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South to the Future, Part 2: Priming Production in North Dakota

New Technology, Lower Tax Rates Drive Bakken Oil Field Boom

November 01, 2011|By Steve MacDonald | Channel 2 News

ANCHORAGE, Alaska — To unlock the riches contained in the massive Bakken oil field, oil companies are using relatively new technology.

Directional drilling reaches down nearly two miles, aiming to hit a narrow vein of rock wedged between two bands of oil shale. Then liquids are pumped into the rock, a process called “fracking.” The technology is crucial and expensive.

North Dakota enacted lower royalty rates and tax incentives to encourage development of the horizontal drilling and hydraulic fracturing industry -- going from one of the highest oil tax rates in North America to one of the lowest.

Production has quadrupled in the state.

That result is fueling the debate over taxes here in Alaska.

Bryan Butcher, commissioner of the Alaska Department of Revenue, says he and Governor Sean Parnell are backing legislation that would change parts of a tax code called Alaska Clear and Equitable Share.

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Better known as ACES, the tax code was crafted by former Gov. Sarah Palin in 2006. ACES calls for the state to get a greater share of taxes when oil prices increase.

With North Slope oil selling for over $100 a barrel these days, the state is reaping the benefits.
But there are also repercussions.

“The negative oil is declining faster than anticipated,” says Butcher. “And the job explosion that North Dakota, Texas, Alberta and other areas are seeing, we’re not seeing.”

Critics say ACES is causing a slowdown of North Slope oil production that’s having a far-reaching impact on the industry.

Doug Smith, who heads an oil field services contractor called Little Red Services, employs 140 workers.

But he says he’s still bouncing back from 2009 – when he had to lay off 14 workers due to a slowdown in demand.

Layoffs are one thing. What he calls “brain drain” is another – more Alaska workers heading off to places like North Dakota.

“We’re seeing some of the more senior technically capable people being drawn out to these areas,” Smith says. “And it’s simply because guys are not sure they can finish their careers in our oil field.”

The State of Alaska says oil production is falling by 6 percent a year. To reverse the decline, tax break advocates are pinning their hopes on House Bill 110. Among other things, it would reduce state taxes when oil prices climb.

The bill has won approval in the Alaska House of Representatives. However, it faces an uncertain future in the Senate.

Supporters of ACES say the tax code provides benefits of its own. With more money, the state has beefed up capital projects and in turn provided new construction jobs. They say tinkering with ACES could cost the state.

“If you take out a billion dollars per year from the capitol budget you’re looking at a loss or the State of Alaska of about 8,000 jobs,” says state Sen. Bill Wielechowski.

Wielechowski says before the oil industry needs to understand that before anything is changed, there will have to be promises of future investment in Alaska.

Tax break supporters argue that their future in Alaska is on the line.

And back on the prairie, North Dakota says it has answered the questions of balance between oil production and taxes. Here in Alaska, the search for that balance seems to remain elusive.

Contact Steve MacDonald at stevem@ktuu.com

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