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Alaska fiscal year ends with only slight decline in oil production

  • Author: Dermot Cole
    | Opinion
  • Updated: September 28, 2016
  • Published July 1, 2014

FAIRBANKS -- The state fiscal year ended Monday, with oil production for the year averaging more than 529,000 barrels a day, only slightly less than the preceding year and beating the projections offered by the state Department of Revenue earlier this year.

Supporters of the Senate Bill 21 oil tax cut will argue that the decline of less than half of 1 percent from the preceding fiscal year shows North Slope oil production has stabilized, thanks to the cut, with average daily oil production nearly equaling the 531,600 barrels per day pumped in fiscal year 2013.

It is the closest the state has come in many years to avoiding an annual decline in production. The last time there was no year-to-year drop in North Slope oil production was in 2001-2002, when the daily average bumped up past 1 million barrels for the last time.

Oil production peaked in 1988 at more than 2 million barrels a day and has been on a downhill slide since then, as reserves decline at Prudhoe Bay, the largest oil field ever found in North America. Production dropped about 8 percent from 2012 to 2013.

Conflicting interpretations

Production for fiscal year 2014 will become an issue in the campaign over whether to repeal the tax cut. Supporters of the repeal measure on the August primary ballot will argue that the production level is below what the state predicted a year-and-a-half ago -- before passage of the tax cut -- and that actions taken over the past year were largely in motion before the Legislature overturned the previous tax system, known as Alaska's Clear and Equitable Share, in 2013.

As with so much else about SB 21 and ACES, the numbers are subject to conflicting interpretations. Opponents of the ballot measure will say that the decline in North Slope production has virtually stopped and only six months have passed since it went into effect, which demonstrates it was the right thing to do.

The opposing argument is that the state predictions were manipulated and the only real test of oil production is what happens over the long term. Plus, the oil industry had every incentive to prevent production from falling this year because that would weaken the heavily-funded campaign to preserve the tax cut.

Predictions changed

In late 2012, the state predicted oil production would be 538,000 barrels a day in fiscal year 2014. It lowered the prediction in early 2013 to 527,000 barrels a day. Last December, the state lowered its production prediction again to 508,000 barrels a day, which turned out to be too low. The state raised it to 522,000 in the spring, but there were already signs in January that the North Slope would surpass that mark. Perception is important in judging the state of production.

Deputy Revenue Commissioner Bruce Tangeman, who has since moved on to work on the state gas line, told legislators this spring that the department put out a forecast that could be "beat" by the oil companies, leading to claims in a recent administrative tax hearing that the number was set deliberately low, a claim rejected by state officials.

The oil industry has now beaten the state's spring forecast for the year by more than 7,000 barrels per day, but it is not just production that has led to shifting predictions and a debate about statistics.

Last December that the Department of Revenue said state income from the new oil tax law, SB 21, would be about the same as it would have been under the former tax system, Alaska's Clear and Equitable Share, in the fiscal year that started Tuesday.

This was a marked contrast to the discussions that led up to passage of the bill in Juneau, when the financial costs of approving SB 21 had been estimated from $3 billion to $5 billion or so by 2019.

"In FY 2015, we can report that the two systems generate similar revenues at the forecasted price, expenditure and production levels," Revenue Commissioner Angela Rodell wrote Dec. 4. She said the elimination of the provision in ACES that set a higher tax rate at higher prices and the end of some credits would be "roughly offset" by a higher base tax rate and new per-barrel credits.

She said the biggest factor leading to the SB 21 and ACES convergence was the projected price of oil. The state lowered its fiscal year 2015 estimate to $105 in late 2013. The renewed crisis in Iraq has pushed oil prices higher in recent weeks, though there is no guarantee that the current price of about $112 will last.

At the time the tax cut was approved by the Alaska Legislature, the state was predicting oil prices of $112 for fiscal year 2015, not enough to avoid the prospect of a growing deficit.

Deductible costs zoom up

There were also predictions right up to passage of the oil tax cut that deductible lease costs would be $30 per barrel. One of the major flaws in the legislative review was the failure to focus on how and why the $30 estimate might be unrealistic. The consultants hired by the administration and the Legislature stuck to the $30 estimate like glue.

The state has a net tax system that allows certain expenses to be deducted before calculating the tax rate. "Costs of production may include operating expenses, such as the cost of labor or the expense to run a facility, and they may include costs to acquire production equipment or to drill a well -- usually deemed to be capital expenses," the state revenue agency said.

By the end of 2013, the state Department of Revenue raised its estimate of lease expenditures substantially, pushing up the 2015 estimate of per barrel lease costs to $46, up from an estimated $40 in 2014 and $30 in 2013. Deductible expenditures, pegged at $5 billion in fiscal year 2013, were estimated to climb to $6.6 billion in fiscal year 2014 and $7.8 billion in fiscal year 2015.

Exactly how much of this projected spending is due to SB 21 and how much was already in the works and would have taken place anyway is hard to pin down, but in either case the higher spending means lower taxes -- and less money for the state.

"Higher spending is forecast for investment in new developments, such as Point Thomson, CD-5 (Alpine West), and Mustang, while development continues at the Oooguruk and Nikaitchuq units," the Department of Revenue said last December. In addition, the forecast included new spending at Prudhoe Bay and Kuparuk.

The final numbers on per-barrel lease costs won't be known for years, depending upon how long it takes to audit the numbers. A lot of the impact is from the activity at Point Thomson, required under a settlement with the state, but the state doesn't break out those figures.

The final fiscal note prepared for the Legislature in April 2013 said that the SB 21 tax cut would mean a reduction of $420 million to $495 million in state income compared to ACES for fiscal year 2015.

Eight months later, changes in price, production and costs led the department to say that the impact of the SB 21 switch would be "negligible or positive" for fiscal year 2015. That was based on prices of $105 per barrel and a lower production rate.

In December, the state said at $105 per barrel, revenue in fiscal year 2015 would be about $4.5 billion under SB 21, about $1.5 billion below the estimate it had made a year earlier -- based on the ACES system and a prediction that oil would sell for $112.

'Move the needle'

If prices stay at $112 per barrel for the new fiscal year and if production is 530,000 barrels a day -- just above the total in fiscal year 2014 -- revenues under SB 21 would be about $100 million below what ACES would have brought in, $5.7 billion compared to $5.8 billion, according to a revised state estimate. The spring revenue forecast is based on lower prices and an expectation that revenues will be more than $1 billion lower.

Over the last year, the tenor of the oil tax debate has changed from the "move the needle" discussion, in which proponents of SB 21 said that its outstanding virtue was that it would lead to increased investment because Alaska would become more profitable for the oil companies. That has been replaced with statements by the same groups that SB 21 and ACES would keep the needle in the same spot -- except at much higher prices -- so there is no point in repealing the law.

If oil prices rise enough to average $120 per barrel for this fiscal year, SB 21 would generate about $400 million less than would have been the case under ACES, the state now estimates. A year ago, just before the Legislature approved SB 21, the state said the difference at that price would be $800 million.