What others say: House Resources tells Armstrong thanks for nothing

  • By Alaska Journal of Commerce editorial
  • Saturday, March 18, 2017 9:44pm
  • Opinion

The first time Bill Armstrong met former Gov. Sean Parnell several years back he pointed at a map of the North Slope and told him where he intended to find a huge amount of oil.

A confident Texas wildcatter is about as uncommon as a member of the House Majority that wants to raise taxes on the oil industry, but only one of them is actually good for Alaska.

As information has trickled out over the years since Armstrong and his former majority partner Repsol began exploring, he has been proven more and more right.

First there were initial drilling results that Repsol described as successful, and led to some preliminary paperwork being filed with the U.S. Army Corps of Engineers that indicated potential production of 60,000 barrels per day.

That alone would have been a significant find, but it got better.

About a year later in late 2015, Armstrong swapped positions with Repsol to become the majority 51 percent owner and operator of the find, and the production estimate from the discovery in what’s now known as the Nanushuk play in the Pikka Unit doubled to 120,000 barrels per day.

Armstrong bought leases and drilled them this winter some 20 miles from his initial find, establishing that the Nanushuk play discovered at Pikka could easily hold more than 2 billion barrels of recoverable, high quality conventional oil.

Repsol billed this winter’s results as the biggest onshore conventional discovery in 30 years in a press release March 9.

Just five days later, and only four days after the bill was introduced, the House Resources Committee expressed its appreciation for the Armstrong-Repsol work by reducing the net present value of their discovery with legislation that would cut their deductions for development and raise their taxes across every range of prices once they reach production.

The process for the Resources Committee substitute bill was so rushed that a fiscal note from the Department of Natural Resources regarding the impact of provisions requiring approval of certain lease expenditures ranged from “minimal to significant.”

There has been no modeling on potential production impacts from raising taxes and cutting development deductions.

Talk about passing a bill to find out what’s in it.

This is just the latest episode in the neverending quest by Alaska Democrats to create a “heads we win, tails you lose” oil tax policy that isolates the state from the risk of exploration and low prices while allowing it to capture a majority share of the upside when a company like Armstrong or ConocoPhillips is successful.

Here’s what we do know about production.

During the last full fiscal year of the previous tax policy known as ACES that ended June 30, 2013, North Slope production was 531,000 barrels. That was down more than 200,000 barrels per day in the six years of ACES, or an annual decline rate of 5 percent.

Current North Slope production is averaging 520,000 barrels per day, which averages out to a 0.5 percent decline rate in just less than four years, or 10 times better than the rate under ACES.

Should the 5 percent decline rate have continued, we would be at about 433,000 barrels per day rather than the current 520,000. That adds up to 31.7 million additional barrels over just one year.

Democrats will cry til the cows come home that you can’t make a connection between the first production increase in 14 years with the tax policy they have staked so much political capital in overturning.

At current production rates, the North Slope will blow away the state forecast of 490,000 barrels per day and it is still a possibility we could see a second straight year of growth if the fiscal year finishes in June with a daily average greater than 514,000 per day.

It is always wise to not assume that correlation (production increasing) implies causation (changing oil tax policy in 2013).

But it is also a sound conclusion to recognize that the current tax law has certainly not hurt the state from a production or revenue standpoint. (The cashable exploration credits that are the source of so much budget angst predate the More Alaska Production Act by nearly a decade.)

It’s indisputable we’d receive no production taxes at current prices under ACES compared to about $2 per barrel under current law.

That doesn’t consider the royalty share either, which ranges from 12.5 percent to 16.6 percent off the top and means the state has unquestionably benefited from the near-complete reversal of the previous decline rate despite the price collapse.

The Democrat leaders of the House Resources Committee are not wrong in their attempt to ensure the state is getting maximum value for either its direct cash investments in development or foregone revenue in exchange for additional production.

However, it seems the only place Democrats are willing to examine return on investment regarding state spending is where oil tax policy is concerned.

They certainly have no interest in determining whether our health and education policies are working as those departments soak up billions in the annual budget while producing results that are mixed at best.

Any claim to the contrary is nothing more than the same lip service House Democrats paid to repairing the state’s reputation as an unreliable business partner while working behind the scenes to cement it.

— Alaska Journal of Commerce, March 15

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