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Aftermath of the SB 21 Referendum

Industry Media Blitz Prevailed in
August 2014, But Results Were Dubious.

As Oil Prices Plunge due to Global Factors,
Legislators Wrangle with New Governor
Over Budget and Natural Gas Prospects.

Confronting an Uncertain Future, the Public
Has Crying Need for Facts, not Rhetoric.

Posted Reports Deal with Oil Controversies.

(See article and reports in column below)

7 ways Alaska could remove oil tax confusion and clarify revenue issues
May 27, 2015
(click here)

Oil industry profits & power omitted from budget & deficit discussions at “Sustainable Future” confab
June 14, 2015
(click here)

By Richard A. Fineberg

April 8, 2015

Confusion reigns as the Legislature enters the session-closing rush while dealing with sharply reduced state oil revenues due to the oil price crash that began last August. In assessing the aftermath of the SB 21 oil tax measure enacted by obliging legislators in April 2013 to replace the ACES regime, it is increasingly important to review facts carefully in order to establish clear perspective on state oil and gas revenue issues. But when major oil producers spend millions of dollars to dominate the media airwaves and get rid of objective critics while maintaining close ties with key legislators, this is no easy task.

Last year the Alaska petroleum industry and its supporters, dominated by three major transnational companies that reap significant profits from the nation's largest oil field on Alaska's North Slope, spent more than $14 million to unleash a media blitz to prevent repeal of SB 21, in a statewide referendum held with the primary election. Voting "yes" to repeal SB 21 last August would have enabled restoration of the cost-based and progressive ACES tax measure, under which both the industry and the state have profited handsomely. But the industry outspent its opponents by more than twenty to one to defeat ACES, resulting in a narrow victory by a 53:47 margin. [1] At that point, due to global factors oil prices were just about to crash.

While oil prices appear to have bottomed out, prevailing prices less than half of last summer's price have created a state budget crisis for this oil-rich but oil-dependent state, exacerbating policy quarrels between legislative leaders and new Governor Bill Walker. Meanwhile, the recent disclosure that SB 21 has turned out to be much harder on state revenues than anticipated [2] demonstrates the effects of confusion over petroleum-related issues.

Two posted overview reports help put this unusual turn of events in perspective: The March 25, 2015 update report, Public Revenue and Extraction Profits from Alaskan Oil: An Updated Case Study (Coping with Bent Numbers Misleading Data [Economic and Environmental Background with Occasional Footnotes]), outlines developments during the past year and concludes with comments by persons with first-hand knowledge that shed clear but unflattering light on the process of North Slope oil development: In 1993 Archie Dunham, President of Conoco Oil - then the only independent field operator on the North Slope - disclosed that he took his company from Alaska because "all the value of that property was taken away in the pipeline tariffs." After Phillips Petroleum acquired ARCO's share of TAPS, Dunham merged with Phillips to form ConocoPhillips. Meanwhile, North Slope Nobel laureate Joseph Stiglitz has commented that the North Slope producers could not resist the temptation to cheat. This report updates The Alaska Oil Tax Cut Controversy: A Case Study (In This Era of Information Overload, Does Our Political System Enable Tall Tales to Triumph?), a March 20, 2014 report that framed problems as the referendum debate was just getting into high gear.

The more recent March 2015 update report also presents salient findings from two reports, previously posted on this web site: A Tale of Two Charts (Revised), posted October 24, 2014, presents conclusive evidence that during 2013 tax cut deliberations ConocoPhillips, the largest North Slope producer, created a chart giving the misleading impression (contrary to the company's own testimony) that North Slope profits declined as oil prices increased. That profits chart was presented to legislative committees six times at critical junctures, but a chart demonstrating strong and steady ConocoPhillips North Slope profits under ACES (in notable contrast to that company's erratic global performance) was seldom seen during 2013 legislative deliberations. Another important report, Sense, Nonsense and the Power of the Big Three on Alaska's Oil Patch, posted in June 2014, identified shortcomings in the presentation by venerable state economist Scott Goldsmith.

Goldsmith argued that SB 21 should replace ACES because its credits would be applied to production -- a policy shift that greatly favored the major producers, who control more than 90 percent of North Slope production. He also warned that SB 21 should be adopted because ACES capital credits under increasing costs could exceed production tax revenues. At that time, Dr. Mark Myers (now Commissioner of Natural Resources) questioned these conclusions, noting that the SB21 credits "classification process is complex, confusing and easy to game" and liable to give already existing infrastructure significant tax breaks, in contrast to ACES credits, which encouraged investments in finding and developing new oil fields." [3] Myers was right: Recent confirmation that under SB 21 tax credits will significantly outweigh production taxes, adding an estimated $400 to $500 million to the current state deficit, has led the Democratic minority to propose emergency oil tax revision. [4]

House and Senate majority leaders now quarrel with new Governor Bill Walker's attempt to give the state more flexibility in promoting natural gas development. [5] As this spat unfolds, whether gas needed in Fairbanks would most economically reach there from Cook Inlet or the North Slope is not known. In considering natural gas investment, it should be noted the state is in a serious budget crisis, while North Slope natural gas is an expensive and risky dream that has not materialized in more than four decades. Under these circumstances, it is difficult to understand opposition to the governor's quest to keep gas development options open.

Meanwhile, legislative leaders put disagreements with the governor aside to join in opposing U.S. President Barrack Obama's endorsement of wilderness status for the Arctic National Wildlife Refuge (ANWR). [6] The Reduced Oil Imports Report, posted three years ago by this writer indicates that according to U.S. Energy Information Administration data skyrocketing oil prices during the first decade of this century have resulted in conservation gains, reducing oil imports through 2030 that outweigh Arctic Refuge production potential by a 25:1 ratio. While supporters of Arctic Refuge development contemplate threatening the federal government with a lawsuit, members of the House Democratic minority have pointed out that the lawsuit would be costly and may not stand up in court. [7]

As these issues unfold against the backdrop of the unanticipated oil price crash and uncertain future, the following issues should not be forgotten. Data problems are a common denominator to the issues summarized in the recent reports. For example:

· To date, basic arguments over state revenue and North Slope industry profitability indicate that Alaska has yet to fix the chronic difficulties the state has experienced auditing petroleum revenue and production cost information.

· Because Alaska petroleum data is kept in state fiscal year format, it is difficult to compare state results to industry data and national trends, which are typically tallied on a calendar-year basis.

Confidentiality provisions further limit public accessibility to critical information.

In addition, the controversies and the concluding comments to the March 25, 2015 Updated Case Study by Stiglitz and Dunham underscore the importance of examining the conduct of the major North Slope producers. The domination of three major transnational companies on the North Slope could be a serious problem in this remote and isolated state, raising significant antitrust issues that warrant careful consideration.

For endnotes click here.

Approximately 423 miles of the 800-mile Trans-Alaska Pipeline is above ground to prevent the hot oil pipeline from thawing potentially unstable permafrost soils.

(August 2004 -- Updated December 2012)

Over the last eight years FinebergResearch.com has gathered and presented fact-based information and commentary about economic and environmental aspects of oil industry operations in Alaska, with special emphasis on the North Slope oil fields and the Trans-Alaska Pipeline System (TAPS). Due to the oil industry's power, political clout and media skills, much of the information you will find here is not widely reported or readily available elsewhere.

Three major petroleum companies -- BP, ConocoPhillips and ExxonMobil (originally Sohio, ARCO and Exxon) -- control more than 95 percent of North Slope production and, in 2012, are in the process of increasing a similar share of the Alyeska Pipeline Service Company (the builder and operator of TAPS) to 100%. The sprawling North Slope complex centers around Prudhoe Bay, where oil is pumped from beneath the frozen Arctic substrate and prepared for the 800-mile journey across Alaska to the ice-free port of Valdez; at the Alyeska terminal, oil is loaded on tankers bound for the West Coast. Although the North Slope was by far the nation's largest producing complex at its peak of two million barrels per day a quarter century ago, North Slope production has been in decline for two decades and is now between 500,000 and 600,000 barrels per day.

Richard Fineberg (Baku, Azerbaijan, May 2003)While declining production and its consequences for the future rightly draw major attention from a policy standpoint, the current dialogue often suffers from exaggerated fears of dependence on foreign crude supplies and failure to recognize, among other things, the recent dramatic reduction in petroleum imports due to conservation, induced in large measure by high oil prices. Moreover, even at today's reduced production levels, those high oil prices still bring producers significant revenue from North Slope crude oil.

During the 4½ decades since the discovery of the nation's largest oil field at Prudhoe Bay on Alaska's North Slope, events from Watergate to the collapse of energy companies such as Enron and, subsequently, financial institutions in the recent the financial crash demonstrate that large institutions frequently fail -- often by grotesque margins -- to live up to legal and moral obligations and to deliver on their public pronouncements. Concurrently, the major Alaska oil companies that play a predominant role in Alaska development have displayed a chronic and troubling discrepancy between promise and practice.

Despite lavishly funded advertising campaigns and public relations efforts urging that Alaska's oil companies can be trusted as the avatars of social salvation, closer examination reveals a profound gap between what these companies say and what they do. With equally disturbing regularity, when confronted with evidence of those failures, government has failed to protect the public interest.

Against this backdrop, Alaska's North Slope development and its pipeline link to market continue to provide unusual opportunities to observe the actions of decision makers, as well as greater access to the central participants than most other places afford. The information presented here points to
two significant conclusions:

  • (1) petroleum developers can and frequently do use pipelines to maximize profit and inhibit competition, to the detriment of host populations; and
  • (2) the chronic discrepancy between promise and practice on major oil projects frequently places the populace and the environment at significant and needless risk.

Reports on pipeline and petroleum development issues on this web site may be understood as case studies providing insight into the relationships among powerful corporate and government institutions. This web site explores the economic and environmental impacts of these interactions in concrete terms in the hope that well-informed individuals can and will make a positive contribution to the course of human development. A premise underlying this research is that it falls to each of us, as citizens, to keep our policy dialogue fact-based as we inform ourselves, analyze and respond appropriately to the events that shape the issues we face. Based on the factual information presented here, readers can come to independent judgments regarding the authenticity of the content, the significance of the relevant facts and the logic and appropriateness of the conclusions. In any event, the topics reported here should be capable of standing for themselves as a documented case studies in petroleum development and public policy.

The studies presented here have beenresearched and compiled by Richard A. Fineberg, founder and principal investigator of Research Associates of Ester, Alaska. Fineberg has observed Alaska petroleum development for more than three decades as a prize-winning reporter, as an advisor to the Governor of Alaska on oil and gas policy and as an independent consultant to investors, government agencies and non-profit organizations.

In recent decades, Fineberg's research horizons were expanded to include observation of oil development in two oil provinces iat opposite ends of the Former Soviet Union -- the Caspian Basin and Sakhalin Island. Collectively, these forays suggest the possibility that exploration of Alaskan oil issues may produce case studies that will inform the general understandings of the politics of oil. Whether or not this proves to be the case, conclusions from the studies conducted in the northwest corner of the North American continent will validate the significance of the Alaskan oil research presented on this web site.

To find additional articles on this web site that discuss economic and environmental issues related to North Slope and Trans-Alaska Pipeline System development, use the search bar at the top of this page.


Background on the Flawed Passage of SB 21

August 2013 (Rev.) -- Despite Senate majority claims of "exhaustive" deliberations before passing SB 21 on the last day of the 2013 session, majority legislators overlooked important defects in administration testimony and charts presented by ConocoPhillips, the North Slope's largest producer. Policy-wise, SB 21 proponents erred by demanding nothing in return for these significant gifts to North Slope producers: (1) retaining the cost-based production tax regime while (2) destroying (instead of correcting) the progressivity component of that tax; and (3) further tilting the North Slope playing field toward the major producers by linking tax credits to production instead of exploration.

SB 21 background information by Richard Fineberg:

The Disappearing Chart and Other Questions the Legislature Failed to Consider when the Legislative Majority Signed Off on SB 21 In the Last Days of the 2013 Legislative Session , text accompanied by slides, presented at the Noel Wien Library, Fairbanks, July 1, 2013 (posted July 25, 2013).

"Library presentation on oil tax leads to pointed exchange on quality of legislative review," article by Dermot Cole, Fairbanks Daily News-Miner (posted July 2, 2013; printed July 7, 2013, p. B-1).

SB 21 and Petroleum Revenue Policy: Six Subjects Requiring Further Consideration, independent report, April 4-8, 2013 (posted July 17, 2013; text and attachments to this report provide background and documentation with examples of information legislators did not address in considering SB 21).

"Tough questions unasked: Slipshod review justifies referendum on SB 21," Fairbanks Daily News-Miner, July 9, 2013 (Community Perspective).

The Prelude to SB 21: Earlier comments and observations on the Alaska State Legislature's 2011 and 2012 petroleum taxation and fiscal policy deliberations

[October 16, 2012 Update]

As major oil producers, the governor and citizen supporters attack legislators who oppose the proposed major cuts in the state's oil tax, analysis of ConocoPhillips (CP) SEC reports reveal that since Alaska adopted a cost-based, progressive production tax regime in 2006: (1) CP has made steady profits from Alaska, in contrast to mixed returns elsewhere, while (2) CP anticipates Alaska under the present tax regime will remain CP's top performing region.

"Alaska's tax structure now is good to oil," Anchorage Daily News, Oct. 14, 2012 (Compass) and "Oil profits weather 'Hurricane' -- ConocoPhillips expects Alaska to outperform every other oil province," Fairbanks Daily News-Miner, Oct. 14, 2012 (Community Perspective).

Mysterious Oil Numbers Tell A Troubling Story in Juneau: Adding "H" to ACES, You Get Aches (Alaska's Confusing, Hidden and Eluysive Share) and PAINS (Piecemeal, Artificial, Incomplete Number Systems), posted May 8, 2012 (archived Dec. 26, 2012).

Letter to Senator Bert Stedman, Co-Chair, Senate Finance Committee, April 2, 2012 [rev. April 7, 2012], 21 pages (includes March 22, 2012 testimony on HB 9).

Letter to Senator Joe Paskvan, Chair, Senate Resources Committee, April 9, 2012, 5 pages.

"Solid info critical to resolving oil economics," Anchorage Daily News, April 21, 2012 (Compass).

"Aches, pains and oil taxes: The weaknesses in governor's plan were coming out," Fairbanks Daily News-Miner, May 6, 2012 (Community Perspective).

Other Posts on Oil and Gas Issues (2004 - 2014)

Since 2004 this web site, which was initiated with focus on Trans-Alaska Pipeline System (TAPS) operations and economics, has posted many other articles on other Alaskan and international oil and gas issues on an occasional basis.

To check out the contents of this web site, use the navigation bars at the top right-hand side of this page for postings under the following headings:

The Oil Patch (Trans-Alaska Pipeline System [Economics]; Trans-Alaska Pipeline System [Environmental])
Reports and Research Memoranda (Alaska [Oil and Gas Production and Revenue Issues; Trans-Alaska Pipeline System [Economics]; Trans-Alaska Pipeline System [Environment]; Oil Spills; Sakhalin; Caspian Basin; Belize)
Archives (loosely chronological record of everything posted)

You can also use the Google search bar, recently installed at the top of this page, to search for references to specific words in the text of posted articles.

A selected sampling of posted articles follows:

The United States Joines EITI: A Case Study in Theory and Practice

To access a PDF copy Fineberg's January 2014 article in The Journal of World Energy Law and Business (Oxford University Press) for personal research and study purposes, click here.
(Parties wishing to make commercial use of this article should contact journals.permissions@oup.com.)

Reports on TAPS Problems with Pigs

To download the December 2012 report on TAPS problems with pipeline pigs, click here.

To read the follow-up news analysis on TAPS pigs that appeared on TRUTHOUT (Feb. 25, 2013, on-line) and the FAIRBANKS DAILY NEWS-MINER (Mar. 10, 2013), as submitted, click here.

The Reduced Oil Imports Report:

Conservation Gains (2012 - 2030): 46.9 billion barrels
Arctic Refuge Drilling (2012 - 2030): 1.8 billion barrels

Updated Report on EIA Data (Jan. 14, 2012)

The synopsis of this report, which compares potential Arctic Refuge oil production to EIA's estimate of U.S. conservation gains between now and 2030, was published in the educational text, Should Drilling Be Allowed in the Arctic National Wildlife Refuge? (Greenhaven Press, 2013, ch. 2).

. ._
Previous Fineberg Posts on Sarah Palin (Archived 2010):

First-Hand Looks at Sarah Palin's Wacky World

The following (archived Aug. 25, 2010) are still available for viewing in the Archives (many in downloadable PDF format):

Under a Rogue Star chronicles Sarah Palin's late-2009 book tour and the Alaska oil spills that silently accompanied her -- a clear demonstration of the results of her general failure as governor to pay attention to what she was doing and her particular failure to protect the environment.

ACES in Palin World, from December 2009, takes a clear look at what really happened during the Special Legislative Session of October-November 2007, in which the Legislature (reversing Governor Palin's proposal) established progressivity for the state's production tax.

A November 2009 post covers the Alaska Risk Assessment project, a Palin administrative wreckage that has attracted little national attention to date.

Completing the Palin package on this web site, the following articles were previously archived:

Click here to review July 2009 posts providing more information on the Alaska Risk Assessment project and other problems Palin left behind when she resigned as governor.

In July 2008, I prepared a report for the Alaska Public Interest Research Group on major unanswered questions regarding Palin's Alaska Gas Line Inducement Act (AGIA) and the natural gas pipeline tariff regime. Following up, I put together a packet of documents ("The Palin Papers") that I gave to Governor Palin. During that brief encounter, I requested a sit-down meeting to explain my respectful disagreement with her natural gas team. The governor was either unwilling or unable to meet with this former member of her consulting team and never responded to these concerns. Two weeks later, she ascended to the national stage. Click here for the story.

Endnotes for the article Aftermath of the SB 21 Referendum

[1] Alex DeMarban, "Oil tax vote deconstructed shows Fairbanks, Southeast, most rural hubs wanted repeal," Alaska Dispatch News, August 22, 2014. For additional reporting of election results, see Ballotpedia, "Alaska Oil Tax Cuts Veto Referendum, Ballot Measure 1 (August 2014)."

[2] See "Press Conference with Rep. Les Gara & Sen. Bill Wielechowski," March 31, 2015 [MP3 Audio File available at Gavel Alaska / 360 North]).

[3] Dr. Mark Myers, "Lauded Goldsmith comparison of ACES, SB21 lacks basic rigor" (Commentary), Alaska Dispatch News, June 18, 2014.

[4] See emergency tax relief measures SB 96 and HB 174, introduced and discussed by Sen. Wielechowski and Rep. Gara March 31 .

[5] HB 132 (Introduced March 2, 2015; enacted and transmitted to Governor April 1, 2015, see Governor Walker's press conference, March 2, 2015 and bill history at www.legis.state.ak.us.)

[6] For Governor Walker's reaction, see Richard Mauer, Alex DeMarban and Nathaniel Herz, "Obama plans to block development in Arctic Refuge; Alaska leaders irate," Alaska Dispatch News, Jan. 25, 2015.

[7] CSHB 115(FIN) passed House April 6, 2015, despite objections by Reps. Andy Josephson and Les Gara


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