Moody's: Alaska Vote To Maintain Oil Incentives Positive

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LOS ANGELES — The failure of an Alaska ballot initiative that would have overturned new oil production tax incentives was deemed a credit positive by Moody's Investors Service.

Alaska implemented a new oil production tax law in January to encourage exploration for new oil fields and to halt declines in North Slope oil extraction, which for many years has generated most of the state's operating revenue, according to Moody's Weekly Credit Outlook for Public Finance released Aug. 28.

The ballot initiative failed by a narrow margin of 52% to 48% Aug. 19, Moody's said in its report.

The measure would have repealed the new tax law, known as the More Alaska Production Act (MAPA), and reinstated a prior law called Alaska's Clear and Equitable Share (ACES). MAPA ends the escalating tax rates on higher oil values included in ACES, and it exempts 20% of the value of new sources on the North Slope, the state's oil-rich, northernmost region.

Oil producers have indicated they could ramp up production under MAPA's more favorable provisions, Moody's said.

The state's finances are heavily dependent on oil revenues and declining output poses a risk to the state's budget. Oil production taxes, royalties and other collections comprised 87% of the state's unrestricted general fund revenue in the current fiscal year, according to the state's most recent forecast. Since 1980, the state has generated enough through oil revenues that it has not had to impose a personal income tax or a broad-based sales tax.

The 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.

Federal research has shown ample reserves beyond current fields.

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. Even as its output steadily declined, Alaska's oil fields have generated strong revenues in recent years. In fiscal 2008, oil reached a record $147 per barrel and production tax receipts tripled to $6.8 billion.

The trend of declining production could soon reach a crucial point if the 7.8% production decline seen in 2013 persists or intensifies. The state's oil output could fall below 300,000 barrels a day as soon as 2021. Production that weak could trigger mechanical challenges for the Trans-Alaska Pipeline System.

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