Do Oil Taxes Need Revision

The debate over oil taxes has recently resurfaced as an issue of importance: some saying that oil taxes need to be rolled back to what Governor Palin initially proposed. Others saying the industry should justify any changes.

The current tax was modeled on the Prudhoe Bay oil field and to a certain extent on Prudhoe Bay satellites, Kuparuk, and Alpine. When the tax was passed, there was a some level of uncertainty regarding what the long-term impact would be on exploration, marginal oil fields, and difficult to produce heavy oil. It was acknowledged that if negative impacts were identified, the tax could be reexamined as to the negatively impacted activities.

The industry has expressed concerns regarding the impact of the current oil tax on their operations. If it is determined that industry investment is being reduced in all areas of oil field development, then a broader review and analysis of the oil tax would be appropriate. But a wholesale revision of the oil tax is not necessary unless it can be shown that major oil fields, satellites, difficult to produce oil fields, and exploration are all being impacted by the tax.

If the industry is concerned about the impact on exploration, then the focus of the review should be on the economic impact of the tax on exploration.

Exploration could be slowing in Alaska for a number of reasons. One is that Alaska onshore is a mature province. Most of the large identified structures have been explored. The industry could be making a reasonable economic decision moving their exploration dollars offshore based on geologic potential and using that as a political opportunity to make a point about the high cost of doing business onshore. My guess is that both are true. The greater geologic potential is offshore and the value of those prospects, if taken to development, will yield a much greater value than a comparable prospect onshore.

The question for the legislature is, "Can a change in one or more variables under the legislature's control change corporate decision-making regarding where they spend their exploration dollars?" A review of the issues surrounding that question would be appropriate for legislative debate.

If the reason for the move offshore is because of the lack of exploration prospectivity onshore, then the state may still need to examine exploration credits and incentives to encourage the major oil companies and independents to explore for the remaining smaller prospects onshore.

If it can be shown that the production tax is having a substantial impact on exploration project economics, then it is appropriate to examine the level of tax as it relates to that negatively impacted activity.