On Monday, September 13th, the Senate Resources committee heard a presentation from the state’s consultant on oil and gas issues, Gaffney Cline.
The presentation focused on three topics:
- The Oil and Gas Industry Today
- Alaska in the Global Context
- Considerations for Alaska’s Oil and Gas Taxation Policy
Key points made in the presentation:
- The oil & gas industry has been battered by deeply disruptive events in recent years, including the oil price collapse of 2014-2016, the COVID-19 pandemic, the emergence of alternative energy platforms, and a related shift in the long-term prospects of the industry
- For resource-rich governments and states, the question is how to address the knock-on impacts of energy transition and how to optimize oil and gas resources in a responsible manner while transitioning to alternative energy platforms.
- The trends relevant to Alaska and other oil producers are increasingly clear:
– The lowest cost producers (Saudi Arabia and Gulf countries) will have an increasing advantage in a lower demand environment, with strong drivers to maximize production to meet budgetary requirements, and a goal to extract as much value as possible from their oil and gas resources while they can.
– Shale oil will remain a potent force with its ability to react quickly to demand/price spikes, which will restrain upward price pressure. – Decelerating demand and a muted price environment will likely mean less upstream investment and activity through 2050, especially for ‘big ticket’ long lead time investments.
• For oil and gas producers such as Alaska, the competition for oil and gas investment dollars is fierce and getting fiercer.
– Oil and gas companies will impose high profitability / return hurdles for upstream investment.
– Oil and gas companies are making decisions today that will determine the extent to which Alaska is able to monetize its oil and gas resources in the future.
• Alaska has been a destination of choice for many leading oil and gas companies with its attractive resources, access to market, skilled workforce, and service company base.
• In recent years, however, Alaska’s oil and gas sector has faced challenges: – Key assets like Prudhoe Bay are maturing and producing far less oil.
– Bringing new assets on stream to replace declining production from maturing fields has not been straightforward (consider Willow as an example)
– Alaska is a difficult and high-cost operating environment, with only a short window of time each year for key activities when ice roads are available.
– At the same time, Alaska has faced the same headwinds as others globally.
• SB 21 (MAPA) introduced the Per Barrel Tax Credit to reverse investment and revenue declines.
– Since MAPA became law, the production decline trend appears to have stabilized.
– Fiscal changes typically take time to take effect and can be overwhelmed by events.
Alaska’s strategy to extract more revenues from the oil & gas sector will need to consider not only near-term revenue capture objectives, but also medium- and long-term impacts on oil and gas development and production and the tax base.
– Ensure that companies are not discouraged from taking on big investment, step-change developments that will replace declining revenues from existing fields; and
– Ensure that existing companies and new entrants continue to invest in mature fields, and so extend the productive life of existing assets
. • Global experience suggests that if the taxes are too high:
– Companies will seek to exit and/or go into ‘harvest mode’, and
– Invest in other more tax friendly jurisdictions.
– All of which will contribute to reduced investment and activity in the oil and gas sector and to production declines.
• Tax policy must be crafted and sufficiently nuanced to support effective revenue capture while maintaining healthy participation across the different asset types.