ACES is broken. It's costing Alaskans jobs and business. It's costing Alaska oil industry investment. Its only beneficiary has been state government, which has continued to expand since ACES was adopted, but in the long term, it also will cost state government revenues by hastening the rate of production decline.
House Bill 308 represents a significant step toward fixing ACES by addressing its most harmful component: the progressivity feature that results in government taking 70% of the profits at current oil prices and more than 90% at higher prices, and distorts the balance between investment risk and reward.
Supporters of ACES, the 1,000 new state government positions it's spawned so far and our growing dependence on state spending say that quadrupling the oil production tax has resulted in record employment in Alaska's oil patch.
It hasn't.
According to the state's Department of Labor, the number of Alaskans standing in unemployment lines because they lost their jobs in the oil & gas support sector has increased 144% since ACES was adopted. 144%.
The Department of Labor says 1,500 jobs were lost in Alaska's oil & gas industry in 2009, and hundreds more will be lost in 2010 due to less maintenance, less exploration and pressure on contractors to work more efficiently.
But oil & gas employment increased under ACES, declare supporters of ACES and bigger state government, and the Department of Revenue says so in its ACES status report!
You may recall a rather significant oil spill at Prudhoe Bay in the summer of 2006. In its wake, North Slope producers spent hundreds of millions of dollars on infrastructure repair & renewal. They hired dozens of contractors & suppliers, who in turn hired hundreds of new workers.
Maintenance and repair, inflation and development projects that already were commissioned before ACES accounted for the employment bubble in the oil & gas support sector over the past few years. It occurred not because of ACES, but in spite of it.
Supporters of ACES and bigger state government may have imposed the largest tax increase in Alaska’s history retroactively, but they can’t take retroactive credit for employment & investments stemming from an oil spill that occurred more than a year before ACES was adopted.
Now that maintenance is stabilizing at a more sustainable level and there’s a scarcity of new development activity to fill the void, oil field employment is plummeting.
Nonetheless, supporters of ACES and bigger state government say ACES has stimulated investment and development.
It hasn’t.
According to the Alaska Oil & Gas Conservation Commission, exploratory and development drilling were at 10-year lows in 2009. This winter, a single wildcat well is being drilled on the North Slope. One. ConocoPhillips, the state’s most active explorer for decades, isn’t exploring at all for the first time in 45 years.
BP says it’s reducing its capital budget in Alaska by 15%, and investments in development projects that result in more oil being produced are down 30% since ACES was imposed. Drilled footage for wells has dropped by half.
ConocoPhillips says more than $2 billion in development projects have been deferred since ACES.
Supporters of ACES and bigger state government who admit that Alaska’s oil & gas industry is in a downward spiral say it’s all because of the global economy.
It isn’t.
In the Lower 48, which is also part of the global economy, the active drilling rig count tracked by Baker Hughes has doubled since mid-2009 as oil prices have rebounded. In Alaska, it’s declined from its already modest level during the same period.
The Fraser Institute, an international research organization that conducts an annual survey of oil & gas executives to rank oil and gas regions worldwide on the basis of their attractiveness for upstream investment, found Alaska in a neck-&-neck race with California & Colorado as the least attractive places in the U.S. for upstream oil & gas investment in its latest survey. California.
Globally, we even ranked behind socialist Norway. We can be thankful for places like Venezuela, Iraq & Russia to keep Alaska off the bottom of the global list as well.
Does anyone honestly believe that the highest tax rates in North America and some of the highest costs in the world have nothing to do with that, or with job and investment losses in Alaska’s oil patch?
We expect supporters of ACES and bigger state government to say whatever it takes to try to convince us that raising taxes stimulates investment and creates jobs … even though it defies logic and flies in the face of what we in the oil support sector see with our own eyes.
House Bill 308 represents a clear & unambiguous choice between bigger state government and long-term oil patch jobs and business for Alaskans.
It’s time to choose.
ACES was introduced, debated, loaded with onerous terms and passed in less than a month. It was the third oil tax increase in 3 years, and there was little concern that the earlier two hadn’t been in effect long enough to assess their impacts.
When the legislature has a will to act quickly, it finds a way.
There are 20 days left in the regular legislative session: plenty of time to act with the same sense of urgency and single-mindedness to fix ACES as when it was adopted in the first place.
Paul Laird
General Manager
