Alaska Dispatch

Lawmakers have pegged the state's oil tax and its impact on production, jobs and investment as the likely top issue of this year's session. Fueled with rhetoric, well-funded ad campaigns and a torrent of numbers thrown about on both sides, the debate is close to exploding.

Yet within the Capitol halls, it's looking less likely that anything is going to happen beyond a lot of talk -- and, possibly, some shouting.

"Probably nothing is more important than dealing with the taxation of oil," Senate President Gary Stevens, R-Kodiak, said. But with an April 19 deadline to finalize a budget and manage other business, a rework of the tax structure may be "a step too far," he added.

For others, such as House Speaker Mike Chenault, the issue is too critical to ignore, no matter how much time it takes.

"Certainly, I was here during the bloodbath of a couple years ago," the Republican from Nikiski told reporters at the beginning of the session, referencing the hot debate over ACES, the current tax structure. "I don't think anyone would like to go through that issue again, but, if that's what it takes to keep Alaska's economic driver moving down the road, then I think there's a number of legislators who would stand up."

For one thing, politicians are about to start the 21st day of a 90-day legislative session. When the oil tax was last restructured in 2007, it took an intense 30-day special session devoted only to Gov. Sarah Palin's proposal, ACES.

For another, House Republicans and Democrats are adamantly split on the issue. Pair that with the Senate bipartisan majority, which shies away from potentially explosive issues in order to maintain its sensitive balance, and there may not be the votes for major changes.

"I really don't see a consensus in the Senate," Stevens remarked.

Finally, throw this into the fire: It's an election year, with the governor's job plus 50 legislative seats at play. Anyone vying to keep his job has to weigh how his apparent support or opposition to industry will resonate among constituents.

Plenty is at stake.

Evaluating the ‘risk/reward balance'

The state turns to oil for 90 percent of its revenue, and there's not exactly a backup plan in place within the next decade. But within that time frame, oil production from legacy fields like Prudhoe Bay and Kuparuk is expected to taper off -- the easy stuff is gone. Companies may have to spend more to reach the leftovers, such as heavy oil, which isn't worth as much. That also translates to less flow through the oil pipeline, which impacts revenues.

Sure, companies are working to bring new fields online, but those won't necessarily be producing tomorrow, or next year. Will there be a gap between production from existing fields and from the fields of the future -- and if so, is there anything a state tax regime more favorable to industry can do to thwart it?

"We, the people, have a bad habit of thinking that Alaska is the holy grail of all things good in the world, when in fact we have an aging oil patch, we have high costs of operation, and the world, the globe, offers an unlimited variety of far more financially interesting prospects than Alaska does," Anchorage Republican Rep. Mike Hawker said.

In a speech to the Alaska Support Industry Alliance in January, BP Alaska President John Minge said ACES hurts by taking away the company's profits when oil is high.

"The bottom line is it's more difficult to attract capital to Alaska because the risk/reward balance is disadvantaged against investment opportunities in other parts of the world," he said. "Alaska has become more of a margin play as there is very little reward for price upside."

The company's capital spending in Alaska is dropping 15 percent in 2010 from 2009 levels, from $1 billion to $850 billion, spokesman Steve Rinehart said.

"That's an important measure and helps describe our reality: This is a global business," he said. "Capital tends to flow where it makes the best return ... The risk/reward balance is much better in other places; for example, the Gulf of Mexico."

ConocoPhillips has also warned of major declines in Alaska investment, including no spending on new exploration in 2010.