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Toxic climate: Alaska's oil tax rate punishes past investment, discourages new

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Posted: Sunday, October 28, 2012 12:00 am | Updated: 11:52 am, Mon Jan 21, 2013.

Community perspective

At current prices and costs, the single highest cost item in producing North Slope oil is ACES, the production tax (“Alaska’s Clear and Equitable Share”). It is higher than the capital costs, the operating costs, the pipeline costs, the marine shipping costs, the royalties, the property tax, the state corporate income tax, or the federal corporate income tax.

At the current $110 per barrel West Coast market price for oil, the production tax on Prudhoe Bay, Kuparuk, and the other older fields is about $30 per barrel.

There are those who say there is no link between investment and the tax. There is one link: namely, the entire body of economic theory. To say there is no link between investment and the tax is to say costs do not matter in making investment decisions.

You invest where costs are lowest. If this were not true, we would be growing pineapples in Alaska.

That is where Alaska under ACES has a problem. Alaska has the highest tax compared to nearly any other jurisdiction with similar development conditions.

Production taxes in North Dakota are about $10 per barrel. That is $20 per barrel less than Alaska. At current production levels of 580,000 barrels per day, 365 days per year, a producer will walk away after-tax with $3 billion more in North Dakota than Alaska. Similarly with Texas, Alberta, the Gulf of Mexico and a plethora of others. Companies only have a limited amount of capital to invest. They make less money investing here compared to alternative opportunities.

Because of ACES’ steep progressivity, Alaska becomes relatively more internationally uncompetitive at higher prices. So ironically, as price goes up, we see less production. This is one reason the state’s production forecasts constantly continue to fall way short of expectations.

But the state has made gobs of money in the short term since ACES passed in 2007. And from a public interest perspective this is exactly the problem. In 2007, there were tens of billions of dollars in infrastructure from past investments. These investments had nowhere to go. It was “captive” investment. This infrastructure was put in place to produce oil over an extended number of years, including the present and the future. So after 2007 production from that past investment continued, paying much higher taxes.

Production from the past investments is being punished by the tax. This is the current state policy: punish the previous investments.

There are those who want to continue this policy and only grant tax reduction on production from new investment. Why? Because production from this previous investment will continue anyway.

But new investment soon becomes old investment. And we would again need to punish the old investment. That is what we do. Once investment is in place that cannot go anywhere, we tax it to oblivion.

Moreover, the state constitution would prohibit the state from guaranteeing it would not raise taxes again on oil from new investments.

State forecasts are that nearly 90 percent of all future production will come from existing fields, but that most of it will require new investment. Producers are currently investing $1.5 billion annually in these fields, mostly for maintenance. This is about the same amount invested in 2007 ($1.3 billion), when oil was $60 per barrel. It’s another reason the production forecasts are always too high.

Elsewhere, worldwide investment has soared at higher prices. Of the three major North Slope producers — BP, ConocoPhillips and ExxonMobil — worldwide capital expenditures and investments increased from $53 billion in 2007 to $82 billion in 2011.

The Department of Energy estimates there are five billion barrels of potential reserve growth from existing North Slope fields. Two billion barrels of this is conventional oil, not heavy or viscous oil. These fields contain hundreds of structural and stratigraphic traps and isolated fault blocks. The geological literature describing these is extensive.

Creating an attractive investment climate entails more than just “encouraging” new investments. Encouraging new investments while punishing the earlier ones cannot make investors feel good about Alaska. It is a toxic business climate. It is difficult to see how significant new oil investment, much less a natural gas pipeline, could happen in such an environment.

Roger Marks, of Anchorage, works as a private consulting petroleum economist. He previously was a senior economist for the Alaska Department of Revenue’s Tax Division.

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