With the election season officially over, let me first thank all the candidates for their sincere desire to serve. Public service seems to be unappreciated and undervalued in today’s society but democracies depend upon people willing to serve and represent their friends and neighbors. Many important issues await the next Legislature, but at the end of the day, what is the most important factor for Alaska’s oil industry, the very lifeblood of our state economy? Is it jobs? Investment? Exploration wells? We need jobs, investment and exploration, but I would argue the most important indicator of what happened in 2012 and what will happen in 2013 is actual oil production.
The harsh reality is this: Alaska continues its accelerated oil production decline rate, of between six to eight percent per year — or about 40,000 barrels per day.
The two newest fields on the North Slope (Pioneer’s Oooguruk and ENI’s Nikaitchuq) are producing only about half of that amount. In other words, new investments, while welcome and important, are not making up the difference.
Whatever the respective oil and gas companies decide to invest in the future, we need to be laser-focused on what those investments will do to production in the short term, because, as has been well-established, in the next 10 years Alaska needs production from fields currently under development or evaluation or our production could dip below 300,000 bpd.
Earlier this year, North Dakota surpassed Alaska to become the nation’s second-largest oil producer. That was a tough enough pill to swallow, but if current trends continue, Alaska could soon be out of medal contention: We hold the bronze right now, but at our rate of decline, California could surpass us by the end of 2013.
It’s important to note that North Dakota’s oil fields were not discovered in the past 10 years. Companies have known about these resources for decades, but high oil prices attracted the investment required to extract them. Philip K. Verleger Jr., a visiting fellow at the Peterson Institute for International Economics, recently told The Los Angeles Times, “Oil prices spurred important technological developments that enabled those looking for oil to essentially see through the bottom of rock as though it were transparent.”
High prices have spurred important advances in how to extract the oil that had already been found. We know there’s plenty of oil still awaiting production on the North Slope. Prices are still high, so where is Alaska’s share of this investment? Why isn’t Alaska booming like North Dakota or Texas?
When companies can keep the upside, which they can’t do in Alaska under the current tax structure, they can invest in these new technologies. Instead, Alaska’s current tax policy encourages exploration, but punishes actual production. We are living with the consequences of that policy.
And what does Alaska look like if oil and gas revenues go away? Were that to happen, there are not enough people in Alaska to tax to fill the gap in what is needed to sustain current government spending levels. Oil revenues brought in more than $7 billion last year for roughly 700,000 Alaskans. The second largest revenue stream, at approximately $165 million, was from excise taxes, or, as federal gas pipeline coordinator Larry Persily recently quipped, smokers are the second largest taxpayers in Alaska. If we are going to continue to rely on the oil and gas industry to foot the bill for the majority of Alaska’s spending, we need to implement a tax policy that encourages not only exploration, but also production from existing fields where we know oil can be recovered given the right economic conditions.
As such, we look forward to the 2013 legislative session, and encourage lawmakers to craft a new tax policy for Alaska to allow for the maximum long-term development of our natural resources.
Comprehensive oil tax reform must bear in mind the following facts:
• Exploration does not guarantee production, and it takes five to seven years to bring a new field online.
• Projects underway are not stemming the decline.
• Legacy fields cannot be ignored: they are critical to the solution.
Alaska needs a strong oil tax policy, and we must work together to achieve one.
Kara Moriarty, of Anchorage, is executive director of the Alaska Oil and Gas Association and former CEO of the Greater Fairbanks Chamber of Commerce.