Senators on both sides of the aisle agreed Thursday, January 17, that oil will not fill the State of Alaska’s structural budget deficit.
The Department of Revenue told the Senate Finance Committee on Wednesday that oil prices are expected to remain near their current levels, rather than where they peaked in October.
On Thursday, the Department of Natural Resources (DNR) advised that production levels are also expected to be flat over the next 20 years, despite the large new developments Pikka and Willow.
New production is forecast to provide an additional 180,000 barrels of oil per day at its peak in 2032. However, that is on top of base production projected to steadily decline.
“We shouldn’t be expecting over the next several years for production to go to 750- or 800,000 or a million barrels a [day]. We should be expecting it somewhere around 500,000, plus or minus, for the foreseeable future. Is that correct?” Senate Finance Co-chair Bert Stedman (R-Sitka) asked during a hearing.
“That is a fair statement,” responded Maduabuchi Pascal Umekwe, Commercial Analyst for DNR.
DNR’s presentation shows that oil production is forecast to peak in 2019, decline through 2023, then start to slowly rebound in 2024 as Pikka and other new developments come online.
Pikka is a project on State land jointly owned by Oil Search and Repsol. It is expected to net between $8 billion and $13 billion for the State through 2040.
Willow, a ConocoPhillips project in the National Petroleum Reserve (NPR-A), is expected to produce oil a couple years after Pikka.
Because of the State’s tax structure, ConocoPhillips can deduct some of its Willow development costs from its other production around the state. At oil prices of $75 per barrel, that would cost the State about $1 billion in revenue between 2020 and 2025.
Willow will not be net cash flow positive to the State of Alaska until 2026, Division of Oil and Gas Director Chantal Walsh told Senate Finance.
“So what you’re telling me is I better not expect revenue two years from now to help us get out of this ditch,” Stedman said of Willow. “We’ve got more of an immediate issue in the middle of the table this year, next year. This project isn’t going to assist with a positive cash flow to bail us out.”
To add to the concern, Willow will not pay the State of Alaska any royalties because it is on federal land.
ConocoPhillips employee Sen. Peter Micciche (R-Soldotna) noted the issue when DNR’s presentation said Pikka and Willow would generate the same amount of revenue for the State.
Walsh apologized, telling Micciche he had caught a typo. Willow will, in fact, net between $5 billion and $9 billion for the State through 2040.
Gov. Mike Dunleavy’s initial FY 2020 budget has a $1.6 billion deficit, in large part due to current oil prices.
Yet Democratic senators, like Stedman, were concerned Thursday about the long term impacts that forecast low price and production will have on the State.
“We need to build a comprehensive and sustainable fiscal plan that will work for all of us. We can’t just continue to rely on oil revenues because it creates instability to our budgeting process and ability to carry out and provide essential services to our citizens,” Sen. Elvi Gray-Jackson (D-Anchorage) said in a Senate Minority press conference.
“I think betting on oil all the time is a gamble, simply put,” agreed Sen. Scott Kawasaki (D-Fairbanks). “Relying on that is problematic for folks that are on the Finance Committee trying to figure out how to balance the needs of education and health and social services with the funds that we rely on every day.”
Kawasaki recommended that, in seeking to close the deficit, the legislature should return to the issue of oil and gas taxes, specifically a per-barrel tax credit that companies can deduct, costing the State $1 billion per year.
He called out ConocoPhillips when describing oil companies as profitable corporations.
“When I see folks in my district that are just trying to heat their homes, families that are just trying to put their kids in good schools and make sure that they have basic necessities, that is one place that we need to look,” Kawasaki said of the per-barrel credit.
Sen. Bill Wielechowski (D-Anchorage), a member of Senate Finance, introduced Senate Bill 14 that would eliminate the per-barrel credit.
If legislators don’t consider oil taxes or new broad-based taxes, there will be few options to close the deficit this year except to cut the budget.
Dunleavy proposed a $1.6 billion unallocated cut to government, but is expected to submit a revised budget in February with specific cuts to social services.
That is the fastest way to increase crime, Sen. Jesse Kiehl (D-Juneau) warned.
Wielechowski agreed, noting that Dunleavy campaigned on protecting education and reducing crime.
“When I see $1.5 billion of unallocated cuts, that shows me there’s a lack of vision out there,” Sen. Donny Olson (D-Golovin) said of Dunleavy’s budget.
Olson added that expecting the legislature to close a $1.6 billion gap is unrealistic.
Senate Minority Leader Tom Begich (D-Anchorage) said that the budget is the primary issue facing the legislature this year, but legislators are in no mood to cut $1.6 billion. They must find other ways to close the deficit that don’t draw more from the Permanent Fund than it can withstand.
“If you’re going to build long term sustainability from this budget, you’re going to have to do it from a renewable resource, not just the nonrenewable resource of oil and gas. The Permanent Fund was designed to be that renewable resource in the long run,” Begich said.
This article brought to you by Midnight Oil’s “Beds Are Burning.”