Alaska's oil tax: Measuring risk and reward

Posted: Sunday, April 10, 2011

Does Alaska need Big Oil?

The answer to that question is just as obvious as whether a bear takes care of business in the woods.

But the follow-up question is, just how much does Alaska need Big Oil?

According to Gov. Sean Parnell and the state House of Representatives, it's enough that we're willing to rewrite the tax structure to change facets the industry says discourage investment in Alaska -- even with the potential of giving up millions, if not billions, of dollars in state revenue.

The House last week sent House Bill 110, the governor's plan to change the oil tax structure, to the Senate, where it meets a much less receptive audience.

With just a week left in the session, time is of the essence, and we encourage members of the Senate to set aside their political posturing and exercise due diligence in examining this piece of legislation.

Why is time so critical? The trans-Alaska pipeline has become an 800-mile-long hourglass, and in the next few years, flow through the pipeline will have diminished to the point that it will longer be feasible to keep it open. The time to act to boost production is now.

During a presentation to the Kenai chapter of the Alaska Industry Support Alliance, ConocoPhillips' Wendy King, vice president for external affairs, and Bob Heinrich, vice president for finance, indicated their company believes that there is enough oil on the North Slope to keep the pipeline running for several more decades. But that oil is going to be more difficult to recover, which means more risk and costlier operations.

The biggest deterrent, however, to ramping up production is the progressive nature of Alaska's current tax structure. As the price per barrel of oil climbs, so too does the state's cut. At current oil prices, for every dollar the price per barrel of oil increases, the state takes 93 cents. Oil producers say that under those terms, Alaska is not worth the investment. The big producers have other options, and they've let their money talk for them, investing in other parts of the country and other regions around the world. Alaska is a small part of their portfolio; North Dakota is booming right now.

ConocoPhillips Chairman and Chief Executive Officer Jim Mulva took the extraordinary step of coming to Alaska this week to issue an assurance that, should the tax structure change, his company is poised to invest substantially in the state, moving forward with projects already on the drawing board.

But he emphasized the need to address changes to the tax structure this year, "because it impacts investment next year, next year, next year."

We appreciate Mulva's candor, and we encourage the state's other major producers to be just as candid -- and give us a similar commitment to future exploration and production.

Big Oil is not a benevolent entity. The industry will not invest in Alaska simply to prop up our economy; they will invest here if the reward outweighs the risk.

The Senate now has a week to wrestle with a risk vs. reward question of its own: Does the risk of losing North Slope oil production altogether outweigh the reward from ACES' progressive tax structure?

We think the risk is indeed too high, and we encourage the Senate to send House Bill 110 to the governor's desk. This is not the time to play chicken with our future.

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