Resource Development Council

RDC Action Alert:
SB192 - Oil Production Tax Reform

View RDC and Member Testimony

Oil Production Tax Hearing in Senate Resources
Tuesday, February 28, 2012 and Wednesday, February 29, 2012

View phone list to contact your senator today (pdf)

View a pdf of the State of Alaska, Department of Revenue graph depicting effective production tax rates of ACES vs. CSSB 192/B

Talking Points

Please choose from the following menu of points focusing on four key areas:
Testimony can be brief and effective if it hits the following main points:

1. Why meaningful tax reform is important, to increase production and revitalize our economy.
2. What it means to you personally. Your business, your children’s future, the value of your home.
3. The committee substitute to SB192 will not alter the investment climate in Alaska. It is not significant; it won’t move the needle and slow the accelerating production decline.

Broad base/concern

  • Meaningful reform of Alaska’s oil production tax structure is a top priority of Alaska’s business leaders spanning all industries and economic sectors of Alaska. A recent Anchorage Economic Development Corporation poll revealed that 72 percent of business executives in the Anchorage area believe the state’s tax structure negatively impacts North Slope production. A recent Hellenthal survey of Alaska voters showed 59.4 percent supported the governor’s proposed oil tax reforms.
  • Reasonable people can disagree on what structural changes need to be made to ACES to encourage investment and stimulate production, but a consensus is needed on adjusting progressivity in a meaningful way.

Investment Climate

  • Oil production tax reform must move the needle to attract the investment necessary to not only stem the decline, but boost production.
  • If the Legislature passes meaningful tax reform, North Slope producers have already pledged at least $5 billion in new investments, and we will likely see billions more. The governor’s bill is the only legislation up to this point that moves the needle in attracting major new investments.
  • Anything the Legislature passes must compel industry to significantly increase investment in the state and arrest the production decline. The Legislature should judge legislation on whether it significantly moves the meter on production.
  • Given the long lead time for projects to come on line, the State needs to act sooner, rather than later. Lawmakers need to craft a tax policy that drives investment back to Alaska.
  • There are many places for the industry to invest and Alaska does need to compete for capital.

Progressivity = Disincentive for investment

  • Alaska’s highly progressive oil production tax creates a disincentive for oil companies to invest here. As oil prices rise, Alaska becomes less competitive because taxes rise so much that they drive investment elsewhere. Alaska needs that investment and major tax reform will deliver it.
  • The state’s current tax structure is taking too much of the upside and the high progressivity is hurting project economics, even in a high price environment. Alaska needs to change its tax structure if it hopes to get companies to reinvest a larger portion of their earnings in Alaska.
  • Alaskans have heard time and again from numerous consultants – and the investors themselves – that progressivity is having a significant negative impact on investment. As presently structured, there is little upside potential at high oil prices for producers investing in new production. The return to them is about the same at lower oil prices as it is at high prices, an unattractive way for an oil company to invest in a high oil price environment.
  • Alaska is not competitive in attracting major investment at high oil prices. If it were, Alaska would be attracting the investment it should at these prices. With lower costs and taxes, the Lower 48 states are seeing a surge in new investment and Alaska is not.
  • Alaska is not participating in the current boom the oil industry is experiencing across the nation and abroad because of its high costs and a tax regime that takes virtually all of the upside at high oil prices. But what nature has dealt us on the cost side can be changed by a more inviting fiscal regime.

The economy, State budget

  • Significant tax reform would be a game changer for Alaska, leading to higher state revenues and a stronger private sector economy over the long term. The private sector is the foundation of Alaska’s economy and its underlying health is the key to sustaining state government and the important services it provides over the long haul.
  • If the Legislature fails to pass meaningful tax reform, Alaska will likely be hit with a severe fiscal storm later in this decade, which will negatively impact the economy and virtually all Alaskans. With government spending continuing to expand as it has and oil production declining four to seven percent annually, Alaska could be running deficits by fiscal year 2015.
  • High oil prices have masked the negative impact of the production decline. The problem is the production decline and it is real. The State gets about 90 percent of its revenues from TAPS and about half the state’s economy depends on oil. However, the pipeline is now operating at one-third capacity and while it may be theoretically possible to operate TAPS down to 100,000 barrels per day, funding state government becomes extremely problematic at that level. Moreover, a “low oil production economy” based on 100,000 to 300,000 bpd throughput will radically change Alaska’s economy and depress virtually every sector.
  • Assuming $94 oil, an annual six percent production decline, and a seven percent increase in the state budget, Alaska will need an oil price of $142 per barrel in four years to balance its budget.
  • At the current ongoing rate of decline, throughput in TAPS will fall to 300,000 bpd in 2020. And at the current rate of increase in the state budget, it would take $220 per barrel oil to balance the budget in eight years.
  • According to a Commonwealth North Study, the Department of Revenue has overestimated future oil production 100 percent of the time.
  • In 2007, just weeks after ACES passed, the State predicted oil production would be 674,000 barrels per day in 2011. The actual production number turned out to be approximately 603,000 bpd. The State in 2007 did not forecast Alaska’s daily oil production would fall to current levels until 2022. The decline curve projections were ten years off.
  • The State warned in its most recent forecast that half of its revenue stream in 2020 will depend on oil industry investments that have yet to be made.
  • Under the current tax structure, the state is taking high returns now, rather than over many years, by removing revenues at a rate which simply is not sustainable over the long term.
  • Overall, oil production has decreased 40 percent over the past decade. Alaska cannot afford a similar decline in the current decade.