Keep Alaska Competitive – Vote No on 1

January 21, 2014

Thank goodness we passed oil tax reform

New law helps lower shortfall

Alaska’s new oil tax law is already working for Alaska. Our budget deficit would be even larger had the new law not passed.

Thanks to the loss of 200,000 barrels of production per day under the old tax policy called ACES, Alaska now faces an approximate $2 billion state budget deficit for the current fiscal year and a second big deficit may occur next year due to a plunge in oil revenues. The combined $4 billion draw will take a big bite from the state’s Statutory Budget Reserve, which now has a market value of about $5.55 billion.

According to Bradners’ Economic Report, oil tax reform has reduced the deficit. Here is their analysis:

“In fact, had SB 21 not been passed and ACES remained in effect, the revenue decline would have been worse.

“That would happen because the progressivity formula in ACES is highly sensitive to changes in oil values. Alaska’s oil tax, whether under ACES or the new tax under SB 21, is a net profits-type tax. The tax rate, whatever it is, applies to the net value of the oil on the North Slope. Net value is revenues minus costs. Currently revenues (production and oil sales prices) are down, and production costs are up. The progressivity formula in ACES is very aggressive. It ramps up the tax rate quickly when values rise, but also ramps down quickly when values drop, as they have recently. Also, a big factor in the revenue drop is the oil production decline, which is happening faster than expected, and was 8 percent last year.

“Had ACES remained in effect (had SB 21 never passed), the industry’s per-barrel tax rate would be lower under the current oil price and cost matrix than under SB 21, contrary to critics’ claims that SB 21 would have been a ‘tax giveaway.’ Had ACES been in effect, the tax rate would have been 34.9 percent of the per-barrel value. Under SB 21, it is 35 percent. As for next year, FY 2015, the ACES tax rate would have been 32.6 percent. Under SB 21, it will be 35 percent.”

Tax reform ‘a really big issue’

While Ballot Measure 1 has cast a chill over our future, the producers remain optimistic that common sense will prevail.

In an interview with Horizon Magazine, BP Alaska President Janet Weiss called tax reform a game changer. Here’s a short excerpt:

Horizon: Earlier this year, the Alaskan legislature enacted a law changing its tax structure to encourage new production. What impact does this have for BP and the energy industry?

Weiss: It is a really big issue. We see this as putting Alaska back into the game. This year, Alaska fell into fourth place in the U.S., behind California, in oil production rate. The new law meant Alaska is once again a competitive region for the industry. If you take a look globally where our state was as far as government's take, we were in the bottom of the fourth quartile. Now we have moved into a more competitive position. It may not be as competitive as other U.S. states, but it is better than it was before.

With that, we are going to add two additional rigs. In 2012, we had five operated rigs. We have added two and are getting ready to add two more, so we will be up to nine by 2016. That will require $1 billion in investments over the next five years for BP and the other Prudhoe Bay working-interest owners.

We also are going to pursue with our partners $3 billion worth of growth projects in the west end of Prudhoe Bay. That should add a couple of hundred million barrels of production. The tax reform enabled us to get all of the Prudhoe Bay owners lined up to go forward.

From shortage to surplus in Cook Inlet

Meanwhile, production continues to soar in Cook Inlet, where aggressive tax incentives have turned fears of rolling blackouts into concerns that there’s too much gas in the marketplace. Click here to learn more.

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