The Sixth Sense: "I see dead people"
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January 23, 2012: As the legislative session gets underway in Juneau, it takes one but a mere moment to realize that the debate in the state senate over oil tax reform will unfortunately be held in a vacuum.
After Wednesday night's State of the State address by Governor Sean Parnell, the Senate Bipartisan Working Group seemed in step for the most part, with the idea of holding a factual and honest discussion over needed tax reform in Alaska's oil patch.
This will be a critical session concerning the future of Alaska's oil & gas production, stated Senate President Gary Stevens (R-Kodiak). We look forward to working together for meaningful reform, he added.
But then the undisputed scourge of Alaska's economy spoke up, and in keeping with his tradition, spoke of half truths and offered up data points without proper context.
Alaska's state senator in charge of economic destruction Hollis French (D-Anchorage), countered Stevens promise to work together by quickly drawing a line in the sand.
Pulling out a chart of oil production from 1996 to 2006, French proceeded to tell the press that even though taxes were low during that decade, production levels still declined. He was attempting to show that lowering taxes doesn't mean we will see increased investment by the oil & gas companies.
First, the producers have already committed to specific projects worth billions of new investments that will translate into actual oil production if current taxes are reformed. Put that aside.
As has been his modus operandi, French failed to once again put his historical figures into the proper context as they related to the overall health of the oil & gas industry.
Production fell during those years because nobody could afford to reinvest in increasing production. In fact, the price per barrel was so low, that reinvesting wasn't a financial option.
Between 1996 and 2003, the price of oil per barrel averaged below $20 per barrel. The resulting pinch on the oil & gas industry had a serious impact on personnel and investments and was the impetus for the three mega mergers, all which happened around 1999. BP swallowed up AMOCO and ARCO, Conoco-Phillips acquired ARCO's Alaska assets and Exxon and Mobil merged.
In all, during the ten year stretch French referred to (96-06), the price per barrel of oil averaged under $32 per barrel. Conveniently, French didn't include those important numbers in his soapbox rant against tax reform.
One just has to look at Cook Inlet. Oil has not been taxed there since the eighties. Outcome – for the last decades platform after platform got shut down.
The fact is, which French as a public policy maker has never grasped, when it's cheaper to invest in future reserves rather than invest in areas where you're already producing, production taxes don't figure into your business modeling. This was the case in the late 90's and early 2k.
However, when commodity prices are high and taxes are high, then taxes do figure into your business modeling.
This year oil prices are projected to average over $100 per barrel and for every dollar over $100, the state takes two dollars for every one dollar that the industry retains.
French's behavior is understandable and predictable. He hates the oil & gas industry.
And while Hollis French's disdain for the oil & gas industry has been omnipresent, so is the fact that he's been wrong on every oil & gas issue he has been a proponent of.
In 2006, he voted against the PPT tax hike because he thought it didn't raise taxes high enough. And if he wants to bring up the Democrats whipping boy Bill Allen, he needs to explain why as many of his Democratic colleagues voted for PPT as voted against it.
In 2007, he led the charge to adopt ACES. During debates he insisted that taxes had no bearing where oil and gas companies invest. And despite being warned that investments would drop off a cliff, as they have, French pushed ahead and supported the largest tax increase in the history of Alaska.
In 2008, he led the charge for the state's $500 million pipeline to nowhere. During debates he told Alaskans that the state would sue the producers if they failed to commit gas to an AGIA pipeline. This was a bold face lie. The state has never had a legal argument to sue the producers to pay for a natural gas pipeline.
On the Senate floor French told Alaskans, "If we don't capitalize on what we have in front of us we will be back at the mercy of those people who had the gas for the last thirty years." This was another bold face lie.
First, to imply that the producers have been sitting on gas reserves for the last thirty years was a blatant falsehood. French and others have intentionally misled the public either out of ingorance or intentional malice.
The Alaska Oil & Gas Conservation Commission - the people responsible for ensuring Alaska's oil & gas resources are not wasted- have testified a number of times that they would never have allowed the off take of enough gas to fill a gas pipeline. In doing so, it would have severely risked the state's goal of maximizing oil extraction, which is much more valuable than natural gas.
In fact one AOGCC Commissioner stated publicly during the debates over AGIA, if Alaska would have allowed gas extraction thirty years ago, we'd be broke today.
Second, just look where French and company have gotten us today with their advocacy of the highly predicted AGIA pipeline failure. We're right back to 2003 at square one. Meanwhile the state taxpayers are out $500 million.
In 2009, French penned an op/ed touting the great benefits of ACES. In doing so, he outlined his newly adopted algebraic equation for operating profitably on the North Slope as follows:
Declining production <shrinking revenue to the state> + higher state oil taxes <higher costs and smaller margins compared to other investment opportunities> + higher non revenue generating labor costs <more maintenance> + reduced capital expenditures <reduced exploration thus reduced future revenues for the state> = profits on the North Slope. All due to ACES and higher taxes according to French.
Meanwhile, over the last ten years since French has represented his consituents in the state senate, spending has more than doubled while production has declined forty percent. This year the state will need to average $97 per barrel to balance the budget and by 2015 expenses are expected to surpass oil revenues.
Arguably, as consistent as French's sustained attacks on Alaska's economic engine have been, so has another alarming trend; the lack of any push back from Senate Republicans.
I'm left to wonder if the requirement for joining the current senate coalition is that you must check your cojones at the door if you're in the GOP.
During French's Wednesday night historical haze, two Republicans sat as quiet as church mice beside him. Neither Kevin Meyer (R-Anchorage) or Lesil McGuire (R-Anchorage) said a word to contest French's obvious half truths.
What's mind bending about their silence, is both Meyer and McGuire were in the legislation in early 2k when the price of oil was under $20 per barrel. They knew the facts about the investment climate back then, but yet refused to say one word to offer the proposition that there was more to the story than French was trying to sell the press.
To quote the movie The Sixth Sense, "I see dead people."
And oh yeah; they're killing the economy.
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