AJOC EDITORIAL: 75 million reasons SB 21 is working

What’s been obvious for several months became official on June 30.

The 2017 fiscal year ended with a final average of 528,484 barrels per day of production on the North Slope.

That is a 2.6 percent increase versus the 514,900 barrels per day last fiscal year, or virtually identical to the 2016 increase in production from 501,500 barrels per day in 2015.

To put this in perspective, the last time the state saw consecutive years of production increases was in 1987-88 when North Slope production peaked at more than 2.1 million barrels per day.

This would be a remarkable story in any circumstance given the number of early obituaries that have been written for North Slope production and the Trans-Alaska Pipeline System, but it is even more so considering the price environment and the ongoing attacks on the industry from Democrats in Juneau.

North Slope crude averaged barely more than the breakeven point at less than $50 per barrel for the fiscal year and the House Majority continues to demand tax increases on production despite the proof of the current policy’s success staring them in the face from the Department of Revenue’s daily reports.

The House Democrats want to double the effective tax rate at the current price, triple it should prices reach $70 per barrel, reduce deductions and eliminate the proven per-barrel incentive.

The per-barrel production incentive is the only explanation why companies have continued to invest billions on the North Slope even after prices started to free fall not long after Senate Bill 21 took effect.

They have certainly not seen the upside from the reduction in progressivity at high prices under SB 21; to the contrary they have paid far more in taxes than they would have had ACES remained in place.

Under ACES they wouldn’t be paying any production taxes at the current price. In fact, they wouldn’t be paying production taxes until prices went past $63 per barrel.

Because SB 21 taxes oil at a higher rate than ACES at low prices, the companies have taken the only tool at their disposal to reduce the effective tax rate: more production.

Every additional barrel brings down the effective tax rate. It’s that simple, and it is a win-win for the producers and the state, which collects both the tax revenue and the additional royalty share.

But never let a good fact get in the way of a Democrat argument.

SB 21, which took effect Jan. 1, 2014, has now been in place for three full fiscal years.

Since fiscal year 2013, the last full year of ACES, production has declined by a barely-measurable 0.6 percent overall (531,600 barrels per day to 528,400).

That is an average annual decline rate of just 0.2 percent.

The average annual decline rate during six years of ACES was 5 percent, or 2,500 percent greater than under SB 21.

Math — the Democrats’ kryptonite — tells a staggering story when comparing where we’d be under the ACES decline rate versus SB 21.

Had the 5 percent annual decline rate continued, fiscal year 2017 production would be 433,000 barrels per day, or about 95,500 fewer barrels per day than what we saw under SB 21.

Adding up the actual production compared to the ACES decline rate over the past four years, the state has collected tax and royalty income from an additional 75.3 million barrels; the 2017 production versus ACES decline alone is an extra 34.8 million barrels.

Democrats’ oil tax policies aren’t just bad. They are proven failures.

Andrew Jensen can be reached at andrew.jensen@alaskajournal.com.

Updated: 
07/03/2017 - 2:08pm

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