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Coghill OP-ED: Understanding ACES, MAPA and Alaska’s Upcoming Critical Referendum Decision

Alaska State Senator John Coghill

Alaska State Senator John Coghill

The views represented herein are the author's own.

Alaskans will face a choice in 2014. Do we want to continue on a path with Alaska's Clear and Equitable Share (“ACES”) by repealing the More Alaska Production Act (“MAPA”)? Or, do we want to embrace the More Alaska Production Act (formerly known as SB 21)?

The following is lengthy explanation as to why I believe Alaskans should not repeal MAPA. It’s lengthy, because the subject matter is much more complex than any bumper sticker. I encourage people to read the entire piece so that this important debate can continue. At the end of the day: I understand Alaskans on both sides of the issue are simply trying to advocate for their perception of “Alaska’s proper course.” To the extent possible, the debate should be based on clinical fact, not emotion.

So, where are we right now?

Under ACES, oil production declines will be expected. These declines were acknowledged during session, even by staunch MAPA opponents.

MAPA, on the other hand, was designed to increase new production while maintaining a fair, stable, competitive tax rate for the state treasury.

The More Alaska Production Act received wide-ranging support by many hard-working people in Alaska. Supporters included smaller producers (Brooks Range), locally owned companies (Universal Welding, Samson Electric, Flowline Alaska, Inc.) unions (like the Teamsters 959), and native corporations (Doyon, Arctic Slope Regional Corporation, NANA Development).

It was supported by respected local government officials, like North Slope Borough Mayor Charlotte Brower.

Here’s what Mayor Brower wrote to Governor Parnell in an August 26, 2013 letter:

We firmly believe the passage of this legislation helps to create an environment in which industry will increase investment into oil and gas projects within our state, and that this investment will lead to more robust economy for both the North Slope Borough and the State of Alaska.

In order to join the Governor and Legislature in fostering an environment which encourages responsible development within our boundaries, the Borough is investing over $90,000,000 to build a new, state of the art water and sewer treatment facility, and a new landfill system at our Service Area 10 in Prudhoe Bay.

This language demonstrates an understanding shared by many: namely, that new production in the oil industry will provide new jobs and a positive outlook for our economy as a whole. The More Alaska Production Act’s passage will allow prosperity, even in collateral ways (such as secondary infrastructure development).

Why did the More Alaska Production Act receive support?

Because MAPA supporters could see that Alaska’s long-term economic outlook was not good. Alaska was facing alarming oil production decline. The tax structure had to be modified (as is done in other international and national jurisdictions to entice new production). Examples of international and provincial governments that set reduced amounts of “government take” to entice new oil production include: Ireland, Peru, New Zealand, Nova Scotia, Denmark, Brazil, Alberta (for conventional oil) and the United Kingdom. In the United States, one can include Texas and Louisiana (both for conventional oil).

Alaska also faces another problem. While production declines, the costs of state government have been increasing….rapidly! According to David Teal, (the legislative finance director), since fiscal year 2007, general fund appropriations (the capital and operating budgets for Alaska) have ballooned 40.7%.

The testimony during session (from the Departments of Revenue and Natural Resources) was that by 2022 the state will have to benefit from sustained high prices for unrestricted general fund oil revenues to meet projected forecasts. Being forced to rely on prospective sustained high prices for oil is unwise. Particularly with aggressive international oil development that could increase world-wide oil reserves. Make no mistake: Alaska is in an intense competition with the lower-48 and foreign players.

Keep in mind: Alaska has a limited window of opportunity. It takes 3 to 7 years for an oil field to get new oil in the pipeline. The clock is ticking. Although oil companies have “large market capitalization” they still only have a certain amount of assets to devote to various projects around the world. Projects are determined by their cash margins and their profitability index. If those numbers don’t add up in Alaska, the companies will look to invest in other areas (which, to a certain extent, has already happened).

So, what does that mean for the state?

We will not get the increased production we need during the necessary, critical timeframes.

 

The More Alaska Production Act is About Creating Opportunity for Alaskans

One would think, in an era of booming demand (coming from Brazil, Russia, India and China) and exploding global investment in oil and gas, Alaska’s North Slope production would either slow its decline, or increase production.

Neither has happened.

Despite the fact that prices that have been consistently $5 to $20 a barrel higher (than those achieved in the lower-48), relatively inexpensive (with easy access to markets through the Trans-Alaska Pipeline System (“TAPS”)) and significant discovered or undiscovered resources, North Slope oil production has continued to decline faster than predicted.

For example: in the Fall 2010 Revenue Forecast, the Department of Revenue predicted North Slope production for fiscal year 2014 (“FY 2014”) to be 637,000 barrels per day.

By Fall 2011, the Department downgraded estimated production in FY 2014 to 561,000 barrels per day.

By Fall 2012, the Department again downgraded predicted production to 538,400 barrels per day.

Finally, by Spring 2013, the Department revised the production forecast to a mere 526,600 barrels per day.

What does that mean?

Basically, in just three years, forecast production for FY2014 dropped by over 100,000 barrels per day.

Why were forecasts dropping?

Since ACES passed, companies weren’t investing enough in new Alaska production.

From 1997 to 2006, 16 new participating areas started production on the North Slope; 15 as new developments in legacy units and one in a new field (Badami). The new developments collectively provided between 90-100,000 barrels per day of production between 2001 and 2011.

Since ACES passed, only 7 new participating areas have been brought online. Three in legacy units and 4 in two new units which were started prior to the passage of ACES.

Simply put, not enough new production was occurring to adequately offset our steep decline rate, and ACES was to blame.

Why?

While Alaska’s government can’t change its location, climate, or how the oil companies develop oil, it can change its tax structure to entice producers with competitive comparative margins (versus the lower-48 and the rest of the world).

What does that mean?

The state needed to change ACES to encourage new production.

Why?

ACES is now widely regarded as having key, critical failings: The most important that the public should be aware of is that the high level of government take reduced the competitiveness for private capital, especially at high prices. In other words, oil companies saw more favorable capital expenditures in other more stable jurisdictions, where their cash margins and profitability was higher. Oil companies, with limited assets, look to those jurisdictions first for new, profitable production.

A good, recent example of this concept occurred on October 25, 2013. Pioneer Natural Resources (an independent oil producer and MAPA supporter) announced it was selling its Alaska assets (at a loss) for a more promising basin in West Texas. One wonders if Pioneer would have made the same decision if MAPA would have already been in effect (right now MAPA is not even effective until January 1, 2014). In addition: the uncertainty associated with the referendum and the potential for a de facto return to ACES certainly adds prospective risk.

Pioneer’s assets were sold to newcomer Caelus Energy Alaska LLC. Many Alaskans are thankful to Caelus for taking the risk. Caelus’s press release stated that they were encouraged by the incentives from the More Alaska Production Act. It appears, at least publically, Caelus is operating on the hope that the More Alaska Production Act will remain the law.

 

The Opponents of the More Alaska Production Act Have “Talking Points” That Disguise Problems

Don’t be confused by opponents’ claims of “record profits in Alaska.” That was mostly because of existing, declining oil production (coupled with high prices) in legacy fields. Not because of new production.

Alaska needs new production to sustain itself for future generations. New production.

Also, don’t be fooled by statements of “record employment.” Industry folks understand that claims of “record employment” mask a critical problem. Namely, as production decreases, it requires more manpower and cost to keep the oil flowing through TAPS.

On October 18, 2013 Tom Barrett of Alyeska Pipeline stated at an Alaska Industry Support Alliance meeting in Fairbanks that it takes more pigs to “scrap the wax” and, generally, just costs more money to keep TAPS operational. Remember this fact: it used to take 4 days to move the oil down to the Valdez terminal in 1980. Now it can take 15 days or more (because there is less oil and colder temperatures).

ACES has significantly contributed to this current sad state of affairs. One doesn’t need a crystal ball to see that the money will continue to leave Alaska if MAPA is repealed. There would be long-lasting negative effects that take years to correct.

I continue to encourage people to go to the following site: http://www.legis.state.ak.us/basis/get_bill.asp?bill=SB%20%2021&session=28 and review the materials that accompanied the debate.

Each and every one of us will have a critical choice in 2014. In many ways, the future of the state is dependent on the public and its ability to educate itself on the issues. If that education does not occur, and the More Alaska Production Act is repealed, Alaska will likely suffer through a depressed long-term economic outlook for years to come. I highly recommend we do not go down that route.

Senator John Coghill is the Senate Majority Leader.  He is Chairman of the Senate Judiciary Committee and Co-Chair of the In-State Energy Committee.  He represents District A (Fairbanks and North Pole).

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