Alaska oil taxes compared to similar oil and gas regions of the world are far too high, especially at higher oil prices like we have today. As a result, Alaska's oil resources are being "harvested" and new investment is not being made at a rate sufficient to prevent steady annual declines in production. This ultimately endangers over a third of Alaska's economy, according to University of Alaska economists.
In the Race for Market Share, Alaska Is Fading Fast Steadily falling oil production is the central issue in the hot debate over Alaska oil taxes. A related issue, and one that speaks directly to competitiveness, is Alaska's steadily falling share of total production in North America.
Steadily declining market share is cause for grave concern, whether it is experienced by a company, an industry or an entire region. In the case of Alaska oil production, it means that Alaska is not getting its share of industry investment relative to other U.S. states and Canada. Put another way, Alaska is missing out on the current worldwide boom in oil and gas investment.
Alaska has been declining in relative importance for most of the past 20 years, as the nearby chart illustrates. Not only is this clear from the production data, but other industry investment indicators such as wells drilled, active rigs and exploration expenditure all tell a similar story.
Alaska Oil Industry Losing Ground to Lower 48 and Canada
At its peak in the late 1980s and early 1990s, Alaska accounted for roughly 20% of combined U.S. and Canadian production. Today, we are in the mid single digits and falling steadily with each passing year. In the meantime, Canada has gained steadily while Lower 48 production has surged more recently due to shale oil output in places like North Dakota, Texas and Oklahoma.
The only exception to Alaska's steady decline was a brief leveling off for a few short years in the early 2000's, when several new oilfields were brought into production as a result of industry-friendly policies enacted under the Knowles Administration. This year, Alaska dropped to number three among the U.S. states in total output, trailing Texas and, now, N. Dakota.
Alaska's Main Competitiveness Drivers Alaska is a unique oil and gas region, in several ways:
Alaska has the largest oilfields ever discovered in North America and they have been developed very successfully. There remains ample oil in the ground onshore and offshore Alaska.
Our cost structure is among the highest in the world. Between the logistical challenges, high labor costs, environmental sensitivity and long distance from markets, oilfields in Alaska have to be larger and more productive than their counterparts in more developed parts of the world in order to be competitive.
There are many layers of government, each subject to extremely unpredictable shifts in policy regarding regulation and taxation, with which oil producers in Alaska must contend.
A Story of Two Policy Eras Looking back over the past two decades, the effects of government policy on Alaska's market share is clear.
The 1990s were an era of recognition and response. Alaska's share of North American oil output began plummeting during that time, along with total production. This was due in large part to the natural production curve of the state's enormous Prudhoe Bay oilfields. It was also due to a long, sustained period of relatively low oil prices, which accentuate how expensive it is to produce oil in Alaska.
Policy makers, led by Governor Tony Knowles, recognized the impact these sharp declines would have on the state's economic and fiscal health. So they set about to change Alaska's relative competitiveness.
Rather than raising taxes on existing producers and using part of the proceeds to lure new, smaller producers to the state, policy makers in the 1990s recognized that the most effective approach was to produce the large existing reserves of oil that had already been discovered but were not yet economically feasible to developed.
Policies were put into place to make Alaska more competitive. These involved the state reducing its "take" on a field by field basis, as needed, and being helpful rather than adversarial during the permitting process. Examples of successful outcomes included the Northstar, Alpine and Badami fields. Wisely, the policies of this era also included avoiding the temptation to offset declining revenue with higher production taxes. Rather, State policy makers controlled spending during those years.
The new fields and new satellite developments, combined, nearly halted the decline of Alaska's market share and production between 2000 and 2004. Remarkably, this all occurred during a period of exceptionally low oil prices. In 1999, oil prices dipped below $10 per barrel, and only improved slowly over the next several years. But the policies had already been successful in changing the competitiveness dynamic of several important new fields, so the producers moved forward with them in spite of low prices, knowing that prices would eventually rebound and make the fields profitable.
If the late 1990s and early 2000s were an era of stable production taxes and incentives for development of known oil deposits, the mid to late 2000s were just the opposite. Three major tax hikes were enacted between 2004 and 2007, each of them increasingly aggressive, under Governors Frank Murkowski and Sarah Palin. As a result, Alaska's production and market share declines resumed, even though those were years of sharply rising oil prices that should have sparked greater reinvestment.
Missing Out on a Boom The abrupt shift to industry-unfriendly policies in the mid to late 2000s has caused Alaska to largely miss out on a worldwide boom in oil and gas investment. In fact, Alaska has lost four full percentage points of North American market share since the tax hikes began in 2005.
In the meantime, our counterparts in North Dakota, the Gulf of Mexico and Alberta, Canada have seen sharp increases in production, not decreases. By keeping themselves competitive, Lower 48 states have actually become net exporters of oil, a milestone unthinkable just a few short years ago.
At this point, the question facing Alaska lawmakers is this: in which direction do they want Alaska's market share curve to trend over the next five to ten years? Will they return to the policies of the late 1990's and put Alaska back into the competitive game? Or will they stick with the current approach of harvesting maximum short-term revenue and allowing Alaska to continue fading as an oil and gas producer?
Those who care about Alaska's future should pay close attention and get involved in the debate.
- Scott Hawkins and Francy Bennett
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