Former president of Conoco Philips Alaska, Kevin Meyer, recently told the Alaska Journal of Commerce the reduction in the flow of oil through the Trans Alaska Pipeline System, or TAPS, would reach a critical point by 2015. Because of ice and wax build up that will occur in the line at its current pumping capacity, TAPS as presently configured cannot continuously pump oil when the flow declines below 300,000 barrels per day. Alyeska's figures show that this point will be reached in 2018-2020 if nothing is done to increase the pumping capacity of TAPS.
Alyeska is working to prevent this point from being reached. It is currently preparing a low throughput analysis it expects to complete by the end of the year. Among other things, that analysis will determine the capital costs needed to increase the pumping power of TAPS to continuously pump oil with flows as low as 150,000 barrels a day.
Alyeska's strategy is to keep TAPS operating until Shell can increase throughput by linking up its oil prospects in the Chukchi and Beaufort Seas to TAPS via a connecting pipeline.
This strategy is dependent upon a number of factors. First, the federal government needs to issue exploration permits to Shell. Second, Shell needs to find sufficient oil to justify the high costs of developing fields in the Beaufort and Chukchi Seas. Third, Shell will need to receive the necessary governmental approvals to develop them. Fourth, the federal government needs to issue the Corps of Engineers permit to allow Conoco Philips to develop oil in the National Petroleum Reserve Alaska (NPRA). The Parnell administration has joined in pushing the federal government on these issues.
Finally, Alaska must rationalize its oil tax structure. Alaska now has one of the highest marginal tax rates in the world. Alaska's Clear and Equitable Share, or ACES, created an asymmetrical oil tax structure for Alaska - the producers retain most of the economic risks associated with low oil prices, but are unable to obtain a sufficient return on their investments to justify taking those risks when oil prices are high.
The governor and Legislature need to change the existing rates to levels that will make Alaska competitive for producer investment dollars with oil provinces like the Gulf of Mexico and Alberta, Canada. For example, at a $100 market price for a barrel of oil, the marginal tax rate for the Gulf of Mexico is 43 percent, for Alberta it is 55 percent and for Alaska under ACES it is 85 percent. This higher cost and risk of doing business make Alaska non-competitive compared to other oil bearing provinces.
The producers have reacted by reducing their investments in developing oil in Alaska to projects that had been approved and were underway when ACES was enacted. This reduction in their investment in development accounts for the increase in the rate of decline of oil flows through TAPS.
Gov. Sean Parnell is right to propose changes to ACES. A sufficient change in ACES will actually increase revenue to the state by again encouraging the producers to invest in Alaska's aging oil fields. The Governor has just convincingly won election in his own right and needs to be bold in his approach to ACES during his "honeymoon" period with the Legislature.
Instead of taxing every dollar at a higher rate as oil prices go up, ACES needs to be changed to a graduated tax, just like the federal income tax. ACES' progressivity factor needs to be flattened. The oil price at which the progressivity factor "kicks in" needs to be increased.
Action needs to be taken in the 2011 session of the Legislature. Given the long lead times to get the permits needed for oil and gas development on the North Slope, we need to give the producers incentive to invest as soon as possible.
It will take bold political leadership to make these changes to protect Alaska's revenue stream at a time when many Alaskans are indifferent to the crisis at hand.
Murkowski served as a U.S. Senator from 1981-2002 and as Governor of Alaska from 2002-2006.
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