The governor has the ability to veto any bill he does not think is in the best interest of the state. The people also have the veto through a difficult petition and election process as seen in Ballot Measure 1. Although we would default to the prior tax system, ACES, a citizen “veto” of Senate Bill 21 does not create a new tax or prevent acceptable oil tax reform.
Q – Should Alaskans want less competition for our oil?
The unspoken agenda of SB 21 was “Basin Control.” Basin Control means an effective monopoly of an entire region where oil or gas occurs. This is possible on Alaska’s North Slope because of the high cost and long lead time of arctic projects. People may talk about details of tax rates and worldwide competitiveness, but the real story is that the SB 21 tax/incentive structure was designed to give the Big Three oil producers the ability to control nearly all development on the North Slope.
ACES incentivized investment in exploration by giving new players the same deal as the Big Three. That is why, under ACES, the number of North Slope oil companies more than doubled. The Big Three quit doing new exploration more than 15 years ago. They disliked new competition, and they wanted the incentive system shifted in their favor. SB 21 accomplished that by a change to “rewarding production,” meaning reduced tax for the Big Three and increased investment costs for new companies. The SB 21 tax/incentive plan reduces competition, eliminates the early exploration credits, and again creates monopolistic basin control.
Q – Can the state control corporate decisions on current field production simply with the SB 21 tax reduction?
SB21 tries to change the corporate schedule of development in the big existing fields. However, a BP executive said they might not want to accelerate Prudhoe Bay output because they anticipate needing its light oil to mix with heavy oil when they perfect the technology for recovery of those massive reserves of heavy oil. They cannot pump heavy oil down the pipeline without significant light oil dilution. Reducing taxes does not override the physics of oil.
Q - Will reducing taxes change the competitive strategies to secure new oil?
Multinational oil companies have a 50-year view to participate in many fields, so as some fields decline, new sources are secured. Our “Big Three” are currently investing in Norway, Russia and other places that have higher government take (taxes, royalty and fees) than Alaska. Those decisions are based on access to new diverse sources of oil regardless of the cost. It is competition for access to those future basins that drives investment. The same is true for North Dakota shale oil where they compete for every private land owner. The real competition is between companies to secure new supplies of oil, not between the tax rates of countries.
Q - Should Alaskans give up windfall profits at spiking high prices and increase the state risk at low prices or high field costs?
Prior to 2005 Alaska had a set dollar “gross tax” per barrel. After the low oil prices of the 1990s, the oil companies wanted low price protection so they negotiated for a profit-based tax. A profit-based tax puts us at risk of low revenue in times of low oil prices or if field costs are high. The progressive ACES tax was established to use the higher price rate to compensate Alaska for the risk taken at lower prices.
SB21 takes away the progressive feature that let us capture windfall profits if prices spike from war or some economic situation. Revenue comparisons based on a stable year round oil price miss most of the ACES revenue that is captured by the monthly windfall progressivity tax rate. Calculations based on actual history show a $200 million-$400 million annual loss with progressivity eliminated. An annual average price comparison of these tax systems as used by opponents is more than misleading.
Before you go to the polls, consider the SB 21 structure. It eliminates exploration and early development credits, recreates basin control monopoly, gives tax breaks for existing production, does NOT require additional production to get tax breaks, and cuts the windfall profit tax to zero. I encourage a YES vote and hope we take this opportunity to create a better balance for Alaska.
Rep. Paul Seaton has represented the Kenai Peninsula in the Alaska House of Representatives since 2003. He has continuously served on the House Resources Committee and as co-chair in 2011-12.