GUEST COMMENTARY: Getting our ‘Fair Share’ of a bigger pie
Meet the Fair Share Act: a ballot initiative that will be presented to Alaskans in November, marketed as a measure to make oil companies pay their fair share in taxes. I did a bit of research to bring some simple analysis forward and present it to concerned Alaskans, to help cut through the noise and disinformation.
Starting with where we are currently, more than 70 percent of total Alaska state revenue from private business is provided by oil and gas:
In addition, Alaskans benefit from the philanthropic activities by oil and gas companies every day. The University of Alaska Arctic Science and Engineering Endowment, Covenant House, the Alaska Performing Arts Center, and the Anchorage Museum of History and Art are just a few examples. The budget cuts that Alaskans are currently adjusting to would be modest compared to cuts stemming from a significant reduction in petroleum activity.
The initiative calls for a rework of our current oil tax structure. It claims to have the potential to generate billions in additional taxes ($1.1 billion in in 2018). This increase amounts to at least 50% of the taxes that oil companies are currently paying on the majority of the barrels in the state, doubling or tripling it at higher oil prices.
With BP leaving Alaska fresh in my mind, I asked myself if taxes really had the ability to incentivize development activities. Last time we thought about this was when our legacy tax regime (ACES) transitioned to the current SB-21 framework. The data is available to the public:
Each year we were losing 40,000 barrels per day of production under ACES, a trend that was almost immediately arrested under SB-21. The trend line above indicates we are hundreds of thousands of barrels per day (hundreds of millions in royalties) better off than we would be if the decline had continued under ACES. To reverse the decline, BP flattened their decline curve, and ConocoPhillips and Hilcorp both grew production significantly.
I think a similarly unfavorable tax regime like the Fair Share Act could cut our production in half within seven years. This will more than offset amounts gained in the very short term, and cripple any growth in the industry that employs the most Alaskans and is fundamental to our economy.
So how are we going to bring in more state revenue under the current tax regime, and how much? Let’s look at the three biggest development projects on the horizon since SB-21 was passed:
•Willow, ConocoPhillips: 130,000 barrels/day (Source: Willow Draft EIS)
•Pikka, Oil Search: 120,000 barrels/day (Source: Oil Search Annual Report, 2018)
• Greater Mooses Tooth 2, ConocoPhillips: 25,000 to 30,000 barrels/day (Source: ConocoPhillips GMT-2 Fact Sheet)
These projects have the potential to add 280,000 barrels per day, or more half of Alaska’s current production. This could amount to $1.1 to $1.4 billion in additional royalties and taxes, a number we can expect to continue to grow as the recent flurry of exploration and development activity continues. Staying the course is the most financially sound decision.
Fundamentally, I think people forget that oil companies have a choice about where to invest their money. In recent years, we have watched the major companies gravitate towards the Permian Basin. Texas is now at record production levels (a condition that Alaska has not enjoyed since the late 80’s). Oil companies make these decisions, in part, based on a predictable, business-friendly geopolitical environment.
A stable environment creates jobs. As our partners in development continue to invest in Alaska, confident in their future here, Alaskans are enriched and our economy is built. Staying the course will put Alaskans back to work.
When we passed SB 21, Alaskans made a commitment to host a responsible industry with a particular tax regime so we could maximize our benefit from developing our rich resources. Industry has responded by placing Alaska high within the global portfolios of ConocoPhillips, Oil Search, Hilcorp, and many others, through tough operating conditions and stringent environmental standards. Staying the course is, beyond being a good financial decision, the right thing to do.
Alaskans who want to see our beautiful State’s revenues increase should support the continued health of Alaska’s oil industry, and vote no on the Fair Share Act. Do not move the goalposts for our children; vote no to keep Alaska’s future sustainable for our next generation.
Liam Zsolt is the Director of Technology for ASRC Energy Services LLC. His work in applying new technology to responsibly extract oil and gas in Alaska has been published multiple times by the Society of Petroleum Engineers and led to multiple patents.