There is a great deal of discussion taking place regarding the prospect of modifying the state’s formula (ACES) of taxing oil companies for producing Alaska’s oil. This discussion, however, appears to be all talk and little action. There’s the usual finger-pointing in the Legislature among and between the parties. Big surprise.
The state has billions in its savings and a proposed budget that, at the onset, exceeded anticipated revenues thereby requiring a dip into those savings, and constituents with their hands out asking for even more. What politician is going to face down voters in their district and expect to get re-elected if they vote to pass a correction in the tax structure that may impact services or projects in their home district? Our answer is that it will fall on those with the fortitude to look past themselves and make decisions for the good of all Alaskans.
The adoption of ACES has done a very good job of filling state coffers over the short term, but the long-term effects could have some far reaching and critical consequences. So far the debate has focused on creating a climate that stimulates further development on the North Slope in order to keep oil flowing in TAPS and an adequate revenue stream coming to the state. This, of course, is a paramount need for Alaska, but so is the need for a stable economy in order to spur investment from other sectors and to keep those who have already established themselves here.
The uncertainty surrounding the economic health of Alaska in the coming years extends far beyond oil related businesses. Investments in Alaska from other sectors are dependent upon a reasonable measure of risk and an appropriate reward. If you’ve seen the oil production charts that demonstrate the precipitous decline in oil production, you’ll understand how this can resonate with business leaders around the state and make them reevaluate their investment strategies. Action needs to be taken now.
With upwards of 80 percent of Alaska’s revenue stream coming from oil related activity, continued declines will impact every corner of the state. Here at home, with nearly half of all state employees working in Juneau, cuts here are going to be impactful, as will likely cuts to the Alaska Ferry system, which eats up considerable subsidies to operate service to Southeast Alaska. All areas of Alaska will suffer, but Southeast may be faced with most of the uncomfortable outcomes.
We believe there are sufficient oil reserves in the legacy fields and those in developable areas adjacent to them that oil will continue to flow. When it flows is dependent on when we find the right combination of incentives to encourage development aimed at seeing an improvement sooner rather than later. There are some very good models to choose from, Norway’s for one, where there is a good combination of risk/reward features as well as developmental incentives. We certainly don’t have the answer but we know there are intelligent folks in the state or resources elsewhere who can or have developed a viable taxing structure.
We can opt to be a good partner now and develop a structure that keeps oil investments in Alaska or we can wait until our economic outlook turns dire and we’re ready to give up the family farm out of desperation. Let’s not fool ourselves, this is a “wants and needs” relationship. We “need” oil development and we have to convince oil companies they “want” to develop our oil. They have choices and alternatives and we have few. This doesn’t mean we have to cow-tow to Oil’s every whim but it does mean we have to be strategic, deliberate and reasonable.
It has been rumored a special legislative session may be called to address this issue. What a colossal waste of time and resources. There are a few weeks left in the regular session wherein focused and earnest deliberation can address this issue before adjournment. Further delays only add to uncertainty. A lack of clarity is rarely a good business model.