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Joe Balash: SB21 was result of ACES' failures

Joe Balash
OPINION: When ACES was created in 2007, it was with a focus on investment. But time has shown that the incentives didn't work as intended. Senate Bill 21 is the solution, and the way forward for Alaska's future. Loren Holmes photo

For those that don't know me, I was raised as an Air Force brat in North Pole. Maybe it is the former wrestler in me, but when it comes to Alaska's future -- and that of my family -- I have a hard time sitting on the sidelines. Over the past decade, I've been square in the middle of all the fights over Alaska's oil and gas policy. In those fights, I served a key legislative aide who fought against former Governor Murkowski's gas pipeline agreement, then as a special assistant to Governor Sarah Palin, who worked on the development of Alaska's C​lear and E​quitable Share, and now as the commissioner of the Department of Natural Resources who helped craft Senate Bill 21.

In 2007, we developed ACES with a focus on investment. We built on a feature of the Murkowski-era tax called progressivity to ratchet taxes up as profits increased. It was built on the theory that companies would have large incentives to reinvest their profits here in Alaska. After ACES passed the Legislature, I supported it, defended it, and watched the numbers to make sure we told Alaskans what the oil companies would not.

In the first couple of years after ACES passed, the numbers were with us. While a roller-coaster of oil prices made things interesting, oil prices were generally rising and Alaska was seeing the benefit of increased investment and more jobs. We were basically keeping pace with the rest of the U.S. and even the world in 2008. In a fiscal year that ended that June, oil prices had averaged $96 per barrel, and our oil was worth $20.4 billion at the wellhead (after royalties). We collected $6.8 billion in tax revenue.

By 2010, we started to see a difference, though, in how much investment was going into places in the Lower 48. We dismissed it as an exception -- new-fangled wells in the Bakken were the reason, we assured ourselves. But the data from the rest of the world started to look the same. They were seeing a significant increase in energy investment. Where was Alaska's investment? We were holding up with what we had seen the year before, but no new growth. And throughput in TAPS was continuing to decline.

As data continued to come in, we saw more and more evidence that a tidal wave of investment was creating opportunities all over the world. By 2012 that tidal wave had washed ashore everywhere but Alaska. Over the last decade, energy investment in Alaska had more than doubled -- which was great -- but in the rest of the world it had doubled twice! How many opportunities had Alaska missed out on? How many wells were not drilled? How many barrels were not produced? We have no real way of knowing.

What we do know is that the theory behind ACES was wrong. Its incentives did not cause companies to make the type of investments we need in Alaska. After the completion of Nikaitchuq, which had started before ACES, not one new field has been brought on to production on the North Slope. But at least we were getting our fair share of the oil, right? The answer might surprise you. In the fiscal year that just ended, oil prices were $10 higher per barrel. With oil prices at an average of $106 our oil was worth $16.0 billion at the wellhead (after royalties) and we would have collected $2.6 billion in tax revenue under ACES.

To compare fiscal year 2008 to 2014: oil prices rose $10 per barrel, but our oil was worth $4.4 billion less. The real kicker is that our tax revenue went down $4.2 billion. For me, this is the final nail in the coffin of ACES. Under ACES, we as Alaskans are taking all of the downside to these changes in price and are the most exposed as production falls. Our schools, our roads, our university are all suffering the consequences of a tax theory that didn't work out.

As a member of the cabinet, and the one responsible for seeing to it that Alaska's oil and gas is produced for the benefit of our citizens, I pitched in with the Department of Revenue to come up with a better tax policy. We knew we needed to improve the investment climate, but had to keep at the front of our minds the charge to be fair to Alaskans. The result: Senate Bill 21.

The key feature of the legislation is the balance that has been restored to our tax system. At today's prices and conditions, we are actually realizing more revenue for Alaskans. With the increased investment projected -- $10 billion more than under ACES -- and the associated jobs and production that will come with it, Alaskans are and will be better off in the decades to come.

Joe Balash is commissioner of the Alaska Department of Natural Resources.

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.