Bradner’s 01.06.2025 Economic Report

Analysis: New carbon rules could disadvantage Alaska State’s new sequestration programs will help 

Summary: 

• Alaska production set to increase as its West Coast market shrinks
• New carbon rules for refiners put Alaska at disadvantage
• State pursues carbon capture to enhance value, sees new Asia markets 

Alaska crude oil production is set to increase with new projects under construction. However, there are questions as to where the new oil will go and whether new clean fuel standards in West Coast states could devalue Alaska crude oil. 

California and Washington state refineries are now required to calculate the carbon intensity of crude oil they purchase, and Alaska doesn’t do well in the rankings. “Alaska oil could be competitively disadvantaged,” said Nicholas Fulford, an analyst with Gaffney Cline, a consulting firm. 

The calculation includes the complete production cycle from production operations, pipelines and tanker shipments, all which put Alaska crude at a disadvantage compared with conventional crudes and shale oil from western states and Canada. Alaska scores at 15.9 in the Washington carbon intensity rankings compared with 8.4 for western Canadian crude oil and 9.3 for North Dakota oil, said Anthony Pennino, an Anchorage-based energy consultant. Canadian oil sands crude has the worst ranking, at 23. 

Carbon calculation includes complete production cycle 

These rankings measure carbon emissions along the production and supply chain and shouldn’t be confused with quality measures of the oil itself, such as the API gravity. Much of Alaska’s disadvantage in the carbon ranking comes from the emissions from North Slope production plants, Pennino said. When they buy crude oil with higher carbon intensity scores, like from Alaska, the new rules require refiners to purchase offsets to reduce the carbon intensity of the supply chain, which imposes a financial penalty. 

Washington state’s standards will tighten under legislation passed in 2021. Fuel suppliers will have to show a 20% decrease in carbon intensity below 2017 in the supply chain by 2037, using 2017 as a base year under the Washington statute. “As these standards become more stringent, they will significantly affect the value of Alaska’s crude oil,” said Frank Paskvan, an affiliate professor with the University of Alaska Fairbanks, who is advising on carbon capture projects. 

Closing of refineries in California tightens market 

The California and Washington state carbon rules aren’t the only problem facing Alaska producers. Recent closings of refineries in California and the shift of demand for lighter-grade crude oil have knocked Alaska out of a market there it once dominated. In the Pacific Northwest, where Alaska is still the main supplier, refineries have access to increasing volumes of shale oil, which have lower carbon intensity scores than Alaska crude. All this means more North Slope oil that may suffer under the new carbon rules will be coming into a shrinking West Coast market the state once dominated. 

Alaska officials estimate the state’s current production, now about 480,000 barrels per day (b/d), could reach 600,000 b/d and more with new North Slope projects starting in late 2025 and 2026 and continuing to 2029. Incoming U.S. President Donald Trump hopes to boost it further. Trump promises to open up prospective places in northern Alaska including the Arctic National Wildlife Refuge, or ANWR, and send a flood of new production into domestic markets and Asia. It remains to be seen how industry will react to Trump’s initiative.

But Trump may be right about Asia. Occasional shipments are now made from Alaska to Japan and China when spot markets make it advantageous, said Ryan Fitzpatrick, commercial analyst in Alaska’s Department of Natural Resources, or DNR. “We see Asia as a potential growth market,” as North Slope production ramps up, he said. 

West Coast refineries diversified as Alaska production dropped 

In the 1980s and 1990s Alaska supplied almost all crude oil imported into California and the Pacific Northwest after the Trans Alaska Pipeline was built and when North Slope oil fields were flush, said John Crowther, deputy commissioner in Alaska’s DNR. This changed as North Slope fields declined over the years. The state now produces about 25% of the 2 million b/d it did in the 1980s. This forced West Coast refineries to diversify their sources of supply. As Alaska producers now prepare to increase output they may find it difficult to regain market share. 

There are also fewer refineries. Some in California have shut down due to tightening environmental standards while others are blending crude oil with lighter fuels like ethanol to better meet new rules. Also, North Slope producers are no longer selling to West Coast refineries they owned, and which were captive customers. For years much North Slope oil went to ExxonMobil’s refinery at Long Beach, Calif. and BP’s at Cherry Point, Wash. But producers shed refineries over the years. ConocoPhillips, a major Alaska producer, sold off downstream assets, as has ExxonMobil in California. BP still owns Cherry Point but it is no longer an Alaska producer. Marathon Petroleum, which has a Washington state refinery, does not have its own production. It is a spinoff from Marathon Oil, which was once an Alaska producer. 

West Coast refineries were designed to process North Slope crude which still makes it efficient to process it. Also, a fleet of U.S.-built Jones Act tankers have operated for years between Alaska and the West Coast. These tankers are dedicated to the Alaska and Pacific Northwest trade, but they are aging and will have to be replaced with costly new Jones Act tankers if Alaska is to stay in the game. But that capital cost will further challenge Alaska producers in keeping Alaska oil competitive and defending a shrinking market share and it may encourage them to look to Asia where the Jones Act doesn’t apply. 

Also, some of the new Alaska production will come from companies new to the state and who don’t have West Coast relationships or Jones Act tankers. Australia-based Santos, Ltd. and Repsol, based in Madrid, have their new Pikka field under construction, which will start up in late 2025. The two companies are likely to expand their production because they have discoveries on nearby leases. Some of this oil may be going to Asia, where Santos has relationships with refiners. 

ConocoPhillips is meanwhile developing its new Willow field on the North Slope and has relationships with West Coast refineries and access to Jones Act tankers. It will likely work its new supply into the West Coast, which may back out other supply. 

Alaska taking steps to make Alaska oil more competitive 

DNR Deputy Commissioner Crowther said Alaska is taking steps to defuse any competitive disadvantages with West Coast refineries. Companies like Santos Ltd. and Repsol are working on plans to capture carbon dioxide from production plant emissions and sequester it, and the state has approved underground storage of carbon dioxide on state lands, Crowther said. An Arctic Slope Regional Corp. technical services subsidiary is leading a group involving Santos and Repsol working on a North Slope carbon capture and underground storage project. The carbon would be captured from emissions from oil process plants and power plants, a technology that is proven, but expensive. 

Removing carbon from the overall production cycle will raise Alaska’s score in the Washington state and California carbon intensity scoring and lessen a disadvantage in its production. The goal is to remove a penalty and possibly get a premium, Crowther said. Fulford, of Gaffney Cline, thinks this will work, pointing to carbon capture now done with ammonia produced on the U.S. Gulf coast that results in a premium paid when the ammonia is exported to Europe, where the European Union has carbon intensity scoring not only on imported petroleum-related products but all products. The California and Washington state carbon intensity scoring does not yet have scores for separate North Slope fields. The North Slope oil now gets one overall ranking. But field-by-field scores could be coming. Lowering the North Slope score overall will take more than what Santos and Repsol can do. The score is mainly driven by emissions from the big Prudhoe Bay field processing plants and power station, we’re told. A carbon capture project there will require Prudhoe owners Hilcorp, ConocoPhillips and ExxonMobil to get on board with the investment needed. 

• Rick Boyles, Rick Mystrom, Linda Leary and Bob Berto
• Fairbanks Daily News-Miner

Late developments in this campaign season remind us of the often-attributed Mark Twain saying, “A lie can travel halfway around the world before the truth can get its shoes on.” We want to set the record straight and address falsehoods swirling around about Alaska’s oil taxes.

In 2014, we joined over 500 Alaskan businesses and leaders throughout the state to oppose a ballot measure that would have reversed Alaska’s current oil tax structure (Senate Bill 21). This ballot measure failed because voters from across our state — from Fairbanks to Anchorage to Utqiagvik — wanted to avoid going back to a time of dangerous oil production declines that would have dealt a body blow to Alaska’s economy.

Now, ten years later, the same old rhetoric citing a long-debunked “giveaway” to oil companies has resurfaced, coupled with outrageous assertions that the current oil tax structure is somehow the reason four Fairbanks schools are closing. We proudly maintain our support for the oil tax reform that passed a decade ago. We do so because the facts demonstrate it was the right decision for Alaska’s economic future.

The truth is plain to see for anyone who takes time to do the research. Even through tumultuous swings in oil prices, and a global pandemic, Alaska oil production did not drastically decline under the current tax system reaffirmed by the voters ten years ago. Instead, we have maintained a tax system that has proved to be competitive and attractive to investors at high and low oil prices, leading to increased activity, both in existing and new oil fields.

And that increased activity is paying off today; oil production stopped its freefall and stabilized over the last decade at just under 500,000 barrels per day. Even more exciting are the two major discovery wells that were drilled in the Pikka (2013) and Willow (2016) fields. Billions are being spent on these mega projects now, and these new fields are set to dramatically increase the amount of oil flowing through the pipeline as the state predicts oil throughput will climb to 600,000 barrels per day by 2032, a level not reached in more than 20 years.

More production leads to more oil royalties — which means billions of dollars in direct deposits into the Permanent Fund. No other industry remotely compares to oil’s direct contributions in support of paying PFDs.

But let’s talk about the single most important thing to Alaskans — especially for us as a former labor leader and current small business owner — spending, economic activity, and jobs for Alaskans.

Today, industry spending supports more than 1,000 Alaskan businesses. With the billions being spent on the Slope right now, some contractors report being busier than they were during the pipeline days nearly 50 years ago. Today, it is hard for union halls and employers to meet the demand for workers, which is a problem we welcome.

The absolute last thing Alaska needs is to reverse course and pump the brakes on the exciting momentum growing our economy and creating new economic opportunities for Alaskans.

The resurgence of the oil industry is one of the bright spots in Alaska’s economy today. Don’t be misled by falsehoods being blasted over the airwaves in the waning hours of this campaign season. Let’s keep Alaska growing, now and in the future.

Rick Boyles, Rick Mystrom, Linda Leary and Bob Berto were co-chairs of the successful 2014 No on 1 campaign. Rick Boyles (Fairbanks/Anchorage) is the former head of Alaska Teamsters Local 959. Rick Mystrom (Anchorage) is a businessman and former Anchorage mayor. Linda Leary (Anchorage) and Bob Berto (Ketchikan) are small businesses owners.

by Jim Jansen and Joe Schierhorn
Jun 9, 2020

With the pandemic threatening our lives and our livelihood, oil prices at rock bottom, the loss of the visitor industry for the season and commercial seafood at risk, this is a terrible time to raise oil production taxes by as much as 300%.

Ballot Measure 1 is a vicious and dangerous attack on the future of our state. It sends the message that “If you invest here, we will increase your taxes every time we run out of money.”

People say this is an oil company issue. It’s not. It’s an Alaska issue. Oil companies can take their money and invest it anywhere in the world — and they will.

But where do the rest of us go?

This is where we have our homes, families, jobs and businesses.

This is where we plan a future for our kids and grandkids.

Where do we go when the pipeline shuts down, the jobs dry up, home values collapse and there is no one left to support our tax base, our charities and our economic way of life?

Other industries, like mining, tourism, seafood, and the many service businesses, will ask the question: Who’s next? Why would they want to invest here? Why would anyone invest in a state that is trying to kill itself?

Proponents of Ballot Measure 1 imply that the oil industry pays little or no taxes. That’s wrong. In the past five years, according to information provided in a prior article by oil economist Roger Marks, the oil industry paid an average of almost $3 billion per year in taxes and royalties and kept about $1 billion. That’s a government take of 74% of the pretax value. The Lower 48 government take was about 64%.

Increased oil production is the best solution to Alaska’s budget problems. The oil industry has plans to spend $24 billion over the next 10 years, which could boost our oil production by several hundred thousand barrels per day. This investment would stop — and oil production would decline to dangerous levels — if we overtax this important industry. Why risk driving away what a 2019 study by the McDowell group noted is a $5 billion annual payroll, 77,000 jobs, $4 billion in annual payments to Alaska businesses? This money runs throughout our economy and supports so many charities and events that provide needed services to so many in our state.

We are extremely concerned that if Ballot Measure 1 were to pass, it would begin an economic death spiral for Alaska. Our economy is fragile, and this initiative could tip us over the edge.

They call this the “Fair Share Act”:

• Is it fair that you will no longer have a job?

• Is it fair that your house will be worth less?

• Is it fair that your children will have little to no opportunity to stay and work in Alaska if this initiative passes?

• Is it fair that there is no industry left to pay for government services, our schools and support our charities?

A better name would be “The Job Killer Act of 2020.”

We have a choice:

• More oil or more taxes

• A strong economy or recession

• Jobs or no jobs

This is not the time to destroy what we have left in Alaska.

Jim Jansen is chairman of the Lynden Companies, a co-founder of the KEEP Alaska Competitive Coalition and member of the OneAlaska campaign. Joe Schierhorn is president and CEO of Northrim Bank, co-chair of the KEEP Alaska Competitive Coalition and a member of the OneAlaska campaign.

By Jim Calvin

Oil prices have plunged in the past few weeks, a result of global market forces and COVID-19. With jobs and government revenue sure to be affected, it is useful to consider how a drop in oil prices played out in Alaska before.

McDowell Group recently completed a comprehensive analysis of the oil and gas industry’s role in Alaska’s economy. For many years, we have tracked jobs and wages associated with industry spending and payments to government. This analysis was different, coming on the heels of a recession in Alaska driven mainly by a sharp drop in oil prices and revenues. Oil prices started sliding in late 2014, falling from $110 per barrel to $30 per barrel by 2016. Oil and gas industry spending and employment sank, as did tax and royalty revenue to the state of Alaska. All told, Alaska lost 12,000 jobs before emerging from recession in 2019. Like Alaska’s economy, the oil and gas industry is again on the rise, adding 500 jobs in 2019.

Though the oil and gas industry downsized during the recession — nationally and in Alaska — it remains a critical component of the Alaska economy. Oil industry spending supported 41,800 jobs and $3.1 billion in wages in 2018, including all multiplier effects. This tally of employment does not include nonresidents employed by the oil and gas industry in Alaska. The 17 companies that produce, transport, and refine oil and gas are the heart of Alaska’s oil industry, spending $4.4 billion in Alaska in 2018. In all, 84% of these companies’ employees are Alaska residents, earning 83% of oil industry wages paid in Alaska.

The industry also paid $3.1 billion in taxes and royalties to state and local governments in 2018. As government uses oil-related taxes and royalties to fund operations, programs and capital projects, thousands of public and private sector jobs are created. Government spending of oil-related taxes and royalties accounted for an additional 29,300 jobs and $1.5 billion in wages in Alaska. The Permanent Fund, and the dividends it generates for Alaskans, is a legacy economic impact of the oil and gas industry. PFD spending in Alaska supports 6,500 jobs and $260 million in annual wages.

All told, including jobs related to private sector spending and payments to government, the oil and gas industry accounted for 77,600 jobs and $4.8 billion in wages — 24% of all wage and salary jobs and 27% of all wages in Alaska in 2018. For each job with Alaska’s 17 oil and gas producers, pipeline companies and refineries, there are 15 additional jobs in the Alaska economy connected to the oil and gas industry. No other industry in Alaska can match the employment footprint of the oil and gas industry.

Alaska oil production has been declining steadily since 1988, when we produced 25% of all U.S. oil. Now Alaska accounts for 4% of domestic U.S. production, and just a small fraction — 0.6% — of global production. While U.S. oil production outside Alaska grew 143% between 2008 and 2018 — largely due to rapid growth in North Dakota, Colorado, Texas, New Mexico, and Oklahoma — Alaska production declined 30%.

Recent history has proven that a healthy oil and gas industry is essential to Alaska’s economic well-being. That fact, coupled with our much-diminished role as an oil producer and another severe drop in oil price, underscores the importance of keeping Alaska an attractive and competitive place for oil industry investment.

Jim Calvin is McDowell Group’s senior vice president and senior economist. McDowell Group is Alaska’s oldest and largest full-service research and consulting firm.

By Roger Marks

Alaska’s constitution provides for “utilization, development, and conservation of … resources … for the maximum benefit of the people.” What is maximum benefit? Cash to the state? Short-term cash? Long-term? Jobs? Income? Environmental quality? Who knows?

Then there is the idea of the state getting its “fair share.” What is fair? For eons, philosophers, theologians, lawyers, economist and countless others have pondered this. There is currently a ballot initiative to raise oil taxes called “The Fair Share Act.”

Most economists would say fairness entails taxes being competitive; taxpayers should pay a similar amount to what they pay in other similar places. Otherwise investment will go elsewhere and production suffers. As measured by percentage of net pre-tax profits going to the state and federal government, the current system is competitive. (Including the “credits,” which do not really function as credits, but rather provide progressivity to the system.)

Presently, the state alone is getting 45% of the net profits at current prices. It would get 64% under the initiative. (These calculations are mine, based on public data.)

On their website, the initiative sponsors call for gross revenues (market price less transportation cost) to be split one-third each to the state, the federal government and the taxpayers. Ascribing and measuring shares of gross revenues going to the three entities makes no sense. Currently, gross revenues are about $50 per barrel. Half of this are upstream development costs; this share of gross revenues go to no one, but is incurred by taxpayers. Per the sponsors’ approach, if you spend $25 to develop oil and sell it for $50, you’ve made $50.

In an Aug. 2018 op-ed, the initiative sponsor lamented that between 2009–2015, taxes had declined from $12 per barrel to $2 per barrel even though oil prices had stayed similar. What was not mentioned was that between those years, upstream costs had increased from $17 per barrel to $40 per barrel. So even with the lower taxes, taxpayers’ after-tax profits were $10 per barrel less.

Most moralists would agree that for something to be fair it needs to be fair to both sides. Generally in the world there is a basic risk/reward symmetry between how taxpayers and governments share downside price risk and upside potential. Either the taxpayers assume downside risk and realize upside potential, or the government does.

The initiative raises taxes at low prices, high prices, and in-between. At prices under $45 per barrel the taxpayers would lose money while the state makes several dollars per barrel. At high prices, the marginal tax rate would be 70%. The taxpayer assumes the downside risk and the state gets the upside potential. It is a classic “heads I win, tails you lose” scheme.

As easy as it is to be cynical about laws that are the outcome of the legislative process, they could be much worse. At least that process provides many checks and balances to the initial subjectivity of a single legislator that may be embedded in early drafts.

For a bill to become a law it will be reviewed by a number of legislators in the initial committee, be analyzed by experts, receive public input, go on to other committees, the body as a whole (House or Senate), and go through the same process in the other body. Along the way, there are exchanges of ideas and the proposition is modified.

In the end, it will be subject to a multiplicity of perspectives and information. The initial favoritism gets tempered. This ultimately results in decisions that are better than could have been made by any single member.

That is the problem with ballot initiatives. They are statutes drafted by a small number of like-minded sponsors. If passed, the Legislature cannot touch them for two years. It’s “take-it-or-leave-it” lawmaking without the balanced review good legislation needs.

The initiative sponsors have not stated what is fair, how they justify it, how they measure it or how the initiative attains fairness. They better have some basis, because economically it is a mess.

Roger Marks is an economist in private practice in Anchorage. He formerly served as a petroleum economist with the Tax Division in the Alaska Department of Revenue.