Ballot Measure 1 — What’s up with that?

For the last several weeks, as I circulate through the district, I have been approached by many individuals with the same question. What is this Ballot Measure 1? Everyone has heard the ads to vote either way, but most have the same question: What am I voting on? Hopefully I can provide some clarity.

At its heart, Ballot Measure 1 is a struggle between those who feel government will best spend monies raised through taxation of the oil, versus those who believe the private sector will best spend the same money through the economy to benefit more Alaskans.

It’s one thing to claim “It’s Our Oil,” but our oil rests at depths between 3,000 and 15,000 feet below the surface, and needs to be taken out of the ground first, before it does the state any good. The oil companies lease our land, make investments, and take risks to produce the oil and convert the resource into money.

In November of 2007 the Legislature passed, and Gov. Sarah Palin signed, a set of changes to the oil production tax statutes that is termed Alaska’s Clear and Equitable Share, or ACES. The bill had been introduced by Palin because she felt that the previous legislation was tainted by the VECO scandal. The new law raised production taxes significantly, provided tax credits for capital spending on the North Slope and introduced “progressivity,” which increased the tax rate charged as the price of oil climbed. It was supposed to even the playing field, incentivize new operators to come to the North Slope, and grab a larger share of the value stream for the state of Alaska.

Shortly after passage, the price of Alaska oil spiked at $144.59 per barrel and the revenue to the State of Alaska climbed dramatically, but the price rise and the influx of easy cash masked the larger problem.

After ACES, investment in new oil production began to wither away. Exploration programs started by several companies were cancelled. The easy oil was being recovered but future production was more technically difficult, more expensive to recover, and not economic under ACES. As I flew clients around the North Slope, I watched the work decline, and by the spring of 2010, it was gone. The state government was flush for the time being as oil prices settled in over the previously unheard of $100 per barrel price threshold.

When prices stabilized, the main driver of state revenue became production and as less oil was produced less revenue was generated each succeeding year. We were declining at a rate of between 6 and 8 percent per year, with no new oil being brought on line due to the lack of significant exploration and lack of investment in future production. Sure, companies were making good profits utilizing those tax credits to maintain and improve their 30-year-old pipe networks, processing plants, and other infrastructure, but little of that spending was leading to new production that could be taxed. At the same time, production in other parts of the world, and especially the Lower 48, was increasing — only Alaska was decreasing every year.

In the Legislature we recognized the problem and realized, unless we took action to get investment back into Alaska, our production would continue to decline. Given the projections at the time, we expected to run out of savings by 2023 and be forced to cut the state government approximately in half.

The first attempt to change oil taxes was HB110 in 2011. It passed the House but died in the Senate. After the 2012 elections, and a regime change in the Senate, we were able to craft and pass Senate Bill 21 (SB21). In contrast to ACES, which passed in three weeks, the legislature spent the entire 90-day session crafting the new bill. In our House Resources Committee, we spent three weeks solely on the bill, with over 48 hours in committee meetings alone. It was a cooperative effort between all stakeholders to write a bill that would lead to increased investment in Alaska, and more production that we could then tax and collect our royalties on to fund state government.

SB21 got rid of “progressivity” and instead raised the base tax rate from 25 to 35 percent. So, instead of a tax rate that varied month to month and was not predictable, companies now know exactly what their return will be on any given investment. Instead of having to assume a worst-case scenario in their investment calculations, the companies are better able to determine their rates of return and that helps them compete against other projects within their own company’s assets. This alone has resulted in over $4 billion of new investment being allocated so far to Alaska since the passage of SB21.

SB21 eliminated the 20 percent capital credits program and instead gave a tax break for “new oil”. We knew that oil in the existing legacy fields was going to be produced at some point, even under ACES. What we wanted was the oil that was going to take new investment to be brought out of the ground, so it could be taxed and our royalty collected. The definition of “new oil” was a major discussion in our debate, and led to clear definitions of what exactly would get taxed at a lower rate to incentivize the development of those new fields.

Finally, SB21 sets a tax rate that compares well with other competing oil jurisdictions around the world. In our debate we heard from administration, legislative and industry consultants. Because various methods of extracting value are used worldwide we used a measure of government take to compare every competing tax system to Alaska’s. Government take accounts for that portion of total revenue that goes to production taxes, state and federal corporate taxes, royalties and property taxes. What’s left is what goes to the oil company, including their profits and expenses. Under ACES we ranked as one of the highest government takes in the world at a range of prices. Under SB21 we set the tax rate to be just above average. We believed it was fair since even though the costs to operate in Alaska are high the risk of losing the investment to political strife is low, the workforce is extremely capable and it is Alaska’s resource from which to generate the maximum benefit for its citizens. We also believed that, by taxing slightly less, we could make up the difference with greater production down the road and increase the benefit to the Alaskan economy with more jobs and company spending than by simply collecting a higher tax.

Everything that we in the House Resources Committee expected SB21 to accomplish has happened except for one thing — it all happened a lot faster. Oil production in the last quarter of FY2014 was higher than the same quarter in FY2013. The production decline has been stopped. Overall the year-to-year difference between FY2013 and FY2014 was 0.1 percent — essentially zero — instead of the 8 percent decline between FY2012 and FY2013. Our rig count between February 2013 at eight rigs and February 2014 at 17 rigs shows the companies are drilling more exploration and production holes. More holes equals more oil. The Department of Revenue forecast for FY2015 has SB21 bringing in $140 million more revenue than we would under ACES. The analysis is laid out on the state Department of Revenue’s website.

With our tax system, we take a fair cut and generate the maximum benefit to the Alaska economy and its people for Alaska. Some believe that fair cut should include high tax rates that divert the most money possible so government can spend it the best. Others believe by taking slightly less in taxes the companies who hold the leases will generate more jobs, more investment, and more spending in the Alaska economy, and that the private sector will boost the economy more effectively.

Ballot Measure 1 asks the question “Should Alaska repeal our new oil tax system?” A “yes” vote will go back to ACES, a “no” vote will stick with what appears to be working as expected. You already know I’m voting “no.” Now you decide.