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Alaska is losing the competition for investment capital.

  • Taxes on most North Slope production are the highest in North America and some of the highest in the world. Under the ACES marginal tax rate, government take can exceed 90 cents for every $1 price increase once the price of oil reaches about $125/barrel.
  • According to data compiled by the Alaska Oil and Gas Conservation Commission and global statistics compiled by Baker Hughes, the active drilling rig count in the rest of the U.S., Canada and worldwide has increased by double-digit rates since oil prices rebounded in mid-2009. Rig activity on the North Slope has declined during the same period.
  • Alaska once was the No. 1 state in oil production. Now we’re a distant second to Texas, and if current trends continue, we’ll be third behind California in the next few years. North Dakota is projected to surpass Alaska in less than 10 years, which would drop us to No. 4.
  • A 2010 study by the international oil and gas research and consulting firm Wood Mackenzie ranked Alaska No. 129 among 141 oil and gas regions worldwide in terms of fiscal stability.
  • A 2010 survey by another international research organization ranked Alaska near the bottom of the list of U.S. states in terms of attractiveness for oil and gas investment. The Fraser Institute found that Alaska’s image only ranked ahead of California’s, New York’s and Florida’s among U.S. producing states. It fell short of nearly all Canadian provinces, and ranked in the third quintile globally, joining regions like Peru, Turkey, Angola, Syria and Vietnam.
  • Alberta oil sands production is growing at a double-digit annual rate due to massive industry investments. Companies like ExxonMobil, Chevron, ConocoPhillips and BP are investing tens of billions of dollars in new development projects in places like Papua New Guinea, Ghana, Iraq and Russia, while development activity in Alaska is stagnant.

Our current tax policy has stifled oil and gas investment.

  • The high level of taxation and the “progressive” nature of the State’s current tax policy, known as ACES, eliminate the upside potential of risky investments at high oil prices and distort the balance between investment risk and reward. Total government “take” (federal, state and local) is 82 cents for every $1 in pre-tax profits at current oil prices.
  • A disproportionate share of “capital spending” under ACES has been on maintenance and repair activities that produce NO new oil. BP has reduced overall capital spending by 15 percent, but investments in development activity are down 30 percent. The company’s “drilled footage” on the North Slope – a key indicator of spending on new oil – is down by half since 2007.
  • ConocoPhillips estimates more than $2 billion in development projects has been deferred because of ACES. Historically Alaska’s most active explorer, ConocoPhillips did not drill an exploratory well in Alaska in 2010 for the first time in 45 years and drilled none in 2011.

Independent oil and gas producers echo the majors with regard to ACES: Tax reform is needed NOW in order to launch new oil activity in Alaska.

  • Great Bear Petroleum told House Resources it hopes to drill 200-250 development wells every year for 20 years on the North Slope, but it must compete globally for investment capital. They say changes to ACES are critical to their ability to secure funding.
  • Great Bear testified that its greatest challenges in Alaska are commercial, not technical.
  • Great Bear President and CEO Ed Duncan: “Alaska has some of the best rocks in one of the best petroleum provinces in the world, but it also has some fiscal terms that are suppressing development.”
  • Brooks Range Petroleum testified that new oil and gas development techniques being used in the Lower 48 could boost production in Alaska, but reforms to ACES are required in order to attract the tens of billions of dollars in new investments that will be necessary. (Brooks Range drilled the only exploratory oil wells on the North Slope in 2010 and 2011.)
  • It said Alaska’s fiscal terms have made it difficult for Brooks Range to attract partners for North Slope ventures. Brooks Range recently had 12 companies express strong interest in a partnership. All but one dropped out, and the remaining prospect has said Alaska’s taxation is the only obstacle to finalizing a partnership agreement. Several others invested in North Dakota instead, in part because of low taxes there. One dropped an existing partnership with Brooks Range to focus exclusively on the United Kingdom because of Alaska’s tax structure.
  • Ken Thompson, managing director of Alaska Venture Capital Group (Brooks Range’s parent company), to House Resources: “If I were to rank the #1 reason they said ‘no,’ it’s the Alaska fiscal regime and the taxation is simply high and complicated.”
  • Pioneer Natural Resources, the first independent to operate an oil field on the North Slope (Oooguruk), also is a strong proponent of ACES reform.

TAPS throughput is falling at an alarming rate

  • The pipeline is operating at less than one-third of capacity. Since peaking at more than 2.1 million barrels a day in the late ‘80s, it has declined to about 600,000 barrels a day. Throughput has fallen more than 100,000 barrels a day since ACES, and declined 7 percent in 2010. The decline is projected to continue at an average annual rate of 4-6 percent.
  • The decline not only jeopardizes state revenues and the economic viability of the pipeline, but also poses serious technical challenges. Among others, the significantly slower velocity rates resulting from lower throughput increase the risks of freezing and wax build-up inside the pipeline.
  • The decline not only jeopardizes state revenues and the economic viability of the pipeline, but also poses serious technical challenges that could force shutdown in the next 10 years. Among others, the significantly slower velocity rates resulting from lower throughput increase the risks of freezing and wax build-up inside the pipeline.
  • Even in a best-case scenario, any discoveries by new players and/or independents (e.g., Repsol) would take a minimum of five years for engineering, permitting and development before oil could be produced.
  • At present, there are no North Slope development projects pending from past discoveries or known reserves, and no company (including Repsol) has committed funds to develop possible future discoveries.
  • If oil and gas exploration is approved and successful in the Beaufort and Chukchi seas (federal Outer Continental Shelf), it’s expected to take more than 10 years for oil to be produced. OCS production will only be possible if TAPS is still viable then.

The more state government takes from the private sector, the more it spends. State government doesn’t need the money.

  • More than 1,000 new state government jobs have been created since ACES was adopted – one of the few “growth sectors” in Alaska’s job market.
  • State spending has grown dramatically since the latest round of increased taxes was adopted in 2007 – now it is close to $10 billion a year.
  • The state has amassed more than $12 billion in “savings,” not counting the Permanent Fund.

Alaska’s economic future depends on oil production.

  • According to the Institute of Social and Economic Research (ISER) at the University of Alaska, oil accounts for a third of Alaska’s economy. (The other two-thirds are federal government spending and “everything else.”)
  • Ninety percent of our state government general fund revenues come from oil production.
  • A North Slope gas line – when and if one is built – will not fill the fiscal gap stemming from declining oil production. Gas development is dependent on a healthy oil business on the North Slope, and oil production is vital as a “bridge” to gas commercialization.
  • If oil production continues to decline, a state income tax and/or reduced Permanent Fund dividends are inevitable, and it may be necessary to tap the Permanent Fund corpus to fund state spending. A percentage of royalties from oil production automatically is deposited into the Permanent Fund, and oil royalties were the foundation of the fund.

MACC Materials:

*Dittman Research, 2010

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