Production is falling far faster than was projected in 2007, when the hefty tax increases known as "ACES" were enacted. Source: State of Alaska

Source: Calculated from data published by U.S. Energy Information Administration

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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:

1. 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.
2. 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.
3. 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.