Yes Vote on proposition 1 good for Alaska
Gov. Parnell Should Seek Long-Term Oil Production Increases
At the Anchorage Chamber of Commerce debate I took the Vote Yes side supporting repeal of SB21. I thought the matter closed until Governor Parnell addressed my arguments on a local radio show. It was implied I suggested more oil production is bad, and the Governor dismissively stated: "Molecules in the ground do no good for Alaskans. Produced oil, produced gas molecules benefit Alaskans. And so we're getting more production now, benefits Alaskans." He missed the point.
In deciding whether SB21 is in Alaska's best interests, we need to ask whether we are getting the best price for our oil resource while also encouraging its maximum development.
The Vote Yes effort has asserted SB21 is a multi-billion dollar giveaway, citing the administration's analysis that SB21 would have resulted in Alaska collecting $8.5 billion less than ACES. Nonetheless Dr. Scott Goldsmith concluded SB21 will generate roughly equal State revenues as ACES going forward.
I do not agree with much of Dr. Goldsmith's analysis for reasons I cannot cover in limited space. Yet for the debate I accepted his thesis that shifting from SB21 to ACES is revenue neutral to the State. I did so to highlight the problem with how SB21 changed tax incentives. If the amount of taxes paid has not changed, the only possibility is that the tax burden shifted between oil companies. In a nutshell SB21 reduced taxes on production from existing fields by increasing them on companies exploring for new oil.
At the debate I differentiated between "reserves acceleration" and "reserves addition." Reserves acceleration is producing a fixed volume of oil more rapidly. Reserves addition is increasing the total oil that will be produced.
Most of the recent activity on the North Slope heralded by the vote no proponents, including the short-term production increases from drilling rigs working Prudhoe and Kuparuk, falls into the category of reserves acceleration. Producing the large legacy fields faster is not a bad thing. It means jobs today rather than tomorrow, and results in immediate work for various service contractors. But the point Governor Parnell missed was that our goal should be more oil, not more rapid production of existing oil.
The fundamental problem with SB21 is that it taxes less per barrel and pays for it by eliminating credits for long-term investment. We encouraged reserves acceleration rather than reserves additions. This is not an accident. The existing large operators – BP, Exxon and ConocoPhillips – relentlessly lobbied to alter ACES and are flooding the airwaves with ads defending SB21.
Exxon has not drilled a well in Alaska since the 1980s except for Point Thomson, which we made them develop under threat of lease termination. BP stopped exploring in Alaska in the early 2000s. This year it sold off interests in most of its Alaska fields. CEO Bob Dudley stated BP was concentrating on "maximizing production from Prudhoe Bay" so as to "focus on value over volume in the future."
Alaska reducing its share of oil revenue to produce legacy oil faster at the expense of exploration is nonsensical. That is why I believe Governor Palin's characterization of SB21 as "crony capitalism" is spot on. The bill benefited the major existing producers, two of three of which no longer explore in Alaska, at the expense of new entrants.
There is a natural progression in the development of an oil and gas basin. The large companies – which are high cost operators – build out the infrastructure to produce the elephant fields. Over time the smaller independents, with lower cost structures, enter to develop the smaller, less economic fields. There is a lot of oil to be discovered or produced from technologically challenged oil deposits in existing fields such as heavy and viscous oil. We want a tax structure that provides incentives for reserves addition from that activity, not one that rewards accelerated production from conventional pools already under development. This is why I am a Vote Yes on Proposition 1, and why I am disappointed that Governor Parnell and other Vote No supporters focus on short-term rather than long-term production increases.
(Craig Richards grew up in Fairbanks and now lives in Anchorage. He holds a BS in finance from the University of Virginia, a law degree from Washington & Lee University, and an MBA from Duke University. Although he practices law with independent candidate for governor Bill Walker, the views expressed herein are exclusively his own.)