My turn: Alaska's Clear and Equitable Share measure is successful

Posted: Thursday, December 10, 2009

Two years have passed since the Alaska Legislature enacted Alaska's Clear and Equitable Share, a new oil valuation measure. Today the benefits of this legislation are apparent. This article will look at the impact ACES has had on revenue, on jobs, and on oil production, exploration and development.

When the Legislature took on oil taxes in 2007, it did so in the shadow of the 2006 Petroleum Profits Tax bill, which many viewed as tainted by the VECO Corp. corruption scandal. ACES provided a fresh start on dividing the revenue from Alaska's most valuable commodity.

What has been the effect on the state's oil income? The Department of Revenue says that, since its inception, ACES brought in an additional $4 billion over PPT. With this revenue, we have been able to forward fund education, invest in renewable energy projects and fund home weatherization for Alaskans all around the state. In 2008, with record high oil prices, we also were able to save billions for a rainy day, which arrived a little sooner than many expected when oil prices plummeted later that year.

This revenue increase for the state has taken place alongside healthy profits for the major producers. For example, ConocoPhilips' financial statements reveal that the company collected almost 29 percent of its total worldwide profits from Alaska wells, which make only 12 percent of the company's total production. Think about that for a moment. Twelve percent of ConocoPhilips' oil production produces nearly 30 percent of its profits. The inescapable conclusion is that Alaska oil production is more profitable than other parts of the world.

How can this be? The answer lies in ACES' combination of only taxing net profits, and a robust set of tax credits for certain types of expenditures. Instead of taxing on gross revenues, the bill recognizes that production costs are substantial and should be factored into the tax rate. This means that for more challenging developments, like heavy oil production with its much higher costs, or extended reach horizontal wells, the law lets those costs be deducted from revenues before a dollar of tax is paid.

The tax credits in ACES work as incentives for new developments and exploration. Together, the net profits tax and the tax credits make the state an investment partner with the producers. Just as we reap the benefits from our natural resources, under ACES we share in the risk of developing those resources.

What about jobs? Some critics of ACES call it a "job-killer." The facts, however, present a much different picture. Recent numbers from state labor economist Neal Fried indicate that employment in the oil industry is at record levels. BP, for example, employed about 1,650 people in 2006. Today the number is just short of 2,000. That's 350 more good paying jobs. Overall employment is equally robust: For the first three quarters of this year, the average monthly job count in the oil and gas industry was 13,111, compared to 12,677 for the same period in 2008.

The passage of ACES has not hurt oil production, which has been declining steadily since North Slope production peaked in 1992 at 2.1 million barrels of oil per day. The Department of Revenue estimates that the decline curve, which for years has been 5-7 percent a year, has improved to only a 2-3 percent decline since ACES was passed. To be fair, though, one must keep in mind that in 2006 production took a serious hit when much of Prudhoe Bay shut down after long-neglected corrosion problems caused major gathering lines to spring leaks.

Finally, there is ACES' effect on exploration and development. While long lead times are necessary for most North Slope projects, two years of data gives reason to be cautiously optimistic. Since the legislation passed, exploration capital expenditures have increased by about 20 percent.

What's the bottom line, then? The state is getting a fair share for its oil. Company profits remain strong. Jobs are up. The oil industry continues to invest in the fields they lease from the state. In sum, ACES is a big success.

• Hollis French is an Alaska senator.

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