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Meaningful reform is needed

Voices of Alaska

Posted: March 28, 2012 - 8:38am

The mission of the Alaska Oil and Gas Association (AOGA) is to foster the long-term viability of the oil and gas industry for the benefit of all Alaskans. By all Alaskans, this means everyone who lives here; families, individuals and others who love this state as much as I do, not just oil companies and their employees. It is also important to note that I represent the full spectrum of the industry here, not just the "Big 3," but the small producers, the new explorers, Cook Inlet producers, companies interested in the offshore, the Trans-Alaska Pipeline, and the three in-state refineries. My message to you today reflects a 100 percent consensus of my membership.

Hands down, the number one threat to the long-term viability of the industry is production decline, or less oil flowing through the pipeline. Production is plummeting, and it doesn't need to be. While industry officials have never said the peak production of the industry's heyday could be reached again, we all believe meaningful tax reform will result in more production.

In 2007, when Alaska's Clear and Equitable Share (ACES) was passed, oil production was about 722,000 barrels per day (bpd), and was predicted to decline by about 45,000 bpd in 2012. So, where are we today? Average production for 2011 was 571,270 bpd, a stunning reduction of 151,081 bpd in four short years, and more than triple the predicted decline. Where is the missing 100,000+ barrels per day? As some have said, that's "our oil." So why wasn't it produced? Was it low prices? Hardly. Was it geology? The ground is the same as it has been for millions of years.  Was it permitting? Not on state lands. High costs? Alaska has always been a high-cost environment. The answer is simple economics: High taxes have accelerated the production decline.

This additional decline is unacceptable at a time of record high oil prices. It is hard to imagine any Alaskan being satisfied with the same level of investment and jobs over the last three years when prices have not been this high (inflation adjusted) since President Abraham Lincoln was living in the White House. We should be sharing in the production boom going on elsewhere in the world where the investment climate is more competitive.

It is plain to see that Alaska's production tax system is not working. Why haven't Alaskans noticed, especially when oil revenue pays for more than 90 percent of the state's unrestricted spending (i.e. schools, roads, pension plans, etc.)? High oil prices have picked up the decline's slack, but that could soon come to a screeching halt.

According to the Legislature's finance division, if oil prices stay about the same, Alaska could collect $900 million less in revenue next year due to declining oil production. To put that in perspective, that's about the same amount the State spent on K-12 education last year. And if state spending increases at the same level of previous years, and production/price stay about the same, the state could be facing budget deficits in 2-3 years.

Where will the State of Alaska turn when faced with shrinking revenues and budget deficits? Will it be mining? Fishing? Tourism? Personal taxes? Spending the Permanent Fund Dividend?

AOGA supports meaningful change to Alaska's production tax system, now. We should not just wait it out another year to see what happens. The sooner changes are made, the sooner production will increase. And because it takes time for new oil to come on line, it could be years before any additional barrels start filling the now one-third empty pipeline. Alaskans can't wait.

Kara Moriarty is executive director of the Alaska Oil and Gas Association.

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