House District 29: Kurt Olson: The challenges of oil taxation

The greatest challenge facing the 28th Legislature will be making Alaska competitive. Our state is dependent on oil for approximately 92% of our revenue. We need to regain our competitive edge with oil producing states such as North Dakota, Wyoming, Texas, and the Gulf of Mexico (both onshore and offshore) and with the shale and conventional oil fields in Western Canada.

 

Most of our efforts have been focused on improving our tax climate — we have one of the highest oil taxation systems in the world. We cannot control the limited drilling season on the North Slope, the harsh weather conditions, or the distance to markets. On the positive side, we can offer companies developing our assets a stable political regime, friendly neighbors on our borders, and an oil pipeline that has surplus capacity for future new production of about 800,000 barrels per day.

When our tax regime on oil is competitive, we will see the companies, contractors and employees, who have had to leave Alaska to find work, return home from Alberta and the oil and gas producing states in the Lower 48.

An initial reduction in revenue to the State coffers will be offset by an increase in oil throughput down the TAPS line. The increase in oil workers, the service industries and the construction industries will also provide dollars working their way through our economy.

The question that has not been successfully answered during the past Legislature is; what is a reasonable level of taxation on North Slope oil? No one, not even the crafters of Alaska’s Clear and Equitable Share (ACES) anticipated oil reaching $140 per barrel. ACES included a mechanism to increase the percentage of tax as oil prices increased. It did not anticipate prices rising as high and as fast as they did.

This was good news and bad news. The good news was revenue to Alaska increased significantly. The bad news was that the North Slope producers looked for other areas to drill. The most notable being the Province of Alberta and North Dakota. Following Alaska’s lead in increasing their taxes, Alberta recognized the negative results and adjusted their program within two years. The only reason we are not running a deficit of billions of dollars is the high price of oil. When it drops to expected levels in the $70-80 range, from the current price of $110 per barrel, we will feel the pain.

We will need a balanced approach that will lessen the increase during periods of high prices per barrel. ACES refers to that as progressivity. We will have to factor in the difference between oil from the legacy fields and oil resulting from new exploration and production. Our challenge will be in keeping it competitive with other hydrocarbon rich areas.

We will know in a week if the proverbial three-legged stool has its third leg back. If the House, Senate and the Governor are all able to sit down at the table and have meaningful dialogue, we may be able to make real progress.

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