Proponents of the Oil Tax Initiative are trying to convince Alaskans that a “yes” vote on the Oil Tax Initiative will increase state revenue and protect the Alaska Permanent Fund dividend. The opposite is true.
The fatal flaw with the proponents’ argument is that it incorrectly assumes that the oil producers will continue to invest and spend money in the North Slope fields after the Initiative passes in the same way they had invested and spent money before the Initiative passed. That will not happen.
If the Initiative passes, Alaska will be a less competitive and a more tax-unstable place for the producers to invest. Less investment means less oil production. Less oil production means less state revenue. Less state revenue ultimately means no Permanent Fund dividend
ConocoPhillips is a case in point. Prior to the COVID-19 pandemic and the determination by the Alaska Supreme Court that the Oil Tax Initiative would appear on the ballot, ConocoPhillips announced its intention to invest $25 billion on the North Slope over the next 10 years. Now, in an Aug. 9 article in the Petroleum News, ConocoPhillips says that it is holding off restarting its exploration program pending the outcome of the Oil Tax Initiative on the Nov. 3 ballot.
It is true that all Alaska industries oppose new taxes. But with COVID-19 ravaging our economy, this is a particularly bad time to raise taxes and depress investment on any industry. It is a fact that Alaska’s oil industry has the highest operating cost of any other oil province in the world.
ConocoPhillips is already losing money due to the plunge in oil prices because of the decline in demand resulting from the pandemic and the production difference between Russia and Saudi Arabia. Conoco’s second quarter 2020 SEC filing, which just came out, showed that it lost $141 million in Alaska while it paid $85 million in taxes and royalties to the State.
We need a resurgence of oil industry investment to fuel a recovery of our economy. We will need a resurgence of oil industry spending to simply offset the natural decline in production of the major North Slope fields which ranges between 4% to 6%. Each barrel of production must be offset by a new barrel of discovery.
How much revenue is actually to be gained by risking billions of dollars of producer investment in the North Slope over the next 10 years? Not much. The State is already collecting 96% of all oil profits at forecasted oil prices around $40/barrel.
The current tax regime passed in 2014 is working. Oil production under the 2014 tax increased by 85,000 barrels/day.
Alaska is a more attractive place to do business if it has a stable tax policy. In addition to increasing production taxes by 300% at $60/barrel oil, the Oil Tax Initiative proposes the eighth change in production taxes since 1977. The producers cannot plan for the long lead times needed for exploration and development if taxes keep changing.
It is noteworthy that the Legislature is not proposing a change in production taxes. If it were, there would be committee hearings with testimony by the producers and oil tax experts. Alaskans would have a chance to weigh in. The effect on investment in the North Slope and on future production caused by the significant tax increase that the Initiative proposes would be analyzed and debated.
The Oil Tax Initiative that will be before voters in November is primarily through the efforts of those who continually litigate against the oil industry. It cannot be amended to correct errors after two years. Thus, there will be continuing production tax instability due to litigation over what the initiative means and requires.
In short, oil tax legislation is too complex and too important to the state to be changed by initiative.
Alaskans can’t have it both ways. Our revenue funds are almost exhausted. Unless we make Alaska competitive in the world market for oil production we will no longer have the luxury of paying a dividend, and our Permanent Fund will be in jeopardy.
A responsible vote for Alaska’s future is a “no” vote on the Oil Tax Initiative,
Frank H. Murkowski served in the U.S. Senate from 1981 to 2002, and as governor of the State of Alaska from 2002 to 2006.