The Oily Facts on Prop 1

By Peter Blanas

Alaskans understand that oil is the economic cornerstone of our state. Alaskans are right to be concerned, that we have a healthy and productive oil and support industry. It’s also understood that the extraction of oil in the Arctic, is very difficult and expensive, and should come with a good return on investment. We want the industry to earn a healthy profit, along with Alaska, the resource owner.

First, a look backward: Oil began flowing down the pipeline from the North Slope in 1977. Daily production peaked in 1988, at just over 2 million barrels a day, and has been in decline ever since. This was wholly expected, and is what usually happens, when mammoth fields like Prudhoe and Kuparuk are tapped.

As those fields have produced over the years, and production has inevitably declined, the oil industry went into a harvest mode. The infrastructure was built and in place, and the oil continued to flow (at a declining rate), and the industry was able to earn continuing profits, especially at higher prices.

By our constitution, the oil is the property of the people of Alaska. When oil leases are granted to an oil company, they’re buying the right (and duty) to enter upon the land and explore for and extract the state-owned mineral. We retain the right to tax the same. For us to do so is not wrong or inappropriate, as some would have us believe.

There will always be disagreement over what tax rates should be. We’ll assert one rate, while they’ll assert a lesser rate. What’s needed is for someone who is knowledgeable and qualified to settle on a fair rate for all.

This happened in the crafting of ACES. The State of Alaska retained the global consulting firm of Gaffney, Cline & Associates to guide us in setting up ACES. GCA is a division of Baker-Hughes Corp., the Houston-based conglomerate of all things oil-related. Founded in 1908, Baker-Hughes is who provides the Weekly Rig Count, worldwide. These people know more about the oil industry, top-to-bottom, than all the rest of us put together. GCA’s function is to advise governments around the world in arriving at a true and correct value of their oil and gas in the ground. And then to guide these governments in dealing with the oil industry. And how NOT to be swindled by them.

This is what they do. And this is who we very sensibly hired to help us with our oil tax structure.

They purposely crafted a higher tax rate to maximize the monetary return from our oil. But that’s not all. They also built in huge incentives, in the form of generous investment credits, to induce the oil industry to explore for more oil, to re-build and upgrade infrastructure. To re-work existing wells. All to maximize and increase production.

As a result, the industry became very busy on the North Slope. New players came in and began exploring for new oil. The majors did likewise, and activity has reached ever increasing levels ever since. ACES worked very well, both in generating more return from the production of our oil and in compelling the industry to shift out of harvest mode and into exploration and development mode.

The oil industry, always seeking to improve the bottom line, managed to lobby for themselves a dramatic reduction in taxes in the last Legislature (Senate Bill 21), which Gov. Sean Parnell signed into law — this despite the overwhelming objection of the people of Alaska. A referendum drive was begun in response, and over 40,000 Alaskans petitioned to repeal SB 21. This is now on the August primary ballot, in the form of Proposition 1.

Worth mentioning: When oil taxes were being debated by the last Legislature, many legislators asked to have Gaffney-Cline back, for followup and review of ACES. After all, the State of Alaska had paid this firm a good deal of money for their expertise and guidance. If some adjustment were in order, surely these folks would so advise. They are, after all, a worldwide authority on this very matter, and they have no reason to be anything other than forthright with us. Their reputation is everything, to them.

Gov. Parnell, whose office is their principal, still has GCA on retainer. And he would not let them speak with our Legislature. And he still won’t. Why can’t we speak freely with our own consultants and have a free and candid exchange with them on how ACES was working? Why are we not allowed to talk to them?

There’s been a massive campaign to try to persuade Alaskans to reject Prop 1. There’s been a litany of claims that are highly questionable at best. One such is that returning to ACES will somehow cause oil-field investment to diminish, and jobs will consequently disappear, harming our state economy. The truth is just the opposite.

The last seven years have seen unprecedented activity because of ACES. ACES has compelled the industry to reinvest in the field, while providing much higher returns for Alaska. Rejecting Prop 1 is to excuse the industry from having to reinvest in Alaska — and invites a return to harvest mode. This is:

• A definite job killer, and,

• Does nothing to ensure the future flow of oil. And,

• Greatly diminishes revenue from our oil, here and now.

Likewise, many of the field improvements that have taken place in the last seven years, Alaska has funded, in the form of investment credits. We would therefore be denied the benefit of the improvements which we’ve already paid for.

The notion that Prop. 1, a return to ACES, would harm our economy and kill jobs, is demonstrably false. Simply look back at the last seven years. We’re living in the ACES economy today.

The real economic killer would be in rejecting Prop. 1, and allowing the industry to return to harvest mode.

Keep Alaska productive and solvent. Vote ‘yes’ on Prop. 1, for the long term good of Alaska.

Peter Blanas is a lifelong Alaskan who, with his wife, Kim, lives and works in Anchorage. He’s a longtime observer of Alaska politics and its relationship to oil and gas and is a registered nonpartisan.

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