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Budget problem can't be solved by cutting into an already hurting North Slope oil patch

  • Author: Kara Moriarty
  • Updated: June 29, 2016
  • Published December 9, 2015

I don't need to tell Alaskans that times are tough for the industry. What is different this time, unlike the last major downturn in the industry in the late 1980s, is that production is no longer surging through the pipeline. We need more than just time and patience for the price to rebound and save us again.

I want to focus on three key policy objectives that are more important than ever. These are not just buzzwords, but necessary policy objectives that are crucial to the continued success of not just Alaska's largest private sector industry, but the state's entire future.

The first is competitiveness. Alaska still has so much potential for oil and gas, but we are not the only place on the planet with these natural resources, and our costs are high.

According to the most recent available data, the Fall 2015 Department of Revenue Sources Book, actual transportation, operating and capital costs for fiscal year 2015 on the North Slope were $50.33 per barrel, before any taxes or royalties were paid. Industry has to pay these costs regardless of Alaska's fiscal system. The average oil price was $72.58 per barrel for that same fiscal year. Well, we know that price is no longer that high. In fact, oil prices today are hovering around $40 per barrel. While oil price have dropped by roughly 45 percent since fiscal year 2015, cost estimates according to the DOR remain about the same, if not slightly higher. The point is, Alaska has a very high cost of doing business regardless of taxes and royalties.

Missing in all the conversation of declining oil prices and state budgets, is the focus on getting more oil in the pipeline. More oil would alleviate a lot of pain right now, but somehow, the focus has shifted away from more oil in the pipeline to more money in the state treasury.

We are not alone in this struggle. Other oil regions are facing challenges at low prices too, but Alaska is unique in one key way: No other state is so dependent on one industry to maintain the well-being of its economy. No other state faces a crisis quite like ours.

This brings me to the second objective: stability.

With our state budget directly tied to oil price and oil production, and the state facing huge shortfalls this year, the stakes have never been higher. Leaders across the state have already begun serious discussions about where and how to cut the budget and generate more revenue. There have been discussions of instituting a broad-based tax, which would be a huge shift for Alaskans, many of whom have never had to pay for state services. And unfortunately, some of the same voices have already begun calling for taking more from the industry, which is not surprising, but still disappointing.

In this new era, we desperately need more from our leaders than the tired and counterproductive strategy of "before we do anything else, just raise taxes on the oil and gas industry."

Changing the rules every time the price of oil goes up or down creates a haphazard, unfavorable business environment. You wouldn't take out a mortgage whose terms may change every time the stock market goes up or down, so how can we expect the oil industry to do the same?

This time, the situation is different and we as a state must adapt. The industry has carried the load for almost 40 years, but there is simply not enough to keep that model going. As Gov. Walker's budget director said during the last legislative session, "oil is not the answer" to the state's budget shortfalls.

The third objective is predictability.

To the extent possible, companies making billion-dollar decisions need to be able to plan for the long term. Confidence that the rules today will be the rules tomorrow is critical to companies analyzing where to spend their increasingly limited investment dollars. Recently, the situation has only gotten more tenuous because industry knows that a proposal to change our tax system is coming, but we don't know what it is. This causes even more unnecessary uncertainty.

Simply jacking up tax rates or tossing aside oil tax credits are not realistic solutions. Even the Senate Democrats' outgoing press secretary admitted that hiking oil taxes and changing credits won't solve the state's budget problems in his now infamous resignation letter where he said, "That doesn't get you there, and you all know it."

It is not my place to make recommendations about how the state should restructure its finances. I applaud the governor, legislators and community leaders for at least beginning to talk about how serious the problem is, and what potential solutions might look like. Whatever proposals emerge, they must be realistic and honest about how the state and the industry have changed and what impact these decisions will have for the long term.

Industry stands ready to work with leaders to ensure policy changes will lead to a healthy industry and Alaska for years to come. It is an uncertain, gut-wrenching time, and it may even get worse. All of us know someone who has lost a job or been forced to lay off employees. These are agonizing decisions. But through change comes opportunity, and we still have so much of it left in Alaska. If we stay focused and unite around smart policies like competitiveness, predictability and stability, we will thrive together.

Kara Moriarty is executive director of the Alaska Oil and Gas Association, a nonprofit trade association.

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@alaskadispatch.com.

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