The following editorial first appeared in the Fairbanks Daily News-Miner:
The $1.7 billion that ConocoPhillips expects to spend on projects in Alaska during the coming year is good news for the state on balance, but there’s no denying it will have a negative effect on the state’s revenues.
The company’s 2014 $1.7 billion capital spending plan is up $600 million from this year and is double 2012’s number. That should mean a lot more jobs for Alaskans.
However, much of the spending will be deductible from ConocoPhillips’ taxes, which will cut deeply into the state’s revenues.
That’s the case regardless of whether we stick with the oil tax system approved by the Legislature in the More Alaska Production Act or we repeal it and return to the previous system, Alaska’s Clear and Equitable Share.
Both tax systems are designed to give companies an incentive to develop more wells and increase oil production, which in the long term will benefit the state’s revenue stream. Some might be surprised to learn that the deductions would cut more deeply into the state’s revenues under ACES than under the MAP Act. That’s because, under ACES, the deductions first reduce the taxable value of the produced oil and then capital expenditure credits also reduce the tax bill. Under the MAP Act, the deductions reduce the taxable value, but the oil companies only get extra credit against their taxes when they sell oil.
That’s part of the reason state officials believe that, at forecasted oil price levels, the MAP Act will return more money to the state than ACES would in 2015.
There’s debate about how much the new tax system has to do with the increased spending by ConocoPhillips. Certainly the company’s expenditure at the CD-5 development adjacent to the Alpine field can’t be attributed to the change; ConocoPhillips began work on that pad long before ACES was replaced this year. The primary obstacle to the CD-5 work was the U.S. Army Corps of Engineers’ hesitancy to issue a key permit.
However, the company said other planned projects, such as the Greater Moose’s Tooth exploration wells and a new well in the Kuparuk field, were helped by the tax system change. By how much? No one but the decision-makers within the company know.
Alaska had many years with too little reinvestment, in part because oil companies had limited money to do such work when prices were low — in the $20 per barrel range — and other places in the world were more attractive.
Now, with prices at $100 or more, the companies have the money. The question is whether they will invest in Alaska. ConocoPhillips’ announcement looks encouraging.
While some might bemoan the loss of state revenue that comes with the increased capital spending by oil companies, economists like to point out that spending is spending, and it all helps the state.
That’s great in the aggregate, but there’s no denying that all spending is not equal for individual Alaskans. If you’re a state or local government worker, odds are that your skills aren’t always applicable in the oil industry. So the personal pain caused by any lay-offs attributable to a drop in state revenues won’t necessarily be alleviated by hiring in the oil patches. Also, if you’re a beneficiary of other state services that get cut because of falling revenue, again, the aggregate improvement in the economy won’t necessarily help you personally.
However, in the long term, Alaska’s economy needs sustained oil production, which will require reinvestment by oil companies. If that reinvestment causes some short-term disruption, that may be the price the state must pay to better ensure our future prosperity.