The Alaska OCS and state fiscal policy.

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

The opinions expressed herein are the author's own.

Sometimes state officials and other proponents argue that oil tax reform is needed to keep the Trans Alaska Pipeline System (TAPS) operational "until" oil from Shell Oil Company's Chukchi Sea or other Alaska Outer Continental Shelf (OCS) projects come online in the 2020s.

The implication is that once OCS oil is flowing through TAPS, the state will be out of the proverbial fiscal woods and once again positioned to spend at the greatly escalated levels experienced over the last few years. The additional suggestion--made by some--is that, believing OCS production ultimately will save the day at the other end, maintaining high spending levels in the meantime is acceptable as a "bridge," even if it requires drawing down the state's fiscal reserves.

There are several reasons why this is bad fiscal policy, not the least of which is the highly speculative nature of the ultimate timing and level, if not the existence, of OCS production. Shell's Alaska OCS experience thus far is not a confidence builder. If the Alaska OCS projects are delayed or, worse yet, deferred until a future generation, the "bridge" visualized by interim spending easily could become a fiscal "bridge to nowhere."

More important, however, is the fact that, even if the exploration and development of OCS oil goes smoothly from this point forward and production begins to reach TAPS sometime in the 2020s, Alaska state government will receive relatively little from the OCS revenue stream.

In fact, current estimates are, even assuming the best possible outcomes, that the net present value of the state's total, lifetime take from anticipated OCS development, spread over decades, will barely cover two years of state spending at current rates.

'Government Take' from OCS Production

As a result of the ongoing debate over oil taxes, Alaskans are becoming increasingly familiar with the phrase "government take" when talking about oil revenues. As used in the oil tax debate, government take generally means the percent of oil company gross profits (revenues minus costs) that ultimately are paid to government. The government's share usually is the sum of state or federal royalties plus federal and state income and production and property taxes.

The governmental recipient of the revenues varies depending on the location of the production. The Prudhoe Bay field, for example, is located entirely within the geographical boundaries of the State of...