fraction of the time and cost it takes for other state-managed lands. Cutting the time and cost of permitting will significantly enable development. The state should also ensure new producers can access existing North Slope pipelines and facilities at a reasonable cost, and build roads to new developments to help make exploration affordable.
My concern is that SB 21 will result in depleting existing fields faster but will do nothing to open new fields for the long-term interests of Alaska. There are many dials that can be adjusted to put more oil into TAPS. If SB 21 is repealed, I will work with all parties to bring forth legislation that incentivizes new exploration to bring long-term production of new oil into TAPS.
Bill Walker is an independent candidate for governor. He is a lifelong Alaskan and owns an Anchorage law firm that focuses on oil and gas law.
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