I join Alaskans celebrating the recent news that there is expected to be more exploratory drilling this winter on the North Slope than in decades. The plans by several companies confirm that the generous system of financial rewards established by the Legislature to incentivize exploration is working, and working well.
But while the positive news of exploration drilling proposals is making headlines, an equally important part of the story is not. Alaska's oil production, which generates almost all of our state's revenue, continues a distressingly steady decline of 6 percent to 10 percent a year. So far in 2011, oil flowing from the North Slope has averaged 572,835 barrels per day. Exploration gives us hope for the future, but does not guarantee new barrels of oil. Only meaningful reforms to Alaska's production tax system can accomplish that.
It is no wonder that so much exploration is scheduled this winter. Government incentives cover up to 80 percent of exploration costs on the North Slope. In Cook Inlet, the state incentives go even farther. Alaska will reimburse 100 percent of the first $25 million a company spends drilling a well with a new jack-up rig.
Alaska's credit system was designed to do just this -- attract smaller ventures to explore our sizable reserves and firm up what geologists think is under the ground. But to attract the billions of dollars needed to turn a prospect into a producing oil field, companies with cash need to see the potential to make stronger profits than they could elsewhere.
Our challenge today is translating exploration into production. While our exploration credits are strong, Alaska is discouraging investment by assessing high production taxes companies must pay over the life of an operating oil field. Alaska's production taxes are the highest in North America and among the highest of competing oil provinces around the world. That gives producing companies little reason to invest their limited capital here, developing resources that exploration companies identified with significant state tax credits.
Nearly all of the ventures planning winter drilling testified before legislative committees, praising the benefits of our liberal exploration incentive credits while warning that the ability to produce any discoveries is compromised by our extremely high oil production tax. Several testified that their top challenge will be attracting well-financed investors to fund the shift from exploration to production.
The common sense solution to getting new oil production is offering a fiscal system with a fair balance of front-end exploration incentives and long-term production taxes. We need to fix ACES to restore fairness and balance to and to re-establish Alaska's international competitiveness.
Two simple amendments to ACES can accomplish this without sacrificing Alaska's fair share of oil profits. We can add brackets to the progressive tax, much like the IRS personal income tax. And we can cap the state's take at a reasonable level. Adding brackets would allow taxes to be assessed in segments with increasing tax rates being applied to increments of value. We should set a maximum tax of 50 percent, evenly splitting profits with the producers.
Under the tax reform proposal before the legislature, a 5 percent production increase over current forecasts would generate the same tax revenue anticipated under ACES. But I believe reform would create a more competitive environment in which we could expect more investment, which in turn could boost production above that 5 percent, allowing Alaska's coffers to take in more revenue than we can plan on under ACES.
Alaska's best interests lie in restoring fairness and balance to our fiscal regime. These two changes can make Alaska globally competitive, with great incentives for exploration and a reasonable, durable production tax that promotes development. With increasing global competition, Alaska must be a beacon in the free enterprise system that sustains our oil economy for years to come. And with two simple adjustments to our fiscal system, we can be that beacon.
Rep. Mike Hawker, R-Anchorage, has served in state House of Representatives since 2003.
By REP. MIKE HAWKER