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Alaska oil output tax proposal puts state’s future production at risk: Fuel for Thought

Alaskans will vote in November on a ballot proposition that would hike taxes on large oil producing fields, more than doubling the state production tax and threatening future crude output in the state.

The initiative would extract more than $1 billion a year from North Slope producers, state officials estimate, and includes a provision that make companies’ confidential financial information filed with tax returns public.

On that point, “we are not aware of any other oil and gas regime requiring the public release of all supporting and backup data associated with taxes paid,” Rich Ruggiero, of IN3nergy, a consultant to the state Legislature, said in an analysis of the ballot measure.

Critics in industry say the measure would crush a renaissance of industry activity seen on the North Slope following a string of recent oil discoveries.

ConocoPhillips, which led much of the new exploration, has curtailed drilling and laid down rigs on the slope. If the ballot measure passes, a drilling suspension will continue, at least through next year, at four large fields targeted for higher taxes, the company told a business group in Anchorage.

Go deeper: Explore S&P Global Platts US election 2020 coverage

An ongoing issue

Alaskans have argued about oil taxes since the North Slope fields began producing in 1977, but past debates have always played out in the state Legislature, where there is an opportunity for discussion and changes.

Alaska’s Legislature has increased taxes several times and also modified them to stimulate industry activity, which it did in 2013.

A ballot proposition, in contrast, is a "yes" or "no" the way it is written. This is the first time a complex petroleum tax issue will be decided at the ballot box, where the outcome will be influenced more by political advertising than detailed analysis by legislative committees.

This year’s initiative, called “Alaska’s Fair Share,” stems from the 2013 change in taxes intended to stimulate investment, but which critics complained gave too much to industry.

A citizen group led by Anchorage attorney Robin Brena organized a signature-gathering campaign to get the question on the ballot to bypass the Legislature, which Brena and others argue is too influenced by industry.

For his part, Brena said his analysis shows the large North Slope fields are still profitable at existing prices. Alaskans have been hit hard by the drop in oil revenues and cuts to public services.

“Alaska needs new revenue and recovering a fair share from our oil is the first place we should look” before enacting new taxes on residents, he has said.

Financial impact

The financial impact on industry of the ballot measure would be substantial.

At $40/b for North Slope crude oil, approximately the current market price, Alaska now nets about 90% of producers’ profits on new investments under its present fiscal system, which includes tax and the state royalty, said Roger Marks, a retired state petroleum economist.

Other studies show under the ballot proposition the tax on profits would increase to 100% for new investments, a rate that would hit in-field investments hard, with adverse effects on production within a few years.

“The (ballot) measure would represent a $2-5/b tax increase [dependent on price], which would likely disincentivize future investment in these long standing fields,” said Parker Fawcett, supply analyst at S&P Global Platts Analytics.

“Prudhoe can’t take that,” said Frank Paskvan, a retired BP petroleum engineer who supervised development work in the Prudhoe Bay field, which produces the bulk of North Slope production.

Paskvan’s concern is that the initiative will further discourage field drilling and maintenance work already curtailed by low oil prices. Alaska North Slope crude oil prices have been stuck at around $40/b since June, Platts data shows. The effect of curtailed drilling would to be steepen production decline rates in the large, mature fields, which provide the bulk of the approximate 480,000 b/d moving through the Trans Alaska Pipeline System.

“How much would the proposed tax reduce oil production? By quite a lot, actually,” Paskvan said. “Each well in Prudhoe typically gets work done every three years to maintain production. At today’s oil prices, Ballot Measure 1 would make most well work uneconomic, and field production would rapidly decline."

The natural decline of Prudhoe is estimated at 5% per year. Producers have been able to soften that in recent years though aggressive programs of drilling new production wells and “workovers” of older wells. BP was able to flatten the decline rate at Prudhoe for two years, though it has recently increased.

Major effects on production

With little or no work on wells currently, the natural decline rate will return. Paskvan believes it could steepen to 7% or 8% per year at Prudhoe, and similar effects are seen for the Kuparuk River and Alpine fields, two other large, mature fields targeted by the ballot measure.

Decline rates of 7%-8% a year would have major impacts on North Slope production within a few years.

“Many in the Alaska public think ongoing investments in legacy fields are no big deal or merely a given because they don’t attract attention like exploration or lease sales,” Paskvan said.

However, ongoing investments have increased Prudhoe’s expected recovery by over 4 billion barrels from 9.6 billion barrels originally estimated, he said. Kuparuk and Alpine see similar percentage increases in recovery from their ongoing investments, Paskvan said.

"Double-blow for Alaska"

Because state taxes also apply to federally owned lands in the National Petroleum Reserve-Alaska and the Arctic National Wildlife Refuge, as well as state-owned lands in the central North Slope, a tax change could dampen bidding in new federal lease sales planned for both areas.

“Ballot Measure 1 would reduce Alaska’s competitiveness on a global stage by increasing its tax burden to one of the highest in the world,” Fawcett said.

“Under the current tax regime, Alaska’s production was finally set to stabilize and potentially even increase in the coming years after decades of declines, with the new tax measure putting this firmly at risk if passed," Fawcett said.

“Alaska’s largest fields would see their declines accelerate with less investment, adversely impacting investment within the state in the long term. This would come as a double-blow for Alaska on the back of BP’s recent exit,” from the state, he said.