Alaska’s Vote to Keep Oil Exploration Incentives May Stabilize Production Trends, a Credit Positive
September 03, 2014
The August primary results showed Alaska's ballot initiative to overturn new oil production tax incentives failed by a narrow margin of 52% to 48% - defeating a measure that would have repealed the new tax law, known as the More Alaska Production Act (MAPA), and reinstated a prior law called Alaska’s Clear and Equitable Share (ACES). Moody’s report stated the rejection of Ballot Measure 1 is a credit positive for Alaska, which in January implemented a new oil production tax law to encourage exploration for new oil fields and halt declines in North Slope oil extraction, which for many years has generated most of the state’s operating revenue. “Moody’s has provided an important and independent validation of the path we are on,” Revenue Commissioner Angela Rodell said. “As this state continues to grow, our AAA rating demonstrates to investors and businesses, large and small, that Alaska is an outstanding place to invest in and that the state is open for business.” According the Moody's report, while producers have no legal commitment to increase Alaskan production, they have indicated a desire to do so under MAPA’s more favorable provisions. Federal research has shown ample reserves beyond current fields. By the end of December, the state will publish its first revenue forecast that factors in new production associated with MAPA. Quoting the Moody report, Alaska’s oil production peaked at more than 2 million barrels per day in 1988. However, it has declined about 5% annually since then as oil fields on the North Slope have been exhausted (see Exhibit 1). Under both the new oil tax system and its predecessor, both the amount of oil extracted and its market value are key determinants of state tax revenue. Even as its output steadily declined, Alaska’s oil fields generated strong revenues in recent years, such as in fiscal 2008, when oil reached a record $147 per barrel and production tax receipts tripled to $6.8 billion.. Because of its oil revenues, Alaska has not imposed a tax on personal income since 1980, and has no broad-based state sales tax. According to Moody's report, oil production taxes, royalties and other collections will account for 87% of the state’s unrestricted general fund revenue in the current fiscal year, according to the state’s most recent forecast. Given Alaska’s reliance on oil, declining output poses a risk to the state’s budget. Moody's current revenue forecast, which does not factor in increased production as a result of the new tax, indicates that the state may need to rely on reserve fund expenditures in coming years to offset revenue shortfalls caused largely by declining oil production. Moody's is an essential component of the global capital markets, providing credit ratings, research, tools and analysis that contribute to transparent and integrated financial markets. Today, Lt. Governor Mead Treadwell certified the election results for ballot measure 1, a referendum to repeal Senate Bill 21 (SB 21), passed during the legislative session that adjourned April 14, 2013. The ballot measure was rejected during the August primary election by a vote of 99,855 NO to 89,608 YES. The measure would have repealed SB 21, an “Act relating to the Oil and Gas Production Tax, Interest Rates on Overdue Taxes, and Tax Credits,” also known as the More Alaska Production Act.
Edited by Mary Kauffman
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