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My Turn: Be careful what you vote for

Posted: July 8, 2014 - 12:00am

Before going to the polls to decide Ballot Measure 1, voters should be very careful about believing everything they read. A “yes” vote will reverse the new oil production tax of Senate Bill 21 and put the Sarah Palin-era ACES back in place. A “no” vote will retain SB21. Proponents of the “no” vote are quick to offer seemingly sensible arguments, but I urge caution as you attempt to understand them fully.

Take the argument that if you vote “yes,” then that will create fiscal uncertainty and will reduce oil and gas investment. Actually, it is a “no” vote which will create uncertainty.

There is much talk about a sudden rise in industry investment right after the new lower tax was imposed. Such speedy new investment is only possible when the producers “warehouse” projects, and then only embark on them if politics go their way. In fact, the speed with which new investment has occurred means the oil companies were strategizing when to invest. When a tax reduction came, they picked up their activity.

If Alaskans vote “yes” on measure 1, then it will send a clear message to the oil companies that they cannot manipulate Alaskan politics with changes in investment. This will induce them to follow a normal, gradual investment spending pattern, rather than a volatile one based on the likelihood of new tax changes. Once this message is clear, it will reduce the temptation for the producers and their cronies to influence the Legislature and governor.

Alaskans need to realize that just because oil prices have stabilized at $100 per barrel does not mean that they will stay there. It is entirely possible for the price to hit $200 per barrel for any number or reasons, not the least of which is the lack of potential shale oil development outside of the U.S. If oil prices reach $200, and we do not have ACES back in place, the state of Alaska will lose billions, especially in the valuable legacy oil fields of Prudhoe Bay and Kuparuk. It is not worth getting a few 350-million barrel oil fields (marginal production at best), which would only create a net gain of $1 or $2 billion while the state losses $10 or $20 billion in net revenue from not having ACES in place.

One of the promises implied by a “no” vote on measure 1 is that when the oil companies benefit from low taxes, they will be willing to invest $60 billion on a new liquefied natural gas (LNG) export facility, much of which will be in Anchorage and will be a new source of property tax. However, the Alaska Oil and Gas Conservation Commission has stated that we will need the natural gas to remain on the North Slope to produce more oil. If natural gas off-takes to fill an LNG project occur, we will experience an even greater oil production decline and Alaska will be hit by both less oil revenue per barrel due to SB21 and less oil flow.

There is not enough natural gas in the large fields to fill a large LNG project for more than five or 10 years, anyway. Massive new natural gas reserves are going to be needed at low profit margins from other sources, such as off-shore development and the Arctic National Wildlife Refuge, to fill an LNG pipeline. The oil companies are not going to put the horse before the cart. They simply will not develop LNG until many more natural gas resources are proven available. The producers’ real purpose in dangling the promise of a natural gas investment in front of Alaska is so that the oil companies can negotiate better terms for a Canadian LNG export project using Alberta’s natural gas. “Look what Alaska has promised us, Canada. Can you top that, eh?”

Alternatively, for only $2 billion Alaska can permit and build a small-bore, under-the-haul-road, 18-inch pipeline in five years. It would solve all of Anchorage’s and Fairbanks’ energy needs for the next 50 years. Why the governor is not pushing such a practical alternative, I’ll never know.

After reviewing all the information and disinformation, I have decided to vote “yes” on measure 1. Better for the state to make more money now, invest it in a sensible natural gas project that will meet Alaskans’ needs, and wait to develop the marginal 350-million-barrel-sized fields later when the price of oil reaches $200 and conserve the life of the oil.

• Dr. Doug Reynolds is a professor of oil and energy economics at the University of Alaska Fairbanks.

He can be contacted at DBReynolds@alaska.edu. His Proposition 1 analysis can be found at http://www.uaf.edu/files/som/Reynolds-Alaska-Oil-Tax-Analysis-2014_06.pdf.

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James Coleman
1968
Points
James Coleman 07/08/14 - 09:51 am
4
9
What if?

What if this warehousing continues or expands even more? What does Alaska do for income in the meantime? Where will laid off workers go? On a recent trip to Washington state I was amazed at the sheer number of railroad tanker cars lining the railways as far as you could see. It appears North Dakota is staged to pick up any slack Alaska may leave.

Karl Ashenbrenner
2623
Points
Karl Ashenbrenner 07/08/14 - 10:07 am
8
4
Then you would need a Gov. with some cajones

who would threaten and or take away the oil leases for non-compliance. Why do you think Pt. Thompson finally had some activity after more than 20 years of "warehousing"? The state moved to revoke Exxon's leases and lo and behold some actual activity was started. Alaska needs to play hardball with the oil companies not kiss their butts like our current gov and repub legislators.

Art Petersen
3066
Points
Art Petersen 07/08/14 - 05:28 pm
11
1
Firing Offenses

Prof. Reynolds goes through quite a number of twists and turns in his reasoning, but none of it is implausible and much of it makes sense. There are dozens of reasons to vote yes on Ballot Measure 1, return to ACES, and adjust it equitably. The oil companies are not the bad guys. Naturally they are going to try to keep the long-term 20% increase in their profitability if they can. Their stockholders demand no less. Not to try to keep it would be a firing offense. ... As for the stockholders on the other side, Alaskans, they should demand no less than their fair share of their own oil, and SB21 gives it away. It would not be surprising to see these stockholders reverse this unnecessary giveaway of Alaska's oil revenue and fire those who have tried to do it.

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