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What Alliance wants from state: sound fiscal management
Increased production is the key to greater state revenue; don’t tax, offer tax incentives instead, says Alliance general manager Steve Sutherlin PNA Managing Editor
The Alaska Support Industry Alliance has a central focus to its wish list for the Legislature this year: sound fiscal management. With a likely $900 million budget shortfall next year and more red ink on the way, balancing the state budget is once again a hot topic in the capital. Some legislators have proposed new taxes on various industries as part of cure for the shortfall. That has Alliance members concerned.
More oil and gas production is better financially for the state in the long run than an emphasis on taxation, Alliance General Manager Larry Houle told PNA Jan. 15, adding the state would benefit most by stimulating the output of its oil and gas industry.
Stability is key The answer to the gap is not to place taxes on industry, he said.
“The producing companies must have predictable taxes,” Houle said. “Stability is the key. As the economics of any field change, tax stability becomes more significant.”
The industry has had fiscal certainty for the last decade, he said. The tax environment has been stable, but companies are concerned about the future.
“There is a perception that change is on the horizon.”
The tax system should induce companies to drill here, not prohibit drilling, Houle said, adding, “We need a tax credit for exploration and development.
“Alaska is one of the few — if not the only — state that does not allow the oil and gas industry to write off exploration and development expenses against taxes. The oil and gas industry already pays 75 percent of the bill.”
“We need to figure out how to create incentives for seismic, drilling and exploration,” Houle said, adding that the activities comprise a short, medium and long-range solution for the fiscal gap.
The state needs to build a tax structure that would bring more independent companies in, he said.
“We need to make it inviting for the prudent investor in a high-risk business,” he said: “We need to persuade companies to drill in Alaska, not Trinidad, not Indonesia.”
ELF and other oil field magic “The economic limit factor works quite well. It’s doing exactly what it is intended to do, prolonging the lives of fields on the North Slope,” Houle said.
“ELF is the single progressive component in a regressive tax structure. Our tax structure is so regressive you literally can lose money on a barrel of oil and still owe taxes on it.”
“The original field at Prudhoe Bay once produced 1.5 million barrels of oil per day, but now it is more like 500,000 barrels per day,” he said.
Most of the new production on the North Slope is the result of ELF: Alpine is an example, he said.
“I think Alaskan oil is special and Alaskans think their oil is special, but for investors simple mathematical equations determine where to drill,” Houle said, adding, “The barrel of oil that has the highest margin is the one the investor will buy.
“Alaska oil has a high lift cost and a high transport cost. It all gets down to unit cost. Every nickel and every dime adds to that cost structure.
“The role the state can play is to give concessions that counteract the high transportation costs,” Houle said, adding that companies must be enticed to operate in Alaska’s harsh environment.
Other parts of the world are making activity in their area competitive on a worldwide basis, he said. For example, Nova Scotia is creating huge tax incentives to get exploration companies in to find oil.
BP layoffs: savvy cost cutting Houle said the membership of the Alliance was not unduly alarmed by recent job cuts at BP (Alaska) Inc.
“BP is cost-cutting dramatically to put the company in the position to stay here for the long haul. They are positioning for longevity.”
“If all the other oil in the world is less expensive to get to market, they have to get costs down. It’s a sound, hard business decision, doing everything possible to make Alaska oil competitive with oil worldwide. BP has big oil reserves — too big to walk away from,” Houle said, especially since they own West Coast refineries tuned for Alaska crude.
Tax incentives won’t change the realities of the oil fields, but do enter into a company’s planning when committing exploration and production investment, Houle said. If there is uncertainty about the tax structure, companies must get their house in order on costs that can be controlled.
But if companies aren’t setting funds aside for taxes, there is more to spend on enhancing production, Houle said, adding that development of viscous oil is a perfect example. At Schrader Bluff, BP will spend $100 million on technology to pull out 2 billion or 3 billion barrels of the 10 billion barrels of viscous oil contained in the structure.
Recent breakthroughs in technology combined with the effects of ELF have opened the possibility that Schrader Bluff will be economic to produce.
“ELF is giving (companies) the edge to put more money into the fields,” he said.
(BP said Nov. 29 it would spend $100 million in 2002 at Schrader Bluff. It spent $50 million in 2001. (See story Dec. 9, 2001 PNA).
Regulatory reasonableness “Time is money,” Houle said. “The regulatory environment offers no timeline certainty.
“Regulations that the oil and gas industry lives with today were written in the aftermath of the Exxon Valdez. People were mad, and that’s understandable, but the regulations are punitive in nature. We need regulations, but we need regulations that are reasonable and fair. We need regulatory reasonableness.”
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