Alaska oil policy: out of alignment.

• Author: Keithley, Bradford G.
• Position: OIL & GAS

Any opinions expressed herein are the author's own.

As Alaska finishes this year's election cycle and starts looking toward the coming legislative session there are several steps which are needed to restore Alaska as an attractive location for oil investment.

One of these steps, upon which the Legislature has focused for the last two sessions, will be in the spotlight in the coming legislative session as well: the current level of oil taxes.

While an important part of the overall puzzle, oil tax reform alone may not be sufficient to overcome the inertia that has settled into Alaska's oil and gas industry. Alaska also is out of alignment with maximizing the development of its oil resources in other significant respects.

As a result, fully realigning Alaska's interests with maximizing the development of its oil resources likely will require more steps than simply tax reform.

Background

In order to appreciate Alaska's challenge in increasing future oil development it is important first to understand Alaska's current approach. In many respects, it is similar to back seat driving--and sometimes just about as successful.

Under the leases entered into between the producers and the state, the producers make all of the investments and bear all of the expenses necessary to develop the lease and produce oil and gas. Because the costs of development are born entirely by the producer, the lease understandably provides that the producer generally is entitled to determine the pace and amount of the investment.

As a result, Alaska is at risk when, due to market and competitive factors, opportunities elsewhere provide a better return on investment. In those instances, the producers have retained the right to defer investments in Alaska in order to pursue other opportunities.

Deferral is exactly what has happened to Alaska over the last few years.

For various reasons, Alaska has become a less attractive investment opportunity over the last several years. Some of the causes are self-inflicted. For example, by some estimates, the 2007 passage of Alaska's Clear and

Equitable Share, or ACES, increased oil taxes on Alaska producers by over 400 percent. That change materially reduced the competitiveness of investments in Alaska compared with those in other parts of the world.

Other factors are external and beyond Alaska's control. For example, substantial advances in drilling and production technology have made investments in shale formations elsewhere in the...