Friday Fact Check: AK in the Global Context. AK’s Oil & Gas Taxation Policy.

In News by wp_sysadmin

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.

Click Here for Presentation Materials

Click Here to Watch the Presentation