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Celebrating independence by signing referendum on Alaska oil tax cut

  • Author: Bert Stedman
  • Updated: September 29, 2016
  • Published July 5, 2013

This week, Americans celebrated the declaration of our independence from the British and the birth of our country based on democratic principles and individual rights enshrined in our Constitution. In light of this important holiday, I find it rather fitting that on the Fourth of July my family and I exercised our right to petition the government by signing the referendum to repeal SB 21, the new petroleum tax that undervalues our oil. Every Alaskan who signs the referendum to repeal SB 21 is simply expressing a desire to participate in a public debate about the selling price of their primary resource. I'm proud to place my name on the referendum with other Alaskans who want to exercise their fundamental right to participate in the government process.

In the last legislative session, I opposed SB 21 because I believe the tax breaks are too generous for oil produced from Alaska's legacy fields of Prudhoe and Kuparuk, and it's for the same reason I support the repeal referendum. It's not necessary to reduce the tax in the legacy fields where production is already economic. The net present value and the internal rate of return surpass the industry's hurdle rate and are extremely profitable. Today, the value of the remaining reservoir is higher than the cumulative value of all the oil produced to date. A 2011 court decision found there are approximately 7 billion barrels of proven reserves that are "technically, economically, and legally deliverable" in the legacy fields. This value is slightly under $800 billion at current oil prices, and those prices are estimated to go up.

In addition to the favorable economics in the legacy fields, the decline rate and the amount of investment needed to reverse that decline must be taken into consideration. One of the arguments used by supporters of SB 21 to justify their efforts to reduce the production tax for BP, Conoco and ExxonMobil is the decline rate. They argued that we can reverse the decline in production if we simply reduce the production tax. Even though the tax cut supporters were well intentioned, they were misinformed. There is very little, if any, correlation between tax policy and the decline rate on the North Slope. The decline in production has been ongoing annually since 1988 (when the tax was close to zero under ELF) and is driven by the available technology and petroleum basin geology. Oil production rates decline as a function of time and are caused by the loss of reservoir pressure and the changing volumes of the fluids produced. Prudhoe Bay is experiencing a normal hyperbolic curve decline rate very comparable to similar petroleum basins around the world.

The decline in production from our legacy fields is irreversible without major investments in technology and facilities. Two years ago in the Senate Finance Committee we heard testimony from Dale Pittman, who was the Vice President of ExxonMobil Alaska at the time. He said that we will need the addition of two projects per year, equivalent to Nikaitchuq, to stem the decline. Nikaitchuq cost $2 billion and will reach peak capacity of 25,000 barrels per day. So industry will have to invest $4 billion dollars every year just to stem the decline. The recent announcement by BP that together with Conoco and ExxonMobil they plan to invest $1 billion over the next five years is only $200 million per year and $3.8 billion per year less than what's needed to reverse the decline. Irrespective of the investment needed to stem the decline rate, an additional 90,000 barrels per day will be needed to make up for the lost revenue as a result of SB 21. The amount of investment needed to produce that much more oil is staggering and could be as high as $7 or $8 billion per year. That level of investment from the three major oil companies is not going to happen anytime soon. It is foolish for the state to relinquish upwards of $1 billion per year from already profitable and economic oil fields where the tax structure is not broken in exchange for a hope and a prayer that unrealistic investments will materialize out of thin air.

The bottom line is that the oil in Alaska's legacy fields is an extremely valuable resource on an international scale and is owned collectively by the Alaskan people. The production tax rate is nothing more than the selling price of that resource. It was the Legislature's constitutional obligation to make sure Alaskans reap the maximum benefit from that resource, and SB 21 falls far short of satisfying that constitutional mandate. Should the referendum receive enough signatures to get on the ballot, the question of whether SB 21 represents a fair one-time payment for the removal of Alaska's oil will finally be answered by the ultimate authority in this state, the people who own the resource.

Sen. Bert Stedman, a Republican from Sitka, represents the Southeast in the Alaska state Senate and served 6 years as co-chair of the Senate Finance Committee.

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

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