Category Archives: Opinion

by Tim Tilsworth

Gov. Parnell’s proposal for new taxes on the oil industry is not good legislation. Neither he nor his administration did a good job of selling this to the public.

The governor’s proposal attempts to undo 2007’s Alaska Clear and Equitable Share, which has a base net profits tax of 25 percent and a progressivity factor of 0.4 (starting at $30 per barrel of net profit or when the West Coast spot price reaches about $56 per barrel). The proposal intends to reward the oil industry for exploration, development and production.

The governor’s proposal implies “take the money, we trust you, and we hope you help us.” No assurances from the oil industry are required. No contract is entered into. It does not say “we’ll do this if you do that.” On March 27, Rick Harper, former ARCO Gas president, told the Legislature “the billions in tax reductions Gov. Sean Parnell is seeking are unlikely to spur the new production the state wants.”

The “Make Alaska Competitive Coalition,” led by Mark Hamilton, made presentations to the Chamber of Commerce in support of the proposal. Hamilton said the governor was unfairly criticized and that the critics have an unrealistic view of the way companies operate. Whoa! Every Alaskan has the right to challenge the way the oil industry operates. Few businesses commit $2 billion to a project on “a hope and a prayer” without extensive study leading to assurances of success. Even the University of Alaska’s Institute of Social and Economic Research has doubts. Individuals who supported the proposal may not have done their homework before rushing to become part of the “herd mentality.”

The governor ramped up pressure, along with MACC and the Daily News-Miner editorial board, to pass HB 110 and SB 49 — with urgency. Very late in the game, ConocoPhillips pledged up to $5 billion (of which $3 billion is from the state) and about 90,000 barrels per day of additional production. Even later, on April 15, BP’s John Minge seconded ConocoPhillips’s pledge “and promised even more but said he couldn’t be specific.” Parnell chastised the Senate by calling them “do-nothing senators” and refused to debate Sen. Hollis French, D-Anchorage, on the issues.

Alaska’s revenue commissioner has been evasive about the impacts of the governor’s proposal, and the department is two years behind in its audit of the oil and gas industry. The labor commissioner admits to confusion with oil and gas industry employment numbers. So, how do we know how well ACES is working? We don’t.

Alaska Senate President Gary Stevens addressed the Senate on April 11. I quote excerpts from that speech: “And where are the other two of the big three — BP and Exxon? … They are nowhere to be seen this session … We need a comprehensive cost-benefit analysis. … Remember we have already given them up to $2 billion in tax credits which were not used for new exploratory wells, but for maintenance …”

Stevens also stated another consultant’s report is not due until after the session.

Superior Court Judge Sharon Gleason found that the pipeline could flow until 2047 and possibly 2065. The court determined the pipeline could operate down to 200,000 and maybe 150,000 barrels per day. In spite of this, alarmists want you to believe the pipeline is about to shut down. It is not!

On April 11, Sen. Bill Wielechowski offered his preliminary cost-benefit analysis. Under Conoco Phillips’s proposal, he said, “Alaskans give up roughly $13.5 billion in oil revenue between now and 2020 in exchange for about $3.2 billion in new state resources. … That’s a loss of $10.3 billion. I don’t know many CEOs who would be OK with a deal like that.”

A simpler and approximate cost-benefit analysis (ignoring tax credits and deductions) can be calculated. Multiply ConocoPhillips’ promised 90,000 additional barrels by 365 days and by $110 per barrel. That’s about $3.6 billion worth of additional oil annually. The state’s effective tax rate is about 30 percent at $110 per barrel. So of the $3.6 billion, Alaska would get $1.1 billion and ConocoPhillips, ignoring tax credits, would get $2.5 billion.

Now this is really bad economics for Alaska — giving up $2 billion to get $1.1 billion. Who in their right mind would do this? Apparently, the alarmists want you to.

Is the sky falling? No! Is the pipeline about to be shut down? No!

Parnell, MACC, the Chamber of Commerce and the News-Miner did an outstanding job of bringing the issue of oil exploration, production and development to the attention of Alaska. The Interior  delegation, along with the Anchorage and Southeast delegations, put the brakes on this legislation so that we have time for a detailed analysis of the issues — before we jump off the bridge.

Tim Tilsworth, Ph.D., P.E., is a 41-year resident of Alaska and a professor emeritus of civil and environmental engineering at the University of Alaska Fairbanks.

 “What I found out about our oil industry and you should know also”
By Senator John Coghill

 My senate District includes nearly four hundred miles of the Trans Alaska Pipeline System (TAPS), the Valdez shipping terminal, and three of the four refineries operating in Alaska.  The communities along the pipeline receive property tax revenue as does the state. We all prosper from having this oil delivery system as well as the value of the oil.

One of these “AHA!” moments happened to me recently when I realized that my constituents have not heard enough about the huge problem of a smaller volume of oil going through the pipe.The temperature, wax and water complexities, heavier glueyness and the instability in a pipe not designed for this volume creates engineering and economic challenges.

The legacy fields, Prudhoe and Kuparuk, produced about 400 million barrels per day, about two-thirds the daily of flow through the pipeline. The legacy fields have a lot of oil deposits that can be extracted but they are heavier, colder, harder to get and harder to transport which makes them less economical.  New technology has helped production some but much is yet to be figured out.  While we still supply about 10-12 percent of America’s oil, we are declining rapidly; more than six percent each year.

A full gas tank made me feel confident and willing to cruise around when I was a young guy, but when the tank was under one quarter on the gauge, I became more careful and frugal while I figured out how to get more gas. In the same way, we are getting to the low level in our pipeline and must end the decline somehow.

“Just put more oil in the pipe” is the easy solution and I agree. The question on how to do this has several answers:  Where can the new oil come from?  How long will it take to get it in the pipe? Do we have any new possibilities on state land; federal land (NPR-A) (ANWR), outer continental shelf (OCS)?

I think the Governor has a good proposal and during the process we may uncover a better tax system, better regulation framework, and some incentives for companies to look for and produce more oil.

When TAPS shut down last month it almost became the largest frozen stick of wax. With water wax and oil as thick as molasses going quickly below freezing, the engineers had a real dilemma in trying to restart the pipeline and deliver to the refineries before they had to shut down their facilities.

I hope you will join me in commending the Alaskans that worked for almost six days and nights in freezing temperatures to get the pipeline up and running without any personal injuries.

Imagine if that pipe had frozen beyond being able to get it going: What would be the cost to Alaska? America?  The price of heating fuel to your home?  The price of fuel to the Army and Air Force?  The cost of fuel to the two largest airports in Alaska, plus the schools, public safety, roads, home values, refineries closing down and all the things that require state income will face tough times.

How long can Alaska survive with the pipeline shut down? How much oil would we have to import from foreign sources to keep us warm and powered?  We already import 25 percent of our crude oil for refining to meet our needs.

The discussion this session is about how our taxes and regulations impact exploration and production in our legacy fields.

We must stand up for Alaska by protecting our economic, environmental and workforce wellbeing while encouraging companies to do business in our state.  I have no problem if a company makes a profit as long as we also profit equitably. 

The shutdown of TAPS would adversely affect every single person in Alaska.  I felt it was important that you be in on some of the things I have learned as we work through the important issues of keeping our state in good shape now and for future generations of Alaskans.

This is one of a series of three on this subject Sen. Coghill is writing.  If you have questions about the article, please contact the Senator’s staff, Rynnieva Moss, at (907)465-6944 in Juneau.