Who to believe? Does it matter?

The Alaska State Legislature is currently engaged in a debate regarding changing ACES, the production tax on oil and gas, in hopes of encouraging new investment on the north slope and ultimately additional production to fill the TransAlaska Pipeline System (TAPS).

Many have entered into the debate regarding the tax. Some have argued that a change to the tax will increase jobs that have been lost due to the current production tax, known as Alaska’s Clear and Equitable Share (ACES); others have argued that the current tax system is working because jobs have increased on the north slope.

Some have argued that a change in the tax will multiply the revenue to the state many times over the cost of the change; others have argued that the tax change will cost the state billions of dollars over the next decade.

Some have argued that exploration drilling on the north slope has become almost nonexistent because of ACES. Others have argued that there were more wells drilled in 2010 than 2009. In fact the number of wells drilled in 2010 was the highest number of wells drilled since 2005.

Some have argued that the pipeline will be shut down if we don’t change the tax, but no one is arguing if we stay the present course that oil production will increase and the pipeline will once again be full.


Who to believe? Does it matter?


All who enter the debate seem to believe they need to justify their position based on either a positive or negative impact from the current production tax, ACES. But all are focused on the wrong question. It does not matter what has happened in the past, even what the actual impact of ACES has been. This is especially important since they will never agree on the results of that impact anyway.

What is clear is that production is falling on the north slope, and everyone agrees with this fact. What is also clear is that everyone would like to see production increase. The real question is how to go about encouraging industry decision-making so that more is invested on the north slope in hopes of increasing production to the benefit of both the industry and the state.


Where might the potential reserves be found and how many reserves can we expect or hope for?


Infield drilling and satellite fields - Small increases to production that will help stem the decline of production if produced, up to a few billion barrels here.

Heavy and viscous oil - Over 20 billion barrels of oil in place. If the technology could be conquered and the economics could be enhanced, perhaps several billion barrels of this heavy oil could be produced.

Exploration - Exploration could bring in several hundred thousand barrels of oil, so even though the amounts may be smaller, exploration should be encouraged.

NPRA - The State of Alaska receives half the bonus and royalty revenue from NPRA plus the state receives a production tax on all oil produced in NPRA. The federal government believes there are still hundreds of millions of barrels of oil to be found in NPRA. Even though this is not a large amount, it should be encouraged.

Federal OCS - Even though the state gets no revenue from the majority of offshore development, offshore production would provide jobs to Alaskans, increase the life of the pipeline, and perhaps someday the state could share in the OCS revenue if Congress changes the current law. Even though OCS development should be encouraged, it does not enter into the debate over changing the state's oil and gas tax.


What is the potential value of those reserves?


This is the estimation of the “golden egg” if the reserves can be found and produced. This estimation is the easiest to determine. Plug in the potential reserves from above, plug in a range of prices and the current tax and the potential value (or range of values) of those reserves can be determined. Any change in the tax can be compared against this range of values. Any change in the tax should be justified against the potential for the state to benefit through production of these additional potential reserves.


What are the options for encouraging industry to pursue those reserves?


The debate is not an either/or debate. It is not “reduce the tax on all production or don’t reduce the tax.” The decisions the legislature needs to make are more complex than that. There are several options or combination of options the legislature could pursue.

Credits - Credits gives the state one of the most measurable benefits of any alternative. One of the concerns is ensuring the state receives something in return for any reduction or benefit it provides to the industry. With a credit the state is guaranteed that the industry must invest in Alaska before it can apply for the benefit. Credits are a good option, but they may not supply sufficient benefit to entice the industry to produce all the reserves Alaska would like to see produced.

Focused reduction in tax - A tax that is focused on the reserves the legislature would like for the industry to pursue, i.e., additional reserves that could be produced through infield drilling, heavy and viscous oil additions, and exploration success.

Broad reduction in tax – this option is overinclusive, giving additional reduction in tax to reserves that would have been developed without the reduction, and it will be difficult to determine if the broad reduction was necessary or if a more strategic alternative would have worked just as well. But the legislature may determine it is the best means to obtain the results they are after.


Summary


The debate in the legislature often turns on looking backwards and using, or misusing, that data to justify a particular position the individual is advocating. The legislature should avoid getting into that debate. The key to moving forward is to recognize the current status of production on the north slope (decreasing production), what the state wants to happen (increased production), and where the potential production can come from (NPRA, infield drilling, heavy and viscous oil, and exploration) and most importantly how the state believes it can achieve its desired goal while obtaining the maximum return to the state for the benefit conveyed.