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Fact check: What was the purpose of ACES oil tax?

Pat Forgey
Even as oil production has declined, employment on the North Slope has increased. David Steed graphic

Gov. Sean Parnell and like-minded Alaska lawmakers claim Alaska's current oil tax isn't working, but one legislator has asked a question that has yet to be answered: What was the goal behind ACES, the ambitious tax structure championed by former Gov. Sarah Palin in 2007?

Those pushing to slash taxes on oil companies to the tune of billions of dollars are now claiming the goal of ACES, otherwise known as Alaska's Clear and Equitable Share, was to increase oil production. But since the Alaska Legislature passed ACES, oil production has continued to decline, evidence that it's failed, according to critics.

Alaska Senate Finance Committee Co-chair Pete Kelly, R-Fairbanks, blames ACES for causing  "much of the decline of Alaska oil production and has essentially slowed the (trans-Alaska oil) pipeline to a drizzle."

The companies that operate on North Slope say the aging oil reserves have been undergoing "normal field decline," most of which happened before ACES was adopted in 2007. But that's not how Kelly sees it: "When ACES was enacted, Alaska was producing about 700,000 barrels per day per year. Now we only produce around 550,000."

Kelly, like many lawmakers, believes Alaska's tax structure discourages oil companies from finding and developing more crude. That impacts the state because Alaska depends on oil taxes, royalties and fees to fund most of state government. Even though ACES has created billions of dollars in surplus funds, Parnell, some lawmakers and business leaders worry that the tax is so high that oil companies aren't investing in new production.

"We either fix or tax system, or we suffer the consequences," Kelly said.

Oil production peaked at 2 million barrels per day in Alaska in the late 1980s and has declined steadily since then, with the decline appearing to slow since ACES became law. A slowing decline curve as fields age is a reality of oil development, industry experts have told the Legislature.

Yet, the Parnell administration says the continued decline is evidence of ACES' failure, despite the tax revenue it has brought in since its adoption.

What's the point of ACES?

Sen. Mike Dunleavy, another member of the powerful Senate Finance Committee, has asked why ACES was created in the first place. The tax structure was overhauled in 2006, but then was tweaked again in 2007, resulting in ACES.

Was ACES created to raise more tax dollars for Alaska? Was it to punish oil companies for the oil tax created in 2006 during the taint of lawmaker-oil bribery scandal? Was ACES designed to increase oil production?

"Many of us hear that ACES isn't working. What was the original goal of ACES?" Dunleavy asked the Parnell administration in a committee hearing.

If ACES was to raise money, it may have worked, he said. If it was to punish the companies, maybe that worked, too. If it was to increase production, then ACES wasn't successful. So what was the goal, he asked.

"I recall presentations from Gaffney/Cline about increasing production," responded Mike Pawlowski, oil tax adviser to Department of Revenue Commissioner Bryan Butcher and one of the administration's key players in pushing for an oil tax cut.

Gaffney, Cline & Associates is an oil industry consulting firm that was a key adviser for Alaska when ACES was adopted.

State Sen. Hollis French, D-Anchorage, who was a proponent of ACES in 2007, said Pawlowski's statement about Gaffney/Cline and the intent of ACES is not accurate.

ACES was intended to ensure Alaska got a fair value for oil pumped from its lands, while at the same time encouraging more investment in the oil fields.

"It was designed to reward investment with a lower tax rate," he said. That's something that could help slow the rate of decline.

French said he doubted that Gaffney/Cline or anyone else had promised ACES would reverse a decades-long decline in oil production.

"Everyone wants to see production go up, but I think there is a real question about whether you can do that when the single biggest variable is an oil field that was first discovered in 1969," French said.

Pawlowski declined to provide evidence to support his claim that Gaffney/Cline had said ACES would increase production. Two documents he provided did not support his claim or even address the topic.

Gaffney/Cline itself was unavailable to answer Dunleavy's question.

The Parnell administration has Gaffney/Cline under contract, but has not been using the firm to defend its oil tax proposal as the Alaska Legislature debates the pros and cons of cutting the tax by billions of dollars.

Rep. Les Gara, D-Anchorage, said he'd like to see Gaffney/Cline consultants testify before legislative committees, or at least to provide written information on oil taxes.

The company's contract calls for it to produce reports and economic models, but Gara said the Parnell administration has refused to respond to his requests for them under the state public records law. Gara added that he's been told there won't be a decision on the release until after the end of the legislative session.

"Silencing needed experts on the most important bill of the session values secrecy over good policy," said Gara, who questioned whether Parnell might be keeping Gaffney/Cline under contract so that no one else can use them.

One former state consultant has volunteered his services. Alaskan oil industry analyst Richard Fineberg submitted a report to legislators detailing his perceived flaws in the Senate Bill 21 tax cut proposal. He also phoned in to a public hearing to emphasize the need for the Legislature to have additional data before it makes a decision.

Fineberg, who lives in the Interior community of Ester, accused the oil companies of presenting misleading data to justify the tax cuts they are seeking.

"We cannot make good policy using bad numbers," he said. "Please put a stop to this madness."

Contact Pat Forgey at pat(at)alaskadispatch.com