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Oil flow decline key factor in oil tax reform

Posted: May 21, 2013 - 5:00pm  |  Updated: May 22, 2013 - 12:00am

In his May 15 opinion piece that argued in favor of repealing the Legislature’s recent reforms to Alaska’s current oil production tax, ACES, state Senator Hollis French never mentions the most critical issue facing Alaskans: the declining flow of oil through the Trans Alaska Pipeline System (TAPS). Status quo decline jeopardizes every Alaskan’s future and the state’s long-term fiscal health.

This omission is consistent with the position of legislators, including Senator French, who argued during the last legislative session that all is fine on the North Slope, ACES is a good system, and that the Legislature’s passage of tax reform is a “giveaway” to oil companies.

But everything is not fine. A massive oil and gas boom is underway in the Lower 48 and just about everywhere else in the world — including hydrocarbon basins previously in decline. Investment is skyrocketing. Alaska is the notable exception. Why? For three years, energy consultants, analysts, and companies testified to the Legislature that ACES is a major impediment to investment and oil production at today’s prices.

As for the “giveaway,” the ultimate giveaway is already happening — year after year — with continued decline. In 2012, we had approximately 40,000 barrels a day less in TAPS than in 2011. At $100 per barrel, that amounts to about $1.5 billion of economic activity and value, including more than $160 million in state royalties that has vanished from Alaska — in just one year!

The Parnell administration is implementing a comprehensive strategy to turn around our production decline by: ensuring efficient, timely permitting; aggressively promoting investment, drilling, and the vast resources on the North Slope; and making Alaska competitive for oil and gas investment. The cornerstone of this effort was the passage of Senate Bill 21, which ties tax benefits to increased production and makes Alaska’s tax regime competitive with others around the world.

By contrast, those supporting the status quo have not presented a serious, workable plan to increase oil production. Senator French says he’s OK with tax changes tied to production increases. But keeping ACES would undermine that objective: it gives out enormous tax credits and cash payments — estimated to exceed $1 billion next year — to companies that have not committed to producing any oil. Talk about a giveaway!

Although he fails to address the critical TAPS throughput decline issue, Senator French does spend a significant amount of time lauding Norway’s “patriots” and energy policies. But those policies are not always enlightened.

When I served as a U.S. assistant secretary of state, one of my responsibilities was to discourage global investment in Iran, the world’s largest state sponsor of terrorism. One of the larger investors in Iran’s energy sector was Norway and its state-owned energy company. It took years of pressure from the United States before they finally divested.

Instead of Norway, Senator French should be looking closer to home for policy inspiration.

In 2010, the Alaska Legislature recognized the state faced serious problems with declining Cook Inlet gas fields. As a result, it enacted significant tax and regulatory reform to attract new investment and enhance gas deliverability.

Since then, the Parnell administration has worked hard to facilitate gas storage, assess Cook Inlet’s undeveloped resources — which are plentiful — and aggressively promote new investment and drilling.

We’re not out of the woods yet, but there has been a huge turnaround in Cook Inlet in a short amount of time. Hundreds of millions are being spent to explore prospects and boost production from older fields. We are seeing significant increases in drilling rigs and oil and gas production. Critically, producers are telling Southcentral utilities that they can meet consumer gas demand for several more years.

This Cook Inlet renaissance is improving energy security for many Alaskans and creating high-paying Alaska jobs. It’s been an all-hands-on-deck effort to make us more competitive for investment dollars, and it’s working.

We can do the same on the North Slope. Sixty-five percent of the Alaska Legislature joined our governor in growing Alaskans’ opportunity by filling the pipeline. They passed a new tax system focused on new production. Senator French should join this effort instead of defending the status quo of decline.

Dan Sullivan is the commissioner of the Alaska Department of Natural Resources.

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