Alaska voters on Aug. 19 will decide one of the most critical issues in state history. They'll choose the complex law that will produce most of Alaska's tax revenue in the coming years.
Will they pick the More Alaska Production Act? The law was passed in 2013, with supporters arguing it would encourage greater oil production.
Or will voters select Alaska’s Clear and Equitable Share, the old law that brought the state billions of extra dollars but slashed profits for the state’s oil producers?
One thing is certain: The facts seem to get squishier by the day.
Even one of the most central issues -- which law will produce more revenue for Alaska -- has no clear answer. That’s because the outcome is based on future assumptions -- such as the price of oil -- and no one knows the future.
With such thorny questions looming, it's no doubt many voters will go with their gut.
And no wonder. Should they trust the multimillion dollar ad campaign funded in large part by the law’s biggest beneficiaries -- BP, ConocoPhillips and Exxon Mobil? Or the Parnell administration and its numbers -- some of them confidential? Or the ‘Vote Yes’ groups whom critics say will undermine the economy and ward off investment if they successfully repeal MAPA?
In hope of helping voters cut through some of the rhetoric, here's a breakdown of some of the major issues surrounding the vote.
What are we voting on?
Ballot Measure 1, which began as a citizen’s referendum to repeal the More Alaska Production Act. MAPA became law this year. If it is repealed, ACES would again be law.
Why is the vote critical?
Oil pays most of the state’s bills, and the state’s biggest oil producers are the state’s biggest taxpayers. By far.
But oil production in Alaska has fallen for a quarter century, from 2 million barrels in 1988 to one-fourth that today.
Now, production has reached critically low levels. The state’s long-term economic outlook appears bleak, with tax revenue declining and years of billion-dollar deficits anticipated.
To slow the decline in oil production -- and increase revenue -- Gov. Sean Parnell introduced Senate Bill 21, which his administration later renamed MAPA.
Critics say it won't work.
How’d we get here?
In the wake of corruption.
ACES was introduced to the Legislature in 2007 by then-Gov. Sarah Palin. At the time, the FBI had launched a sweeping corruption investigation that would eventually lead to jail time for some state lawmakers and top officials with now-defunct oilfield service company VECO. Also, the state’s 2006 production tax law -- created by some of the same lawmakers implicated in the scandal -- produced far less revenue than expected.
Palin, a Republican, worked with members of both parties to overhaul the oil-production tax. She argued that ACES met the Alaska Constitution’s mandate that resources be developed for Alaskans’ “maximum benefit.”
The law’s key feature was a tax rate that rose with oil prices, or “progressivity.” The escalator kicked in after producers netted $30 a barrel.
As chance would have it, oil prices rose, from monthly averages around $60 a barrel in 2006 to sometimes double that. Suddenly, the state was raking in massive revenues -- along with oil companies -- and shoveling billions of dollars into savings accounts.
But while the law provided incentives for new fields with generous tax credits, oil production continued to fall, dropping by 200,000 barrels a day in six years, from 734,000 barrels a day in 2007. The decline is part of the long-term drop in production that has occurred primarily because the state's huge oil fields are aging and much of the oil -- 17 billion barrels since 1977 -- has been removed.
Gov. Sean Parnell, the lieutenant governor who replaced Palin after she quit office early, initially supported ACES. But he began working to replace the law after he was elected governor in 2010.
The first bill Parnell introduced failed for two years, but he had success with Senate Bill 21 in 2013. In a key step, the act passed the Senate by the narrowest of margins, 11-9. Only Republicans voted for it, including two senators who work for ConocoPhillips, Sen. Kevin Meyer and Sen. Pete Micciche. Two Republicans, Sen. Bert Stedman and Sen. Gary Stevens, voted against it.
Shortly after the tax cut passed, former state lawmakers Ray Metcalfe and Vic Fischer, along with others, organized a campaign to gather enough signatures to put the repeal question on the ballot.
They argued that the new law gave away too much to the oil companies and did not provide enough to the Alaskans who owned the oil. In three months they reported gathering more than 50,000 voter signatures across the state -- more than enough to put the question before voters.
What does voting ‘Yes’ mean?
A "Yes" vote means you disagree with the new tax law and don’t want it. If the initiative passes, ACES is put back on the books.
What does voting ‘No’ mean?
It means you agree with the new tax law and want it to remain in place.
MAPA vs. ACES: A key similarity
Before the taxing begins, both laws allow producers to deduct many expenses, meaning the state shares in the cost of exploration and development.
For example, a barrel of oil has recently been selling for about $105 a barrel. But the state taxes only a portion of that. In the current fiscal year, the state expects tax-deductible expenses to average $56 a barrel. That leaves $49 to be taxed.
MAPA vs. ACES: Key differences
Of what is left to be taxed, the new law increased the base tax rate to 35 percent, up from ACES’ 25 percent.
But it removed ACES’ steep progressivity, eliminating the trigger that allowed the state to rake in windfall revenue as oil prices rose.
The new law offers a per-barrel credit -- the state pays producers a certain amount for every barrel produced -- that critics say essentially lowers the base tax rate.
The costliest per-barrel credit now goes to the older legacy fields, owned primarily by BP, Exxon and Conoco. The credit ranges from $0 to $8 a barrel, with the state paying the producers less as oil prices rise. Above $160 a barrel -- a price that has never been reached -- the state offers no credit.
At recent prices of about $105 a barrel, the state provides $6 a barrel. With oil production at about 500,000 barrels per day, the state is on track to provide at least $800 million a year in credits for oil produced in legacy fields such as Prudhoe Bay, Kuparuk and Alpine.
New fields or newly produced oil -- called GVR or Gross Value Reduction oil -- receive the best deal, including a flat, $5 per-barrel credit. Economists and critics have said that new oil will result in little to no tax income for the state, eventually bringing down the value of MAPA as more new oil comes on line. Supporters of MAPA have said the state will enjoy some tax revenue as well as royalty benefits and jobs from that oil, which they say has a greater chance of being produced under MAPA.
ACES had its own credits, and opponents of ACES bash those. They say they weren’t effective at getting new oil in the pipe and threatened to bankrupt the state as new development came on line and explorers and producers claimed credits. Ironically, some of the projects that may come on line in the coming years advanced under ACES, though some say not quickly enough.
Mike Pawlowski, deputy commissioner for the Department of Revenue, said in a recent comparison that the new law will pay the oil companies more in deductible credits this fiscal year, $903 million versus the $824 million that ACES would pay.
Which law will bring the state more revenue?
That has been all over the MAPA, so to speak.
In 2013, just days before MAPA passed the Legislature, the Parnell administration said it would bring the state about $700 million less in revenue a year, averaged out over a five year period, assuming no new production.
Now, the administration says MAPA could actually bring the state more tax revenue than the old law, at least this year.
What changed? The numbers that go into the formula. They include:
• Oil price assumptions are lower. When the bill passed, they were expected to average $111.67 a barrel for the current fiscal year. They’re now expected to average $105.06.
• Expected per-barrel costs are higher. Deductible lease expenditures rose more than 50 percent in just two years. The last full fiscal year ACES was in effect, in 2013, the companies deducted $30 a barrel. This fiscal year, they expect to deduct $46 a barrel (plus another $10 in transportation costs).
That leaves $49 per barrel to tax. After producers take home $30 of that, ACES' progressive rate does not have much room to rise, giving MAPA the edge under such assumptions.
Producers’ submitted expenses are deemed confidential taxpayer information by the state. The data is visible to the oil companies and some officials at the Department of Revenue, but has not been independently verified.
In the current fiscal year, the Parnell administration broadly estimates the new law could bring in $79 million more in revenue than the old law would, if predictions hold true.
But that advantage for MAPA may be short-lived. A researcher with the Institute of Social and Economic Research, Matt Berman, produced a recent analysis of the two laws, saying that once the high tax-deductible costs of ExxonMobil's Point Thomson development are removed in the near future, ACES brings in more tax revenue. Saying he used Department of Revenue assumptions for oil price, production costs and production levels, Berman found that ACES will bring the state $1.3 billion more over the next five years.
One thing that most agree on is this: MAPA brings in more tax revenue to the state at lower oil prices. ACES brings in more tax revenue, possibly much more, at higher oil prices.
Why would the Big Three spend millions to keep MAPA?
One answer is this: ACES' progressivity.
If prices spike to around $120 a barrel, ACES’ progressive feature can make more money for Alaska than MAPA, a lot more if oil prices rise even further.
ACES' progressivity, which both sides agree was too high, has been cited by oil executives as a key reason ACES should be banished forever. The progressivity will remove huge profits from the producers if say, there’s a Middle East conflict or some other crisis that forces world oil prices higher.
A temporary boost in production? Or something more?
In the fiscal year that ended June 30, oil companies slowed the long-term production decline to almost nothing, the administration says. The state says the decline was .13 percent, the second-smallest drop since 1988, versus an unusually large drop of 8.2 percent the year before.
Some critics say the oil companies delayed well enhancement projects the previous year, so they could ramp up the efforts and more easily improve oil flow after MAPA passed. Also, there is dispute over whether the state simply lowered its production estimates so they could more easily be beaten, about how long the boost will last, and whether the new tax law should get all the credit. Finally, critics of the new law say it does Alaska no good to drain legacy fields faster, when that oil will be produced eventually, possibly at better returns.
Some recent increases have occurred at Italian major ENI's Nikaitchuq field and the Oooguruk field, operated by Caelus Energy Alaska. Both fields began producing under ACES, Oooguruk in 2008 and Nikaitchuq in 2011.
Also, BP and ConocoPhillips, operators of Prudhoe Bay and Kuparuk, the nation’s two largest oil fields where Exxon is also a partner, have been conducting well enhancements to improve flow.
Conoco said the new law enabled it to add two new drilling rigs to its North Slope operation, which now produce about 7,000 barrels per day.
New projects planned?
The Big Three say they're pursuing projects that could add at least 80,000 barrels daily, thanks to MAPA.
Conoco said it could add 40,000 daily barrels by 2018 at three projects, including the Greater Mooses Tooth No. 1 in the National Petroleum Reserve-Alaska. It will begin seeking executive approval late this year -- after the vote -- a spokesperson said.
Opponents of the new tax have said the projects were moving forward under ACES. ConocoPhillips has said they’re more likely to be approved for development and financing with ACES removed.
Conoco has said it will add a third additional rig in 2016, in partnership with Doyon Drilling, a Native-owned corporation.
BP said it plans to add two additional drilling rigs to the North Slope, one next year and a second in 2016, because of the tax change. It has also said MAPA helped it win approval from partners Conoco and Exxon to evaluate $3 billion in projects in Prudhoe Bay’s west end, which could lead to first production in 2018 that later peaks at 40,000 barrels per day. Another BP project, Sag River, is scheduled to move into a first phase of development in 2015 and 2016, thanks to MAPA and new technology, to unlock a field containing 200 million barrels.
Supporters of MAPA have also said raising financing for smaller projects developed by independents, such as Brooks Range Petroleum's Mustang field, which also had moved forward under ACES and is set to begin producing in 2016, is now easier.
MAPA opponents are skeptical. They note that Parnell administration figures show continued declining oil production. The latest figures show production falling to 315,000 barrels of production in 2023, from 521,000 that had been estimated for 2014.
State officials have said they're optimistic the numbers will continue to improve, once pending developments are more certain.
Making their case
We asked six advocates on either side of the issue to make a simple argument for why voters should support their position.
For the repeal:
Gregg Erickson, longtime economist: "The reason they should vote for repeal is the benefit to Alaska is so much smaller, in terms of increased production, than what is lost to Alaska by cutting tax rates at high prices. If oil prices are low, MAPA really doesn’t matter much, it’s not that different from ACES. But if we have another big run-up in oil prices, that’s when we get the windfall that gives us a cushion of savings that allows the Alaska economy not to be strangled if prices fall or production falls."
Sen. Bert Stedman, R-Sitka: "The farmer in North Dakota is negotiating a better deal for his hydrocarbons than the sovereign state of Alaska that has the two largest conventional oil fields in North America. And we the resource owner, the collective citizens of this state, should be fairly compensated for our hydrocarbons. Senate Bill 21 (MAPA) does not do that."
Sen. Bill Wielechowski, D-Anchorage: "ACES created a win-win for Alaska and the oil industry. It led to all-time highs in oil company jobs and investment, and the oil companies made over $43 billion at rates of return of over 123 percent at Prudhoe Bay. Senate Bill 21 (MAPA) would have cost Alaska $8.5 billion over the last seven years, and is projected by Gov. Parnell to cost another $4.6 billion over the next six years. The governor is projecting a 45 percent decline in oil production under SB 21 over the next 10 years, and “new” oil will result in a negative value to the state -- and cause Alaska to actually lose money on production taxes. This is not acting like an owner state."
Against the repeal:
Tony Knowles, former Democratic governor: "Since we Alaskans own the oil and gas, it’s our responsibility to have a smart business strategy on how to develop it. In many ways we sit in the catbird’s seat. We don’t take any risks, we never drill a dry hole, and we don’t spend any money on exploration or maintenance. The business obligation we have is to design a system that gives incentives for someone else to take risks and spend money to increase production. What we do know is production and exploration were declining for the last seven years. Changes were recently made and if they don’t work we need to keep trying other solutions. The only wrong step is to keep doing things that haven’t worked."
Rick Mystrom, former Anchorage mayor: "If the ‘Yes’ vote prevails on Proposition 1, were in for a long economic decline. The gasline will very likely not happen and more exploration and production is not going to happen. But if the ‘No’ vote passes, we’re headed for 10, 20 years of prosperity, depending on whether a gasline goes or not. But even if it does not, a lot of projects have been announced. I think we’re headed for a lot of prosperity."
Andrew Halcro, Anchorage Chamber of Commerce president: "I’d simply say the previous tax structure killed investment. It created disincentives for investments and the new tax regime is working and putting more oil in the pipe."