Tim Bradner: SB 21 better than ACES when it comes to revenue and incentives for exploration

Tim Bradner
OPINION: Two arguments made in support of Ballot Measure 1 really surprise me. One is that the change will cost revenues and rob future state budgets. The second is that SB 21 takes away incentives for oil exploration. Both are wrong. The reality is just the opposite. Loren Holmes photo

The contentious vote on Ballot Measure 1, asking voters whether or not to repeal the oil production tax change made in 2013, is seven days away.

Relief is coming. No more bombardments, pro or con.

But since everyone else is blathering on about this, I want my final two cents’ worth.

Two arguments made for the repeal, and against the new tax law, really surprise me. One is that the change will cost revenues and rob future state budgets. The second is that SB 21 takes away incentives for oil exploration, which everyone supports (we need more oil in the pipeline).

Both are wrong. The reality is just the opposite.

I explain: On the budget impact, the fact is that a repeal of SB 21 and a return to the former oil tax, ACES, actually exposes us to more financial risk if oil prices drop.

It’s now well-established that ACES and SB 21 bring in about the same revenues at the current oil prices and costs. However, if ACES now returns, there will be a big near-term hit to state revenue because of a 20 percent capital investment tax credit in ACES that was repealed in SB 21.

The oil producing companies have really ramped up drilling and other work in the last year and, under ACES, we will pay 20 percent of all those capital investments. More particularly, we pay 20 percent of the $4 billion Point Thomson gas project now under construction. That’s $800 million. Ouch.

In the longer term, ACES will expose us financially if oil prices drop, more so than SB 21, because of the way ACES is structured. The tax formula in ACES is sensitive and reacts quickly to oil price changes, ramping up taxes quickly when prices rise but down just as quickly when prices drop. That’s great for us if there’s a cycle of high oil values but not great if oil values drop.

We saw exactly this happen last year with a sharp, unexpected drop in oil revenues that created a $1.8 billion budget deficit. ACES was partly in effect last year and is partly responsible.

This will happen again if ACES is restored because we appear to be in a cycle of lower oil prices due to large volumes of shale oil being produced in the Lower 48 and production increases in Russia and elsewhere.

In contrast, SB 21’s effects are more levelized. It provides more revenue protection on the downside (lower prices) but at the expense of sharing more of the upside (higher price income) with the oil producers. This is a tradeoff, but I think it's pretty important that our revenues are better protected in a price downturn. Slumps do happen. Many of us remember $8 per barrel oil prices in 1998. Those were scary times.

Another aspect of this is a mechanism in both ACES and SB 21 that is intended to provide a margin of protection in a serious oil price slump. This is a tax “floor,” a 4 percent gross revenues tax that kicks in to replace the normal net revenue tax at a certain (low) price.

A problem is that the ACES “floor” tax has a hole in it and is defective. That’s because ACES allows various investment tax credits extended to industry to count against the 4 percent floor. In contrast, SB 21 does not allow the tax credits to apply to the 4 percent tax floor. It provides protection that ACES does not.

Let me turn to new oil development incentives. We need new oil in the pipeline because without it our state finances are toast, no matter which law is in effect.

First off, Alaska has a long-standing exploration incentive tax credit that is not affected by the ACES and SB 21 debate. It remains either way the vote goes. However, SB 21 enhanced the exploration incentives for unexplored parts of the state to help nearby rural communities secure new sources of energy. If SB 21 goes away, those go away too.

More fundamentally, however, a 20 percent capital investment tax credit in ACES does not effectively help development once an explorer has found oil.

It helps at the beginning, and explorers say they appreciate the tax credits, and subsidy, for up-front expenses. But explorers still worry that ACES’ unpredictability, due to its complex structure, will make it difficult for them to actually develop something they find. For example, Repsol, a new company to Alaska, has discovered new oil but has said it is worried whether this can be produced economically under ACES.

SB 21 provides a more effective new oil development incentive with a per-barrel tax credit for new oil. This will be more effective than the capital investment tax credit because to get the credits new oil must be produced. Under ACES all that has to be done is to spend money, even on things that don’t produce new oil.

There are also tax credits in SB 21 for “old” oil, from existing fields, which is a point of controversy. While there are good arguments for those (there’s “new” oil even in those old fields) these credits at least merit a debate. But to say that SB 21 has no provisions for new oil is simply untrue.

What’s really odd in this debate is that most of the critics of the tax change are legislators who have themselves championed “new oil” tax credits in their own proposals for changing ACES. The concept seems widely supported, though the amounts can be debated.

To sum up: If we want more security for state funding, we need more oil in the pipeline. In the last year since SB 21 was passed, we’ve seen a remarkable surge of industry activity on the North Slope. The producing companies have ended, or nearly ended depending on who is counting, the production declines that have averaged 6 percent yearly since 1989 including the years ACES was in effect.

That’s a pretty remarkable performance. It shows that SB 21 will do a better job than ACES in getting new oil into the pipe.

Tim Bradner is a natural resources writer for the Alaska Journal of Commerce. He also worked in BP’s external affairs group from 1970 to 1984.

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.