Dear Neighbors,

        The slick oil tax ads are starting.  And when political ads begin, you start to wonder whether telling a fib is cheaper than telling the truth.  Well, because political ads cost lots of money, and they tend to be more fib than truth.  So, fibbing must be cheaper than telling the truth, right?  Or, maybe in politics it’s just more effective to mislead people.  Nah.  No one would ever do that.  Not when billions in state oil revenue are at stake.

        As you know, the governor has proposed the biggest oil company tax rollback in state history.   To support his effort, the major oil companies have said that if the bill passes they. . . . . um . . . . won’t guarantee any new investment, won’t guarantee any new development, and, basically, what they have to say is proprietary information.  Basically they’ve said, “Gosh, we don’t want to commit to anything, but give us some huge tax breaks and let’s see what happens.” 

        How’s that for proof the governor’s plan will work?  A bunch of companies that won’t tell you whether they’ll produce any more oil if we give them $1.5 billion a year.  Would you cut a deal with a “partner” who wouldn’t tell you whether they’d hold their end of the bargain?  Wait.  There’s no bargain here.  The deal is we give the money away, and just cross our fingers.

        If Governor Parnell succeeds at passing his legislation, the state will receive roughly $1.5 billion less in oil revenue a year than it does today.  That’s $250 million a year over what the governor conceded until this week.  We’ll see if the number keeps growing.

        In a year when the governor is proposing a budget with a $150 million deficit, his oil tax rollback proposal threatens to run through the state’s $12 billion in savings in five to eight years (depending on whether his trend of budget growth continues.)  That’s a recipe for an income tax.  But instead of conceding that the proposal might run through the state’s savings absent a hefty income tax, supporters of the governor have started to take out political ads.  And the ads threaten the “Orwellian truth” that if we don’t pass the Governor’s bill, well, he’ll have to impose an income tax.

        So, who’s being Orwellian, and who’s not?  Let’s let history be our guide.

       If vastly reducing the state’s oil revenue will lead to new production, then that’s a good thing.  But in 2006, when developers were told that virtually any new field on the North Slope would pay a 0% production tax, there was 20% less investment on the North Slope, 20% fewer jobs, and oil production was declining just as it is today.  Low taxes didn’t reverse the decline in Alaska oil production.  If the governor gets his way, and history repeats itself, the governor’s plan will burn through our savings accounts – and he’ll have to start pushing an income tax.  Or he’ll have to cut the Permanent Fund Dividend.  I’d rather do neither of those things.

        We have better ways out than rolling back oil taxes at a rate that will burn through our savings accounts in eight years.

        The state needs to be more aggressive about promoting our substantial tax incentives to new companies.  Instead, we’re scaring away new investment by telling the world not to do business here – or to wait for a promised day when our taxes are lower (why would a new developer invest in Alaska today if the governor is telling them to wait while we debate lowering our oil tax rate?)  Two weeks ago Senator Hollis French and I wrote the governor to ask him to do that, and have met with him since.

        It’s worth reminding folks how “abusive” Alaska’s oil tax system has been to our producers.  Eni and Pioneer have recently started production at two new fields, Ooogaruk and Nikaitchuq. 

        ConocoPhillips has earned over $7.5 billion in Alaska profits under the current tax system in the past four years. 

        British Petroleum earned $7.2 billion in Alaska profits between 2007-2009 (their 2010 annual report isn’t yet available.)

        And Exxon, well, never reveals their Alaska profits.  They just tell us to trust them that they don’t make enough money here.  

        And, though it’s out of our control, I have to believe the most lucrative new area for oil development on the North Slope will be opened soon.  The National Petroleum Reserve-Alaska holds what many believe to be large stores of crude oil.  The Army Corps of Engineers denied Conoco a permit to build an access bridge there over the Colville River.  The inside scoop is that the decision will be reversed.  It should be.  And, notably, Conoco has proposed development there under our existing tax system.  Hard to argue that the current system deterred that development.

     There’s no easy way to reverse the decline in oil production.  One option, though, is to demand that the major oil companies allow fair access to their oil, gas and water separating production facilities on the North Slope at a fair price.  A truism in Alaska production is that small fields are not economic when the owner has to build their own processing facility, and I’ve co-sponsored legislation to require fair access.  I’ll also keep my mind open to ideas that might work.  But the Governor’s plan isn’t one of them.

        There will be more to come on oil taxes.

        As always, let me know if you need anything.  If not, stay tuned.

Best Regards,