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SB 21 has fired up investment in Alaska's oil and gas

Jonathan Katchen
OPINION: In my professional experience, the passage of SB 21 has triggered more capital investment in Alaska's North Slope, and that's key to continued prosperity.
Stephen Nowers illustration

Much of the discussion surrounding our oil taxes is driven by emotion and ideology instead of facts. Most Alaskans want a vibrant oil industry that generates good paying jobs, keeps the oil flowing for years to come and provides Alaskans with a fair share of revenue. Here’s why voting to repeal SB 21 will jeopardize these goals.

My firm represents many of the independent oil and gas companies operating in Alaska. We have seen a surge of interest from investors and oil companies since ACES was repealed. What we are hearing from our clients and potential investors is that SB 21 encourages investment and rewards production. As a result, there has been a flood of money coming to the independent oil and gas companies operating on the North Slope. With additional investors looking to lend money to the independents, the cost of borrowing is plummeting – some companies have seen the cost fall by more than half because of the amount of competition from eager investors looking to get in on the action. With more investors interested in loaning money at cheaper rates, the independent companies operating on the North Slope now have additional capital to spend on their drilling and development programs, which in turn means more jobs for Alaskans, more production and more revenue for the state.

In 2010, DNR Commissioner Dan Sullivan and I traveled around the country to market Alaska’s oil and gas resources. In meeting after meeting we heard the same refrain from the oil and gas companies and investors: There is a ton of money looking for investments but Alaska has a terrible tax regime. We responded by saying that ACES offered lucrative incentives and credits that offset the high tax rates. They didn’t care about the incentives because ACES was viewed as a punitive regime that was too complicated. In these meetings we repeatedly heard a version of the same three points:

(1) ACES takes away the “upside” by imposing a 80 percent marginal tax rate at high prices;

(2) ACES is uncompetitive with other jurisdictions because it is one of the highest tax regimes in the world; and

(3) ACES is too complicated.

One investment banker remarked that he could not tell his client (a large oil and gas company looking to acquire leases in Alaska) what the company’s production tax would look like at various prices because ACES’ progressivity factor, which was eliminated by SB 21, made the calculation virtually impossible.

After I left the state for private practice in 2012, I saw firsthand how ACES was preventing capital from flowing into the state. This changed dramatically after SB 21. In the past year, new companies like Caelus Energy, Hilcorp and Miller Energy have begun to acquire leases on the North Slope and have stated that they are eager to invest. Other companies that had acquired leases under ACES, like Royale, Linc and NordAq, are now pursuing drilling programs. And Brooks Range Petroleum Corp., which has been one of the most active explorers on the North Slope over the past 10 years but was unable to secure the financing to put its discoveries into production because potential investors were not willing to invest under ACES, recently announced that it is now moving its fields into production.

Repealing SB 21 could undermine these positive developments largely because changing our tax regime will send a terrible signal to the capital markets and industry. Five different tax regimes in an eight-year period tells investors that Alaskans are unreliable and the tax regime is unstable.

Here’s the bottom line: Since ACES was repealed we have seen an infusion of capital into the state and a record amount of drilling. We have real competition in the capital markets and on the North Slope. New companies have arrived eager to explore and develop neglected prospects. And there is finally a willingness from the capital markets to finance their exploration and development programs. As a result of the added investment and drilling, our future looks bright – there are at least six development projects on the North Slope that are underway and are expected to be in production by 2016 generating a significant amount of production, jobs and revenue. More are just getting started. Given these positive developments, we should give SB 21 a chance to work.

Jonathan Katchen works at Crowell & Moring LLP, which represents many of the independent oil and gas companies operating in Alaska.

The views expressed here are the writer's own and are not necessarily endorsed by Alaska Dispatch News, which welcomes a broad range of viewpoints. To submit a piece for consideration, email commentary(at)alaskadispatch.com.