It is my hope that as Alaskans go to the polls they are weighing the considerable risks that the Oil Tax Initiative (Ballot Measure No. 1) poses to Alaska’s economy. For openers, should the initiative pass, it will be the fourth major change in oil taxes in 14 years. Alaska will not be seen by the national and international oil industry or other industries as a stable place to do business.
As a matter of economics adding to the tax burden of the oil industry will cause it to invest less in Alaska. Less investment means less production. Less production means less revenue to the state. So, voting no on Ballot Measure 1 is in the long-term best interests of the state. Why?
International oil markets are depressed because COVID-19 has driven down the demand for oil. Workers, including in Alaska, are being laid off. BP recently left Alaska after 60 years of producing oil.
In recognition of these economic realities the federal government has reduced royalty rates on all its leases. Other oil provinces such as New Mexico, Wyoming, Norway and the United Kingdom have reduced oil taxes or royalties to attract new investment. Passing the Oil Tax Initiative will clearly place us at a competitive disadvantage with these provinces. Yet the initiative’s proponents propose to increase oil taxes in Alaska.
Production from the North Slope currently averages slightly less than 500,000 barrels per day. Production from Alaska’s aging oil fields declines naturally at a rate of 4% to 6% per year. So, we need investment just to maintain current production. For every barrel of oil consumed another barrel must be discovered.
Major flaws with the Initiative are that it assumes that the producers will continue to invest sufficiently to maintain the current flow rate and that the producers have so much already invested in Alaska that they will continue to invest in future exploration and development.
That neither is true is seen in ConocoPhillips’ reaction to the Oil Tax Initiative. Prior to the Initiative going on the ballot, ConocoPhillips (which is the largest oil producer in Alaska) announced that it planned to invest $25 billion in Alaska over 10 years — $11 billion to maintain production from the aging fields and $14 billion to continue exploration and development at promising new fields. In August ConocoPhillips said that it was delaying investment until it saw how the vote on the Initiative turned out.
The risk/reward trade-off makes no sense for Alaska. At the current price of $40/barrel the initiative would bring in $250 million in new revenue (which would decline as production fell due to reduced investment). This is hardly enough to offset the projected $1 billion shortfall in the upcoming state budget.
Do we really want to risk an average investment by ConocoPhillips of $2.5 billion per year to maintain current production and to develop and produce new oil for a short-term payout of $250 million?
There are also new, very recent events that illustrate that Alaska can expect less investment and therefore significantly less long-term revenue by passing the Oil Tax Initiative. First, because of the uncertainty surrounding passage of the Initiative, ConocoPhillips is already actively making major investments in oil provinces other than Alaska. Specifically, ConocoPhillips has just made a $9.7 billion purchase of Concho Resources, a shale production oil company based in Midland, Texas.
Concho’s shale production is located in the Permian Basin in Texas and New Mexico, where it costs less than $30 a barrel to supply oil to market. It costs over $38 a barrel to supply oil to market from the North Slope.
Second, if there is a new Biden Administration, it will be urged by environmental groups to end oil and gas leasing on federal land in Alaska, including NPRA where ConocoPhillips is currently developing new fields.
The combination of the adverse economic impact on ConocoPhillips of passage of the Oil Tax Initiative, the company’s opportunity to offset lost production from Alaska with lower cost production from the Permian Basin, and the company’s potential loss of development opportunities on federal land in Alaska, compels us as Alaskan voters to recognize and address the very real risks of loss of long-term revenues from Alaska’s oil fields.
The Initiative’s disincentives not only apply to ConocoPhillips. The disincentives also apply to the hundreds of small operators which we want to invest in Alaska that depend on oil production and exploration for their livelihood.
It is disturbing to note that at a time when America has finally become energy independent that we are now threatened with an Administration that could again return us to dependence on Middle East oil.
Please join me in voting no on Ballot Measure 1.
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.