Thursday, August 30, 2012

Does Alaska OCS Development Really Help ... Alaska

Show of hands ... how many believe that Alaska state government revenues will increase as a result of Alaska OCS development? 

The Governor certainly has spent a lot of state time and effort talking and helping to litigate the issue.  In a discussion Senator Bill Wielechowski and I had on The Dan Fagan Show a few months ago, the Senator listed the OCS as one of the sources for the new oil that he asserted would help offset the continued decline in state production.  And the other day, the Alaska Dispatch had this to say in discussing the hurdles Shell has faced in its OCS drilling program:
The problems are a setback not just for Shell, but for the oil-dependent state of Alaska that has pinned its economic hopes on Shell for years. Oil production has been declining for years at the oil fields on Alaska’s North Slope. The state depends on oil tax to fund about 90 percent of its budget. It needs to keep oil flowing through the 800-mile trans-Alaska oil pipeline, and Shell is the great crude hope. 
The answer?  The State of Alaska will collect zero in revenues from Alaska OCS oil and gas production.  No royalty and no production taxes.

In a 2010 presentation, UAA's Institute of Social and Economic Research (ISER) Professor (now, Professor Emeritus) Scott Goldsmith analyzed the Alaska state take from various sources of supply.  The results are summarized on the slide to the left.  

While Alaska retains 100% of the royalty from production within 3 miles of the coastline, the royalty share declines to 27% in production from 3 - 6 miles offshore, and then to 0% at 6 miles and beyond.   Production beyond 3 miles also is exempt from production tax ("ACES").  Shell's Beaufort prospect is 18 miles offshore; its Chukchi prospect is 70 miles offshore.

Senator Begich and Senator Murkowski have proposed changes to the federal revenue sharing provisions, and recently Senator Wyden -- the incoming Democratic lead on the Senate Energy and Natural Resources Committee and, unlike his predecessor, from a coastal state (Oregon) -- has signaled some interest in the matter.   Whether those efforts mature into actual state revenues is doubtful given the federal government's own budget issues.

But even if there were changes and they stretched the current provisions governing the 3 - 6 mile area (where Alaska receives 27% of the federal government's royalty share) outward to the areas being explored by Shell, Alaska's income stream from OCS development would still be small.  The only revenue would be a moderate portion of the royalty received by the federal government.  As elsewhere in federal waters, state production taxes would not apply.

This is not to say that Alaska OCS is not important.  It produces Alaska jobs, develops new technology potentially applicable to development on state lands  and by keeping the industry active in the state, potentially lowers the costs for onshore producers. 

In no way, however, does it approach being a substitute for the development of state lands.  Development on state lands is the key to both Alaska's fiscal and oil future, and should be the continued focus of our Governor and legislators.