Here are 10 points that were missed during the debate over oil taxes:
1. Shareholders pay the tax, not the corporation. Higher taxes reduce earnings, share value and dividends. It is management's job to maximize shareholder value by allocating resources to their most highly valued uses. If they don't, shareholders replace them.
2. Corporations have a finite amount of capital to invest. Not all profitable projects get financed, only the most profitable. Jurisdictions compete for capital. Capital is fluid and flows to the best deal. There are no shortages of opportunities.
3. Tax outlays often exceed development and production costs. They are a very significant component of international competitiveness between jurisdictions.
4. In comparing fiscal regimes it is necessary to look at comparable jurisdictions. Companies are willing to pay more tax when reward is greater (more oil/lower cost/lower geological risk). Alaska's suggested "peer" group is other North American jurisdictions, Arctic jurisdictions, other tax and royalty regimes, and places with similar production/reserves. (Alaska cannot be compared with Iraq, which has greater reserves, lower costs and lower geological risk.) Compared to its peers', Alaska's taxes are very high.
5. Governments competing to attract investment opportunities can be thought of as a market, with taxes the price. Because of taxes, investors can demonstrably make considerably more money nearly anywhere else in the peer group than in Alaska. Even though Alaska may be profitable, it is more profitable elsewhere. Alaska is like a baker selling bread at $5 a loaf, when everyone else is selling for $3 a loaf, and cannot figure out why it cannot sell more.
6. On the North Slope it's all incremental oil. Eighty percent to 90 percent of future production will come from existing fields. Producers are currently investing $1 billion to $2 billion annually in these fields. (This is the same amount invested in 2007 when oil was $60 a barrel. Elsewhere, investment has soared at higher prices.) They could be investing less, reducing production. Or they could be investing more, increasing production. The decline rate is not fixed. The Department of Energy estimates there are 5 billion barrels of potential reserve growth from existing fields. Old and new fields do not need to be taxed differently. Taxes based on net value encompass the economic differences.
7. Revenue estimates between tax plans cannot be compared using the same number of barrels. The Department of Revenue's production forecast does not consider availability of capital. That is why it is always too high, and the status quo production forecast (with ACES) is also too high. Five years ago, DOR's production forecast for 2012 was 100,000 barrels a day more than actual production now. With lower competitive taxes, not only is investing in the current forecasted production more attractive but development possibilities expand. Exactly how much is uncertain but it takes only a very modest increase in production to generate more total petroleum revenue (including royalties, property taxes, state corporate income taxes), quite contrary to being a "giveaway."
8. During the ELF era (1977-2006), production declined but had peaked at 2 million barrels per day. Over 30 fields were developed; two have been developed since. Oil prices averaged $18 a barrel then. Nobody knows what decline would have been with higher taxes.
9. It is difficult for management to promise to increase investment if taxes are reduced. Only corporate boards have authority to commit billions of dollars, after analyzing detailed financial parameters and cost estimates against competing opportunities. No one asked the producers to promise not to invest less when ACES was passed. There is a very effective mechanism that will create higher production with competitive taxes: the free market. (People don't need to promise to buy more bread if the price drops; it happens.)
10. If Alaska is establishing a policy precedent to start out with low taxes and throttle them up to steep levels on legacy production, a future natural gas pipeline may prove elusive. It will be difficult to avoid paying the price of excessive taxation on gas, as well as oil.
Roger Marks is a petroleum economist in private practice in Anchorage. Clients have included federal, state and local governments as well as independent petroleum companies. He also specialized in petroleum tax policy when he worked at the Alaska Department of Revenue.